2013 (7) TMI 361 - HC - Income Tax

Depreciation by straight line method - Till previous year assessee exempted u/s 10(29) - Held that - basic and normal scheme of depreciation under the Indian Income Tax Act, is that value of the asset decreases every year, being a percentage of the written down value which in the first year is the actual cost and in succeeding years, the actual cost less all depreciation actually allowed under the Income Tax Act or any Act repealed thereby. Thus, depreciation allowance is in respect of such assets as are used in the business and is to be calculated on the written down value - in the straight line method , depreciation is allowed at a fixed percentage of the original cost year after year till the original cost is exhausted. Assessee has claimed the entire depreciation during the assessment year under consideration, which is not permissible as per the scheme of the depreciation - Though, the income was exempted under section 10 (29) of the Act, but it does not bar the assessee to claim the notional depreciation in its books of accounts - Even the income is exempted nonetheless, the balance-sheet etc. will have to be prepared as per law for each assessment year as per principle of accounting - Matter remanded to the AO to allow depreciation on various items of the assets by taking notional depreciation for the earlier years, but the depreciation cannot be more than 100% of the value of the assets - Decided in favour of Revenue.

Summary

Issues:
Interpretation of Section 10 of the Income Tax Act 1961 regarding computation of total income for exempted persons.
Allowability of depreciation claimed by an assessee for the first time after exemption withdrawal.
Applicability of Explanation 5 to Section 32(1) for depreciation deduction.
Comparison between straight-line method and written down value method for depreciation calculation.
Claiming notional depreciation for earlier years when income was exempted under Section 10(29).

Interpretation of Section 10:
The case involved a dispute regarding the interpretation of Section 10 of the Income Tax Act 1961, specifically related to the computation of total income for individuals exempted under this section. The Tribunal's decision was challenged by the department, arguing that exempted individuals are still required to compute total income as per the Act, including depreciation on written down value.

Allowability of Depreciation:
The dispute centered around the allowance of depreciation claimed by an assessee for the first time after withdrawal of exemption. The department contended that depreciation is a mandatory charge on income, while the assessee argued that depreciation is a factual cost incurred in business operations, especially in the context of assets' wear and tear. The Tribunal had allowed the depreciation claim, which was contested by the department.

Applicability of Explanation 5 to Section 32(1):
The department relied on Explanation 5 to Section 32(1) to support their argument that depreciation is a necessary charge on income, irrespective of whether it is claimed by the assessee. This provision was cited to emphasize the mandatory nature of depreciation as a business cost.

Depreciation Calculation Methods:
The debate between the straight-line method and the written down value method for depreciation calculation was crucial in this case. The straight-line method allows a fixed percentage of original cost as depreciation annually, while the written down value method calculates depreciation on the asset's diminishing value. The court analyzed the differences between these methods and their implications for depreciation allowance.

Claiming Notional Depreciation:
The assessee claimed depreciation using the straight-line method for the first time after exemption withdrawal, arguing that it was the initial opportunity to do so. The court highlighted the necessity of claiming depreciation on a year-to-year basis, even if income was previously exempted, emphasizing the importance of adhering to accounting principles for each assessment year.

Judgment:
After considering the arguments and legal precedents, the court set aside the Tribunal's decision and remanded the matter to the Assessing Officer to allow depreciation on assets based on the schedule from the acquisition date, following a year-to-year basis. The court ruled in favor of the department, affirming the mandatory nature of depreciation as a business cost. The appeal by the department was allowed for statistical purposes.