Depreciation Rate Amendment: A Substantial Question of Law

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Case Name:

Principal Commissioner of Income Tax Vs. U.P. State Bridge Corporation Ltd. (High Court of Allahabad)

Income Tax Appeal No. 106 of 2015

Date: 12th January 2017

Key Takeaways:

• The court recognized that amendments to statutes affecting depreciation rates can be substantial questions of law.
• The case was remanded to the Tribunal for further factual investigation and a fresh order.
• The decision underscores the importance of statutory amendments in tax assessments and their potential to alter legal proceedings.

Issue

Can an amendment to the statute regarding depreciation rates be raised as a substantial question of law before the High Court?

Facts

The case arose from a dispute over whether shuttering should be treated as part of a plant and thus eligible for 100% depreciation deduction. The appeal was under Section 260A (of Income Tax Act, 1961), concerning the assessment year 2009-10. The High Court had to decide if the amendment to the statute permitting depreciation at a particular rate, applicable to the disputed period, could be considered a substantial question of law.

Arguments

• Revenue’s Argument: The Revenue, represented by Sri Manish Misra, argued that under Section 32(1) (of Income Tax Act, 1961), all depreciations are provided, and the amendment to the statute should be considered a substantial question of law.
• Respondent’s Argument: The respondent, represented by Sri Pradeep Agrawal, contended that the issue was not raised before the Tribunal and should not be allowed to be raised for the first time before the High Court.

Key Legal Precedents

The court referred to Section 32(1) (of Income Tax Act, 1961), which outlines the provisions for depreciation of tangible and intangible assets. The case also involved Rule 5 (of Income Tax Rules, 1962), which specifies the calculation of depreciation allowances.

Judgement

The High Court partially allowed the appeal, modifying the impugned order dated 30.04.2015. The court remanded the matter to the Tribunal to address the question of the statutory amendment’s applicability to the disputed period. The Tribunal was instructed to provide both parties an opportunity to be heard and to decide the question in accordance with the law, expeditiously.

FAQs

Q1: What was the main legal question in this case?

A1: The main legal question was whether an amendment to the statute regarding depreciation rates could be raised as a substantial question of law before the High Court.

Q2: What was the outcome of the case?

A2: The High Court partially allowed the appeal and remanded the case to the Tribunal for further examination of the statutory amendment’s applicability.

Q3: Why was the case remanded to the Tribunal?

A3: The case was remanded to allow for further factual investigation and to provide both parties an opportunity to address the question of the statutory amendment’s applicability.

Q4: What does this case mean for future tax assessments?

A4: This case highlights the significance of statutory amendments in tax assessments and their potential to be raised as substantial questions of law, impacting legal proceedings.

1. Heard Sri Manish Misra, learned counsel for appellant and Sri Pradeep Agrawal, Advocate for respondent.

2. This appeal under Section 260 (of Income Tax Act, 1961)­A of Income Tax Act, 1961 (hereinafter referred to as the “Act, 1961”) has arisen from judgment and order dated 30.04.2015 passed by Income Tax Appellate Tribunal, Lucknow Bench ‘A’, Lucknow (hereinafter referred to as the “Tribunal”) in ITA No. 585/LKW/2012. It relates to Assessment Year 2009­10.

3. The disputes relates to question, whether shuttering be treated to be part of plant and will be entitled for 100% deduction or less than that.

4. Sri Manish Misra, learned counsel appearing for Revenue

submitted that under Section 32(1) (of Income Tax Act, 1961) all the depreciations

are provided and it reads as under:

“32. Depreciation.­­(1) In respect of depreciation of­­

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know­how, patents, copyrights, trade marks, licences,

franchises or any other business or commercial rights of similar

nature, being intangible assets acquired on or after the 1st day of

April, 1998. owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed­­

(i) in the case of assets of an undertaking engaged in general or

generation and distribution of power, such percentage on the

actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:

Provided that no deduction shall be allowed under this clause in respect

of­

(a) any motor car manufactured outside India, where such motor

car is acquired by the assessee after the 28th day of February,

1975, but before the 1st day of April, 2001, unless it is used­

(i) in a business of running it on hire for tourists; or

(ii) outside India in his business or profession in another country;

and

(b) any machinery or plant if the actual cost thereof is allowed as

a deduction in one or more years under an agreement entered into

by the Central Government under Section 42 (of Income Tax Act, 1961):

Provided further that where an asset referred to in clause (i) or clause

(ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one

hundred and eighty days in that previous year, the deduction under this

sub­section in respect of such asset shall be restricted to fifty per cent of

the amount calculated at the percentage prescribed for an asset under

clause (i) or clause (ii) or clause (iia), as the case may be:

Provided also that where an asset being commercial vehicle is acquired

by the assessee on or after the 1st day of October, 1998, but before the 1st

day of April, 1999 and is put to use before the 1st day of April, 1999 for

the purposes of business or profession, the deduction in respect of such

asset shall be allowed on such percentage on the written down value

thereof as may be prescribed.

Explanation—For the purposes of this proviso.­­

(a) the expression ‘commercial vehicle” means “heavy goods

expression”, “heavy passenger motor vehicle”, “light motor

vehicle”, “medium goods vehicle” and “medium passenger motor

vehicle” but does not include “maxi­cab”, “motor­cab”, “tractor”

and “road­roller”;

(b) the expressions ‘heavy goods vehicle’, “heavy passenger motor

vehicle”, “light motor vehicle”, “medium goods vehicle” and

“medium passenger motor vehicle” “maxi­cab”, “motor­cab”,

“tractor” and “road­roller” shall have the meanings respectively as

assigned to them in section 2 of the Motor Vehicles Act, 1988 (59

of 1988):

Provided also that, in respect of the previous year relevant to the

assessment year commencing on the 1st day of April, 1991, the deduction

in relation to any block of assets under this clause shall, in the case of a

company, be restricted to seventy­ five per cent of the amount calculated

at the percentage, on the written down value of such assets, prescribed

under this Act immediately before the commencement of the Taxation

Laws (Amendment) Act, 1991:

Provided also that the aggregate deduction, in respect of depreciation of

buildings, machinery, plant or furniture, being tangible assets or know-

how, patents, copyrights, trademarks, licences, franchises or any other

business or commercial rights of similar nature, being intangible assets

allowable to the predecessor and the successor in the case of succession

referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 (of Income Tax Act, 1961) or section 170 (of Income Tax Act, 1961) or to the amalgamating company and the amalgamated

company in the case of amalgamation, or to the demerged company and

the resulting company in the case of demerger, as the case may be, shall

not exceed in any previous year the deduction calculated at the prescribed

rates as if the succession or the amalgamation or the demerger, as the

case may be, had not taken place, and such deduction shall be

apportioned between the predecessor and the successor, or the

amalgamating company and the amalgamated company, or the demerged

company and the resulting company, as the case may be, in the ratio of

the number of days for which the assets were used by them.

Explanation 1­­ Where the business or profession of the assessee is carried

on in a building not owned by him but in respect of which the assessee

holds a lease or other right of occupancy and any capital expenditure is

incurred by the assessee for the purposes of the business or profession on

the construction of any structure or doing of any work, in or in relation

to, and by way of renovation or extension of, or improvement to, the

building, then, the provisions of this clause shall apply as if the said

structure or work is a building owned by the assessee.

Explanation 2­­ For the purposes of this sub­section “written down value

of the block of assets" shall have the same meaning as in clause (c) of sub-

section (6) of section 43 (of Income Tax Act, 1961);

Explanation 3—For the purposes of this sub­section, the expression “assets” shall mean—

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know­how, patents, copyrights, trade

marks, licences, franchises or any other business or commercial

rights of similar nature.

Explanation 4—For the purposes of this sub­section, the expression

“know­how” means any industrial information or technique likely to

assist in the manufacture or processing of goods or in the working of a

mine, oil­well or other sources of mineral deposits (including searching

for discovery or testing of deposits for the winning of access thereto).

Explanation 5—For the removal of doubts, it is hereby declared that the

provisions of this sub­section shall apply whether or not the assessee has

claimed the deduction in respect of depreciation in computing his total

income;

(iia) in the case of any new machinery or plant (other than ships

and aircraft), which has been acquired and installed after the 31st

day of March, 2005, by an assessee engaged in the business of

manufacture or production of any article or thing or in the

business of generation or general and distribution of power, a

further sum equal to twenty per cent of the actual cost of such

machinery or plant shall be allowed as deduction under clause (ii):

Provided further that no deduction shall be allowed in respect of­

(A) any machinery or plant which, before its installation by the

assessee, was used either within or outside India by any other

person; or

(B) any machinery or plant installed in any office premises or any

residential accommodation, including accommodation in the

nature of a guest­house; or

(C) any office appliances or road transport vehicles; or

(D) any machinery or plant, the whole of the actual cost of which

is allowed as a deduction (whether by way of depreciation or

otherwise) in computing the income chargeable under the head

“Profits and gains of business or profession” of any one previous

year.

(iii) in the case of any building, machinery, plant or furniture in

respect of which depreciation is claimed and allowed under clause

(i) and which is sold, discarded, demolished or destroyed in the

previous year (other than the previous year in which it is first

brought into use), the amount by which the moneys payable in

respect of such building, machinery, plant or furniture, together

with the amount of scrap value, if any, fall short of the written

down value thereof:

Provided that such deficiency is actually written off in the books of the

assessee.

Explanation—For the purposes of this clause,­­

(1) “moneys payable” in respect of any building, machinery, plant or

furniture includes—

(a) any insurance, salvage or compensation moneys payable in

respect thereof;

(b) where the building, machinery, plant or furniture is sold, the

price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43 (of Income Tax Act, 1961), taken to be twenty ­five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty ­five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso;

(2) “sold” includes a transfer by way of exchange or a compulsory

acquisition under any law for the time being in force but does not include

a transfer, in a scheme of amalgamation, of any asset by the

amalgamation company to the amalgamated company where the

amalgamated company is an Indian company or in a scheme of

amalgamation of a banking company, as referred to in clause (c) of

section 5 of the Banking Regulation Act, 1949 (10 of 1949) with a

banking institution as referred to in sub­section (15) of section 45 (of Income Tax Act, 1961) of the

said Act, sanctioned and brought into force by the Central Government

under sub­section (7) of the section 45 (of Income Tax Act, 1961) of that Act, if any asset by the

banking company to the banking institution.”

5. He also pointed out that pursuant to Section 32 (of Income Tax Act, 1961), Rule 5 (of Income Tax Rules, 1962) has been framed, which reads as under:

“5. Depreciation—(1) Subject to the provisions of sub­rule (2), the

allowance under clause (ii) of sub­ section (1) of section 32 (of Income Tax Act, 1961) in respect of

depreciation of any block of assets shall be calculated at the

percentages specified in the second column of the Table in Appendix

I to these rules on the written down value of such block of assets as are

used for the purposes of the business or profession of the assessee at any

time during the previous year.

(1A) The allowance under clause (i) of sub­section (1) of section 32 (of Income Tax Act, 1961) of

the Act in respect of depreciation of assets acquired on or after 1st day of

April, 1997 shall be calculated at the percentage specified in the second

column of the Table in Appendix IA of these rules on the actual cost

thereof to the assessee as are used for the purposes of the business of the

assessee at any time during the previous year :

Provided that the aggregate depreciation allowed in respect of any asset

for different assessment years shall not exceed the actual cost of the said

asset:

Provided further that the undertaking specified in clause (i) of sub-

section (1) of section 32 (of Income Tax Act, 1961) may, instead of the depreciation

specified in Appendix IA, at its option, be allowed depreciation under sub-

rule (1) read with Appendix I, if such option is exercised before the due

date for furnishing the return of income under sub­section (1) of section

139 of the Act,

(a) for the assessment year 1998­99, in the case of an

undertaking which began to generate power prior to 1st day of

April, 1997; and

(b) for the assessment year relevant to the previous year in which

it begins to generate power, in case of any other undertaking :

Provided also that any such option once exercised shall be final and

shall apply to all the subsequent assessment years.

(2) Where any new machinery or plant is installed during the previous

year relevant to the assessment year commencing on or after the 1st day

of April, 1988, for the purposes of business of manufacture or production

of any article or thing and such article or thing—

(a) is manufactured or produced by using any technology

(including any process) or other know­how developed in, or

(b) is an article or thing invented in, a laboratory owned or financed by the Government or a laboratory owned by a public sector company or a University or an institution recognised in this behalf by the Secretary, Department of Scientific and Industrial Research, Government of India,

such plant or machinery shall be treated as a part of block of assets

qualifying for depreciation at the rate of 40 per cent of written down

value, if the following conditions are fulfilled, namely :—

(i) the right to use such technology (including any process) or

other know­ how or to manufacture or produce such article or

thing has been acquired from the owner of such laboratory or any

person deriving title from such owner ;

(ii) the return furnished by the assessee for his income, or the

income of any other person in respect of which he is assessable, for

any previous year in which the said machinery or plant is

acquired, shall be accompanied by a certificate from the Secretary,

Department of Scientific and Industrial Research, Government of

India, to the effect that such article or thing is manufactured or

produced by using such technology (including any process) or

other know­how developed in such laboratory or is an article or

thing invented in such laboratory ; and

(iii) the machinery or plant is not used for the purpose of business

of manufacture or production of any article or thing specified in

the list in the Eleventh Schedule to the Act.

Explanation : For the purposes of this sub­rule,—

(a) “laboratory financed by the Government” means a laboratory

owned by any body including a society registered under the

Societies Registration Act, 1860 (21 of 1860), and financed

wholly or mainly by the Government ;

(b) “public sector company” means any corporation established by

or under any Central, State or Provincial Act or a Government

company as defined in section 617 of the Companies Act, 1956 (1

of 1956) ; and

(c) “University” means a University established or incorporated by

or under a Central, State or Provincial Act and includes an

institution declared under section 3 (of Income Tax Act, 1961) of the University Grants

Commission Act, 1956 (3 of 1956), to be a University for the

purposes of that Act.”

6. Appendix 1 referred to in Rule 5 (of Income Tax Rules, 1962) was substituted by Income Tax

(Sixth Amendment) Rules, 2005 w.e.f. 02.04.2005 and effective from

Assessment Year 2006­07. It provides in Clause III depreciation at the

rate of 15% in respect of machinery and plant and other than those

covered by sub­items (2), (3) and (8) below. Learned counsel for

Revenue submitted that in view of aforesaid amendment depreciation

only to the extent of 15% is admissible.

7. Sri Pradeep Agarwal, learned counsel appearing for respondent

submitted that this issued was never raised before Tribunal and hence

cannot be allowed to be raised for the first time before this Court.

8. However, we find that if statute permitting depreciation at a particular rate itself has been amended and such amendment is applicable to disputed period of assessment, it is a substantial question of law and can be raised before this Court but since it may also involve some factual investigation, we find it appropriate to remand this matter to Tribunal to look into this aspect and pass a fresh order in accordance with law.

9. In view of above, appeal is allowed partly. Impugned order dated

30.04.2015 is modified only to the extent that parties shall be allowed

to address Tribunal on aforesaid question and after giving opportunity

of hearing to both parties, Tribunal shall decide such question in

accordance with law, expeditiously.

Order Date :­ 12.01.2017

AK