COMMISSIONER OF INCOME-TAX VS LEVER BROTHERS LTD., 2007 PTD-KARACHI-HIGH-COURT-SINDH 1436 (2006)

Income Tax Ordinance (XXXI of 1979)---

---Ss. 26, 62-B & 136---Depreciation allowance---Computation of---Appeal to High Court---Assessee company, which had been following calendar year as its income year, filed its return covering 12 months' period commencing from 1-1-1994 to 31-12-1994---Return of income showed a sum of Rs.98,961,619 as 12 months' depreciation allowance---Assessee company had also filed return covering the entire 18 months' period starting from 1-1-1994 and ending 30-6-1995 wherein a total sum of Rs.35,27,08,833 was claimed as 18 months' depreciation allowance worked out on the basis of written down value of the assets as stood on 1-1-1.994---Validity---Depreciation was to be computed on the basis of "income year" as defined in Finance Act, 1995 which for the purposes of assessment year 1995-96, covered the entire period of 18 months, without any break in the computation---Said 18 months, on account of transaction in the income year i.e. from calendar to financial year, had to be treated as one income year---No lawful justification was available to split the income year into two parts, first comprising 12 months and the second 6 months and then compute depreciation, which obviously would give different quantum of depreciation.

Nasarullah Awan for the Appellant.

Arshad Siraj for Respondent.

ORDER

FAISAL ARAB, J.---Prior to the amendments made under the Finance Act, 1995 in Income-tax Ordinance, 1979, taxpayers had the opinion to choose calendar year as their income year under section 2(26)(b) of the Income Tax Ordinance, 1979. In order to bring uniformity in the income year for all taxpayers and to facilitate information matching, section 2(26)(b) was omitted through Finance Act, 1995, whereby the option to adopt calendar year as income year stood withdrawn. Pursuant to such amendment, all taxpayers had to follow financial year as their income year, except of course where special income year is prescribed by C.B.R. under section 2(26)(c) of the Income Tax Ordinance, 1979. However, the question of special income year is not part of the controversy in the present case.

To facilitate this transition in the income year, all such taxpayer who were hitherto following calendar year as income year, required to submit their return covering 18 months' period starting from 1-1-1994 and ending on 30-6-1995. Thus for the assessment year 1995-96, this entire 18 months' period was to be treated as one income year. Of this 18 months' period, the taxpayers were required to file two returns. The first return for period commencing from 1-1-1994 to 31-12-1994 was to be tiled by 30-9-1995 and the second return covering the entire 18 months transitional income year starting right from 1-1-1994 and ending on30-6-1995. This 18 months return was to be submitted by 31-12-1995. In this manner one final assessment for the entire transitional income year spread over 18 months was to be made for the assessment year 1995-96.

The respondent company, which had been following calendar year as its income year, tiled its return covering 12 months' period commencing ,from 1-1-1994 to 31-12-1994. In this return a sum of Rs.98,961,619, was shown as 12 months' depreciation allowance, the A respondent company filed return covering the entire 18 months period starting from 1-1-1994 and ending 30-6-1995 wherein a total sum of Rs.352,708,833 was claimed as 18 months depreciation allowance worked out on the basis of written down value of the assets as it stood on 1-1-1994.

The assessing officer accepted the depreciation allowance claimed at Rs.352,708,833. I.A.C. however, was not satisfied with such assessment. He on one of the hearing called upon the respondent company to submitted two separate schedule of depreciation. The first schedule of depreciation covering first 12 months period and the second covering the remaining 6 months period. The second schedule was sought on the basis of written value of assets as it stood on 1-4-1995. When two separate schedules of depreciation as required by the I.A.C. were submitted, the depreciation allowance for the first 12 months period commencing from 1-1-1994 to 31-12-1994 was worked out to be Rs:98,916,619 and depreciation allowance for the remaining 6 months period covering 1-1-1995 to 30-6-1995 worked out to be Rs. 146,729,529. The total of these two separately computed depreciation allowance came to Rs.245,646,148 as against the depreciation allowance of Rs.352,708,833 claimed by the respondent company in its return for the entire 18 months period computed on the basis of one written down value as of 1-1-1994. Nothing the difference of Rs.107,062,685 in the computations of depreciation allowance, I.A.C treated the different as excessive claim of depreciation allowance and added the difference to respondent's income.

Aggrieved by I.A.C.'s decision, the respondent company preferred appeal before the Income Tax Appellate Tribunal. The Tribunal rejected I.A.C.'s method of breaking the 18 months period into two period i.e. first period covering 12 months and the second 6 months and allowed the entire claim of the depreciation allowance which was worked out on the basis of single computation of depreciation allowance for the entire 18 months period taking only one written down value of the assets as it stood on 1-1-1994.

Aggrieved with the decision of the Tribunal, the department has filed the present appeal. The appeal was admitted by this Court on 21-2-2006 to consider the following questions of law which arises from the order of the Tribunal:

"Whether on the facts and circumstances of the case, the learned ITAT was justified in deleting the addition made out of the excessive claim of normal depreciation for an income year of 18 months, in proportion to an income year of 12 months instead of directing to claim the depreciation in two period of 12 and 6 months separately?"

We are of the opinion that the depreciation was to be computed on the basis of "income year" as defined in allowance Finance Act, 1995 which for the purposes of the assessment year 1995-96 covered the entire B period of 18 months without any break in the computation. This 18 months period on account of transition in the income year i.e. from calendar to financial year, has to be treated as one income year. There was no lawful justification to split the income year into two parts, first comprising of 12 months and the second 6 months and then compute depreciation. This would obviously give different quantum of depreciation as is evident from the computations worked out, on the basis of I'A.C.'s direction but such method was wrongly adopted.

C.B.R., vide its Circular No. 4 of 1995 (Income Tax) dated 9-7-1995 explained the effect of amendments made in the Income Tax Ordinance, 1979 through Finance Act, 1995, in paragraph 7 of the said Circular it has given following explanations.

Revision of Dates for Filing of Income Tax Return:

The dates for filing of Income Tax returns were 31st July, 31st August, 30th September and 31st December every year. The first two dates fell very early at the start of the year. Income Tax was felt that the time available for filing of return would be very short in view of changes brought in the procedure of assessment particularly the discontinuation of option to have calendar year as income year. The first two dates [i.e. 31st July and 31st August] have, therefore, been merged with the next date i.e. 30th September. Accordingly, the new dates of filing of return of income will be:

(a) For companies with income year ending between 1st January to 30th June: 31st December.

(b) For other assessee: 30th September

The companies which have already closed their accounts on 31-1-1994 shall file returns for 12 months by 30-9-1995 subject to revision of returns for 18 months (up to 30-6-1995) to be filed by 31-12-1995, if audit has not been completed in such cases, provisional return can be filed the return will not be treated as invalid on this account. Auditor report can be furnished on completion of audit, but not later than two months from the date of filing of return.

In the concluding part of the above mentioned explanation it is clearly stated that 12 months' return was required to be submitted subject to submission of revised return for the entire 18 months-period. It is thus evident that the first return of 12 months was only a provisional step as the taxpayers were ultimately required to submit final revised return for the entire 18 months' period for assessment. This entire 18 months' period obviously meant to be treated as one income year. Had the return for the first 12 months was subject to final assessment then there was no need for calling upon the taxpayers to again-submit a return for the entire 18 months' period. This distinction, coupled with the facts that the income year for the assessment year 1995-96 comprised of 18 months', the computation of depreciation allowance for the entire 18 months without any break i.e. without splitting the written down values at two different points in time, was to be made as was done by the respondent company itself in its return.

Furthermore, section 26 of the Income Tax Ordinance, 1979 when read as a whole also makes it clear that income year in relation to any assessment year means and includes any period in respect of which a return of total income is required to be furnished. In the case in hand, on account of transition of income year from calendar to financial year, the total income of the respondent spread over 18 months was required to be furnished for assessment for the assessment year 1995-96, therefore, the entire 18 months are to be treated as one income year without splitting it in any manner. The depreciation allowance for one income year therefore, has to be computed once on the basis of written down value of the assets as it stood at the start of such income year i.e., as on 1-1-1994. The yearly rate of depreciation for 18 months then was to be applied on prorata basis as envisaged under section 62-B of the Income-Tax Ordinance and as explained in paragraph 10 of C.B.R.'s Circular No.4 of 1995 (Income Tax) dated 9-7-1995 i.e., one and half times of the depreciation allowance which was allowable for 12 months period.

Vide short order dated 11-10-2006 this Court answered the question of law in the affirmative. The above are reasons for the same.

H.B.T./C-7/K????????????????????????????????????????????????????????????????????????????????????? Order accordingly.