DISALLOW WHEN CLAIMED AND ALLOW WHEN NOT CLAIMED – the wrong approach of officers.

[C.A. DEV KUMAR KOTHARI]

Funny depreciation allowance:

Funny allowance:

Author is calling depreciation allowance as 'funny depreciation allowance' because it is one of such allowance which can be disputed by the AO either way. Generally  allowance is disputed because the AO do not want to allow the same or want to allow a lesser amount than claimed. More than 99% of cases relating to depreciation allowance is for allowability of higher claim which is denied by the AO.

In very few cases  (that will not be even 1% of total disputes about depreciation) the reverse situation is noticed. That is that the assessee do not want to claim depreciation but the AO want to allow depreciation.

More funny situation is that to support the AO in his action to force depreciation allowance , which is found in very few cases, and which may not have much impact on revenue, amendment was made in law to provide that depreciation will be allowable whether assessee had claimed depreciation or not. This is another funny aspect because amendment in law is made just to amend law to overcome judicial pronouncements without even examining number of cases which would be affected by such amendment and the revenue impact.

Another such optional allowance or deduction is found u/s 43B about  claim of tax, duty fees, cess , PF ,Bonus, some type of interest etc.  which are allowed only in the year of actual payment except that such sums relatable to any previous year can be claimed even if paid after the previous year but before the due date to file return u/s 139(1) by claiming and furnishing evidence. Therefore, here assessee has option either to claim in the year of accrual based on payment made after 31^st march of previous year but before due date or to disallow in year of accrual and claim in next year or other year in which such sum is actually paid. Here in this situation also one should not be surprised if the AO try to impose a deduction even though the assessee do not want to claim in say first year *(year of accrual) but want to claim in second year (the year of actual payment ). One more such case can be in respect of S. 40(a) (ia) and assessee can choose to claim in subsequent year instead of current year by delaying deposit of TDS.

Depreciation a privilege:

The claim for depreciation has always been a privilege due to special advantages attached to it in comparison to other losses. Without relevant information made available by the assessee and claim preferred by the assessee the A.O. may  not be in a position to allow depreciation allowance.

Furthermore, unless the assessee  make a claim in return or revised return the A.O. cannot entertain claim of assessee even if made by way of letter. As held by the Supreme Court in the case of Goetz (India) Ltd. It is also not likely that the AO will allow depreciation even when there is no claim. In fact after the judgment in case of Goetz , any claim is not being entertained unless it was made in the return or revised return.

In physical return it was possible to make additional claims below the computation . However, in case of e-returns, it is not  possible to make such a claim. It is desirable that in e-returns  there should be provision to add  sheets like  MS word sheets , MS  excel sheets or combination of MS word sheet and  MS excel sheet  where assessee can place explanations about contentious issues and claims  can also add  further claims for consideration of the A.O. 

In fact Explanation 5 to S. 32(1) does not makes  provision for compulsory deduction, but merely says that provisions of sub-section (2) shall apply whether or not assessee makes a claim. When assessee makes a claim but it is disallowed by AO depreciation is not actually allowed.  When assessee does not claim and AO does not allow depreciation, there is no actual allowance. For making a claim assessee has to furnish relevant details. Unless those details are furnished the AO cannot allow deprecation.

The  moot question is whether the AO will allow depreciation when no claim has been made by assessee?

If he does not allow, depreciation is not actually allowed.

It is felt that explanation like Explanation 5 below S. 32 (2) was not at all required in view of settled legislative intention. The Explanation also creates ambiguities, and in view of other provisions, claim for depreciation is still a privilege for the assessee and therefore, the assessee may choose to claim or not to claim depreciation allowance. However, this will involve litigation and may again require final word by the Supreme Court.

General tendency to amend provisions is not good:

In view of general tendency of making amendments to nullify the impact of judgments of the Supreme court, and High Courts and that too by way of explanations or by expressly making amendment with retrospective effect, now it appears that past history, composition of legislators at all times when un amended law was in force and the composition of legislators at the time of amendment is required to be considered. Otherwise, the bureaucracy will have upper hand in disguise of legislative intention.

Explanation 5 in the sub-section (1) of section 32 was inserted vide the Finance Act,2001 w.e.f. 1.4.2002 that is to say from assessment year 2002-03 for which the relevant previous year is year ending on 31.03.2002. The explanation reads as follows:

        Explanation  5.-- For the removal of doubts, it is hereby declared that the provisions of this  sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income.

Amendment is for removal of doubts:

Thus, as per the explanation the amendment is for removal of doubts. Although it has been specifically provided that the explanation is w.e.f. 1.4.2002, however, it can be viewed as retrospective and applicable to earlier years because the provision is by way of an explanation and that too for removal of doubts.

Role of explanation and new controversies:

Broadly speaking the role of an explanation in a section is to clarify the provision and legislative intent. Generally the explanation is declaratory of the scope and intent of the provisions.

An explanation is appended to a section to explain the meaning of the words contained in the section and normally is to be read to harmonize with and to clear up any ambiguity in the main section.

Generally explanations are intended to be more as legislative exposition or clarification of existing law than a change in it. When an explanation serves the purpose of clarification of the existing law, there is no question of any prospective or retrospective operation of the explanation.

When a provision is inserted to clarify the legal position or to declare the legislative intent it has been held by courts that the provision whether by way of explanation, proviso or a new sub section it  will apply to earlier years also. For example in case of  Explanation 8 to section 43(1) ( meaning of actual cost) it was held by Calcutta High Court that the explanation which has been given effect w.e.f. 1.4.1974 shall be applicable even before 1.4.1974. In the  context of proviso to section 43B the supreme court has held that the proviso is curative / remedial  and classificatory to remove difficulty, therefore it will be applicable from the date when section 43B itself was introduced in the Act. We may refer to :

              CIT V India steamship Co. Ltd 1992 -TMI - 21866 - (CALCUTTA High Court)

              Allied Motors P.Ltd V CIT 1997 -TMI - 5575 - (SUPREME Court)  

              ITO V D. Manoharlal Kothari 1998 -TMI - 16391 - (MADRAS High Court)  

              Engineers Impex (P.) Ltd V D.D.Sharma 1999 -TMI - 15076 - (DELHI High Court)

In view of these rulings  controversies have already arisen and reached to courts.  Revenue authorities are applying  the explanation 5 to section 32(1) in pending cases for earlier period also wherever they find that the allowance of depreciation in earlier years is beneficial to revenue. One should not be surprised if in due course of time  large  number of cases will come up for reopening of assessments or revision  and rectification by revenue authorities to take view that depreciation was allowable and  has to be allowed in earlier years and the written down value is to be scaled down and past depreciation has to lapse due to limitation for carry forward for eight years for the period of  five years for the period 01.04.1997 to 31.03.2002 . 

The reasons for explanation:

It is now very clear that there is tendency in the Government (Bureaucratic approach) to bring amendments to counter or nullify the effect of Judicial Rulings in favour of tax payers. . On interpretation of the provisions of section 32 read with section 34 and relevant rules the supreme court in the case of CIT V  Mahindra Mills and others (2000) 243 ITR 56 (SC)  held that depreciation allowance is a privilege given to assessee and it is at the option  of the assessee to claim or not to claim depreciation allowance and a privilege cannot be cast upon the assessee as a burden. The explanation 5 to section 32(1)  seems  just  a bureaucratic approach  to nullify the effect of this ruling.

Some Judgments on Expl. 5 - not to apply retrospectively:

In a quick action we find that in a  judgment dated 01.10.2002 of the Madras High Court in the matter of CIT V Sree Senhavalli Textiles P. Ltd  has been  reported at 2002 -TMI - 12137 - (MADRAS High Court). In this case the high court has held that the explanation 5 has been specifically made applicable w.e.f.  04.04 2002 and therefore it will not apply for earlier years. The contention of Revenue was that the explanation is `for removal of doubts' and it is an explanation so it will apply even for assessment year 1998-99. The court held that the law was settled by the Supreme Court in CIT V Mahindra Mills (2000) 243 ITR 56 (SC). Unless the subsequent amendment is expressly given retrospective effect the law laid down by the Supreme Court will remain binding for the period prior to amendment.

In case of CIT V (1) Kerala Electric Lamp Works Ltd and (2) Crompton Greaves Ltd 2003 -TMI - 11987 - (KERALA High Court) Kerala high court has also held that the label of explanation to the new provision is not decisive of the scope and true meaning of the new provision. In view of law laid down by the supreme court , unless the assessee claims or make request for allowing depreciation, the A.O. will not be justified to force depreciation allowance for periods prior to coming into force of the Explanation 5 to section 32.

In CIT V. Aircel Ltd. 2007 -TMI - 3147 - (MADRAS HIGH COURT) also view taken is that for the assessment year 2000-01 depreciation cannot be forced upon the assessee when the assessee does nto wish to avail of that benefit.

Many tribunals have also taken the view that the explanation will apply only from assessment year 2002-03 and not to earlier years.

Wrong approach of authorities causing brain drain:

                         The approach of revenue authorities to " DISALLOW WHEN CLAIMED AND ALLOW WHEN NOT CLAIMED", is really unjustified. However, for such an  approach we professionals are very much benefited as we get lot of business only due to such approach. However, this is causing brain drain which is very unfortunate for any country and any section of people. Ultimately we can grow by doing productive work only.

 Legislative intention:

It is most important principle of interpretation that the legislative intention is to be gathered from the language used in the enactment. On this issue the provisions of  Section 32 (without the explanation 5) have been in force on more or less same lines for all times - even under the Income Tax Act, 1922. How legislative intention is gathered in 2002 to provide an explanation is difficult to understand. It is simply bureaucratic approach. Now the courts may have to minutely examine the composition of parliament as it was at various times prior to amendment and at the time of amendment. In case any significant number of members are not common, it cannot be said that the new legislative body is capable to ascertain legislative intention which prevailed when the un amended law was enacted and was allowed to be continued for long period.

Legislative intention - how changed:

The legislative intention was found out by the Supreme Court by reading the provisions as they stood.  Prior to that the same exercise was done by High Courts and Tribunals. How in the year 2002 entirely new set of legislators could ascertain the legislative intention and to provide a declaration by way of explanation?

Is it not understandable.

It seems to be a simple bureaucratic approach or show of power in attempt to alter the nature of an optional claim to a necessary claim and to disregard law laid down by the Supreme Court. Such amendments have very damaging effect on goodwill of the Government and the judiciary. Now- a- days we can hear many petty officers of the Revenue Authorities saying, if you get … claim from court, we will amend the law retrospectively. This clearly shows that such amendments are exposition of intentions of bureaucrats and not the legislators.

The legislative approach in respect to depreciation allowance has always been liberal approach with a view to enable trade, industry and profession to conserve sufficient resources to install new assets , to make provision for replacement of capital assets. The explanation has made privilege a burden.

After   amendment  of S. 34 and  deletion of Rule 5AA :

Even after deletion of  sub-sections (1) and (2) of section 34 and Rule 5AA , it is considered that depreciation is optional because unless assessee furnishes relevant particulars and prefer a claim of  depreciation in the computation / return the Assessing Officer may not have basis to allow depreciation on all the assets including the new assets acquired during the previous year. For allowing depreciation the following  information are  required to be ascertained:

          What is written down value brought forward from earlier year?

         Whether, the asset was used during the previous year?

         When the new assets were acquired and put to use during the previous year?

         What was actual cost of new assets?           

         Whether, any assets were sold during the previous year, if yes, what was sale

         price?

        What is rate and how much depreciation is allowable in respect to each block of assets - at full rate or half rate depending on number of days used in case of new assets.

In absence of relevant information having been furnished by the assessee the Assessing Officer may not have a base to allow depreciation allowance.  The ITAT has so held in Medley Pharmaceuticals Ltd V ITO 2001 -TMI - 59415 - (ITAT BOMBAY-F) and Unifort Metalizers V DCIT (2001) 73 TTJ (Ahd.) 381 and United Phosphorus Ltd V JCIT 2001 -TMI - 55298 - (ITAT AHMEDABAD-A). 

Assessed income not to be less than returned income:

 The general rule or practice  followed by the A.O. is that the assessed income cannot be less than the income returned by the assessee or assessed loss cannot be more than that as per return of loss filed  by the assessee. Therefore,  generally in absence of a claim the A.O.  do not grant any benefit though he is  supposed to grant the same and make assessment as per law.

Assesses will be very much obliged even if the A.O.'s grant benefits and deductions allowable and claimed by the assessee where there is no dispute.

Action of  Assessing Officer in absence of claim:

Suppose an assessee has not claimed depreciation and declared  gross  total income of say Rs.250000/-  claimed deductions u/s  80C and 80G and paid tax of  say Rs.15,000/- after considering basic exemption and  deductions. There is TDS of Rs.25000 and therefore  claim for refund of Rs.10000/- is made.  The information available in the return or return of earlier year suggests that even in respect of the written down value of  old block of assets assessee is entitled to depreciation allowance of say  Rs.1,00,000-. In this case if the A.O. allow depreciation of Rs. 100000/- there will be assessed income below taxable basic exemption and assessee shall be entitled to refund of Rs.25000/- with interest u/s 244A as against claim for refund of Rs.10000/-

Will the A.O. allow depreciation and grant higher  refund to the assessee.?

If yes, will it not be against the practice of the Revenue to generally assessee income more than the returned income?

In another case assessee chose to file return of loss at say Rs. two crores without depreciation. Will the A.O. allow depreciation and increase loss to be carried forward ?

Particularly when majority of  returns are  accepted u/s 143(1) it will be impossible for the A.O. to comply with the conditions of the explanation 5 in various years. However, in case in future the assessee claims depreciation on actual cost ( or higher written down value , without deducting un-claimed and un-allowed depreciation) it is likely that the A.O. may, deny depreciation on higher WDV and in that year he may apply Explanation to reduce WDV brought forward.  This will not be as per law.

 Why to unsettle settled legal position:

In case of Mahindra Mills the relevant assessment year was A.Y. 1974-75 the Supreme Court  decided the matter on 15.3.2000 so it took about 25 years to reach a finality of legal position. By amendment the legal position has been altered and new controversies shall be created. It is unfortunate that  amendments brought in our law are hardly discussed in the parliament and the laws are passed without proper deliberation and understanding. Many times the power of bureaucracy prevails over everything else.

It is also unfortunate that major issues, fundamental issues are not discussed and deliberated and petty issues having public applause  are deliberated in the parliament.

  It is really very much unpleasant situation that now-a-days, it has become general trend to amend law just to unsettle settled legal position. The amendments made are in such a way that there is further ambiguities created.

 Whether, depreciation allowance is still optional?

From assessment year 2002-03 the law relating to depreciation allowance and unabsorbed depreciation allowance has been amended and it has been brought on the same lines as it was prior to A.Y. 1997-98. The claim for depreciation has several added advantages like that  it can be set off against any income, it can be carried forward without limitation , even after carry forward unabsorbed depreciation can be set off against any income  because carried forward depreciation becomes part of current depreciation etc.

Therefore, in view of these special privileges attached with depreciation allowance  the Supreme Court in Mahindra Mills ( Supra.)  held that depreciation allowance is a privilege , and it is at the option of the assessee to claim or not to claim depreciation allowance. If the assessee has not claimed depreciation allowance, then it cannot be forced upon the assessee so as to become a burden.

What the A.O. cannot force upon the assessee is now being tried to be forced in guise of legislative intent. But the question is whether, it is true legislative intention? For answer of the same author feels that courts must consider the past history of law and legislatures , and discussions and need of amendments to unsettle settled legal position. It is necessary to seek answer to - whether there was any urgent or important need to change the law by way of explanation?