2007 (11) TMI 718 - HC - Income Tax

Revisional power under Section 263 upheld; depreciation capped at actual cost/WDV; Section 32AB deduction starts from profit per Schedule VI

South India Sugars Limited Versus The Deputy Commissioner of Income Tax, Special Range VI

South India Sugars Limited Versus The Deputy Commissioner of Income Tax, Special Range VI - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner was justified in invoking the revisional power under Section 263 of the Income Tax Act in respect of the assessment order for the relevant year. 2. Whether depreciation allowance for energy-saving equipment in a transitional previous year (extended 17 months) could exceed the actual cost of the assets (or exceed the written down value concept), having regard to Rule 5 of the Tenth Schedule, Section 32 and related provisions. 3. Whether rental and interest income should be excluded when computing the amount eligible for relief under Section 32AB of the Income Tax Act (i.e., the correct starting figure and deductions for computing the 20% deduction under Section 32AB(1)(ii)). ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of exercise of power under Section 263 Legal framework: Section 263 empowers the Commissioner to revise an assessment where the assessment order is, in his opinion, erroneous in so far as it is prejudicial to the interests of the revenue. Precedent Treatment: The Tribunal and the revisional authority treated the matter on the basis that both prerequisites - error and prejudice to revenue - were satisfied; that treatment was not controverted on merits before authorities. Interpretation and reasoning: The Court observed that the revisional power was invoked after the Commissioner formed a satisfaction that the assessment order was erroneous and prejudicial. The correctness of invocation was never entertained as a live issue before the authorities, and the Commissioner's satisfaction was supported by the matters under consideration (depreciation computation and application of Section 32AB). The Court accepted the Revenue's contention that the appeal should not deviate from the admitted question of law challenging the invocation of Section 263. Ratio vs. Obiter: Ratio - The Court endorses that, on the facts, the statutory prerequisites for Section 263 were present and the Commissioner was justified in invoking revisional jurisdiction. Obiter - procedural observations about framing of questions under Section 260A are explanatory. Conclusion: The exercise of power under Section 263 was held to be properly invoked in the circumstances; no fault was found with the Commissioner's jurisdictional action. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Whether enhanced transitional depreciation can exceed actual cost / affect WDV Legal framework: Section 32(1)(ii) allows depreciation as a percentage on written down value (WDV) of a block of assets; Section 43(6)(c)(ii) defines WDV for previous years relevant to assessments commencing on or after 1-4-1989; Rule 5 of the Tenth Schedule prescribes enhancement of depreciation proportionate to months in a transitional previous year. Precedent Treatment: The Tribunal relied on statutory scheme and Board circulars interpreting the Tenth Schedule and transitional provisions; the Court referred to the Tribunal's reasoning and a relevant CBDT Circular (No. 549) explaining limitations when enhanced depreciation is allowed in a transitional year. Interpretation and reasoning: The Court analysed the interaction between Rule 5 (enhancement for extended transitional previous year) and the WDV concept under Section 43(6). It reasoned that allowing enhanced depreciation in excess of the asset's actual cost (or so high as to produce a negative WDV) would be contrary to the legislative intent and inconsistent with the concept of depreciation as reduction of WDV. The CBDT Circular expressly directed that while allowing enhanced depreciation in a transitional previous year, care must be taken that total depreciation allowed during the extended period, including amounts allowed earlier, does not exceed actual cost. The Court also noted that subsequent rule provisions (Rule 5(1A) and its proviso in the Income Tax Rules, 1997) reinforce the principle that aggregate depreciation for an asset across assessment years shall not exceed actual cost. Ratio vs. Obiter: Ratio - Depreciation allowed in a transitional previous year under Rule 5 must be applied so that aggregate depreciation does not exceed actual cost and cannot result in a negative written down value; therefore the revisional restriction to WDV (or actual cost) is correct. Obiter - references to the later Rule 5(1A) and proviso are explanatory of legislative trend and confirmatory rather than decisive for the 1989-90 assessment. Conclusion: Enhanced depreciation in the transitional 17-month previous year cannot be allowed over and above the actual cost of the asset or to the extent of producing a negative WDV; the Tribunal correctly sustained the Commissioner's direction to restrict depreciation to the WDV/actual cost. The first question of law is decided against the assessee. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Inclusion/exclusion of rental and interest income for computation under Section 32AB Legal framework: Section 32AB prescribes a special deduction (20% of a specified amount) for eligible business as defined by reference to profit computed under Parts II and III of Schedule VI to the Companies Act; the statutory text of Section 32AB and the scheme require starting with company profit as per Schedule VI and then deducting depreciation under Section 32(1) before applying additions listed in Section 32(3). Precedent Treatment: The Court relied on earlier decisions of the same Court which held that calculations for Section 32AB must commence with figures representing profits as computed in accordance with Parts II and III of Schedule VI to the Companies Act and that the profit so computed encompasses all income and expenditure reflected in the company's profit and loss account; those decisions were applied and followed. Interpretation and reasoning: The Court adopted the reasoning that Section 32AB requires the starting figure to be the profit as per Schedule VI accounts and not the separate heads of income under the Income Tax Act. Thus, one cannot import the concept of separate heads (e.g., treating rental or interest as excluded) when computing the base for Section 32AB unless those amounts are excluded in the company accounts themselves. The Tribunal's partial relief for concessional rent collected from employees was noted, but exclusion of rental and interest in other respects was held to be incorrect in law given the established principle that Section 32AB calculations follow Schedule VI profit figures. Ratio vs. Obiter: Ratio - For the purpose of Section 32AB computation, the profit must be the figure as drawn under Parts II and III of Schedule VI; therefore interest and rental income that form part of the company's profit as per Schedule VI cannot be excluded merely by reference to tax-heads. Obiter - factual application (concessional rent to employees) is case-specific illustration. Conclusion: The revisional exclusion of rental and interest income from the computation under Section 32AB (except the conceded concessional rent amount) was incorrect; the second question of law is answered in favour of the assessee and against the revenue. FINAL DISPOSITION (as to issues considered) The Court held that the Commissioner's invocation of Section 263 was valid; that depreciation in the transitional 17-month previous year cannot be allowed in a manner that causes aggregate depreciation to exceed actual cost or produces a negative WDV; and that rental and interest income cannot be excluded from the Section 32AB computation where such amounts are included in profit as per Schedule VI accounts, resulting in a partly allowed appeal (depreciation restriction sustained; Section 32AB relief restored except as conceded).