TaxTMI 
TaxTMI 
2011 (3) TMI 964
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...., the interest paid to the partners is allowable as a deduction in computing the income from business, however subject to the conditions prescribed in that section. Both these assessees paid interest to their respective partners and claimed the same as a deduction. There is no dispute that both the partnership firms have complied with the conditions prescribed under section 40(b) of the Act. 3.1 The dispute is related to the determination of the Capital account balances of the partners on which the interest is payable. These assessees claimed interest on the capital account balances of the partners as disclosed in their respective books of account. However, during the course of assessment proceedings, the assessing officer noticed that both the firms did not provide for depreciation on the fixed assets in their books. However for the purpose of computing the total income, they have claimed depreciation in accordance with section 32 of the Act. Thus it was noticed that the net profit for book purposes have been shown at a higher figure by not-charging depreciation, which would consequently increase the capital balances of the partners. In that case, these assessees would g....
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....lowance/disallowance of interest paid to the partners is governed by the provisions of section 40(b) of the Act. Both the assessees herein have duly complied with the conditions prescribed in that section and hence the Assessing Officer should have fully allowed the claims made by these assessees. He further submitted that, even if it is assumed that the assessing officer is entitled to rework the capital balances, it is not proper on the part of the assessing officer to reduced the cumulative amount of depreciation that was allowed under the income tax Act. The ld A.R submitted that the reworking of capital balances is not such a simple exercise as carried out by the Assessing Officer. Elaborating this proposition, the Ld. A.R. submitted that there are mainly two types of claiming depreciation viz., Straight line method (SLM) and Written Down Value method (WDV). The companies registered under the Companies Act have an option to follow any one of the two methods. However, the income tax Act recognizes only WDV method of claiming depreciation. Further the rates at which depreciation is allowable very significantly between SLM method and WDV method. Even the rates of depreciation all....
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....fficer is not entitled to re-work the capital balances of the partners for the purpose of determination of interest payable to the partners:- (a) Ambica Chemical Products, Order dated 31-5-2005 in ITA No. 612/V/1998 and ITA No. 09/V/1999. (b) Ambica Chemical products - Order dated 09-1-2009 in ITA No. 201/V/2003. The Ld. A.R further submitted that the SMC bench has given much importance to the explanation 5 to section 32, which was inserted into the Act with effect from 1.4.2002. He submitted that the decision rendered in the case of Aarthi Nursing home, supra shall not apply to the assessee named Swaraj Enterprises (ITA No.495/V/2010), as the assessment year involved there is 1999-2000, which is the year prior to the insertion of the above said explanation 5 to section 32. He also invited our attention to the decision of the division bench Pune in the case of Devi Utensils Factory v. D.C.I.T. [2005](98 TTJ (Pune) 501), where in it was held that the assessing officer's method of reworking of capital was held to be justified. Accordingly the Ld. A.R submitted that, for the purpose of allowing interest on capital balances of the partners, only it is requ....
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....th regard to the method of valuation of stock, which materially affected the book profit and consequently the total income also. The assessee, in that case, was valuing the stock by adopting the cost of raw material and did not take into account over head charges. However, the Assessing Officer therein was of the view that the overhead charges should be added to the value of stock. In that context the Hon'ble Apex Court held that if the consistent practice adopted by an assessee does not disclose true and proper income, then it is the duty of the Assessing Officer to determine the taxable income by making such computation as he thinks fit. However, in the instant cases, the dispute is with regard to the charging of depreciation for book purposes, which will not have any effect in the process of determination of total income. There cannot be any dispute that the depreciation under the Income-tax Act is allowable as per the provisions of section 32 of the Act in accordance with the rates prescribed under the Income-tax Act, i.e. the amount of depreciation provided for in the books of account shall be disregarded while computing the total income under the Income-tax Act, meaning there....
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.... the said accounting standards. 9. The Ld D.R vehemently argued that it is mandatory to claim depreciation as per the explanation 5 to section 32 of the Act. The said provision was also taken into account in the case of Arthi Nursing Home, supra. The said explanation reads as under:- "Explanation 5:- For the removal of doubts, it is hereby declared that the provisions of this sub section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income." First of all, the above said provision is applicable only for the purpose of computation of total income under the Income-tax Act and no where it is provided that it is applicable even for preparing the books of account. The words "Whether or not the assessee has claimed the deduction in respect of depreciation" would show that the assessee has an option not to claim depreciation while computing his total income, but the said option shall be ignored by the assessing officer and he will deduct depreciation from the total income of the assessee. Hence, in our view, it is not mandatory for the assessee to always claims depreciation, but it is only m....
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....ect the method of accounting for the income chargeable under the two heads cited in section 145. In the similar manner, in our view, it is the prerogative of the assessee to select the method and rate for providing depreciation for book purposes. In case of partnership concerns, since there is no statutory compulsion to provide for depreciation, the partners may choose not to provide depreciation in books. As per the ratio of the Hon'ble Apex Court in the case of British Paints Ltd., (supra), the Assessing Officer may disturb the method of accounting only if it does not enable him to determine the correct total income. We have already seen that the quantum of depreciation charged in the books does not affect the total income. 13. Now we shall turn to the main controversy, viz., whether the assessing officer is entitled to re-compute the capital account balances of the partners. In the case of Asstt. CIT v. Sant Show Store [2004] 88 ITD 524 (Chd.), it was held that the assessing officer is not entitled to rewrite the books of account. The relevant observations made in that case are extracted below:- "There is no power with the AO to rewrite the books of account. ....