Investment allowance, disputed excise duty and depreciation: statutory deductions cannot be reduced by contrary conditions or unresolved assessment timing.

Investment allowance under section 32A was not forfeited merely because no reserve existed in a loss year; where taxable income emerged, the Assessing Officer had to give an opportunity to create the required reserve before rejecting the claim. A provision for disputed excise duty was deductible on mercantile basis because an enforceable statutory liability had accrued, even though the demand was disputed and not finally paid. Proportionate curtailment of depreciation on account of a shortened previous year was not sustainable where the restriction conflicted with the statutory allowance, and full depreciation remained available in law.

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Issues: (i) Whether investment allowance could be denied for want of reserve in the year of loss and whether the Assessing Officer was bound to afford an opportunity under the Explanation to section 32A(4); (ii) Whether the provision made for disputed excise duty was deductible as an accrued liability on mercantile basis; (iii) Whether proportionate disallowance of depreciation was valid merely because the previous year was shortened on change of accounting year.

Issue (i): Whether investment allowance could be denied for want of reserve in the year of loss and whether the Assessing Officer was bound to afford an opportunity under the Explanation to section 32A(4).

Analysis: The allowance under section 32A was not lost merely because no reserve had been created in a year where the assessee returned a loss. The Explanation to section 32A(4) contemplated an opportunity to make good the reserve where the assessment resulted in higher income than that shown in the return. The Board's circular clarified that reserve need not be created in a loss year and could be created when taxable profits arose. The view that the Explanation applied only where some reserve had already been created was rejected.

Conclusion: The issue was decided in favour of the assessee. The matter was remitted to the Assessing Officer to allow an opportunity to create the necessary reserve and then consider the claim under section 32A.

Issue (ii): Whether the provision made for disputed excise duty was deductible as an accrued liability on mercantile basis.

Analysis: Under mercantile accounting, deduction of tax liability depends on accrual of an enforceable liability and not merely on quantification or actual payment. The excise levy had been determined by the departmental authorities, the assessee had furnished bonds and bank guarantees for the differential amount, and the dispute had not been finally resolved in the assessee's favour. In that statutory setting, the liability had accrued even though no demand notice had been issued and the amount remained disputed. The provision, therefore, represented an allowable accrued liability.

Conclusion: The issue was decided in favour of the assessee. The excise duty provision was allowable as a deduction.

Issue (iii): Whether proportionate disallowance of depreciation was valid merely because the previous year was shortened on change of accounting year.

Analysis: Depreciation under section 32 is allowable at the prescribed rates and is not to be curtailed by a condition imposed while permitting a change in the previous year, if that condition is contrary to the statute. A party cannot contract out of the Act, and an arbitrary restriction on statutory depreciation could not override the allowance otherwise available in law. The condition that depreciation would be confined proportionately was therefore unenforceable.

Conclusion: The issue was decided in favour of the assessee. Full depreciation in accordance with law was allowable.

Final Conclusion: The assessee succeeded on the substantial issues decided on merits, including investment allowance reserve opportunity, deductibility of excise duty provision, and full depreciation, while the remaining ground was not pursued.

Ratio Decidendi: Under the mercantile system, a statutory tax liability is deductible when an enforceable liability accrues, even if quantification or payment is pending; an assessee cannot be denied a statutory deduction by a condition that is contrary to the Act, and where the assessment turns a loss return into taxable income, the Assessing Officer must afford the statutory opportunity to create the required reserve.

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