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TMI Blog2008 (8) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... following question under section 256(1) of the Income-tax Act, 1961 ("the Act"), at the instance of the Commissioner of Income-tax, Baroda: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that initial depreciation allowed in the assessment year 1982-83 on new hotel building is not deductible for arriving at written down value in view of the amendments effected by the Finance Act, 1983?" The assessment year is 1985-86 and the relevant accounting period is the calendar year ended on December 31, 1984. While computing depreciation allowance under section 32 of the Act, the Assessing Officer, decreased the written down value (WDV) of hotel building by deducting initial depreciation, allowed to the assessee in the assessment year 1982-83. The assessee, being aggrieved, carried the matter in appeal before the Commissioner of Income-tax (Appeals). By order dated July 27,1988, the Commissioner of Income-tax (Appeals) came to the conclusion that the WDV was wrongly reduced by deduction of initial depreciation amounting to Rs. 6,74,500 (rupees six lakhs seventy-four thousand five hundred only). It was noted by the Commissioner (Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. According to him, the words "actually allowed" cannot mean anything else but what was actually granted as a deduction towards depreciation of the assets in the past. That, in the present case, admittedly, the assessee had been granted deduction under section 32(1)(v) of the Act in the assessment for the assessment year 1982-83. Once this was the position, the Assessing Officer was required to take the said figure while computing the written down value on which depreciation could be allowed for the year under consideration. By virtue of the amendment by the Finance Act, 1983, with effect from April 1,1984, the words "but any such sum shall not be deductible in determining the written down value for the purposes of clause (ii)" had been omitted and, therefore, the Assessing Officer was justified in reducing the written down value by the figure of such initial depreciation granted for the assessment year 1982-83. Though served, there is no appearance on behalf of the respondent-assessee. Attention of Mr. Naik was invited to the decision in the case of ITC Ltd. v. CIT [1994] 205 ITR 126 (Cal) and the decision in the case of CIT v. Adyar Gate Hotel Ltd. [2001] 252 ITR 129 (Mad). In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, of various terms, would apply. "Written down value" has been defined in the following manner in clause (6) of section 43 of the Act: "(6) 'written down value' means- (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force: Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of subsection (1) of section 32, 'depreciation actually allowed' shall not include depreciation allowed under sub-clauses, (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi)." It is not in dispute that under clause (v) of section 32(1) of the Act, the assessee was granted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, it is apparent that it is not an allowance in the nature of depreciation. It is not an allowance towards normal wear and tear upon the assets being put to use for the purposes of business. It is a special deduction granted in the initial year when, in fact, the asset is not yet put to use, or the use has just commenced. Thus, there is no possibility of wear and tear of the assets by its use in the course of business. The allowance is primarily in the nature of incentive. Once this position becomes clear and the distinction between the allowance by way of incentive and an allowance by way of depreciation is borne in mind, the requirement provided in sub-clause (b) of clause (6) of section 43 of the Act cannot be said to have been fulfilled. What the provision requires is reduction of the figure of the written down value by all depreciation actually allowed. Once the allowance does not bear the characteristic of depreciation, it cannot be stated that it would form part of all depreciation actually allowed so as to be deductible while computing the written down value. There is one more reason. The scheme of the Act is clear from a conjoint reading of sections 4 and 5 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of ITC Ltd. [1994] 205 ITR 126 lends support to the view adopted by this court, namely, that initial depreciation allowable under section 32(1)(v) of the Act is in the nature of incentive for the new construction or new instalments and cannot be equated with the cost of replacement which is allowed as deduction in lieu of depreciation in respect of certain assets. Therefore, the contention on behalf of the Revenue that the said decision is prior to the amendment by the Finance Act, 1983, does not make any difference as the basic distinction between the two allowances remains. Similarly, the decision of the Madras High Court in the case of CIT v. Adyar Gate Hotel Ltd. [2001] 252 ITR 129 also is on the lines of the view expressed hereinbefore. It is stated at page 132 of the Report that: "The depreciation to be allowed in that assessment year is to be allowed with reference to the written down value as at the commencement of the year which figure had been calculated by excluding the initial depreciation as that was the mode in which the written down value was required to be determined prior to April 1, 1984." The legislative intent is thus clear taking into consider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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