Bombay High Court

Medley Pharmaceuticals Ltd. vs Income Tax Officer on 22 January, 2001

Equivalent citations: (2001) 71 TTJ Mumbai 328

ORDER

R.V. Easwar, J.M.

The only issue in this appeal is whether the assessing officer can thrust depreciation upon the assessee and thereby reduce the profits eligible for deduction under section 80-IA despite the fact that the assessee had neither claimed depreciation nor furnished the particulars required for ascertaining the amount thereof.

2. The assessee is a company engaged in the manufacture of pharmaceuticals. The old unit is in Aurangabad. The new unit, the profits of which are eligible for the deduction under section 80-IA, is in Daman and started production in the previous year relevant to the assessment year 1995-96. The claim of the assessee under section 80-IA for the year under appeal was Rs. 1,70,26,715. The assessing officer, however, reduced the same by the amount of depreciation of Rs, 13,87,736 and allowed deduction of the balance of Rs. 1,58,99,948. His reasoning, in brief, was that the depreciation claim had been withheld only with a view to availing of the deduction, as otherwise the depreciation claim would be sufficient to adsorb the entire profits from the Daman unit. According to him, tax avoidance was the sole motive for not claiming depreciation and so the case also attracted the McDowell & Co. v. CTO (1985) 154 ITR 148 (SC). He incidentally noticed that the assessee had chosen to claim depreciation in respect of its Aurangabad unit and Mumbai office. He relied on the judgment of the Madras High Court in CIT v. South India Shipping Corporation Ltd. (1998) 6 DTC 480 (Mad-Trib) : (1998) 233 ITR 546 (Mad) in support of his action.

3. On appeal, the Commissioner (Appeals) found no merit in the assessees claim since the provisions of section 34(1) and (2) which required the furnishing of particulars in support of the claim for depreciation had been omitted with effect from the assessment year 1988-89 and thereafter no particulars were required to be filed in support of the claim and, therefore, the assessing officer would be justified in calculating and allowing depreciation under section 32, as it was a statutory allowance. He, therefore, upheld the assessing officers action and dismissed the appeal.

4. The assessee is in further appeal before the Tribunal. The first question is whether in the absence of a claim by the assessee depreciation can be forced upon him and the second is whether the omission of section 34(1) and (2) has any impact on the issue. We should have thought that the recent judgment of the Supreme Court in CIT v. Mahendra Mills (2000) 243 ITR 56 (SC) but for the contention taken on behalf of the revenue that the omission of these statutory provisions has nullified the effect of the judgment. In this judgment, the Supreme Court approved a number of judgments of various High Courts which held that the assessee has a choice in the matter of claming depreciation and that if he chooses not to claim it, the assessing officer has no power to thrust the allowance. One such judgment which was approved was that of the Honble Bombay High Court in CIT v. Shri Someshwar Sahakari Karkhana Ltd. (1989) 177 ITR 443 (Bom). In this judgment, the High Court referred to the judgment of the Supreme Court in CIT v. Dharampur Leather Co. Ltd. (1966) 60 ITR 165 (SC) and held that depreciation is an allowance for the benefit of the assessee and he is entitled to a choice of claiming or not claiming the same, and if the choice is exercised in favour of not claiming the allowance, the assessing officer cannot force it on the assessee. Another judgment approved was that of the Punjab & Haryana High Court in CIT v. Friends Corporation (1989) 180 ITR 334 (P&H) where it was held that the allowance for depreciation is a benefit available to the assessee to claim "but not one that can be thrust upon him against his wishes". It may be noted that in this judgment the High Court had drawn sustenance for its view from the Circular No. 29D of 1965, dated 31-8-1965, issued by the Central Board of Direct Taxes in which instructions had been issued to the assessing officer not to allow depreciation while estimating the income of the assessee if the assessee had either not preferred a claim or had not furnished the required particulars. The judgment of the Gujarat High Court in CIT v. Arun Textile "C" (1991) 192 ITR 700 (Guj) was one of judgments approved, wherein it was held in terms that "a mere claim to deduction would not be enough since the deductions are to be allowed subject to the provisions of section 34 which required necessary particulars to be furnished in the prescribed form. Therefore, until a claim is made for allowing deductions of the nature covered under section 32 along with necessary particulars, there would hardly be any occasion for the Income Tax Officer to allow any claim. Thus, it is clear that both the conditionsthe making of a claim and the furnishing of particularshave been read as cumulative conditions by various High Courts, whose judgments were approved by the Supreme Court in Mahendra Mills (supra).

5. It follows that if either of the two conditions is not fulfilled the assessing officer cannot force the depreciation allowance on the assessee. It further follows logically that in the absence of a claim by the assessee the allowance cannot be thrust upon him even if the particulars are available to the assessing officer. Therefore, the mere fact that the assessee before us did not make a claim for depreciation in respect of its Daman unit places a fetter upon the powers of the assessing officer to allow depreciation.

6. But the contention of the revenue is that after 1-4-1988, the condition of furnishing the particulars required by sub-sections (1) and (2) of section 34 has been done away with and that has altered the effect of the judgment in Mahendra Mills (supra). It is difficult to uphold the contention because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the assessing officer has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down the principle that irrespective of whether the statute requires the furnishing of the particulars are not, if there is no claim for depreciation, it cannot be allowed by the assessing officer. The debate, therefore, as to whether the omission of section 34(1) and (2) and rule 5AA of the Income Tax Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The following observations of the Supreme Court in this regard clinch the issue in favour of the position that despite the omission of the above sub-sections of section 34 and the rule, still depreciation allowance cannot be thrust upon the assessee in the absence of a claim:

"The language of the provisions of sections 32 and 34 is specific and admits of no ambiguity. Section 32 allows depreciation as deduction subject to the provisions of section 34. Section 34 provides that deduction under section shall be allowed only if prescribed particulars have been furnished. We have seen rule 5AA of the rules which though since deleted provided for the particulars required for the purpose of deduction under section 32. Even in the absence of rule 5AA, the return of income in the form prescribed itself requires particulars to be furnished in great detail. There is a circular of the Board, dated 31-8-1965, which provides that depreciation could not be allowed where the required particulars have not been furnished by the assessee and no claim for the depreciation has been made in the return. The Income Tax Officer in such a case is required to compute the income without allowing depreciation allowance. The circular of the Board, dated 11-4-1955, is of no help to the revenue . It imposes merely a duty on the officers of the department to assist the taxpayers in every reasonable way, particularly, in the matter of claiming and securing relief. The officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The provision for claim of depreciation is certainly for the benefit of the assessee. If it does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather the Income Tax Officer should advise him not to claim our view in the spirit of the circular, dated 11-4-1955. Income under the head Profits and gains of business or profession is chargeable to income-tax under section 28 and that income under section 29 is to be computed in accordance with the provisions contained in sections 30 to 43A. The argument that since section 32 provides for depreciation if has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in section 34. If section 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under section 32 cannot be allowed. Section 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code."

7. Rule 5AA derives its strength from section 34(1)/(2). The Supreme Court noticed that even in the absence of the rule, since the return form itself prescribes particulars to be furnished in support of the claim of depreciation, the allowance can be granted only if the assessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. This very basic principle of income-tax law has been reiterated by the Supreme Court in these observations. Therefore, it is no answer to the judgment to say that it does not hold good after the omission of sub-sections (1) and (2) of section 34 and rule 5AA with effect from 1-4-1988.

8. The argument based on tax avoidance and the judgment in McDowell (supra) has also been answered by the quoted observations. If, as held by the Supreme Court, it is expected of the assessing officer to advise the assessee not to claim depreciation if that would be more beneficial to the latter, then there is no scope for invoking the McDowell rule or for saying that the withholding of the claim is a tax-avoidance measure. The Supreme Court approved the view that "it is for the assessee to see if the claim of depreciation is to his advantage". And if he does not make any claim because that is to his advantage, he cannot be hauled up for tax avoidance.

9. In the present case it is an admitted position that the assessee did not claim depreciation in respect of the assets pertaining to the Daman unit. In fact, at p 4 of the assessment order, the assessing officer notices the fact that no depreciation was claimed even in the profit and loss account for the Daman unit.

10. In our considered opinion, therefore, the case is fully covered by the judgment of the Supreme Court in Mahendra Mills (supra). We, therefore, accepted the claim of the assessee for deduction under section 80-IA without deducting the depreciation from the profits of the Daman unit and allow the appeal.