Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss.136 & 23(1)‑‑‑Reference to High Court ‑‑‑Deductions‑‑ Depreciation allowance ‑‑‑Assessee was under obligation to claim depreciation allowance as well as expenditure under the head maintenance of car in the Profit and Loss Account and non‑claim of such depreciation and expenses amounted to an ad hoc addition which was not permissible under the Self‑Assessment Scheme‑‑‑Validity‑‑‑Such was an allowance, which could only be allowed if claimed‑‑No concept of an allowance or depreciation existed in law without claim‑‑‑Appellate Tribunal found that the depreciation could not be allowed without claim and that the present was not fit case for cancellation of the order‑‑‑No substantial question of law arising from the order of the Appellate Tribunal, questions framed were considered as without any notable or useful purpose‑‑‑Appellate Tribunal refused to refer the same to High Court.

CIT v. Mathendra Mills and others 2001 PTD 609 rel.

Mrs. Sabiha Mujahid, D.R. for Appellant.

Jamal Sukheera for Respondent.

Date of hearing: 22nd June, 2002.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).‑‑ Following statement of the case and questions of law have been proposed on behalf of the Department for reference to the High Court:‑‑‑

"The assessee, an A.O.P. derives income from manufacturing of auto parts. Original assessment for the assessment year 1996‑97 in this case has been finalized under section 59(1) at net income of Rs.114,000 against declared income of Rs.114,000. Later on the assessment record was examined by the I.A.C. and the assessment was cancelled under section 66A after fulfilling all the procedural aspects. It has been observed that the assessee purchased new Car No. LIZ‑4060 Model 1996 for a consideration of Rs.784,000 in the assessment year 1996‑97. No expenses under the head maintenance and depreciation on car were claimed in the Profit and Loss Account. The Assessing Officer had not kept in view the statutory allowance, allowed under section 23(1) of the Income Tax Ordinance, 1979. The Assessing Officer did not put the return into initial scrutiny and ignored the aspect of sources of investment in the said car and also did not examine the issue of allowance of depreciation. It was further viewed that if the depreciation on the said car was allowed/claimed then declared income should be at lesser figure and tax payable on the same would have been less than the tax paid for the assessment year 1995‑96 for which the comparison was to be made for classification of the case under the Scheme of S.A.S.

The assessee being aggrieved went into appeal and the I.T.A.T. vide Order No. W.T.A. 1717/LB of 2000, dated 22‑11‑2001 cancelled the assessment order passed under section 66A on the contention of the assessee that he purchased a car in the fag end of the year, due to which practically there was no depreciation.

It is further submitted that I.T.A.T. on the same issue had already decided the case cited as I.T.A. No.6201/LB of 1999 assessment year 1995‑96 and I.T.A. No.6202/LB of 1996, assessment year 1996‑97 dated 12‑2‑2000 in which it was observed as under:‑‑‑

`We have given consideration to the arguments of both' the parties and we fell inclined to agree with the learned D.R. The explanation given to section 66‑A states that an order prejudicial to the interest of Revenue shall include an order passed without lawful jurisdiction. Depreciation is a statutory allowance, section 23(1) of the Income Tax Ordinance, 1979 states in clear terms that allowance and deductions even therein shall be made in computing the income under the head business from profession. Depreciation is an allowance, which has been given in the condition enumerated in section 23(1). If deprecation allowance was to be allowed in both the years as well as the tax therein could be less than in the immediate preceding year. This is an undisputed position. The Self‑Assessment Scheme provided that no ad hoc addition could be made to avail the benefit of S.A.S. By not claiming the depreciation allowance income has been declared higher and in a way an ad hoc addition has been made which is not admissible. In these circumstances, the provision of section 66A, had been rightly invoked.'

Question of Law

(1) Whether depreciation allowance is mandatory or discretionary and assessee was not under obligation to claim depreciation under section 23(1) of the Income Tax Ordinance, 1979 on a new car purchased in the year before 30‑6‑1996.

(2) Whether the assessee was not under obligation to claim depreciation allowance as well as expenditure under the head maintenance of car in the P&L A/c.

(3) Whether failure to claim statutory depreciation and expenses amounts to an ad hoc addition nor permissible under the Self- Assessment Scheme 1996‑97.

(4) Whether the learned Tribunal erred in law in not following its earlier judgment on the same issue and not referring the matter to a larger Bench."

The learned L.A. says that the depreciation allowance is a mandatory allowance and assessee need not claim it. The Assessing Officer in this case had omitted to allow this allowance, which would have definitely resulted in reduction of income and exclusion of the return from S.A.S. The order, therefore, was erroneous and prejudicial to the interest of Revenue. It was further argued that non‑claim of depreciation amounts to ad hoc addition, which is not permissible under the provisions of the S.A.S. for 1996‑97. Reference to a judgment has also been made without producing before us a copy of the same in which statedly the Tribunal has held that depreciation is a statutory allowance. It is allowable even if the assessee does not claim it. The assessment finalized in consequence thereof is erroneous as well as prejudicial to the interest of Revenue.

We have gone through the arguments of learned L.A. and have also perused the statement prepared by him. It was pointed out to him that the judgment now being mentioned was not before the Tribunal at the time of original hearing; hence the question whether it was binding or not does not arise. He replied that he has been given the impression by the Department that the same was produced to which we cannot agree as it was neither referred nor produced. It is not even a part of the discussion of the order. The question whether the ratio was applicable or not or that it was binding or not, therefore, is to be ignored on the face of it.

Regarding the main issue that the depreciation is mandatory and must be allowed even in the absence of a claim, we re‑produce following relevant section:‑‑‑

"23. Deductions.‑‑‑(1) In computing the income under the head `Income from business or profession', the following allowance and deductions shall be made, namely:‑‑‑

(v) In respect of depreciation including First Year Allowance or Reinvestment Allowance or Industrial Building Allowance, of any such building, machinery, plant, furniture or fitting, being the property of the assessee, the allowance admissible under the Third Schedule (except depreciation (or First Year Allowance) on assets given on lease shall be allowance against income from lease rentals only):‑‑

Above subsection (v) provides for deduction of depreciation with the words `an allowance admissible under the Third Schedule.

In Third Schedule this Admissibility is mentioned in the following manner:‑‑‑

THE THIRD SCHEDULE

(See section 23)

RULES FOR THE COMPUTATION OF DEPRECIATION ALLOWANCE

1. Allowance for depreciation.‑‑‑(1) Where, in any income year, any building, machinery, plant or furniture owned, by an assessee is used for purposes of any business or profession carried on by him, or in any income year commencing on or after the first day of July, 1982, any machinery or plant is given on lease by the assessee, being a scheduled bank, a financial institution (or such modaraba or leasing company as is) approved by the Central Board of Revenue for purposes of this Schedule, on such conditions as may be specified, an allowance for depreciation shall be made in computing the profits and gains of the business or profession of the assessee in the manner hereinafter provided.

Above clause speaks of the allowance on such conditions as may be specified, shall be made in computing the profits and gains of the business or profession or the assessee in the manner is hereinafter provided. The conditions and the manner hereinafter provided. Thereafter, under sub‑clause (3) of clause (1) the Legislature has in unequivocal terms provided following qualifications for this allowance:‑‑

"(3) No allowance under this rule shall be made unless:‑‑‑

(a) [at the time of filing a return of total income] such particulars as may be prescribed and such further information or documents as the (Deputy Commissioner) may require, are furnished; and

(b) Such building, machinery, plant or furniture has been so used during the income year."

From the above it is clear that an allowance under this rule can only be permitted if at the time of filing of a return of the total income the particulars prescribed for this purpose and the information necessary for granting 'depreciation has been produced. This exception to the earlier rules make it abundantly clear, that this is not an automatic deduction. When the I.T.O. have tire power to disallow it on non -furnishing of prescribed particulars it cannot be said that he has got the power to allow it in the absence of such particulars and claim. In the present case, the assessee had purchased car at the fag end of the year; hence its utilization during the year was also debateable. This has been so mentioned in our order and is also relevant in term of clause (2)(b) in the manner that whether it was used for business or not during this year at all. This, however, is without prejudice to the earlier finding with regard to the claim of the depreciation by the assessee. The use of word in clause (1) "on such conditions as may be specified" also is not to be ignored. If the Legislature had the intention of providing this allowance to every body without claim then there was no reason of putting conditions on the allowance of depreciation. It could have been allowed straightaway without aforementioned. There are requirements still some more clauses of the same provision, which fortify our claim. In this regard we can mention with advantage clause (7) of the Third Schedule, which deals with disposal of assets and treatment of resultant gains or losses. This clause says that no allowance under rules 1, 3, 4, 5, 5A, 5AA, 5B or SC shall be made in respect of the year in which such asset is sold. So, this is another example of the circumstances in which this allowance is to be disallowed. In any case, this is an allowance, which can only be allowed if claimed. Furthermore, the provisions of law relevant to the issue have been reproduced by us above and have also beep dilated upon. There is no concept of an allowance of depreciation without claim in the law. Here we would like to take. advantage from a judgment decided by the Supreme Court of India in the case of CIT v. Mahendra Mills and others reported as 2001 PTD 609. The finding therein is that the law does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim. If the assessee does not want to enjoy this benefit it cannot be forced on him. It is for the assessee to see if the claim of depreciation is to his advantage and not the Assessing Officer. It is held as under:‑‑‑

"Section 32 allows depreciation as deduction subject to the provisions of section 34, section 34 provides that deduction under section 32 shall be allowed only it prescribed particulars have been furnished. We have seen rule 5AA of the Rules, which though since deleted provided for the particulars required for the purposes of deduction under section 32. Even in the absence of rule 5AA, the return of income in the form prescribed itself requires particulars to be furnished if the assessee claims depreciation. These particulars are required to be furnished in great detail. There is a circular of the Board, dated August 31, 1965, which provides that depreciation could not be allowed where the required particulars have not been furnished by the assessee and no claim for the depreciation has been made in the return. The Income‑tax Officer in such a case is required to compute the Income without allowing depreciation allowance. The circular of the Board, dated April 11, 1955, is of no help to the Revenue. It imposes merely a duty on the officers of the Department to assist the taxpayers in every responsible way, particularly, in the matter of claiming and securing relief. The officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that.

The provision for claim of depreciation is certainly for the benefit of the assessee. If it does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather the Income‑tax Officer should advise him not to claim depreciation if that course is beneficial to the assessee. That would be in our view the spirit of the circular dated April 11, 1955. Income under the head `profit and gains of business or profession' is chargeable to income‑tax under section 28 and that income under section 29 is to be computed in accordance with the provisions contained in sections 30 to 43A. The argument that since section 32 provides for depreciation it has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in section 34. If section 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under section 32 cannot be allowed. Section 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code."

We, therefore, cannot agree with the learned L.A. that the depreciation can be allowed without claim and that this was a fit case for cancellation of the order. No substantial question of law arises from the order of the I.T.A.T. The questions framed, therefore, are considered as without any notable or useful purpose. We, therefore, refuse to refer the same to the Hon'ble High Court.

C.M.A./564/Tax(Trib.) Order accordingly.