South India Sugars Limited v. The Deputy Commissioner Of Income-Tax Special Range Vi

In the High Court of Judicature at Madras Dated : 06.11.2007 Coram : The Honourable Mr.Justice K.RAVIRAJA PANDIAN and The Honourable Mrs.Justice CHITRA VENKATARAMAN Tax Case (Appeal) No.248 of 2004 South India Sugars Limited97, Mount RoadChennai – 600 032. .. Appellant Vs.. Respondent The Deputy Commissioner of Income-taxSpecial Range VI Chennai. TAX CASE (APPEAL) under Section 260A of the Income Tax Actagainst the order of the Income Tax Appellate Tribunal Madras 'B'Bench dated 13.06.2001 made in I.T.A.No.1639/Mds/93 for theassessment year 1989-90 against the order of the Commissioner ofIncome Tax, Madras-34 dated 24.3.93 in C.No.218-I (5) 92-93 andagainst the assessment order of the Deputy Commissioner of IncomeTax, Special Range VI, Madras-34 dated 20.3.92 in PAN.No.47-004-CV-7196 in G.I.NO.17-S/1989-90 respectively. For Appellant : Mr.VenkatanarayananFor Respondent : Mr.T.Ravikumar, Standing Counsel for Income-tax. JUDGMENT JUDGMENT OF THE COURT WAS DELIVERED BY K.RAVIRAJA PANDIAN,J The relevant assessment year is 1989-90. The appeal isfiled formulating the following substantial questions of law:-1. Whether on the facts and in thecircumstances of the case, the Tribunal was rightin sustaining the action of the respondent hereinby invoking the provisions of Section 263 of theAct? https://hcservices.ecourts.gov.in/hcservices/ 2. Whether on the facts and in thecircumstances of the case, the Tribunal was rightin sustaining the action of the respondent inrestricting the claim in terms of Section 32AB ofthe Act excluding the rental and interest income? 2. The necessary facts as culled out from the statement offacts are as follows:- The appellant was a company engaged in the business ofmanufacture and sale of sugar. For the relevant assessment year1989-90, while computing the assessment under Section 143(3) ofthe Income-tax Act, the assessing officer allowed depreciation ofRs.2,49,06,101/- which included depreciation claimed by theassessee on energy saving equipment at Rs.98,66,304/-. Theassessee had claimed depreciation at 100% on those equipment, thecost of which was Rs.69,64,450/-. The same was claimed asallowable being increased in proportion to the number of months inthe transitional previous year. The assessing officer also alloweddeduction of the rental income and interest income in a sum ofRs.3,84,237/- and Rs.5,49,144/- respectively under Section 32AB ofthe Act. 3. The said assessment order was considered by theCommissioner of Income-tax, as erroneous and prejudicial to theinterest of the revenue and on that reason initiated action underSection 263 of the Act. After hearing the assessee, theCommissioner of Income-tax by his order dated 24.3.1995 directedthe assessing officer to restrict the allowance of depreciation tothe actual cost of the assets. He further directed the assessingofficer to exclude the rental and interest income whilecalculating the relief under Section 32AB of the Act. 4. Aggrieved by the revisional order, the assessee carriedthe matter on appeal to the Income-tax Appellate Tribunal, whichby its order dated 13.6.2001 confirmed the issue of depreciationby holding that the commissioner was justified in setting asidethe assessment order and directing the assessing officer to allowdepreciation limited to the written down value of the asset. 5. As regards the rental income considered as part ofbusiness income, the Tribunal has granted the relief for a sum ofRs.3,56,235/- being the concessional rent collected from theemployee of the assessee for the premises let out to them but inother respect the revisional order was confirmed. The correctnessof the said order is now canvassed before us. 6. In respect of the first question of law, it was contendedby the counsel for the assessee that as per depreciation TableAppendix I, the depreciation allowance for energy saving devises https://hcservices.ecourts.gov.in/hcservices/ 5. As regards the rental income considered as part ofbusiness income, the Tribunal has granted the relief for a sum ofRs.3,56,235/- being the concessional rent collected from theemployee of the assessee for the premises let out to them but inother respect the revisional order was confirmed. The correctnessof the said order is now canvassed before us. 6. In respect of the first question of law, it was contendedby the counsel for the assessee that as per depreciation TableAppendix I, the depreciation allowance for energy saving devises https://hcservices.ecourts.gov.in/hcservices/ was 100% under item Nos.(i) (iii). The devises were installed bythe assessee during the previous year ending 31.2.1989. So, forthe assessment year 1989-90, the depreciation allowable was 100%of the cost of the assets. As per Rule 5 of the Tenth Schedule,the depreciation allowable was in proportion to the number ofmonths in the previous year. For the assessment year 1989-90, thetransitional previous year extending to a period of 17 months,allowance of depreciation was to increased by multiplying thenormal depreciation of 100% with 17 months and reduced to one yearby dividing the same by 12. In the absence of any statutoryprescription that the allowance of depreciation should not exceedthe actual cost, the order of the Commissioner as confirmed by theTribunal is not correct. 7. Refuting the contention, the learned counsel for theRevenue submitted that the question of law on which the appeal wasadmitted, is pertaining to invocation of power of the Commissionerunder Section 263 of the Act. The assessee cannot be allowed toargue the appeal in deviation to the questions of law. The twinrequirements for invoking Section 263 of the Act are very muchpresent in the case, in the sense, the order of assessment wasconsidered by the Commissioner as erroneous and prejudicial to theinterest of the Revenue. Hence, the invocation of Section 263 isvery much in order. As to the correctness of the revisional order,directing the assessing officer to restrict the depreciationallowance to the W.D.V. of the assets has not been questioned byframing any question of law, which is the requirement fordetermination of an issue under Section 260A of the Act. Hefurther contended that at no case the depreciation cannot beallowed over and above the actual cost of the asset. 8. We heard the argument of the learned counsel on eitherside and perused the materials on record. 9. It is true that the the first question of law on which theappeal has been admitted is very general in nature questioning thecorrectness of the order of the Tribunal in sustaining the actionof the Commissioner invoking the provisions of Section 263 of theIncome-tax Act. As rightly contended by the learned counsel forthe Revenue, the Commissioner has invoked the revisional powerunder Section 263 on being satisfied that the order of assessmentwas not only erroneous in nature, but also prejudicial to theinterest of the revenue. Further, it could be seen from therevisional order as well as the order of the Tribunal, thecorrectness of the invocation of Section 263 was never been anissue for consideration before the authorities. Hence, thecontention on behalf of the revenue is correct in this regard.However, an issue as to the allowability of the depreciation overand above the actual cost of the assets acquired during the relevant period, which is transitional previous year of extended17 months was made with reference to Rule 5 of the Tenth Scheduleof the Income-tax Act, we heard the counsel on either side onmerits. relevant period, which is transitional previous year of extended17 months was made with reference to Rule 5 of the Tenth Scheduleof the Income-tax Act, we heard the counsel on either side onmerits. 10. Even on merits, we are not able to countenance theargument of the learned counsel for the assessee for the reasongiven in the order passed by the Tribunal. In respect oftransitional previous year it was provided in Rule 5 of Schedule10 of the Income-tax Act that there could be enhancement ofdepreciation allowance in proportion to the number of months inthe previous year. The depreciation was an allowance on thewritten down value of the assets concerned. Section 43(6)(c)((ii)of the Act defined the written down value of any block of assetsin respect of any previous year relevant to the assessment yearcommencing on or after the 1[st] day of April 1989 as written downvalue of that block of assets in the immediately precedingprevious year as reduced by the depreciation actually allowed inrespect of that block of assets in relation to the said precedingprevious year. For the transitional previous year, if thedepreciation is allowed at more than 100% of the actual cost onthe basis of the number of months in the previous year, that wouldgive a negative figure for the written down value. That would nothave been the intention of the Legislature, if one have regard tothe concept of depreciation with reference to Section 32(1)(ii) ofthe Income-tax Act, which provided that depreciation would beallowed in the case of block of assets such percentage on thewritten down value, as prescribed in Rule 5 of the Income-taxRules. The Tribunal has also taken note of the Circular No.549dated 31.10.1998 issued by the C.B.D.T. after the introduction ofTenth Schedule by the Direct Tax Laws (Amendment) Act, 1987 witheffect from 1[st] April, 1989 stating the scope and effect of theSchedule and also referred Paragraph No.2.8 which dealt with thetransitory provisions for the assessment year 1989-90. The BoardCircular proceeded as follows: “(iv) Rule 5 provides that where in atransitional previous year the assessee's income underthe head “profits and gains of business or profession”is included in the total income for a period of 13months or more, the depreciation allowance u/s.32(1)(ii) shall be increased proportionately. However, ;while allowing enhanced depreciation, care should betaken that the total amount of depreciation allowedduring the extended transitional previous year,including the depreciation allowed in earlier years,does not exceed the actual cost of the asset. Similarcare will also have to be taken where 100%depreciation is allowable on certain block of assetsunder the rate schedule for depreciation provided in Appendix-I to the IT Rules, 1962 or where 100%depreciation is available on machinery or plantcosting upto Rs.5000 under the provisions of the firstproviso to Sec.32(1)(i).” Appendix-I to the IT Rules, 1962 or where 100%depreciation is available on machinery or plantcosting upto Rs.5000 under the provisions of the firstproviso to Sec.32(1)(i).” 11. Thus, it could be clear that even for the transitionalprevious year, the intention was not to allow depreciation inexcess of the original cost of the assets. The Tribunal has alsorejected the contention of the assessee that after the deletion ofSection 34(2) with effect from 1.4.1988, there was no restrictionon the allowance of depreciation by taking note of Rule 5(1A) ofthe Income-tax Rules, 1997 introduced by way of an amendment bythe Income-tax (Twelfth Amendment) Rules, 1997 and the provisothereto. As per the sub-rule, the allowance under clause (i) ofsub-section (1) of Section 32 of the Act in respect ofdepreciation of assets acquired on or after 1[st] day of April, 1997shall be calculated at the percentage specified in the secondcolumn of the Table in Appendix 1A of these rules on the actualcost thereof to the assessee as are used for the purposes of thebusiness of the assessee at any time during the previous year. Italso provided that the aggregate depreciation allowed in respectof any asset for different assessment years shall not exceed theactual cost of the said assets. The proviso to sub-rule 1A clearlyrestricted that the aggregate of the depreciation allowed inrespect of any asset should not exceed the actual cost of thatasset. 12. Thus, even on merits, the assessee has not made out anycase in this appeal for taking a different view than the one takenby the Tribunal. Hence, the first question of law is decided inaffirmative against the assessee. 13. In respect of the second question of law, learned counselon either side submitted and agreed that the issue is covered infavour of the assessee by the decision of this Court in the caseof COMMISSIONER OF INCOME-TAX VS. TAMIL NADU MERCANTILE BANKLIMITED reported in (2002) 255 ITR 205 and CARBORANDUM UNIVERSALLIMITED VS. COMMISSIONER OF INCOME-TAX reported in (2004) 265 ITR372, wherein this Court has held that the calculations required tobe made for the purpose of section 32AB of the Income-tax Act,1961, are to commence with the figure representing the profits ofthe eligible business as computed in accordance with therequirements of Parts II and III of Schedule VI to the CompaniesAct, 1956. From that figure the amount equal to the depreciationcomputed in accordance with section 32(1) of the Income-tax Act,1961, is to be deducted. After such deduction, that amount is tobe increased by the aggregate of the amounts set out in clauses(i) to (vii) of section 32(3). A sum equal to 20 per cent. of thatamount was to be allowed as a deduction under section 32AB(1)(ii). The determination of the profit required to be made in accordancewith Parts II and III of Schedule VI to the Companies Act wasrequired to be made after taking into account all the activitiesof the assessee governed by the Companies Act, as the profit andloss account required to be drawn up by a company must necessarilyreflect all the income and all the expenditure incurred by thecompany in that year. Section 32AB does not require the profit forthe purpose of section 32AB(1) to be calculated in accordance withthe provisions of the Income-tax Act. All that it provides wasthat the calculations should first be made in accordance with theCompanies Act and the requirements more specifically required ofParts II and III of Schedule VI to the Companies Act. There was,therefore, no scope at all for importing the concept of differentheads of income found in the Income-tax Act, into the calculationof profit required to be made. 14. Thus, the issue the deletion of the interest amount andcertain part of the rental received by the assessee is only heldto be incorrect. Thus, the second question of law framed above isanswered in favour of the assessee and against the revenue. 14. Thus, the issue the deletion of the interest amount andcertain part of the rental received by the assessee is only heldto be incorrect. Thus, the second question of law framed above isanswered in favour of the assessee and against the revenue. 15. For the fore-going reasons, the appeal is partly allowedas indicated above. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar. uskTo 1. The Assistant Registrar, Income Tax Appellate Tribunal,III Floor, Rajaji Bhavan, Besant Nagar, Chennai. 2. The Commissioner of Income-tax, Tamil Nadu- I Madras-34. 3.The Deputy Commissioner of Income Tax, Special Range-VI Madras-34. Income Tax, Special Range-VI Madras-34. 1 cc to Mrs. Pushya Sitaraman, Advocate, SR. 67066 Tax Case (Appeal) No.248 of 2004NSM (CO)kk 16/11