Commissioner of Income Tax vs Maltax Malsers Ltd.

Rakesh Kumar Garg, J.—The assessee company is manufacturing malt from barley. In addition to this, the company has income from dealings in Indian made foreign liquor on wholesale basis.

The assessee company filed its return of income on 29th June, 1984 declaring net income of Rs. 11,85,890. The accounting period of the assessee company for asst. yr. 1983-84 ended on 30th Nov., 1982. The assessee company moved an application for change of its accounting period from 30th November to 30th June. While allowing the said application on 30th Dec, 1982, the AO had imposed a condition that depreciation allowance for asst. yr. 1984-85 will be restricted to 7/12 of the admissible amount of depreciation. The said order was never challenged by the assessee. During the course of assessment proceedings, the AO allowed depreciation to the extent of 7/12 of the admissible amount of depreciation. The assessee preferred appeal to Commissioner of Income Tax (Appeals), Ludhiana [hereinafter referred to as the CIT(A)], who held that in view of the Rule 5(1) of the IT Rules, the assessee was entitled to full depreciation instead of 7/12. When the matter came before the Income Tax Appellate Tribunal, Chandigarh (hereinafter referred to as ''the Tribunal''), it was observed that the assessee in the present case did not file any appeal against the conditions imposed by the AO while permitting change in the "previous year" because no such appeal lies under the IT Act. The Tribunal while relying upon the judgment of the Hon''ble Gujarat High Court in the case of Vxl India Limited Vs. Income Tax Officer and Others, and J.K. Synthetics Ltd. Vs. O.S. Bajpai, Income Tax Officer, Central and Another, held that there was no estoppel against the law and if the condition imposed by the ITO while permitting a change in the "previous year" was invalid and even if it is not challenged by the AO (sic-assessee), the full depreciation is allowable to the assessee at the prescribed rate irrespective of the user of the assets. On a petition filed by the Revenue, in compliance of the directions of this Court, passed in ITC No. 185 of 1993 dt. 10th April, 1996 reported as COMMISSIONER OF INCOME TAX Vs. MALTEX MALSTERS LTD., - Ed. u/s 256(2) of the IT Act, 1961, the Tribunal referred the following question of law to this Court for its opinion:

Whether on the facts and circumstances of the case, the Tribunal was right in law in upholding the decision of CIT(A) allowing full depreciation, when the AO while passing order u/s 3(4) imposed condition that depreciation allowance for the asst. yr. 1984-85 will be restricted to 7/12 of the admissible (sic) did not challenge the same in appeal?

Shri K.L. Goyal, advocate for the Revenue has argued that since the order dt. 30th Dec, 1982 allowing the change of the previous year has been accepted by the AO (sic-assessee) by imposing a condition upon the assessee which was obligatory, therefore, the CIT(A) as well as the Tribunal have erred at law by allowing full depreciation to the assessee.

On the other hand, Mr. Akshay Bhan, learned Counsel for the assessee respondent has vehemently argued that the AO cannot impose condition arbitrarily and contrary to the provisions of the IT Act and the conditions which the ITO can impose while permitting a change in the "previous year" must be valid, legal and reasonable. He further argued that there is no estoppel against the law and if the condition imposed by the ITO while permitting a change in the previous year was invalid, the same can be ignored by the assessing authority while granting the benefit of full depreciation u/s 32 r/w Rule 5(1) of the IT Rules, which permitted full depreciation to the assessee. In support of his arguments, the learned Counsel has placed reliance upon the judgment of Hon''ble Gujarat High Court in the case of VXL India v. CIT (supra) and J.K. Synthetics Ltd. v. ITO (supra) for the proposition. The conditions which the Act imposes, while permitting a change in the "previous year" must be valid, legal and reasonable and the Revenue authority cannot impose conditions which are contrary to the provisions of the IT Act.

We have heard learned Counsel for the parties and perused the record of the reference.

From the arguments raised by learned Counsel for the parties, the following two issues emerge for the decision of this reference:

Whether and what is the meaning of previous year as provided u/s 3(4) of the IT Act?

Whether the AO is competent to impose any condition while allowing such change in the previous year?

u/s 3 of the IT Act, 1961 (as applicable), "the previous year means", "the financial year immediately preceding the assessment year". Sub-section (4) of Section 3 of the IT Act, entitles the assessee to vary the meaning of the expression "previous year" as applicable to him with the consent of the AO and upon such conditions as the AO may think fit to impose.

Section 3(4) of the IT Act reads as under:

Where in respect of a particular source of income or in respect of a business or profession newly set up, an assessee has once exercised the option under Clause (b) or Sub-clause (ii) of Clause (d) or Sub-clause (i) of Clause (e) of Sub-section (1) or has once been assessed, then he shall not, in respect of that source, or, as the case may be, business or profession, be entitled to vary the meaning of the expression ''previous year'' as then applicable to him, except with the consent of the AO and upon such conditions as the AO may think fit to impose.

Rule 5(1) of the IT Rules provides that depreciation is allowable to the full accounting period irrespective of the fact as to whether the machinery has worked for a full year or even for a day. Rule 5(1) of the IT Rules reads as under:

5(1) Subject to the provisions of Sub-rule (2) the allowance under Clause (ii) of Sub-section (1) of Section 32 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.

From the perusal of the provisions of Section 3(4) of the IT Act, it is clear that the assessee has the option to choose his accounting year ending on any date within the preceding financial year as his ''previous year''. Once he exercises this option, the meaning of the expression "previous year" as applicable to him is determined, and he cannot exercise this option again so as to vary the meaning of the expression ''previous year'' as then applicable to him, except with the consent of the ITO and upon such conditions as the ITO may think fit to impose. If the assessee wants to change the meaning of the previous year as then applicable to him, he must obtain the consent of the ITO, and the ITO may refuse to give his consent, but if he does give his consent, he has ample power to impose the condition that the full period from the end of the ''previous year'' for the preceding year''s assessment to the end of the new accounting year should be taken as the previous year for the current assessment year. Rule 5(1) of the IT Rules provides for depreciation allowable to the assessee according to which the assessee is entitled to full depreciation as the said depreciation is allowable to the assessee u/s 32 of the IT Act at the prescribed rate irrespective of the period of user of the assets.

In view of the above situation, any condition to the contrary imposed by the ITO while permitting a change in the "previous year" cannot be made applicable, as it is well settled that there cannot be estoppel against the law. We agree with the judgment of Gujarat High Court in the case of VXL India v. CIT (supra), wherein it has been held that the AO could not impose condition arbitrarily and the conditions should not go against the spirit of, the IT Act. The facts of the present case are similar to the instant appeal.

Thus in view of the above discussion, the question of law referred by the Tribunal is answered in affirmative i.e. against the Revenue and in favour of the assessee.