2008 (12) TMI 622 - HC - Income Tax

On the basis of the refusal of the Assessing Officer to accept the change in method of accounting system from cash to mercantile with retrospective effect.

Summary

Issues:
1. Taxing of interest income based on change in accounting system
2. Disallowance of depreciation claimed

Issue 1: Taxing of interest income based on change in accounting system:
The appellant-revenue proposed two questions related to the taxing of interest income and disallowance of depreciation. The dispute arose regarding the taxing of Rs.105,27,20,724/- as interest income by the Assessing Officer under Section 145(3) read with Section 145(1) of the Income Tax Act, 1961. The Assessing Officer contended that the assessee changed its accounting system from cash to mercantile without proper grounds, resulting in the evasion of tax on interest income. However, the Tribunal held that the change in accounting method was bona fide, in line with accounting standards, and not aimed at tax evasion. The Tribunal concluded that the interest income in question was not taxable for the year under consideration as it pertained to an earlier period when the assessee was not liable to tax. The Tribunal's decision was based on factual evidence and legal principles, dismissing the Revenue's argument that the change in accounting method was mala fide. Thus, the Tribunal's findings were upheld, and no substantial question of law arose in this regard.

Issue 2: Disallowance of depreciation claimed:
The second dispute revolved around the disallowance of Rs.26,16,20,204/- out of the total depreciation claimed by the assessee. The Assessing Officer contended that notional depreciation should be computed and deducted from the original cost of assets, even for the period when the assessee was not taxable. The Commissioner (Appeals) upheld this view, stating that actual wear and tear of assets should be considered in determining depreciation. However, the Tribunal disagreed, holding that notional depreciation cannot be deducted unless specifically provided for in the Act. The Tribunal relied on Section 32 read with Section 43(6) and Supreme Court decisions to support its conclusion. The Tribunal emphasized that no provision in Section 32 allowed for reducing the written down value by notional depreciation. The appellant argued that depreciation should account for wear and tear of assets, but the Tribunal's decision was upheld as no legal infirmity was found. Consequently, the appeal was dismissed due to the absence of any substantial question of law.

In conclusion, the High Court of Gujarat upheld the Tribunal's decisions on both issues, emphasizing the importance of factual evidence and adherence to legal principles in tax matters.