2017 (10) TMI 421 - HC - Income Tax

High Court Upholds Tribunal Decision on Depreciation Deduction

M/s. Herdillia Chemicals Limited, Versus The Commissioner of Income Tax, City-III, Mumbai

The High Court affirmed the Tribunal's decision to deduct the depreciation differential from the capital, relying on the precedent set by Zenith Steel ... Charge of Surtax - Deduction of the amount of depreciation differential from the capital - whether Tribunal erroneously held that the judgment of this Court in Zenith Steel Pipes (1976 (7) TMI 9 - BOMBAY High Court) concludes the issue? - Held that:- Mr. Malhotra is right in his contention that merely because a coordinate Bench has distinguished a judgment of this Court in Zenith Steel Pipes (supra), we must not remit the questions back to the Tribunal. Firstly he would submit that the coordinate Bench was sitting at Madras. The Tribunal's coordinate Bench at Madras was bound by the judgment and order of the jurisdictional High Court. The jurisdictional High Court for that Tribunal is not this Court, but High Court of Madras, at Madras. Secondly, in that case, the Tribunal found on facts that the issue of Companies (Profits) Surtax Act, 1964 levying additional tax on the total income of a company in the manner stipulated by the Act, was brought in issue by the assessee. The assessee argued that Surtax is charged over and above the statutory deductions. The First Schedule to the Act contains the rules for computing the chargeable profits and Second Schedule contains rules for computing the capital base of the company. The Tribunal found that in the case before it, these conditions have not been satisfied. In the case before the Tribunal in respect of differential, there is no reserve credited by the board of directors through a conscious overt act, nor is there any crediting of amount to any reserve by a conscious overt act on the part of board of directors. Of course, a large amount has been allowed in the income tax proceedings as and by way of depreciation. But the other two conditions were not satisfied. That is why the Tribunal found that there was no need to reduce the capital base by differential. It is these facts of the matter which enabled the coordinate Bench of the Tribunal at Madras to observe that true it is that in the case of Zenith Steel Pipes (supra) this Court has taken a view which supports the revenue, but the contentions advanced before the Tribunal's coordinate Bench at Madras and considered by it, were not advanced before the Bombay High Court. It is in these circumstances that the coordinate Bench of the Tribunal distinguished it. We do not see how in the abstract and de­hors the factual backdrop Mr.Seth can rely upon the view of the coordinate Bench of the Tribunal. As far as the Income Tax Appellate Tribunal, Mumbai Bench is concerned, it was bound by the judgment of this Court in Zenith Steel Pipes (supra) and when it applies with full force to the facts also. In our view, therefore, none of the contentions of Mr. Seth can be accepted. The questions which have been forwarded for our opinion by the Tribunal are answered against the assessee and in favour of revenue Issues Involved:1. Deduction of depreciation differential from capital.2. Application of Supreme Court decision in Zenith Ltd. Vs. CIT.3. Omission of relevant material by the Tribunal.Detailed Analysis:Issue 1: Deduction of Depreciation Differential from CapitalThe Tribunal upheld the deduction of the depreciation differential amounting to Rs. 2,43,11,321 from the capital. The assessee argued that the Tribunal did not consider the provisions of law and the specific circumstances of the case. It was contended that the Tribunal should have accepted the plea for rectification and re-heard the matter, as the depreciation amount credited to the books of accounts should have been credited to the reserves. The Tribunal's decision was based on the precedent set by Zenith Steel Pipes, which the assessee claimed was not applicable in their case as the reserves had been depleted by dividends declared over the years.Issue 2: Application of Supreme Court Decision in Zenith Ltd. Vs. CITThe Tribunal applied the Supreme Court decision in the case of Zenith Ltd. Vs. CIT without considering the assessee's claim regarding the deletion of the depreciation differential due to dividend distribution. The assessee distinguished their case from Zenith Steel Pipes, arguing that the later part of Rule 1(iii) was not considered in the Zenith case. The Tribunal, however, did not accept this distinction and upheld the deduction from the capital.Issue 3: Omission of Relevant Material by the TribunalThe assessee claimed that the Tribunal omitted to consider relevant material, specifically the depletion of reserves by dividend payments. The Tribunal rejected this argument, stating that the conditions in Rule 1(iii) were satisfied, and there was no need to read additional conditions into the provision. The Tribunal also noted that the coordinate Bench at Madras, which had taken a different view, was not bound by the jurisdictional High Court's decision in Zenith Steel Pipes, unlike the Mumbai Bench.Conclusion:The High Court concluded that the Tribunal correctly applied the decision in Zenith Steel Pipes and upheld the deduction of the depreciation differential from the capital. The Court found no merit in the assessee's arguments and answered the questions in favor of the revenue. The reference was thus disposed of, affirming the Tribunal's decision.