2006 (4) TMI 347 - AT - Income Tax

Summary

Issues Involved:
1. Whether the CIT(A) erred in upholding the action of the ITO of allowing depreciation under section 32 of the Income-tax Act, 1961, despite it not being claimed in the return of income filed by the assessee.

Detailed Analysis:

1. Allowance of Depreciation by the ITO:
The primary issue raised by the assessee was that the Assessing Officer (AO) computed and allowed depreciation from the total income, which was confirmed by the CIT(A), even though the assessee did not claim it. The assessee argued that the claim of depreciation is optional and cannot be imposed. The AO, however, referenced sections 28 and 29 of the Income-tax Act, 1961, which mandate that income from business or profession must be computed in accordance with sections 30 to 43D. The AO asserted that post the deletion of section 34(1) effective from 1-4-1988, the requirement to furnish particulars for claiming depreciation was removed, making the allowance of depreciation mandatory under section 32(1). The AO relied on multiple judicial precedents to support this view, concluding that the claim of depreciation is not optional.

2. Assessee's Argument Before CIT(A):
Before the CIT(A), the assessee reiterated that the claim of depreciation is optional and cannot be imposed if not claimed in the return of income. The assessee cited the decision of the Hon'ble Punjab & Haryana High Court in Ram Nath Zindal v. CIT, arguing that Explanation 5 to section 32 has only a prospective effect. The CIT(A), however, relied on decisions from the Bombay High Court and Madras High Court, which emphasized that profits must be computed in a commercial sense, considering the wear and tear of assets, thereby mandating the allowance of depreciation.

3. Arguments Before the ITAT:
The assessee's representative argued that depreciation could not be imposed based on the Supreme Court's decision in Mahendra Mills' case, asserting that Explanation 5 to section 32 is prospective. The representative also argued that the decision of the Punjab & Haryana High Court in Ram Nath Zindal's case should be binding. Conversely, the Department's representative contended that the issue was settled in favor of the revenue by the Special Bench of ITAT in Vahid Paper Converters, which held that depreciation must be allowed whether claimed or not. The Department argued that the deletion of section 34 and the introduction of Explanation 5 clarified the legislative intent, making the allowance of depreciation mandatory.

4. ITAT's Analysis and Conclusion:
The ITAT analyzed the Supreme Court's decision in Mahendra Mills' case, which pertained to the period before the deletion of section 34. The ITAT noted that post the deletion of section 34 and the introduction of the block of assets concept, the allowance of depreciation became automatic and mandatory, irrespective of any claim by the assessee. The ITAT emphasized that the computation of income must consider depreciation as per the statutory provisions, and the format of the return alone cannot determine the liability or duty of the parties. The ITAT concluded that the decision of the Special Bench in Vahid Paper Converters, which mandated the allowance of depreciation for computing deductions under Chapter VI-A, applied to the computation of gross total income as well.

5. Prospective or Retrospective Effect of Explanation 5 to Section 32:
The ITAT considered whether Explanation 5 to section 32, introduced by the Finance Act, 2001, with effect from 1-4-2002, was prospective or retrospective. The ITAT concluded that even without Explanation 5, depreciation must be allowed as per law due to the deletion of section 34. The ITAT referenced various judicial decisions, including those from the Madras High Court and Kerala High Court, which supported the view that depreciation must be considered for computing income.

Final Judgment:
The ITAT dismissed the appeal of the assessee, upholding the CIT(A)'s decision to allow depreciation under section 32, even though it was not claimed in the return of income. The ITAT emphasized that the computation of income must include depreciation as per statutory provisions, and there is no option for the assessee to exclude it.