Court allows depreciation claim despite accounting policy, directs set off of interest income, and permits carry forward.

The High Court held in favor of the appellant in a case concerning the capitalization of depreciation and its set off against interest income. Despite the appellant's accounting policy capitalizing all highway construction expenditure, the Court ruled that the right to claim depreciation under Section 32(1) should not be estopped by the accounting treatment. The Court directed the Assessing Officer to allow the deduction for depreciation, set off interest income, and permit carry forward. The appeal was allowed without costs.

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Issues:
1. Interpretation of provisions of explanation 5 to Section 32(2) and Section 145 of the Income-tax Act, 1961 regarding capitalization of depreciation and set off against interest income.
2. Allowance of highway construction expenditure including depreciation as a deduction for the assessment year 2003-2004.

Issue 1:
The appeal challenged a judgment regarding the capitalization of depreciation and its set off against interest income. The appellant, engaged in road construction, showed interest income but claimed depreciation on assets, resulting in a loss. Authorities disallowed the depreciation claim, citing the appellant's accounting system capitalizing all highway construction expenditure. The appellant argued for depreciation allowance under Section 32(1) irrespective of accounting policy, citing judicial precedents. The Revenue contended that since the expenditure was capitalized per accounting policy, depreciation should be treated as capital expenditure. The High Court referred to precedents emphasizing the legal right to treat an expense as revenue despite its accounting treatment. The Court held that the appellant's right to claim depreciation should not be estopped by its accounting treatment, directing the AO to allow the deduction and set off interest income.

Issue 2:
The second issue involved the allowance of highway construction expenditure, including depreciation, as a deduction. The appellant's accounting system capitalized all expenditure under "National Highway Development Expenditure," leading to disallowance of depreciation claim. The appellant argued for depreciation allowance under Section 32(1) despite accounting treatment. The Revenue contended that since the expenditure was capitalized, depreciation should be treated as capital expenditure. The High Court emphasized the right to claim a deduction under the Act, regardless of accounting treatment. The Court held that depreciation on assets used for business purposes should be allowed, directing the AO to rework the deduction, set off interest income, and allow carry forward. The appeal was allowed without costs.

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