2008 (8) TMI 1 - HC - Income Tax

Initial depreciation not deductible for written down value calculation.

The court held that the initial depreciation allowed in the assessment year 1982-83 on a new hotel building is not deductible for arriving at the written ... Initial depreciation under section 32(1)(v) is not depreciation but an incentive allowance - written down value as defined in section 43(6)(b) excludes amounts not being depreciation actually allowed - amendment by Finance Act, 1983 not to be applied retrospectively to alter earlier computation of written down value - taxing provision to be interpreted in favour of the assessee where two constructions are possibleInitial depreciation under section 32(1)(v) is not depreciation but an incentive allowance - written down value as defined in section 43(6)(b) excludes amounts not being depreciation actually allowed - amendment by Finance Act, 1983 not to be applied retrospectively to alter earlier computation of written down value - Initial depreciation allowed in assessment year 1982-83 is not deductible in computing the written down value for assessment year 1985-86 despite the Finance Act, 1983 amendment - HELD THAT: - The Court held that the allowance under section 32(1)(v) is a special initial incentive granted in the year of erection/first use of a hotel building and does not possess the characteristics of commercial depreciation (wear and tear or cost of replacement). Consequently, the phrase in section 43(6)(b) requiring deduction of 'all depreciation actually allowed' does not extend to that incentive-type allowance. The statutory scheme requires the written down value for a previous year to be the figure computed at the end of the immediately preceding previous year, incorporating only amounts properly forming part of depreciation for those years; there is no provision to disturb that figure by subsequently treating an incentive allowance as depreciation. The omission by the Finance Act, 1983 of the proviso disallowing deduction of initial depreciation for WDV purposes could not be given retrospective effect to alter computations already settled for earlier years. Finally, where two constructions of a taxing provision are possible, the one favourable to the assessee is to be preferred, reinforcing the conclusion that initial depreciation granted in AY 1982-83 cannot be deducted in computing WDV for AY 1985-86.Initial depreciation granted under section 32(1)(v) in AY 1982-83 is not to be deducted in arriving at the written down value for AY 1985-86; the Tribunal's view upholding the assessee is correct.Final Conclusion: Reference answered in favour of the assessee and against the Revenue: initial depreciation allowed in assessment year 1982-83 cannot be deducted for computing written down value for assessment year 1985-86; reference disposed of with no order as to costs. Issues Involved:1. Whether initial depreciation allowed in the assessment year 1982-83 on a new hotel building is deductible for arriving at written down value in view of the amendments effected by the Finance Act, 1983.Issue-wise Detailed Analysis:1. Deductibility of Initial Depreciation for Arriving at Written Down Value:The core issue revolves around whether the initial depreciation allowed in the assessment year 1982-83 for a new hotel building should be deducted when computing the written down value (WDV) for the assessment year 1985-86, following the amendments by the Finance Act, 1983. The relevant accounting period is the calendar year ending December 31, 1984.The Assessing Officer reduced the WDV of the hotel building by deducting the initial depreciation granted in the assessment year 1982-83. The assessee contested this reduction, leading to an appeal before the Commissioner of Income-tax (Appeals), who ruled in favor of the assessee. The Commissioner noted that the initial depreciation was not debited due to the provisions of section 32(1)(v) of the Income-tax Act, 1961, as they stood at the relevant time. The Commissioner concluded that the amendment could not be applied retrospectively, and thus, the WDV should not have been reduced by the initial depreciation amount.The Revenue appealed to the Tribunal, which upheld the Commissioner's decision, agreeing that the deletion of the phrase 'but any such sum shall not be deductible in determining the written down value for the purposes of clause (ii)' from section 32(1)(v) with effect from April 1, 1984, could not be applied retrospectively.Arguments by Revenue:The Revenue contended that the definition of 'written down value' under section 43(6) of the Act requires considering all depreciation 'actually allowed' under the Act. They argued that since the initial depreciation was granted in the assessment year 1982-83, it should be deducted when computing the WDV for subsequent years, including the assessment year 1985-86.Court's Analysis and Conclusion:The court noted that the term 'depreciation' as understood in commercial circles and accountancy practice refers to the wear and tear of assets used for generating revenue. However, section 32(1)(v) provides for an initial depreciation allowance, which is not related to the actual wear and tear of the asset but is an incentive for new construction. The court emphasized that this initial depreciation does not bear the characteristic of normal depreciation and thus should not be considered when computing the WDV.The court also highlighted the legislative intent and the scheme of the Act, which requires the WDV at the beginning of the previous year to be the starting point for computing depreciation for the current year. Any allowance not considered in earlier years cannot be included in the computation for the current year.Supporting this view, the court referred to the decisions in ITC Ltd. v. CIT and CIT v. Adyar Gate Hotel Ltd., which distinguished initial depreciation as an incentive rather than a replacement cost. The court also cited the Supreme Court's principle that tax provisions conferring benefits should be interpreted in favor of the assessee.Final Judgment:The court concluded that the initial depreciation granted in the assessment year 1982-83 could not be deducted for computing the WDV for the assessment year 1985-86. The Tribunal's decision was upheld, ruling in favor of the assessee and against the Revenue. The question was answered affirmatively, and the reference was disposed of without any order as to costs.