UN-NECESSARY APPEALS BY REVENUE MUST BE AVOIDED- A RECENT CASE BEFORE SUPREME COURT in case of CIT, Dibrugarh versus Doom Dooma India Ltd. 2009 -TMI - 32437 shows un-necessary litigation by revenue on issues which were settled long ago.

[C.A. DEV KUMAR KOTHARI]

WDV- depreciation 'actually allowed' is only to be deducted- Supreme Court followed legal position well settled long ago. The same law still hold good. The ruling is applicable in all cases where a part of deprecation is not actually allowed by application of Rules 7, 7A, 7B and 8 of the income Tax Act and also when part of depreciation is not actually allowed for any reason like personal or non business use or non use of assets for business or profession.

Departmental appeals:

Departmental counsels should point out accepted and settled legal position to avoid unnecessary litigation and waste of time and public money. When a legal position is settled, the revenue should not first of all prefer further appeals at any forum. In any case if such appeal is filed, and later on it is found that the matter has been settled, the counsels of revenue must bring to the notice of the appeal court such settled legal position. However, we find that in the recent case before the Supreme Court, also the settled legal position by judgments in the cases of Suman Tea and Plywood Industries P. Ltd was not  brought to the notice of the Supreme Court, causing unnecessarily detailed celebration and decision from the Supreme Court and loss of time of the Supreme Court. We also find that failure of the counsel to point out settled legal position lead to a wrong judgment by Kerala High Court contrary against settled legal position on the same issue.

Income tax-Act, 1961 - a central legislation:

Income-tax Act, 1961 is a central legislation and it should be uniformly applied and followed all over India. A policy decision taken by the CBDT (Board) or a decision of any Tribunal, which has been accepted by the revenue, should be followed all over India by the department. And appeal on similar issue should not be filed by revenue, except fro a just cause. This is the legal and acceptable administrative position emerges from several judgments like Berger Paints India Limited Vs. CIT (2004) 266 ITR 99 (SC) [=2008 -TMI - 6139 - SUPREME Court], the Supreme Court held that if the Revenue has not challenged the correctness of the law laid down by any high Court and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees without 'just cause'.  The  Supreme Court followed its earlier judgment in case of Union of India Vs. Kaumudini Narayan Dalal (2001) 249 ITR 219 (SC), CIT V. Narendra Doshi (2002) 254 IT 606 (SC) [=2008 -TMI - 6071 - SUPREME Court] and CIT v. Shivsagar Estate (2002) 257 ITR (SC) held that the Revenue cannot dispute the correctness of the judgment of Gujarat High Court in case of another assessee.

Duty of counsels and particularly senior counsels:

At least from senior counsels who appear before high Courts and the Supreme court it is expected  that they should not advise clients to file an appeal on a settled matter to assist the courts to arrive at right conclusions and decisions on facts and legal issues. Therefore, counsels should be ready to point out not only decisions in his clients favour but also decisions, which are against his client. There is no point in playing seek and hide game, because there is opponent counsel also who is expected to say about decisions in his favor. After pointing out decisions which are apparently against his clients the counsel can make attempt to distinguish the same and /or make a prayer to reconsider the same by the court or by a larger bench of the court as the circumstances may require.

Abstaining from  pointing out relevant provisions and  change in legal legal position, relevant amendments, relevant case laws, in opinion of the author amount to failure on part of counsel to assist the court. In case of such failure, the court may render a decision which is wrong or is not in accordance with the settled legal position. This will lead to un-necessary litigation and in some cases may also reduce reputation of the judiciary. Therefore, the counsels should be careful in performing their functions by assisting the court so as to arrive at:

a. correct factual position,

b. consider correct and up to date legal position by way of amendments as well as decided cases on the point.

To ensure that the court render a correct decision.

In view of the above position, it appears that filing of an appeal or reference petition against order of Tribunal on an issue already settled by other high is not desirable - the counsels of the revenue should not advise to file appeal on such issues.

The controversy before the Supreme Court in recent case was in fact already well settled:

The legal position was sell settled long ago by several judgments of the Supreme Court, including larger benches the concept of term 'written down value', as defined in section 43(6) was well settled long ago. Practically WDV means the actual cost of a depreciable asset minus depreciation actually allowed by the assessing officer while computing taxable income under the provisions of the income-tax Act, 1961 and earlier enactments for computation of income for the purpose of income tax levied by the Central Government on income chargeable to the Central income-tax. The key words 'actual cost' and   `actually allowed' is the pivot of the meaning of 'written down value'. Any notional allowance or any allowance merely allowable will not be deducted from the actual cost or WDV unless benefit of depreciation has been actually given effectively in the assessment of taxable income by the Assessing Officer it will not be deducted. About WDV the Supreme Court on these lines has rendered several judgments. For example:

Madeva Upendra Senai V. UOI (1975) 98 ITR 209 (SC) [=2008 -TMI - 6436 - SUPREME Court].

Depreciation allowed or merely allowable during tax holiday period by State Government under state tax Act was also held to be not depreciation actually allowed under Income-tax act, and therefore such depreciation was not to be deducted from written down value and actual cost of assets was taken as actual cost and WDV when the provisions of the income-tax were extended. -CIT V. Dharampur Leather Co. Ltd. (1966) 60 ITR 165 (SC).

When only a portion of gross income, or global income is taxable, then depreciation actually allowed will be only to the extent and in proportion of taxable income comprised in the gross income or global income and not the full amount of depreciation considered while computing gross income or global income

 CIT V. Nandlal Bhandari Mills Ltd (1966) 60 ITR 173 (SC), Hukumchand Mills Ltd V. CIT (1967) 63 ITR 232 (SC). 

Tea company- when Rule 8 is applicable the legal position was well settled long ago:

Applying the law laid down various judgments of the Supreme Court as referred to in earlier para the Calcutta High Court in CIT v. Suman Tea & Plywood Industries Pvt. Ltd. (1993) 204 ITR 719(Cal.) held that when rule 8 is applied in case of a tea company only 40% total depreciation notionally taken into consideration against composite income (comprising of agricultural income and business income) is actually allowed under the income tax and therefore, only 40% of such total or notional depreciation is  to be deducted from cost to determine the written down value. The revenue did not file appeal against this judgment.

The above judgment was again followed in the case of same assessee vide CIT v. Suman Tea & Plywood Industries P. Ltd. 226 ITR 34 (Cal.). There the matter of determination of written down value u/s 43(6), was relevant for the purpose of computing balancing charge or terminal depreciation as the assessee had sold the tea estate.  The department had preferred an appeal against this judgment.  However, the Honorable Supreme Court for delay as well as lack of merit dismissed the same by use of the following words:

"There is a delay of 157 days in the filing of the special leave petition for which no satisfactory explanation has been offered. The applications for condonation of delay are therefore, dismissed. Even otherwise, we see no merit n the petition and the same are accordingly dismissed on the ground of delay as well as merits."

Please see at (2004) 7 CAPJ at page 918 (in section knowledge resource).  

Therefore, it is clear that the law as laid down by the Calcutta High Court in case of Suman Tea had attained finality when the department did not file any appeal against the first judgment (204 ITR 719) and again when the Supreme Court dismissed the Revenue's appeal against the second judgment for lack of any merit. Thus these judgments are binding all over India.

The settled legal position was not pointed out before the Supreme Court:

On reading of the judgment of the Supreme Court we find that the fact that the judgments of the Calcutta High Court have attained finality was not conveyed to the Supreme Court. In fact there is no mention about the second judgment against which SLP was dismissed. Otherwise, lot of time of the honorable Supreme Court would have saved because it was not at all necessary to go into details, for the reason that first judgment of Calcutta high Court was accepted by revenue and in case of second judgment the SLP was dismissed for delay as well as for lack of any merit.

In fact on the same issue in many cases represented by the author, long ago the Assessing Officers themselves allowed the correction of WDV by deducting from actual cost, depreciation actually allowed in past that is  only 40% of normal deprecation charged against composite income in earlier years and the matter attained finality as even there were some cases of revision by CIT and enhancement in appeals before CIT(A) on issues relating to depreciation, but there was no revision or enhancement on the issue of  corrected WDV. In case of Suman Tea, the author took additional ground before the CIT(A) but he  did not accept the contention, therefore matter was carried to the Tribunal where author referred to various circulars of Board in relation to tea companies for development rebate, development allowance, and investment allowance as well as various judgments of the Supreme Court and high Courts on the point of WDV.  The Tribunal allowed the appeal and then the same was also confirmed by the Calcutta High Court and departments SLP was also dismissed.

Administrative orders about status not complied with:

It appears that administrative orders of the Supreme Court about report on status of cases before the court, and related cases was not complied with. Otherwise, there should have been a report about status of judgments of Calcutta high Court. We find that the CBEC in view of judicial order of two judges of the Supreme Court issued  Circular No. 863/1/2008-CX., dated 2-1-2008 F. No. 275/116/2007-CX.8A, in which we find reference of the order of the judge of the Supreme Court:

Government of India

Ministry of Finance (Department of Revenue)

Central Board of Excise & Customs, New Delhi

Subject: Filing of appeals in the Supreme Court - Instructions regarding forwarding of information on connected matters for incorporation in the synopsis annexed to the Special Leave Petition/CA and for proper appreciation of law by the Hon'ble Supreme Court - Reg.

1. Attention of the field formations is invited to the instructions issued by the Board from time to time regarding the modalities to be observed while forwarding the proposal for filing a Civil Appeal/Special Leave Petition in the Hon'ble Supreme Court. Vide Circular number 544/40/2000-CX, dated 6-9-2000 (copy enclosed) [Not printed - See 2000 (121) E.L.T. T3] issued from F. No. 390/186/2000-JC, it was emphasized that a separate report on connected matters should be obtained & enclosed with the appeal proposals, in the proforma annexed thereto. Reference is also invited to Member (L & J)'s communication F. No. 275/41/2004-CX.8A, dated 14-9-2006 reiterating the said instructions.

2. The Ld. Solicitor General in a communication dated 8th December 2007 has brought to the notice of the Board that the Civil Appeals/Special Leave Petitions filed by the Revenue are bereft of a statement about the status of relied upon matters, connected matters and other judgments referred to by the Tribunal or High Courts. It has been further stated by the Ld. Solicitor General that on 7th December 2007 in a revenue matter placed before their Lordship Mr. Justice Kapadia and Mr. Justice Reddy, the status of two earlier orders of the Tribunal relied upon by the Tribunal in a subsequent matter were not stated in the petition filed by the department. This situation had caused considerable inconvenience for proper appreciation of law and delivery of justice by their Lordships. As a result Hon'ble Justice Kapadia had passed a judicial order stating that unless the status of connected/relied upon cases/judgments referred to by the Tribunal and the High Courts is made clear in the forefront of the synopsis of the cases annexed with the Civil Appeal/Special Leave Petition the Registrar of the Hon'ble Apex Court should not number the revenue cases.

3. In view of the above judicial order, it has become of utmost necessity to ascertain and indicate the status of all matters as mentioned in para 2 above as in the absence of the same the CA/SLP is not likely to be numbered. It is, therefore, impressed upon the field formations that while forwarding their proposal for a Civil Appeal/SLP the Commissioner should ensure that the Board's instructions in the matter and orders of the Hon'ble Apex Court are scrupulously complied with. Any proposal forwarded without containing the status of the connected matter relied upon/referred to by the Tribunal and the High Courts would not be accepted in the Board and viewed strictly as it tantamounts to non-compliance of the order of the Hon'ble Apex Court. This would in turn entail consideration as a failure and dereliction of duty.

4. This issues with the approval of the Chairman (EC).

5. Hindi version follows.

Authors views about Status Report:

It appears that if the judicial -cum administrative orders of the judges of the Supreme Court were followed, the Supreme Court would have found lot of assistance in passing the recent judgment on the point of WDV and saved time.  If it was pointed out that the judgment of Calcutta high Court in 204 ITR 719 was accepted and that Civil Appeal by way of SLP against 226 ITR 34 (Cal) was dismissed for want of merits, then court could have followed its earlier judgments which were on the same issue and dismissed the appeal.

The same rule about status report of related cases should also be applied for appeal before High Court and Tribunals to save time of courts and to expedite justice.

Recent judgment of the Supreme Court on WDV:

The decision is on the fundamental issue fo what is WDV and it has been decided following the long ago settled legal position in several judgments of the Supreme Court as discussed earlier. The Supreme Court in present case besides relying on those judgments also provided two illustrations and methods for computation of income from sale of tea cultivated and manufactured by assessee. The Court found that in both way what is noticed is that deprecation 'actually allowed', will be to the extent of 40% because the proportion of taxable income is only 40% of composite income of the assessee when only 40% of composite income is taxable. The Supreme Court also found that the earlier judgments of the Supreme Court, and in particular judgment in case of nand lal Bhandari Mills, which was concerned with computation of taxable income taking into account 'world income', was similar to the computation of taxable income from 'composite income'. Therefore, the Supreme Court dismissed appeal of the revenue against the judgment of Guwahati High Court.

Earlier published article:

For a detailed discussion on matter of depreciation actually allowed in case of computation of income under rule 7A, 7B and 8 readers may also refer to the published article titled " Tea/ coffee/ rubber estates- WDV of depreciable assets- revised return should be filed" by the author published during year 2004 in Volume 7 of CAPJ at page 916 (page 326 of Knowledge Resource section). In that article the author has emphasized that when only certain percent. (say X %) of composite income is taxable, only depreciation actually allowed against taxable income under I.T. Act, that is certain percent. (X%) of notional depreciation taken in computing composite income should be deducted from cost/ WDV to determine WDV for calculation of depreciation allowable in subsequent years. And that the legal position is settled and this ratio is binding on the income tax department, all over India.

The readers are also advised to go through various judgments on section 43 (6) in which it has been held that depreciation actually allowed is only to be deducted when certain portion of depreciation was disallowed for non business purposes, or when asset was used partly for business purpose and partly for non business purposes, or when no depreciation was allowed due to absence of claim or non filing of return etc.

Authors views:

The above judgment of the Supreme Court reconfirms the fundamentals of 'actual cost' and 'written down value'. However, the author feels that the counsels of the Revenue should have brought the decision on SLP of revenue in the case of Suman Tea & Plywood industries P. Ltd. and also  admitted position by several circulars of the CBDT to the effect that in case of tea companies where Rule 8 applies, it is admitted that only 40% of deductions like development rebate, development allowance and  investment allowance are considered as allowed under I.T. Act and accordingly the Board has taken consistent view that it will be sufficient compliance if the reserves are created to the extent of 40% of 75% of such allowances allowable. Therefore, in fact on this issue the revenue should not have raised any objection. However, as usual the revenue is interested to indulge in un-necessary litigation and also in unsettling the settled legal position. Let us hope that now the revenue will not try to again unsettle the recently reiterated settled legal position by the Supreme Court about WDV. 

Applicability of rule in case of Rubber and Coffee Plantations:

Rules 7A and 7B were inserted in the Income Tax Rules w.e.f. 01.04.2002 to provide for computation of chargeable income from activity of cultivation and manufacture of rubber and coffee. These rules are, on the same lines as rule 8  except that proportion of taxable income is different. Therefore, what is laid down in relation to Rule 8 is principally applicable in case of application of Rule 7A for Rubber and Rule 7B for coffee. Therefore, rubber and coffee companies can also make correction in their WDV by deducting from actual cost only deprecation actually allowed under I.T. Act.

When income is computed as per Rules 7, also, depreciation actually allowed will be deductible to compute WDV of assets used in activities of cultivation of agricultural produce and also in some business activities. When agricultural income is merely computed for the purpose of aggregation to determine average rate of tax applicable, it cannot be said that deprecation is actually allowed under I.T. Act, therefore, such depreciation should not be deducted from actual cost to determine WDV.

The Rule apply in other situations also:

Applicability of rule in other cases when depreciation is partly allowed:

The rule that depreciation actually allowed is to be deducted from actual cost / WDV is also applicable when a part of depreciation is disallowed for reasons like personal use or use for non business purposes, assets not used etc. Therefore, suppose depreciation on motor car of a doctor is disallowed to the extent of 50% for personal use, then only deprecation actually allowed that is 50% of other wise allowable depreciation shall be deducted to determine WDV for allowing depreciation in future.

Suppose a retired person use motor car only for personal use, he does not claim depreciation and it is not also allowed by the A.O. In case the car is sold after 36 months holding period, he will be entitled to claim indexed actual cost of car and compute capital gain / loss as long term capital gain/ loss. The A.O. cannot say that he will deduct notional deprecation and compute WDV and tax sale value above WDV as short-term capital gains u/s 50. However, suppose 25% of  normal deprecation was allowed against business/ professional income or income from other sources, then 25% of normal deprecation which has actually been allowed will be deducted from actual cost to determine the WDV of block of asset  and accordingly , applying section 50 short term capital gains will be computed after taking into account WDV brought forward of the block in which the car is grouped, minus sale value of car  plus  actual cost of new car (or other asset in the same block ) if any in the block of asset, purchased by assessee during the relevant previous year.

Suggestion for self employed persons:

In response to confidence reposed by the revenue in assesses, by accepting more than 90% returns of income u/s 143(1) , the author always suggest the personal use of motor cars, other assets, telephones etc. should be estimated and a part of such expenses should be charged to personal expenses. Similarly deprecation of motor car and other assets should be claimed partly and a part can considered for personal use. While computing WDV, deprecation actually claimed and / or allowed can be deducted .For example, suppose a Doctor has two cars, one is exclusively used for professional purposes by his assistants and another is used by him and his family for professional purposes as well as personal use. Suppose personal use is estimated @ 25%, then he claim fully all expenses and depreciation on first car as professional expenses and he should claim expenses and depreciation the extent of 75% for the second car. In Depreciation chart he can show this fact and deduct 75% of normal deprecation which he claims as deduction to determine WDV of the car to be carried forward to next year.