2005 (4) TMI 514 - AT - Income Tax

Depreciation, Building, etc., partly used for business, Expenditure incurred in relation to income not included in total income, Actual Cost

Issues Involved:
1. Applicability of section 38(2) for proportionate disallowance of depreciation.
2. Restriction of depreciation to 50% under section 32(1) due to less than 180 days of use.
3. Application of section 14A regarding expenditure related to income.
4. Application of section 50 concerning deemed sale of assets.
5. Retrospective application of Explanation 11 to section 43(1).

Issue-wise Detailed Analysis:

1. Applicability of Section 38(2) for Proportionate Disallowance of Depreciation:
The Tribunal examined whether section 38(2) of the Income-tax Act, 1961, could be invoked to disallow a proportionate amount of depreciation based on the period of use. The assessee argued that section 38(2) applies only when an asset is used partly for business and partly for non-business purposes. The Tribunal agreed, stating, "No disallowance can be made where the asset is exclusively used for the purpose of business though such assets might have been used for a lesser period in the accounting year." The Tribunal found that the equipment was used exclusively for business purposes, thus section 38(2) could not be invoked for proportionate disallowance.

2. Restriction of Depreciation to 50% Under Section 32(1) Due to Less Than 180 Days of Use:
The Tribunal analyzed the second proviso to section 32(1) which restricts depreciation to 50% if the asset is used for less than 180 days. It was noted that two cumulative conditions must be satisfied: the asset must be acquired during the previous year and used for less than 180 days. The Tribunal concluded that the asset was acquired in the preceding year, thus the first condition was not met. Consequently, the second proviso could not be applied, and the depreciation could not be restricted to 50%.

3. Application of Section 14A Regarding Expenditure Related to Income:
The Tribunal rejected the Department's contention regarding the application of section 14A, which disallows expenditure related to income not included in the total income. The Tribunal stated, "Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee." Since the entire income of the assessee was taxable, section 14A did not apply.

4. Application of Section 50 Concerning Deemed Sale of Assets:
The Department argued that the equipment should be deemed sold when sent back from India, invoking section 50 for capital gains. The Tribunal dismissed this argument, stating, "In the absence of any deeming provisions regarding the sale of the asset, the contention of the revenue cannot be accepted."

5. Retrospective Application of Explanation 11 to Section 43(1):
The Tribunal addressed whether Explanation 11 to section 43(1), introduced by the Finance Act, 1999, could be applied retrospectively. The Tribunal concluded that the Explanation was substantive and not procedural or clarificatory, thus it could not be applied retrospectively. The Tribunal emphasized, "A provision can be construed as retrospective only when such provisions are either procedural or declaratory or clarificatory or to remove the hardship caused by the main provisions."

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the assessee's claim for full depreciation and rejecting the applicability of sections 38(2), 14A, and 50, as well as the retrospective application of Explanation 11 to section 43(1).

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