1990 (9) TMI 134 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of depreciation claims under Section 32 of the Income-tax Act.
2. Applicability of Section 42 deductions for the assessment years in question.
3. Taxability of interest on compensation received under the Settlement Agreement dated 26-12-1983.

Detailed Analysis:

1. Legitimacy of Depreciation Claims under Section 32:
The primary issue concerns whether the assessee company was entitled to claim depreciation for the assessment years 1981-82 to 1983-84. The Commissioner of Income-tax (CIT) found that the assessee had not carried out any business activities in Iran during these years due to political changes, thus rendering the depreciation claims erroneous and prejudicial to the interests of the revenue. The assessee argued that the cessation was temporary and that the assets were capable of being used, thereby justifying the depreciation claims. However, the tribunal held that for claiming depreciation under Section 32, two conditions must be met: ownership of the assets and their use for business purposes. Since the assessee did not carry out business operations after 1978 and the assets were not in use, the depreciation claims were rightly disallowed by the CIT.

2. Applicability of Section 42 Deductions:
The CIT also disallowed deductions under Section 42, which pertains to allowances for expenses related to prospecting for or extraction of minerals. The CIT reasoned that Sections 28 to 43 of the Income-tax Act govern the computation of profits and gains from any business or profession carried on by the assessee during the relevant previous year. Since the assessee did not conduct any business activities during the relevant years, there was no basis for allowing deductions under Section 42. The tribunal upheld this view, stating that the deductions under Section 42 are contingent upon the continuation of business activities, which was not the case here.

3. Taxability of Interest on Compensation:
Another issue was the taxability of interest on the compensation amounting to 6 million US Dollars received under the Settlement Agreement dated 26-12-1983. The CIT viewed this as a debatable question but, based on the Supreme Court's decision in CIT v. Chunilal V. Mehta & Sons (P.) Ltd. [1971] 82 ITR 54, concluded that the interest on the said compensation was taxable in the assessment year 1984-85. The tribunal agreed with this conclusion, noting that the interest on the compensation was rightly included in the taxable income for the relevant assessment year.

Conclusion:
The tribunal concluded that the CIT was correct in revising the order passed by the IAC (Asst.) and directing the recomputation of the total income of the assessee after disallowing the claims under Sections 32 and 42. The appeals were dismissed, affirming the CIT's findings that there was no business activity in Iran during the relevant years, and thus, the claims for depreciation and Section 42 deductions were not justified. The tribunal also upheld the taxability of interest on the compensation received under the Settlement Agreement.