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Issues Involved:
1. Entitlement to depreciation u/s 32(1) despite deductions u/s 35(1)(iv) and 35(2)(ia). 2. Constitutional validity of the retrospective amendment to section 35(2)(iv) by the Finance (No. 2) Act of 1980. Issue 1: Entitlement to Depreciation u/s 32(1) The assessee, a private limited company, claimed depreciation on its laboratory building and machinery for the assessment year 1971-72. The Income-tax Officer rejected the claim, stating that since deductions were already allowed in previous years u/s 35, the assessee was not entitled to claim depreciation. However, the Appellate Assistant Commissioner and the Tribunal held that deductions u/s 35 and depreciation u/s 32 are disjunctive and cumulative, allowing both, though not in the same year. The Tribunal referred the following question to the High Court u/s 256(1): "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation allowance given u/s 32(1) and deduction given u/s 35(1)(iv)/35(2)(ia) of the Act, are disjunctive, cumulative and not alternative?" Issue 2: Constitutional Validity of Retrospective Amendment The Finance (No. 2) Act of 1980 amended section 35(2)(iv) with retrospective effect from April 1, 1962, stating that where a deduction is allowed for any previous year u/s 35, no depreciation shall be allowed u/s 32 for any previous year. The assessee challenged this retrospective amendment, claiming it violated articles 19(1)(g) and 14 of the Constitution. The court examined the legislative history, noting that the original section 35 did not intend to bar depreciation for all time but only for the same year in which deduction was allowed. Retrospective Legislation and Reasonableness The court acknowledged the Legislature's power to enact retrospective laws, including taxing statutes. However, it emphasized that such retrospective amendments must be reasonable and justified by compelling public interest. The court cited the Supreme Court's decision in Lohia Machines Ltd. v. Union of India, which held that retrospective amendments withdrawing benefits granted by valid statutory provisions could be unreasonable if they impose new burdens without compelling reasons. Impact on Assessee The court noted that the assessee had made significant financial decisions and representations based on the existing law, which allowed depreciation on scientific research assets in years other than those in which deductions were claimed u/s 35. The retrospective amendment resulted in a substantial tax liability, adversely affecting the assessee's business operations and financial planning. Conclusion The court declared the retrospective amendment to section 35(2)(iv) by the Finance (No. 2) Act of 1980 as unconstitutional, violating articles 14 and 19(1)(g) of the Constitution. The amendment was deemed arbitrary and unreasonable, as it imposed a new burden retrospectively without any compelling public interest. The rule was made absolute in favor of the assessee, and the question in Income-tax Reference No. 343 of 1975 was answered in the affirmative.
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