2008 (5) TMI 79 - HC - Income Tax

Change in previous year - Tribunal allowed the assessee s claim for depreciation and investment allowance at the higher rate on proportionate basis for the period 3.11.86 to 31.3.88 previous year longer than 12 months - Revenue pointed out that the Proviso u/r 5(1) has been deleted w.e.f. 2.4.87 so claim can t be allowed for the full period of 17 months depreciation should be given for the full period - issue is required to be decided by the Tribunal afresh

Summary

Issues:
Interpretation of Rule 5 of the Income Tax Rules, 1962 regarding depreciation claim at a higher rate on a proportionate basis after its deletion with effect from 2.4.1987.

Analysis:
The case involved a dispute over the allowance of depreciation claimed by an assessee for the period from 3.11.1986 to 31.3.1988 for Assessment Year 1988-89. The Assessing Officer initially disallowed the claim, stating that the higher rate of depreciation on a proportionate basis was only allowable for A.Y. 1989-90. However, the Commissioner (Appeals) allowed the claim based on Rule 5 of the Income Tax Rules, 1962 and a judgment of the Gujarat High Court in a related case. The Tribunal upheld the Commissioner's decision without providing an independent opinion.

The Revenue contended that the Proviso under Rule 5(1) had been deleted with effect from 2.4.1987, and therefore, the Assessing Officer's action was correct in disallowing the claim for a period of 17 months. The court acknowledged the initial attractiveness of the Revenue's submission but emphasized the need for a closer scrutiny due to the intricacies of the legal provisions involved.

The court analyzed Section 32 of the Income Tax Act, which deals with depreciation, and highlighted the introduction of the concept of a block of assets from A.Y. 1988-89 onwards. It noted the substitution of Rule-5 of the Rules with effect from 2.4.1987, deleting the Proviso that allowed for increased depreciation in certain cases. However, the court emphasized that the provisions of Section 3(4) of the Act, which allows for varying the previous year, remained unchanged during the relevant period.

The court concluded that the provisions of Rule 5 could not override the Act and that once an assessee varied the previous year under Section 3(4), the corresponding depreciation for the extended period could not be denied. It clarified that depreciation allowance is for the wear and tear of assets used to earn taxable income during the relevant period. Therefore, the Tribunal was directed to reconsider the issue in light of the legal position explained, ensuring a thorough examination of the facts for the relevant Assessment Year.

In the end, the court left the question unanswered, allowing the Tribunal to adjust its decision based on the clarified legal position. The reference was disposed of without any order as to costs.