1993 (12) TMI 116 - AT - Income Tax

Tribunal rules on depreciation and investment allowance for assessee

TRACTORS & FARM EQUIPMENTS LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.

The Tribunal ruled in favor of the assessee regarding the treatment of depreciation differentials, stating that such differentials should not reduce the ... - Issues Involved:1. Treatment of depreciation differential/aggregate depreciation differential under Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.2. Treatment of Investment Allowance Reserve under Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.Issue 1: Treatment of Depreciation Differential/Aggregate Depreciation DifferentialQuestion (i): Whether the excess of the amount allowed as depreciation allowance in the income-tax assessment over the amount of depreciation charged in the books of account of the assessee will reduce the capital base for purposes of surtax.The Tribunal found that the excess depreciation allowed in income-tax assessments over the book depreciation (referred to as the 'differential') should not reduce the capital base for surtax purposes. The Tribunal emphasized that Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, must be interpreted correctly. It stated that the creation of reserves involves a conscious, overt act by the board of directors, which was not evident in the case of the differential. The Tribunal concluded that there was no call to reduce the capital base by the differential.Question (ii): Whether the capital base for surtax must be reduced by the depreciation differential as on the first day of the previous year relevant to the assessment year or by the aggregate of such differentials relevant to the first day of the previous years relating to the earlier assessment years.The Tribunal held that there is no warrant for reducing the capital base by the aggregate differential. It noted that if the capital base should not be reduced by the depreciation differential, it logically follows that there is no need to reduce it by the aggregate differential either. The Tribunal emphasized that the scheme of the Act is to take the balance sheet as the starting point and make only those adjustments specifically stipulated by the Act and its schedules, without extensive changes amounting to mutilation.Issue 2: Treatment of Investment Allowance ReserveRule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964The Tribunal addressed the issue concerning the investment allowance reserve for the assessment years 1983-84 and 1984-85. The Assessing Officer had reduced the capital base by the investment allowance actually allowed to the assessee, invoking Rule 4 of the Second Schedule. The CIT(A) declined to interfere in the matter.Upon hearing both sides, the Tribunal concluded that the assessee is entitled to succeed. It noted that the investment allowance granted under Section 32A of the IT Act should not be treated as 'income, profits, and gains not includible in the total income.' The Tribunal emphasized that the investment allowance is a deduction allowed in the process of computing the total income, and there is no warrant for treating it as income not includible in the total income of the assessee. Consequently, the Tribunal set aside the impugned orders of the lower authorities and directed the Assessing Officer to compute the capital base by leaving out of reckoning the investment allowance granted to the assessee.ConclusionIn conclusion, the Tribunal decided both questions regarding the depreciation differential in favor of the assessee and directed the Assessing Officer to modify the surtax assessments accordingly. It also allowed the appeals concerning the investment allowance reserve, directing the Assessing Officer to compute the capital base without considering the investment allowance granted to the assessee.