2003 (2) TMI 61 - HC - Income Tax

Court rules on depreciation deductions: Assessee must claim, no retrospective application of amendment

The court held that the Assessing Officer cannot allow depreciation deductions without a claim from the assessee, emphasizing the requirement for the ... Allowance of depreciation - claim by the assessee / assessee's choice to seek deduction - interaction of section 32 and section 34 - prerequisites for allowing depreciation - retrospective effect of an explanatory amendment - Explanation 5 to section 32 (Finance Act, 2001) - prospective commencementAllowance of depreciation - claim by the assessee / assessee's choice to seek deduction - interaction of section 32 and section 34 - prerequisites for allowing depreciation - Whether the Assessing Officer was justified in allowing depreciation where the assessee had not made any claim or request for such allowance - HELD THAT: - The court affirmed that section 32 permits depreciation only subject to the conditions in section 34. The statutory language contemplates that allowance is given when the assessee seeks it: prescribed particulars must be furnished and, implicitly, the assessee must have asked for the deduction. The apex court's decision in CIT v. Mahendra Mills confirmed that depreciation cannot be granted by the AO where the assessee has not claimed it; 'actually allowed' denotes amounts claimed and allowed, not notionally allowed. Applying that settled principle to the facts for assessment years 1989-90 and 1990-91, the court held the Assessing Officer was not justified in granting depreciation where the assessee made no claim for it.Assessee's failure to claim depreciation disentitles the Assessing Officer from allowing the deduction; question answered in favour of the assessee and against the Revenue.Retrospective effect of an explanatory amendment - Explanation 5 to section 32 (Finance Act, 2001) - prospective commencement - Whether the Explanation inserted into section 32 by the Finance Act, 2001 operates retrospectively to validate allowance of depreciation for periods prior to its stated commencement - HELD THAT: - The court examined the Explanation (Explanation 5) inserted by the Finance Act, 2001 and observed that the amendment expressly took effect from 1 April 2002 and the Finance Bill and memorandum clearly stated it would apply to assessment year 2002-03 and subsequent years. Reliance was placed on authority that the effect of an Explanation depends on its language and any express commencement; where the Legislature prescribes a prospective commencement, courts should not import retrospective effect. Given the clear prospective operative date and the apex court's contemporaneous declaration of law in Mahendra Mills, the court rejected the Revenue's contention that the Explanation should be read retrospectively to cover earlier assessment years.Explanation 5 is prospective as enacted and does not operate retrospectively; it does not entitle the Revenue to allowance of depreciation for the assessment years before 1 April 2002.Final Conclusion: For assessment years 1989-90 and 1990-91 the Assessing Officer was not justified in allowing depreciation where the assessee had not claimed it; the Explanation inserted into section 32 by the Finance Act, 2001 is prospective (effective 1 April 2002) and does not affect earlier years. The references are answered in favour of the assessee and against the Revenue. Issues Involved:1. Whether the Assessing Officer is justified in allowing depreciation deduction when the assessee did not claim it.Issue-wise Detailed Analysis:1. Justification of Allowing Depreciation Deduction Without Assessee's Claim:In Income-tax Reference No. 21 of 1999, for the year 1989-90, the assessee filed a return showing a loss of Rs. 9,30,59,275. The Assessing Officer allowed depreciation of Rs. 2,02,79,334 and carried it forward, despite the assessee not claiming it. This decision was confirmed by the Commissioner (Appeals). However, the Tribunal held that the Assessing Officer was not justified in allowing depreciation without a claim from the assessee, referencing the amendment of section 34(1) by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, and the decision of the Bombay High Court in CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. [1989] 177 ITR 443.A similar scenario occurred in Income-tax Reference No. 216 of 1999 for the assessment year 1990-91, where the assessee filed a return showing a loss of Rs. 3,33,77,642 without claiming depreciation. The Assessing Officer allowed depreciation of Rs. 1,65,95,460. The Tribunal again held that the Assessing Officer was not justified in allowing depreciation without a claim from the assessee, relying on the same Bombay High Court decision and CIT v. Andhra Cotton Mills Ltd. [1997] 228 ITR 30 (AP).The High Court of Kerala, in its judgment dated October 15, 1999, in CIT v. Kerala Electric Lamp Works Ltd. [1999] 157 CTR 346 (Ker), held that section 34(1) of the Income-tax Act requires the Income-tax Officer to allow deductions only if the prescribed particulars are furnished by the assessee. The court emphasized that the use of the words 'allowed' and 'allowance' implies a claim or application by the assessee, and without such a claim, the deduction cannot be allowed.The Supreme Court in CIT v. Mahendra Mills [2000] 243 ITR 56 reiterated that sections 32 and 34 of the Income-tax Act require the prescribed particulars to be furnished for depreciation to be allowed. The court stated that if the assessee does not claim depreciation, it cannot be allowed by the Assessing Officer, emphasizing that 'a privilege cannot be to a disadvantage and an option cannot become an obligation.'The Revenue argued that the Explanation inserted by the Finance Act, 2001, with effect from April 1, 2002, to section 32, which states that the provisions apply whether or not the assessee has claimed the deduction, should be considered retrospective. However, the court held that the Explanation is prospective, effective from April 1, 2002, and does not apply to prior assessment years. The court referenced CIT v. Rajasthan Mercantile Co. Ltd. [1995] 211 ITR 400 and CIT v. S. R. Patton [1992] 193 ITR 49 to support its stance that a fiscal amendment is not retrospective unless explicitly stated.The Finance Bill, 2001, and the memorandum explaining its provisions clarified that the amendments to section 32 would apply from April 1, 2002, onwards. The court concluded that the Explanation added to section 32 does not have retrospective effect and upheld the decision in CIT v. Mahendra Mills [2000] 243 ITR 56, ruling in favor of the assessee and against the Revenue.