Rate of depreciation – litigation by revenue is not desirable.

[DEV KUMAR KOTHARI]

Rate of depreciation – litigation by revenue is not desirable.

Relevant provisions:

Section 32 and  43 of Income-tax Act, 1961 and Rule 5 and Appendix I and Appendix IA  to Income-tax Rules prescribing method and rates of depreciation on various assets.

Recent case 2020 (8) TMI 48 - ITAT DELHI - RELIGARE SECURITIES LTD. VERSUS DCIT, CIRCLE-21 (1) , CR BUILDING, NEW DELHI. AND (VICE-VERSA) ITA No.230/Del/2017, ITA No.574/Del/2017 Dated: - 31 July 2020

Earlier case relied on:

2010 (8) TMI 58 - DELHI HIGH COURT - COMMISSIONER OF INCOME TAX VERSUS BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD.1267/2010, 1266/2010 Dated: - 31 August 2010

EXPEDITORS INTERNATIONAL (INDIA) (P) LIMITED. VERSUS ACIT AND DCIT VERSUS EXPEDITORS INTERNATIONAL (INDIA) (P) LIMITED [2008 (8) TMI 399 - ITAT DELHI-F], INCOME-TAX OFFICER, WARD-31 (4) , KOLKATTA. VERSUS SAMIRAN MAJUMDAR [2005 (8) TMI 293 - ITAT CALCUTTA-B]

General discussion:

Depreciation is allowed as a statutory deduction while computing income. Provisions are contained in section 32 and relevant definitions are found in section 43 of the Income-tax Act, 1961.

 Rates are prescribed in Appendix I and Appendix IA to the Income-tax Rules 1962 in terms of Section 32 and Rule 5.

Depreciation is to be allowed to compute real income over a period of time.

The period is hypothetically derived from rate of depreciation. It is not actual in some situations depreciation is allowed at slow rate and in some situations or assets it is allowed at accelerated rates.

We can recall that at some time for many years general rate for plant and machinery was 33.33% and then it was reduced to 25% and then to 15%. Prior to rate of 33.33 % the general rate was 15% and it revert back from AY 2006-07. Similarly for many assets rates of depreciation have seen acceleration and slowdowns. For example for many assets rate of 100 % 80% and 60% have been reduced to 40%

Therefore, rate of depreciation for computation of income is not real rate of depreciation.

Normal depreciation is allowed at prescribed rates on written down value or on actual cost (in case of some businesses at option of assessee). Normal rate of depreciation is for wear and tear of assets and total normal depreciation on any asset or block of asset will not exceed actual cost.

Therefore, over a period of time say deemed useful life of any assets or block of asset actual cost can be allowed.

For revenue there is not much impact:

For revenue, considering totality of depreciation allowed over useful life, there is not much impact. If higher depreciation is allowed in some earlier years, then in subsequent years depreciation allowance will be reduced in case of WDV method is adopted. In case of Straight Line Method, the amount shall remain fixed. If higher rate is allowed, total period will reduce.

Besides, in large proportion of industrial assessee, in initial years and also in years of low business performance, there is loss and rate of depreciation makes no impact at all even in any year.  

However, we find that revenue raises disputes on various aspects to deny depreciation allowance all together or to reduce amount allowable.

For assessee there can be significant impact:

For assessee, there can be significant impact due to rate of depreciation in case of profits and in all cases due to penalty proceedings. However , in case of loss in business of assessee, there is no impact because depreciation which cannot be allowed due to inadequate income is to be carried forward to form current depreciation.

Penalty provisions are such that assesses are forced to carry litigation if the tax officer reduces depreciation allowance.

Policy decision by CBDT is desirable:

Therefore, as a policy decision CBDT should direct the tax officers not to indulge into litigation by denying depreciation at all or at higher rates, if there is possible view in favor of assessee.  

 

Recent case of RELIGARE SECURITIES LTD (supra.)

Higher depreciation on UPS - assessee claimed depreciation on UPS @ 60% treating the same to be part of computer and peripherals The AO denied the same by not following binding precedence. The assessee has to carry litigation to justify that his claim was reasonable and as per law.

On first appeal of assessee the claim was allowed by the CIT(A). The revenue carried litigation and filed an appeal against order of CIT(A).

The Tribunal confirmed the order of CIT(A). Tribunal followed precedence in favour of assessee including judgment of Delhi High Court in case of  BSES YAMUNA POWERS LLD. / BSES RAJDHANI POWERS LTD. [2010 (8) TMI 58 - DELHI HIGH COURT]  in which it has held that UPS is an essential part of computer system and is eligible for depreciation @ 60%.

Un-necessary litigation by revenue:

Therefore, it can be said that the  revenue in un-ncecessarily indulging into litigation for reasons that:

1. When there is no significant impact on revenue over a period of time, because it is only a matter of time that depreciation is to be allowed either quickly or slowly, there should not be dispute,
2. When assessee has relied on and followed a reasonable view  which is also supported by  precedence, there should not be litigation by denying a reasonable deduction.
3. When Tribunal and High Court has allowed similar claims, there should not be further litigation.
4. Tribunal is final fact finding authority. When on similar issue Tribunal has taken view that UPS, printers, scanners, routers etc. which functions on software and with computers, are part of computers, this being purely question of fact, should not be disputed further before various  High Court and the Supreme Court.
5. Computers, and its attachments have very short and uncertain useful life and they are also facing increased obsolescence. Therefore, accelerated depreciation should be allowed in a practical manner.
6. Higher rates means higher depreciation in initial years which goes on rapidly reducing from next year. For example, suppose cost is ₹ 100 and  rate is 60% ,then  in first year depreciation  will be 60, in second year ₹ 24 and in third year 9.60. This shows that there is rapid decline in depreciation allowable.
7. The much older judgment reported as  2005 (8) TMI 293 - ITAT CALCUTTA-B in case of INCOME-TAX OFFICER, WARD-31 (4) , KOLKATTA. VERSUS SAMIRAN MAJUMDAR is dated Dated: - 01 August 2005. That has attained finality. This was relied on by assessee and CIT(A).