INTANGIBLE ASSETS AND DEPRECIATION ON ACTUAL COST -AMENDMENT IN SECTION 295(2)(d) IS DESIRABLE TO AVOID CONTROVERSIES ABOUT POWER TO MAKE RULES.

[C.A. DEV KUMAR KOTHARI]

Preambll:

Depreciation is allowable as per section 32 read with relevant rules and Appendix to IT Rules. Power for prescribing rates in this regard is given to the Board (CBDT), vide section 295 (2)(d) which  does not cover many items of depreciable assets and manner of allowing depreciation on actual cost , as contemplated in section 32 and the rules framed by the Board in form of Appendix IA and many entries in Appendix I. To avoid controversies, it is desirable that the section 295(2)(d) be suitably amended w.r.e.f. 01.04.1961.  A suggested draft of relevant clause is also provided.

POWER TO MAKE RULES

Under Section 295 of the Income Tax Act 1961 (The Act) the Central Board of Direct Taxes (CBDT) has power to make rules. The relevant part of which reads as follows:

Power to make rules:

295. (1) The Board may, subject to the control of the Central Government, by notification in the Gazette of India make rules for the whole or any part of India for carrying out the purposes of this Act.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters: -

XXXXX

(d) The percentage on the written down value which may be allowed as depreciation in respect of buildings, machinery, plant or furniture.

A reading of the above provision shows that under sub-section 1 the CBDT may frame rules for carrying out the purpose of the IT Act. This is the general clause. But specific powers are governed by sub-section 2 vide various entries prescribed therein. Therefore, where a specific item is covered by a specific provision, the board is not empowered to make rules in respect of specified items under sub-section 2 by way of exercising general power under sub section 1.

A reading of clause (d) of sub-section 2 of section 295 shows that board is specifically empowered to prescribe for allowable depreciation only in respect of buildings, machinery, plant or furniture on the basis of certain percentage on written down value and in no other way and not for any other asset except building, machinery, plant or furniture as prescribed in S.295 (2)(d).

AMENDMENTS IN SECTION 32 BUT NO AMENDMENTS IN SECTION 295

It appears that Section 32 has been amended from time to time and new scope of depreciation allowance and new manner of depreciation allowance has been prescribed in Section 32. For example, at present the section provides for the following special items, which are not covered by Section 295(2) (d):

Intangible assets like know-how, pattern, copyright, trademarks, etc. under section 32(1)(ii).

Though section 32 was amended to add new items eligible for depreciation allowance but corresponding amendment was not made. A Public Interest Litigant can definitely come forward and say that the Rules prescribing the rate for depreciation on intangible asset is ultra-virse the Act and therefore the prescription of the rate is without power vested in the Board. Consequently deductions allowed may become ultra-virse the Act.

DEPRECIATION ON THE BASIS OF ACTUAL COST (INSTEAD OF WDV)

On certain assets used in an undertaking engaged in generation and / or distribution of power vide section 32(1), an option to the assessee to claim depreciation either on actual cost basis or on WVD basis has been given. A reading of the section 32 vis-à-vis section 295 (2)(d) shows that the CBDT is not empowered under Section 295(2)(d) to prescribe depreciation rate to be applied to actual cost of asset and not allow option to the assessee to adopt either actual cost method or written down value method for claiming depreciation. In section 32 as well as in section 295(2)(d) there is no provision to allow depreciation on 'any other asset', as prescribed in the appendix IA - item no. (p) therein. Therefore, it is an arguable point that the prescription of rate of depreciation vide Appendix-IA for power generation and / or distribution undertakings, depreciation on any other asset, and rate of depreciation for intangible assets in part B of the Appendix I (for all assessees' including power undertakings) are not as per specific authority for prescribing rate of depreciation.

OLD ENTRIES IN RESPECT OF SHIPS:

We find that in old Appendix I, for example, between period 1984-85 to1987-88 under entry No. IV in column No.3 of the Appendix in respect of ships it was stated that depreciation is to be calculated on the actual cost. This was in accordance with section 32 but at that time there was no specific powers under section 295(2) to prescribe depreciation on actual cost. Therefore it appears that at that time ship owners could have claimed depreciation on the basis of general plant and machinery on WDV basis if the rule in this regard was challenged as having been framed without power and such rule being prejudicial to ship owners.

SECTION 32 CANNOT BE CALLED AN EMPOWERING PROVISION:

It cannot be said without doubt that by virtue of section 32 read with section 295(1) the Board is empowered to make such rules which are not specifically empowered by section 295 (2) (d) in respect of depreciation allowance. Section 32 itself says 'as may be prescribed' but it does not empower such prescription. Furthermore if the section 32 was an empowering provision than there was no need to have clause (d) of sub section (2) of section 295. Therefore, though prescription of Appendix IA, and rates for intangible assets are for the purpose of achieving the purpose of amendment of section 32, but the are not empowered by S. 295.

AMENDMENT IS DESIRABLE:

To keep the matter beyond doubt the section 295(2)(d) may be amended w.r.e.f. 01.04.1961 as follows:

(d) The percentage on the actual cost or written down value which may be allowed as depreciation in respect of buildings, machinery, plant or furniture, intangible assets and any other assets as may be eligible for depreciation allowance from time to time.

This amendment shall avoid all controversies relating to depreciation allowance. In absence of the amendment, if a public interest litigant want to challenge the basis of depreciation opted by power generation and or distribution companies with a view to suit their requirements for the purpose of fixation of rate of electricity (or other form of power) there is considerable scope to challenge even the rate fixed for power based on depreciation allowance on a basis which may not be found to be authorised.

Similarly in case of pharmaceutical companies, which have claim for depreciation on intangible assets may face public interest litigation due to claim for depreciation on intangible which may not be found as per the empowering provision of Section 295. On such challenge, it may be that the prices fixed for medicines which are subject to the drug price control order may be challenged because the public interest litigant may say that depreciation on intangible asset should not be taken into cost of medicines. These are some examples and there can be several other cases involving litigation.