1993 (4) TMI 31 - HC - Income Tax

Court Rules Unabsorbed Depreciation Trumps Development Rebate in Profit Set-Off

The court held that unabsorbed depreciation takes priority over unabsorbed development rebate for set off against profits. The assessee was denied ... Depreciation, Developement Rebate, Reference, Set Off, Unabsorbed Depreciation, Unabsorbed Development Rebate Issues Involved:1. Priority of development rebate over depreciation allowance.2. Entitlement to depreciation on acquisition of technical data.3. Entitlement to depreciation on expenditure for the purchase of know-how.4. Allowability of payment for know-how as revenue expenditure.Issue-wise Detailed Analysis:1. Priority of Development Rebate Over Depreciation Allowance:The primary issue is whether the assessee-company could lawfully claim the development rebate in priority to the depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for the assessment years 1970-71, 1971-72, and 1972-73. The controversy relates to the priority in setting off unabsorbed depreciation allowance and unabsorbed development rebate. The assessee argued that due to the time limit for carrying forward unabsorbed development rebate, it should be set off first against the current year's profit. However, the Income-tax Officer contended that under the scheme of the Act, unabsorbed depreciation had to be adjusted first.The court examined sections 32 and 33 of the Act, which deal with depreciation and development rebate respectively. Section 32(2) creates a legal fiction that unabsorbed depreciation of the earlier year forms part of the current year's depreciation allowance. Section 33(2) provides for carrying forward unabsorbed development rebate for eight years. Sections 72 and 73 were also considered, which deal with the carry forward and set off of business losses and depreciation.The court concluded that unabsorbed depreciation has priority over unabsorbed development rebate in the matter of set off against the profits of subsequent years. This view was supported by decisions from various High Courts, including Karnataka, Madras, Kerala, Patna, and Orissa High Courts, and the Supreme Court in CIT v. Mother India Refrigeration Industries P. Ltd. The court also addressed the assessee's claim that it had the option to claim or not claim depreciation, referencing the decision in CIT v. East India Cotton Association Ltd. However, it clarified that while the assessee can choose not to claim current year's depreciation, unabsorbed depreciation from earlier years must be set off against the current year's profits.The court answered this question in the negative, against the assessee and in favor of the Revenue.2. Entitlement to Depreciation on Acquisition of Technical Data:The second issue was whether the assessee-company is entitled to depreciation on the price paid for acquiring drawings, blueprints, specifications, process sheets, and technical data from Henry Meadows Ltd. of England, considering these as 'plant' within the meaning of section 32 of the Income-tax Act, 1961, for the assessment years 1970-71, 1971-72, and 1972-73.The court noted that this issue was covered by its earlier decision in Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28, where it was held that the entire amount paid for acquiring such technical data was revenue expenditure and allowed as a deduction in the computation of income for the year in which the payment was made. Consequently, the assessee could not claim depreciation on the same amount.The court answered this question in the negative, in favor of the Revenue and against the assessee.3. Entitlement to Depreciation on Expenditure for Purchase of Know-How:The third issue was whether the assessee-company is entitled to depreciation on the expenditure of lb2,000 incurred for the purchase of know-how from Messrs. Ricardo and Co. Engineering Ltd., U.K., for the assessment year 1971-72.The court agreed with the counsel for both parties that this issue was covered by the decisions of the Supreme Court in Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 and CIT v. Elecon Engineering Co. Ltd. [1987] 166 ITR 66, which supported the assessee's claim.The court answered this question in the affirmative, in favor of the assessee and against the Revenue.4. Allowability of Payment for Know-How as Revenue Expenditure:The fourth issue, which arose consequent to the third issue, was whether the payment of lb2,000 made by the assessee to Messrs. Ricardo and Co. Engineers (1927) Ltd., U.K., was an allowable revenue expenditure if the answer to the third question was in the negative.Since the court answered the third question in the affirmative, question No. 4 did not arise and was not answered.Conclusion:The court concluded that unabsorbed depreciation has priority over unabsorbed development rebate in the matter of set off against the profits of subsequent years. The assessee was not entitled to depreciation on the price paid for acquiring technical data from Henry Meadows Ltd. The assessee was entitled to depreciation on the expenditure incurred for the purchase of know-how from Messrs. Ricardo and Co. Engineering Ltd. Consequently, the question of allowability of the payment for know-how as revenue expenditure did not arise. The court made no order as to costs.