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TMI Blog1986 (4) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... peal in IT Appeal No. 566 (Mad.) of 1985 in the case of Sri Rani Lakshmi Gng., Spg. Wvg. Mills (P.) Ltd. Was also taken up for hearing. In both appeal the only question is the same, that is the question set out in the first paragraph. 3. The question involves only the quantum of depreciation to be allowed to these two assesses for the respective assessment years under appeal. The assessment year in both cases is the same, namely 1981-82. 4. In the case of Rajapalayam Mills Ltd., the original claim for depreciation was in a sum of Rs. 29,40,062. This together with a claim for additional depreciation amounted to a total of Rs. 29,56,253. The ITO allowed as depreciation and additional depreciation of Rs. 25,05,430. In addition, he allowed Rs. 25,638 as depreciation and additional depreciation on lathe capitalized. He disallowed Rs. 4,25,185 as excess depreciation claimed. 5. Two variations were made on appeal in this computation of depreciation by the ITO. The first was in determining the written down value by reference to the subsidy from SIPCOT while the ITO took the subsidy in to account for reducing the written down value of the assets, the Commissioner (Appeals) directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, but at the rates of depreciation prescribed earlier. The claim on the revised rates was raised by way of an additional ground before the Commissioner (Appeals) which was admitted by him. The assessee claimed depreciation on buildings at the rate of 10 per cent as against 2.5 per cent [as stated by the Commissioner (Appeals) and at the rate of 15 per cent on general plant and machinery as against 10 per cent earlier. The Commissioner (Appeals) has rejected this claim for the same reasons he gave in the case of Rajapalayam Mills Ltd. 9. Shri K. R. Ramamani appearing for Rajapalayam Mills Ltd. made these submission. The Income-tax (Fourth Amendment) Rules was by a Notification No. SO 151(E), dated 28-2-1983. The rule specifically lays down that it comes into effect form 2-4-1983. Under section 295(4) of the Income-tax Act, 1961 a retrospective operation of a rule is possible. The rule together with the Appendix specifying the rates of depreciation gives a formula for calculating the depreciation. Depreciation itself is allowed under section 32 of the Income-tax Act. The rules nearly quantify the depreciation which is granted to an assessee as an allowance under section 32. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation allowable on a ship. 13. The attention of Shri Ramamani was brought to the observations of the Calcutta High Court in the case of Burrakur Coal Co. Ltd. v. CIT [1982] 135 ITR 804 which are as follows : "... It appears to us that the following propositions are well settled and cannot be disputed : (1) The depreciation or allowance of expenditure must be determined with reference to the law prevalent in the year of assessment..(2) In determining the depreciation allowable, the actual cost as computed and in accordance with the provisions of the Income-tax Act, namely, section 32 read with section 43(1) (6) and section 32(2), should be computed irrespective of what was the position on the previous year." 14. Shri Ramanamni submitted that that observation may not be of help in sorting out the question here. According to him the term 'the year of assessment' contained in this observation might well be taken to mean the year in which the assessment of any assessment year is made and not the assessment year as may be generally understood. 15. Shri S. Swaminathan, the learned counsel for Sri Rani Lakshmi Gng. Spg. Wvg. Mills (P.) Ltd. made these submissions. There is dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of rule 5 which itself is a part of section 32. What is prescribed by rule 5 through the Appendix as to the rates of depreciation is only part of section 32, Instead of making section 32 cumbersome by making the various rates of depreciation as part of it, they have been given in the form of an Appendix to the Rules. It is the contention that section 32 should be considered a substantive provision because the depreciation allowed goes into the computation of income. Since it is part of the substantive law, it can apply to the assessment year commencing on 1-4-1984 and onwards and not for any earlier assessment year. Reliance is placed for this proposition on the order of the Tribunal in the case of ITO v. Bharat Roadways [1985] 12 ITD at p. 649 (Cal.). 19. It is submitted that the order of the Tribunal in Biju Patnaik's case has not been accepted by the department and the matter is under reference to the High court. Shri Jaganathan also distinguished Biju Patnaik case from the case before us. Rule 1BB was made under section 46[2] [a] of the wealth tax Act, 1957 ['the 1957 Act']. This rule only prescribed the manner in which the market value of a particular property is to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the Supreme court in the case of CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589. Shri S. V. Jaganathan also cited the decision of the Madras High Court in CIT v. India Cements Ltd. [1975] 98 ITR 69 in support of his proposition that unless the depreciation rates are amended specifically with retrospective effect, they can only be considered to be prospective in operation. The departmental representative also relied on the decision of the Supreme Court in CIT v. Southern Roadways (P.) [1975] 98 ITR 205. 21. Shri Ramamani in reply submitted that section 32 allowed depreciation to an assessee having income under the head Profits and gains of business or profession leaving it to the Government to prescribe the rates at which depreciation is to be allowed. The rule can, therefore, be considered only procedural on procedural on the analogy that rule 1BB was held procedural in Biju Patnaik case. It is submitted that no valid distinction can be drawn between the allowance of depreciation under the Income tax Act and the determination of market value under rule 1BB of the wealth-tax Rules. The former affects the computation of income while the latter affects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided for inclusion of a group of items of machinery under the general heading Energy saving devices in Group D under the special rates as item [10C]. They were to be allowed depreciation at 30 per cent by this classification. 25. The same group of machineries have been reclassified as item [2A] in Group F by the Income-tax [fourth Amendment] Rules. This classification allows 100 per cent depreciation in this group. A already mentioned, the Income-tax [Third Amendment] rules was notified on 26-2-1983 while the Income-tax [Fourth Amendment] rules was notified on 28-2-1983. We would advert to this position later in this order. 26. The controversy in these appeals is whether the depreciation rates as modified by the income tax [fourth amendment] Rules are to be applied year prior to 1984-85. According to the asse ssee they are to be applied to all assessments made after the impugned date, viz., 2-4-1983. According to the department they are to be applied only to assessments for the assessment years following 2-4-1983 that is to say from the assessment year 1984-85. The assessee's view finds support in the order of the Tribunal in the case of Rayalaseema Passenger and Goods Transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys down the method of collecting the tax. The former determines the extent of the liability to tax, while the latter merely sets out the manner of collecting the tax. The former belongs to the realm of substantive law while the latter to the realm of procedural law. 30. It is not necessary to labour this point. The decision of the Supreme court in Scindia Steam Navigation Co. Ltd's case is clearly on this point. There it was a question of the applicability of clause [vii] of subsection [2] of section 10 of the Indian Income-tax Act [which came into force on 5-5-1946] to the assessment year 1946-47. It was held that it did not apply to that assessment year as it was not in force on 1-4-1946. This was clearly on the basis that this clause in section 10 was a substantive provision even though it would be classified as machinery provision according to the earlier decision of the Federal Court in the case of Chatturanm. It is, therefore, difficult to accept the proposition made by Shri Swaminathan that because section 32 is to be classified as a machinery provision in accordance with the above decision of the Federal Court, it deals with a procedural matter only. 31. Shri Swaminatha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sertion of clause [vi] in sub section [1] of section 32 by section 3 of the Direct Taxes [Amendment] Act 1974, giving additional depreciation on plant and machinery acquired after 31-5-1974. The third is the insertion of clause [iia] in sub section (1) of section 32 by the Finance [No. 2] Act, 1980. Here the plant and machinery should have been installed within a specified period. It is the contention of Shri Swaminathan that in all these amendments specific dates are mentioned making them prospective. The specified dates are also with reference to the installation of the Machinery. It is submitted that these changes have become prospective because specific dates are mentioned about the erection or installation. It such specification is absent, the change could have been retrospective. 34. We are unable to accept this proposition. It is clear that these amendments specified the dates of erection or installation not with the intention mainly of making the amendments to particular classes of assets. It does not follow that the specification of the dates or periods as the case may be made them prospective but with the intention of confining the different treatments to particular cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 214, not being either section 4 or section 5, is a procedural section. 38. The second case cited by Shri Swaminathan is the decision of the Calcutta High court in the case of CIT v. P.M. Bagchi and Co. [1951] 20 ITR 33. The provision considered here was section 23[5] [a] of the Indian Income-tax Act. This was held to be retrospective in operation. It is clear from the ratio of this decision that this was clearly a procedural provision evolving a more convenient made of collection of tax. 39. The third case cited by Shri Swaminathan is the decision of the Gujarat High Court in the case of Motilal Ambaidas. He has drawn our attention to the observation at page 150. The question considered by the Gujarat High court was whether section 41[1] of the Income-tax Act is a charging section. The High Court referred to the case of Chatturam to point out that the charging sections [in the Indian Income tax] were section 3 and 4 and held that section 41[1] is not a charging section. His contention is that the other provisions of the Act are only machinery sections and, therefore, only procedural in nature. We have already considered this submission. The Gujarat High Court has observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n rates should be constructed in the same manner as section 32. 42. Rule 5 lays down that the depreciation allowances under clause [i] or clause [ii] of sub-section [1] of section 32 in respect of buildings, machinery, plant or furniture shall be calculated at the percentage specified in the second column of the table in Part I of Appendix I. The actual rates of depreciation on the various assets are specified in Part I, Appendix I. This part is referred to in the rule itself as a table and the heading for this part reads 'Table of rates at which depreciation is admissible'. It is clear form a description of Part I of Appendix I, that the different rates of depreciation for the various kinds of plant and machinery are as specified in the form of table in order to remove the otherwise cumber some specification of the depreciation rate in the section, namely, section 32 authorising depreciation allowance. The table of depreciation should, therefore, be considered to be only part of section 32. We have already section 32 contains a substantive provision though it might be part of the machinery sections for effectuating the charge laid under sections 4 and 5. It would follow that par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether under the head 'Energy seven devices'. We do not think that one can or should invest the Government with such purposeless intention in the Discharge of its statutory functions. We must, on the other hand, consider that is was the intention of the Government in prescribing these notification to allow depreciation on us items of machinery only at 30 per cent for the assessment year 1983-84 following the date of the notification, namely, 26-2-1983 regarding Income-tax [Third Amendment] Rules and that higher rate of depreciation is to be allowed on these items of machinery for the assessments following the Income-tax [Fourth Amendment] Rules, namely, the assessment years coming up after 2-4-1983, i.e., 1984-85 assessment year and later years. 44. Shri Ramamani has relied upon an order of the special Bench of the tribunal in the case of Biju Patnaik. We have earlier detailed his arguments. In that case, the Tribunal held that rule 1BB was only a rule of evidence for determining the market value and, therefore, procedural. Shri Ramamani has pointed out that the Karnataka High Court in the case of CWT v. Vidyavathi Kapur [1984] 150 ITR 319 and the Gujarat High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its market value. The manner in which the market value can be determined has been the subject of discussion and consideration in various forms even before rule 1BB was introduced. The concept of market value is a well recognized one and different methods for arriving at the market value of the property were already known even before rule 1BB was introduced. The same cannot be said of the allowance contemplated under section 32. The allowance cannot be granted without refrain to the table of depreciation, while the market value contemplated under section 7[1] can be detrained even in the absence of rule 1BB. We, therefore, do not consider that ratio of the decision of the Special Bench of the Tribunal in the case of Biju Patnaik and the Gujarat High Court in Kasturbhai Mayabhai's case can really be applied in the case of depreciation allowance under the Income-tax Act. 46. Shri Ramamani has submitted that under section 295[4], it is possible for the Government to give retrospective effect to the rule that is made under the authority of this provision. There can be no quarrel about this proposition; but it cannot be said that the Income-tax [Fourth Amendment] Rules has been brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rule by the ITO was a valid interpretation. In determining this question, the High Court has only held that the Rules cannot be so interpreted as to run counter to the provisions of the Income-tax Act. Now under section 32(1) (i), wherein the depreciation allowance is authorised for ships, it is laid down that a percentage on the actual cost shall be allowed as the allowance under this provision. There is no further constraint that in the case of second-hand ship anticipated life expectancy period should not have expired at the time the asset falls to be used. On this question the Bombay High Court has held that rule 5(2) contains a formula for the determination of the depreciation in the case of ships. It cannot be said that because the Rules specified a formula for allowance of depreciation in the case of ship, it was not substantive. The question that was really decided in that case was whether the rule itself exceeded the authority contained in that substantive provision, namely, section 32(1) (i). It was only held that the rule cannot be interpreted in such a way as to restrict the depreciation allowance to any extent greater than what is contained in section 32(1) (i) and s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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