Avoidance of disputes.Option exercised in ITR form is essential and can be considered as such. However, if in any provision of the Act or Rules, there is requirement to exercise any option, it should also be made in prescribed form, if any , otherwise in suitable manner in writing before specified time to avoid disputes. A study in view of recent judgment of the Supreme Court

[DEV KUMAR KOTHARI]

Avoidance of disputes.

Option exercised in ITR form is essential and can be considered as such. However, if in any provision of the Act or Rules, there is requirement to exercise any option, it should also  be made in prescribed form, if any , otherwise in suitable manner in writing before specified time to avoid disputes. A study in view of recent judgment of the Supreme Court

Provision and context. Section 32  and Rule 5 option for WDV or SLM based claim in case of power company.

Case under study:

COMMISSIONER OF INCOME TAX VERSUS M/S JINDAL STEEL & POWER LIMITED THROUGH ITS MANAGING DIRECTOR - 2023 (12) TMI 417 - SUPREME COURT

Earlier article in context of withdrawal of exemption:

Provision for withdrawal of exemption vide sub-section (8) of  S.10B  considered as provision for exemption by the assessee Wipro by following wrong approach. Possiblity of proper remedy by way of petition for  reconsideration of the judgment of the Supreme Court may be explored by Wipro.

From Section 32 relevant portion with highlights added:

Depreciation.

32. (1) ¹[In respect of depreciation of-

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, ³⁴[not being goodwill of a business or profession,]

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-]

²[(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]

(ii) ³[in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:]

From Income-tax Rules ( relevant part as exist now):

C. Profits and gains of business or profession

Depreciation.

5. (1) Subject to the provisions of sub-rule (2), the allowance under clause (ii) of sub- section (1) of section 32 in respect of depreciation of any block of assets shall be calculated at the percentages specified in the second column of the Table in Appendix I to these rules on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year.

 (1A) The allowance under clause (i) of sub-section (1) of section 32 of the Act in respect of depreciation of assets acquired on or after 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the Table in Appendix IA of these rules on the actual cost thereof to the assessee as are used for the purposes of the business of the assessee at any time during the previous year :

Provided that the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the said asset :

Provided further that the undertaking specified in clause (i) of sub-section (1) of section 32 of the Act may, instead of the depreciation specified in Appendix IA, at its option, be allowed depreciation under sub-rule (1) read with Appendix I, if such option is exercised before the due date for furnishing the return of income under sub-section (1) of section 139 of the Act,

               (a)  for the assessment year 1998-99, in the case of an undertaking which began to generate power prior to 1st day of April, 1997; and

               (b)  for the assessment year relevant to the previous year in which it begins to generate power, in case of any other undertaking :

Provided also that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

From a conjoint reading of S. 32 , Rules 5(1) and (1A) of the Rules read with Appendix-1 and Appendix-1A, it is clear  that while sub-rule (1) provides for allowance of depreciation in respect of any block of assets in terms of the second column of the table in Appendix 1, sub-rule (1A) enables an assessee to seek allowance of depreciation of assets acquired on or after the 1st day of April, 1997 as per the percentage specified in the second column of the table in Appendix-1A on actual cost basis.

The second proviso to sub-rule (1A) clarifies that an assessee may opt for depreciation under Appendix-1 instead of Appendix-1A but such option has to be exercised before the due date for furnishing the return of income under sub-section (1) of Section 139 of the Act.

Case study:

In the case of Jindl Power (supra), assessee claimed depreciaion on WDV basis in ITR wihtou filing any document specifically to opt for WDV basis instead of SLM basis allowed of rpoer generation company.

 Dispute  arose, whether assessee has exercised option to claim depreciation on basis of WDV ( Appendix 1 ,instead of cost / SLM bais as per Appendix 1A. The revenue carried dispute before honorable Supreme court for the reason that claim was made in ITR but any specific option was not exercised as required.

To understand the factual and legal aspect relevant part of judgment is reproduced belwo with highlights added for analysis and easy understanding.

From judgement:

EXERCISE OF OPTION TO ADOPT WRITTEN DOWN VALUE METHOD.

35. We may now take up the first of the three additional issues. As we have noted at the very outset, the issue is or the question raised by the revenue is whether the Tribunal could ignore compliance to the statutory provisions relating to exercise of option to adopt Written Down Value (WDV) method in place of the straight line method while computing depreciation on the assets used for power generation. This issue has been raised by the revenue in Civil Appeal No. 13771/2015 (CIT Vs. M/s Jindal Steel and Power Ltd.) in the following manner:

Whether on the facts and in the circumstances of the case, the High Court was justified in upholding the order of the Tribunal that compliance to statutory provisions of exercising option to adopt WDV method in place of straight line method prescribed under the statutory provision on the assets used for power generation can be waved in the case of the assessee?

36. This issue arises in the case of the respondent-assessee M/s Jindal Steel and Power Ltd., Hisar for the assessment year 2001- 2002. While dealing with the core issue, we have already made a brief description of the status of the assessee. It is, therefore, not necessary for a repetition of the same. What is however discernible from the assessment order dated 26.03.2004 passed under Section 143(3) of the Act is that the assessee had purchased twenty five MV turbines on and around 08.07.1998 for the purpose of its eligible business. Assessee claimed depreciation on the said turbines at the rate of 25% on WDV basis. On perusal of the materials on record, assessing officer held that in view of the change in the law with regard to allowance of depreciation on the assets of the power generating unit w.e.f. 01.04.1997, the assessee would be entitled to depreciation on straight line method in respect of assets acquired on or after 01.04.1997 as per the specified percentage in terms of Rule 5 (1A) of the Income Tax Rules, 1962. Assessing officer however noted that the assessee did not exercise the option of claiming depreciation on WDV basis. Therefore, it would be entitled to depreciation on straight line method.

36.1. After obtaining the clarification of the assessee, assessing officer held that since the assessee did not exercise the option of adopting WDV method, therefore, in view of the provision of Rule 5 (1A) of the Income Tax Rules, 1962 (briefly ‘the Rules’ hereinafter), it would be entitled to depreciation on the straight line method. On that basis, as against the depreciation claim of the assessee of Rs. 2,85,37,634.00, the assessing officer allowed depreciation to the extent of Rs. 1,59,10,047.00.

37. In the appeal before the CIT (A), the assessee contended that the assessing officer had erred in limiting the allowance of depreciation on the turbines to Rs. 1,59,10,047.00 as against the claim of Rs. 2,85,37,634.00. However, vide the appellate order dated 16.05.2005, CIT (A) confirmed the disallowance of depreciation made by the assessing officer.

38. On further appeal by the assessee before the Tribunal, vide the order dated 07.06.2007, the Tribunal on the basis of its previous decision in the case of the assessee itself for the assessment year 2000-2001 answered this question in favour of the assessee.

39. When the matter came up before the High Court in appeal by the revenue under Section 260A of the Act, the High Court referred to the proviso to sub-rule (1A) of Rule 5 of the Rules and affirmed the view taken by the Tribunal. The High Court held that there was no perversity in the reasoning of the Tribunal and therefore, the question raised by the revenue could not be said to be a substantial question of law.

40. Rule 5 provides for the method of calculation of depreciation allowed under Section 32 (1) of the Act. It says that such depreciation of any block of assets shall be allowed, subject to provisions of sub-rule (2), as per the specified percentage mentioned in the second column of the table in Appendix-I to the Rules on the WDV of such block of assets as are used for the purposes of the business or profession of the assessee during the relevant previous year. In so far the present case is concerned, it is not in dispute that sub-rule (2) has no application. We may, therefore, refer to sub-rule (1A) along with the provisos thereto which read as under:

(1A) The allowance under clause (i) of sub-section (1) of section 32 of the Act in respect of depreciation of assets acquired on or after 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the Table in Appendix IA of these rules on the actual cost thereof to the assessee as are used for the purposes of the business of the assessee at any time during the previous year:

Provided that the aggregate depreciation allowed in respect of any asset for different assessment years shall not exceed the actual cost of the said asset:

Provided further that the undertaking specified in clause (i) of sub-section (1) of section 32 of the Act may, instead of the depreciation specified in Appendix IA, at its option, be allowed depreciation under sub-rule (1) read with Appendix I, if such option is exercised before the due date for furnishing the return of incomes under sub-section (1) of section 139 of the Act,

(a) for the assessment year 1998-99, in the case of an undertaking which began to generate power to prior 1st day of April, 1997; and

b) for the assessment year relevant to the previous year in which it begins to generate power, in case of any other undertaking :

Provided also that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

40.1. Thus, what is noticeable is that as per sub-rule (1A), the allowance under clause (i) of sub-section (1) of Section 32 of the Act in respect of depreciation of assets acquired on or after the 1st day of April, 1997 shall be calculated at the percentage specified in the second column of the table in Appendix-IA to the Rules. As per the first proviso, the aggregate depreciation of any asset should not exceed the actual cost of that asset. The second proviso says that the undertaking specified in clause (i) of sub-section (1) of Section 32 of the Act may instead of the depreciation specified in Appendix-IA may opt for depreciation under sub-rule (1) read with Appendix-I but such option should be exercised before the due date for furnishing the return of income under sub-section (1) of Section 139 of the Act. The last proviso clarifies that any such option once exercised shall be final and shall apply to all the subsequent assessment years.

41. Before we proceed further, we may briefly refer to the relevant Appendix-1 which was applicable for assessment years 1988- 1989 to 2002-2003 as well as to Appendix-1A. Appendix-1 provides for a table of rates at which depreciation is admissible. While the first column refers to the block of assets, such as, tangible assets, including buildings, furniture and fittings, machinery and plant etc., and intangible assets, the second column mentions the relatable depreciation allowance as per percentage of WDV. On the other hand, Appendix-1A has been inserted by the Income Tax (Twelfth Amendment) Rules, 1997 with retrospective effect from 02.04.1997. While column one of Appendix-1A mentions about the class of assets, column two provides for the relatable depreciation allowance of such class of assets as per the percentage of actual cost. From a comparison of the two appendixes, it is evident that the depreciation allowance as per percentage of WDV in Appendix-1 is higher than the depreciation allowance as per percentage of actual cost under Appendix-1A.

42. From a conjoint reading of Rules 5(1) and (1A) of the Rules read with Appendix-1 and Appendix-1A, it is evident that while subrule (1) provides for allowance of depreciation in respect of any block of assets in terms of the second column of the table in Appendix 1, sub-rule (1A) enables an assessee to seek allowance of depreciation of assets acquired on or after the 1st day of April, 1997 as per the percentage specified in the second column of the table in Appendix-1A on actual cost basis. However, the second proviso to sub-rule (1A) clarifies that an assessee may opt for depreciation under Appendix-1 instead of Appendix-1A but such option has to be exercised before the due date for furnishing the return of income under sub-section (1) of Section 139 of the Act.

43. In the instant case, there is no dispute that the assessee had claimed depreciation in accordance with sub-rule (1) read with Appendix-I before the due date of furnishing the return of income. The view taken by the assessing officer as affirmed by the first appellate authority that the assessee should opt for one of the two methods is not a statutory requirement. Therefore, the revenue was not justified in reducing the claim of depreciation of the assessee on the ground that the assessee had not specifically opted for the WDV method.

44. A similar issue was examined by this Court in COMMISSIONER OF INCOME TAX-I, COIMBATORE VERSUS M/S. G.R. GOVINDARAJULU & SONS - 2015 (9) TMI 1248 - SUPREME COURT, wherein it has been held that the law does not mention any specific mode of exercising such an option. The only requirement is that the option has to be exercised before filing of the return. In that case, assessee had set apart a sum of Rs. 32 lakhs to be spent for charitable purposes in the following year and claimed deduction of the entire amount under Section 11 of the Act which deals with income from property held for charitable or religious purposes. This claim of the assessee was denied by the assessing officer on the ground that no option for this purpose was exercised by the assessee before filing of the return. Though the assessee had stated so in the return itself, that was not treated as exercising the option in a valid manner. All the appellate authorities answered this issue in favour of the assessee. When the revenue approached this Court by way of civil appeal, this Court opined that the law does not mention any specific mode of exercising the option. The only requirement is that the option has to be exercised before filing of the return. This Court held that if the option is exercised when the return is filed, that would be treated as in conformity with the requirement of Section 11 of the Act.

45. Applying the aforesaid principle to the facts of the present case, we are in agreement with the view expressed by the Tribunal and the High Court that there is no requirement under the second proviso to sub-rule (1A) of Rule 5 of the Rules that any particular mode of computing the claim of depreciation has to be opted for before the due date of filing of the return. All that is required is that the assessee has to opt before filing of the return or at the time of filing the return that it seeks to avail the depreciation provided in Section 32 (1) under sub-rule (1) of Rule 5 read with Appendix-I instead of the depreciation specified in Appendix-1A in terms of sub-rule (1A) of Rule 5 which the assessee has done. If that be the position, we find no merit in the question proposed by the revenue. The same is therefore answered in favour of the assessee and against the revenue.

xxxxx

56. For the aforesaid reasons, the civil appeals are hereby dismissed. However, there shall be no order as to cost.

Observations of author:

It can be said that when a claim is made in ITR form itself  in a particular manner as prescribed in the ITR form , the claim stand preferred .  And option stand exercised.

For example, in ITR assessee claimed depreciation at rates applicable on WDV basis, thereore, assessee exercised option to claim as such instaed of SLM basis applicable in case of power generation business.

This is because a claim in ITR form is basic claim  without such claim the AO cannot entertain a claim, even if an option is exercised on some other manner like filing of a letter  to exercise option.  Though appelalte authorities may, in some ircumstances,  admit and adjudicate even a

Prescribed mode for exercise of option:

In the case before the Supreme Court in case of Jindal Power  includign precedence in CIT Vs. GR Govindarajulu followed , there was no specific manner prescribed to exercise the option. Only requirement was to exercise option, and that was done by making a cliam in ITR form which was filed before due date.

However, if there is a requirement priescribed in Rules to file a particular form to exercise option , then matter  can be considered in different manner.

If the provision in IT Act requires only exercise of option without any referecne to any form to be filed, then it can be said that filing of Form, is procredural requirement,  and it can be filed even belatedly, even before first appellate authority.

In many provisions specified forms are prescribed, to avail an exemption or deduction it has been held that filing of form is procedural matter and delay in filing can be condoned. And mere failure to file form will not disentitle the exeption or claim if it is made in the ITR as required in the provision and the ITR form.

Advisory :

It is always better to exercise option in prescribed form if there is any or in some other  writein manner by way of application or declaration in absence of prescribed form, It is always beter to make such compliance well before prescribed time at before filing of ITR.

Procsssing of ITR while filling the form.

In processing of ITR in course of filig itself, by articficial intelligence , a non complaince can be warned by way of an error message or warning or speific query whether particualr form has been filed, if yes , give the date of filing. If not a warning messge can be prompted to file the form.

In case there was no error message or warning, and ITR was filed online and claim was accepted and got approved in calculations  of income and tax, then a possible view is that it was accepted in the system of income tax department by way of applicaion of online tools with artificial intelligence.

A word of caution:

Please refer to earlier article above referred to. I case of PRINCIPAL COMMISSIONER OF INCOME TAX-III, BANGALORE AND ANOTHER VERSUS M/S WIPRO LIMITED - 2022 (7) TMI 560 - SUPREME COURT  in context of withdrawal of claim for exemption , it was held that filing of declaration and filling  before due date  both were mandatory. Since declaration was not filed within due date, assessee could not claim withdrawal of exemption and therefore loss was not eligible for set off and / or carryforward.