Commissioner of Income Tax vs Sankara Allom (P.) Ltd.

G. Ramanujam, J.—The following three questions of law have been referred to this Court for its opinion at the instance of the revenue u/s 256(1) of the income tax Act, 1961 (''the Act'') : " 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that depreciation at 100 per cent should be allowed in respect of certain expenditure which are allowable as repairs and renewals in the respective assessment years in the past but capitalised by the assessee for the purpose of allowance of depreciation?

Whether, on the facts and in the circum stances of the case, the Appellate Tribunal was right in holding that the written down value for an asset, for which no rate of depreciation has been prescribed prior to the assessment year 1970-71 and for which 100 per cent depreciation is allowable from the assessment year 1970-71 onwards, is the actual cost of the asset after deduction of the depreciation actually allowed?

Whether, on the facts and in the circum stances of the case, the Appellate Tribunal was correct in holding that for the purpose of finding out the written down value, the provisions of section 43(6)(b) would apply to the case of an item of an expenditure in the past but capitalised by the assessee?"

The assessee is a private limited company deriving income from manufacture and sale of salt. For the assessment year 1971-72 (the accounting year ending 31-12-1970), the assessee claimed depreciation of Rs. 1,90,275 on salt pans, reservoirs and condensers made of earthy material at the rate of 100 per cent. The ITO disallowed the claim on the ground that the claim was misconceived up to 31-3-1970 since the income tax (Fourth Amendment) Rules, 1969, allowing 100 per cent depreciation in respect of salt works, salt pans, reservoirs and condensers, etc., came into force only on 1-4-1970 and that, in any event, the assets in question not having been acquired in the previous year, the assessee cannot claim depreciation at 100 per cent even on the basis of the said amendment.

The order of the ITO, disallowing the claim for depreciation as claimed by the assessee, was challenged before the AAC, who, how ever, confirmed the order of the ITO. The assessee took the matter in appeal before the Tribunal. The Tribunal has taken the view that even though the assets had not been acquired during the previous year, the assessee is entitled to claim depreciation at 100 per cent based on the income tax (Fourth Amendment) Rules, which had come into force on 1-4-1970. How ever, the Tribunal directed the ITO to find out whether any depreciation has been allowed in the earlier years and if no depreciation is found to have been given in the earlier years in relation to the assets set out above, the assessee should be given full depreciation at 100 per cent as per the above rule on the actual cost of the assets to the assessee. Aggrieved by the decision of the Tribunal, the revenue has obtained a reference to this Court on the three questions set out above.

The learned counsel for the revenue con tends that normally the cost of repairs and replacements each year would have been allow ed as revenue expenditure and in this case the assessee not having claimed those expenditures as revenue expenditure, those expenditures would have been capitalised so as to increase the value of the assets and, though the rules as amended gives the benefit of 100 per cent allowance in relation to various assets, the allowance granted can only be on the actual cost of those assets and not on the basis of the value as capitalised by including the normal and routine expenditure incurred for repairs and replacements. It is seen from the Tribunal''s order that the assessee''s claim for depreciation in the earlier years for expenses of repairs and replacements was rejected and depreciation had not been allowed in respect of these items and the repairs and renewals had been allowed only as revenue expenditure in the relevant year. Even otherwise, the Tribunal had in fact, directed that fact to be verified by the ITO. From the orders of the authorities below, it is seen that the controversy between the parties was in a narrow compass. While the revenue has taken the view that the depreciation of 100 per cent on cost of salt pans, condensers and reservoirs made of earthy material is admissible only if such assets are brought into use for the first time in the previous year relevant to the assessment year 1970-71 and onwards, the view put forward by the assessee is that if the assets, whenever purchased, had been used in the previous year, depreciation of 100 per cent as per the amended rules can be claimed. The Tribunal took the view that so long as the rules do not say that the 100 per cent depreciation is available only to the assets acquired during the previous year and put in use in that year, the 100 per cent depreciation is available in respect of all salt works, salt pans, reservoirs and condensers, etc., which might have been acquired in the earlier years, but put in use in the previous year. The Tribunal then referred to the conditions to be satisfied for claiming depreciation u/s 32 of the Act, and held that the assessee-has made out his entitlement to claim depreciation at 100 per cent.

Thus, the main point which came for consideration before us is whether, the depreciation at 100 per cent is allowable under the rules as amended in respect of the assets acquired long before the previous year but used in the previous year. The ITO and the AAC proceeded on the basis that since the assets in this case had been acquired long before the previous year, the benefit of 100 per cent depreciation cannot be availed of, while the Tribunal took the view that whether the assets had been acquired in the previous year or not, the depreciation at 100 per cent could be allowed, if the assets had been put to use during the previous year. A perusal of the order of the authorities below, including the order of the Tribunal, would indicate that in this case, the cost of repairs and replacements, which the assessee wanted to capitalise, had been treated as revenue expenditure. Therefore, as on date, we have got only the actual cost of the assets on which the 100 per cent depreciation has to be allowed, if no depreciation had been claimed in the earlier years. In this view of the matter, we agree with the view taken by the Tribunal that the date of acquisition of the assets is immaterial but their actual use in the previous year is the criterion for allowability of the depreciation at 100 per cent. Therefore, we answer question Nos. 2 and 3 in the affirmative and against the revenue.

Question No. 1 proceeds on the basis that 100 per cent depreciation has been claimed by the assessee in respect of the cost of the assets as capitalised by including the cost of repairs and renewals in the earlier assessment years. It is seen from the order of the Tribunal that though the assessee for the years 1965-66 to 1969-70, had capitalised the expenditure relating to the renewals and repairs for the purpose of allowance of depreciation, the Commissioner, by his order dated 20-2-1976 acting u/s 264 of the Act, had directed the ITO to verify the figures of the cost of repairs and replacements and allow the same as re venue expenditure after making adjustment of depreciation, if any, already allowed with reference to such cost. Thus, as it is, the 100 per cent depreciation has not been allowed on any capitalised value of the assets as assumed by the revenue in framing this question. In view of the facts referred to above, this question does not arise and, therefore, the question is left unanswered. The assessee will have the costs from the revenue.