INCOME-TAX APPEALS NOS. 352/KB, 361/KB AND 362/KB OF 1980.81, DECIDED ON 23RD JANUARY, 198-3. Versus INCOME-TAX APPEALS NOS. 352/KB, 361/KB AND 362/KB OF 1980.81, DECIDED ON 23RD JANUARY, 198-3.
ORDER
1. MUHAMMAD MAZHAR ALI (CHAIRMAN). ‑Of these three appeals two involving in the assessment year 1975‑76 are cross‑appeals while the one pertaining to char‑,‑ year 1976‑77, is at the instance of the assessee, a private limited company. These appeals are directed against the combined order of the learned Appellate Assistant Commissioner, A Range. The departmental appeals call in question the order of the learned Appellate Assistant Commissioner whereby he has ordered the allowance of depreciation of Rs. 5,60,283 for 12 months instead of Rs 4,20,212 allowed by the Income‑tax officer for nine months only. The assessee's appeals on the other hand, commonly assailed certain add‑backs out of expenses debited to profit and loss account, and working of the taxable income without giving effect to the brought‑forward losses before adjustment of allowable depreciation.
2. We first take up the departmental appeal for the charge year 1975‑76. The relevant facts giving rise to this appeal are these. The assess vide their counsel's letter No. D. T. 6622, dated 19‑6‑1976 requested the Income‑tax officer concerned for change of accounting dated from 25‑3‑1975 to 30‑11‑1974, to respect of the year under appeal. The assessing officer conceded to the appellant's requests on the condition that "Depreciation would be allowed for nine months only during the assessment year 1975‑76". The assessee, vide their letter dated 28‑8‑1974, addressed to the Income‑tax Officer, stating that there is no provision in the Income‑tax Act which could justify the allowance of depreciation in proportion to such period during which the asset has worked and sought for confirmation that the company has been allowed to change its accounting year and the depreciation as provided in section 10(2)(vi) would be allowed to the company irrespective of the accounting period. The Income‑tax Officer did not make any reply to this letter. The assessee, later on addressed another letter dated 24‑5‑1976 on this subject but the Income‑tax Officer did not make any reply as well. The assessee had claimed depreciation for 12 months at Rs. 5,60,283 : whereas the Income‑tax Officer restricted it to nine months for Rs. 4,20,212 in view of the condition imposed for the change in the accounting year. The assessee's appeals on this point succeeded before the learned Appellate Assistant Commissioner, The relevant observations from the Appellate Assistant Commissioner's order are extracted below
2. "Any way, periodical depreciation is not admissible according to law and for any assessment year the full depreciation for the year should be allowed (l2 months). Therefore, in my opinion, the Income‑tax Officer was not justified in allowing only Rs. 4,20,212 instead of Rs. 5,60,283 which should be allowed by him. Therefore, the Income‑tax Officer is directed to allow the depreciation in full.
3. We have heard the parties Representatives. The learned Departmental Representative contended that by virtue of the first proviso to section 2(II) of the repealed Income‑tax Act, 1922, the Income‑tax Officer is vested with a discretion to accord his consent to the exercise of option by an existing assessee to change their accounting period upon such condition as he (Income‑tax Officer) may think fit to enforce. He urged that under section 10(2)(vi) it is a statutory right of an assessee to get depreciation at the prescribed percentage of the written down value of the asset but it is subject to statutory discretion vested in the Income‑tax Officer under section 2(11) where it is applicable. In short, the Departmental Representative pressed for the restoration of the order of the Income‑tax Officer in this behalf. Mr. Rustamjee the learned Authorised Representative of the assessee emphasised that the allowance of depreciation at the prescribed rate is the statutory right of the assessed and the Income‑tax Officer could not curtail it in the manner he has sought to do. The learned Authorised Representative argued that the Income‑tax Officer has exercised his discretion arbitrarily, capriciously and in indiscriminatory manner. According to him, he has acted without legal justification inasmuch as, the declared profits of the previous year (nine months) were greater than that of the preceding year and no loss would have been caused to revenue if the option for change of accounting date was allowed to be exercised without the condition in question enforced by the income‑tax Officer. His next line of argument is that the exercise of discretion in this manner has resulted in depriving the assessee of his statutory rights and, as such, it is unsustainable in law. Relying upon the decision of the Patna High Court in the case "Commissioner of income‑tax Bihar and Orissa v. Dalmia Cement Factory Limited ((1945) 13 I T R 415) urged that notwith standing the actual user of the asset for a period less than a year (12 months) during the relevant previous year, the assessee was entitled to the full depreciation allowance under section 10(2)(vi) and not only such amount of depreciation of allowance as was proportioned to the period during which it actually worked. Lastly, he submitted that the Income‑tax Officer's action in restricting the liberal depreciation allowance as admissible under section 10(2)(vi) is harsh, unreachable and injudicious, more particularly, in view of the letters addressed by the assessee explaining the legal position as it was understood by the assessee.
4. We have given our earnest consideration to the submissions made at the bar and we find that the grievance of the department is well‑founded. Before dealing with the contention of the parties' representatives, we would like to reproduce hereunder ,he relevant provision of law. Section 2(11) of the repealed Income‑tax Act, 1922 reads as under :‑
5. "Section 201) "Previous year" means‑
(i) in respect of any separate source of income, profits and gains ;‑
(a) the twelve months ending on‑the thirtieth day of June, next preceding the year for which the assessment is to be made, or, if the accounts of the assessee have teen made up to a date within‑ toe said twelve months in respect of a year ending on any date other than the said (thirtieth day of June), then at the option of the assessee, the year ending on the date to which his accounts have been so made up:
6. Section 10(2)(vi) in respect of depreciation of such buildings, machinery, plant, or furniture being the property of the assessee, a sum equivalent (where the assets are ships other than ships ordinarily plying on inland waters) to such percentage on the original cost thereof the assessee 3s may in any case or class of cases be prescribed (and in any other case, to such percentage on the written down value thereof as may in any case or class of cases be prescribed (and where the buildings have been newly erected, or the machinery or plant (not being (motor vehicles not plying for hire or) machinery or plant entitled to the development allowance under clause (vi‑a) and (not) having previous) been used in Pakistan) has been installed (in Pakistan) after the 31st day of March, 1945, a further sum . . . .in respect of the year of erection or installation (or the year in which such building, plant or machinery is used by the assessee Or the first time for the purposes of his business, profession or vacation or the year in which commercial production commenced, whichever is the later equivalent‑
7. (aa). .. . . . . . .
8. (b)..........
9. (rest omitted being not relevant for this case).
10. The reading of the First Proviso to section 2(11) (i)(a) of the Act clearly indicated that where in respect of a particular source of income, profits and gains, as assessee has once been assessed he shall not in respect of that source exercise the option given by this sub‑clause so as to vary the meaning of the expression, previous year as then applicable to him except with the consent of the Income‑tax Officer and upon such condition As the Income‑tax Officer may think fit to impose. It is thus, evident that an absolute‑ and full discretion is vested in the Income‑tax officer to record his consent upon such condition as he may think to impose. The legislature has not considered it advisable to restrict its discretion of imposing the condition which may affect his right for the allowance of certain benefit available to an assessee under section 10(2) of the Act for working out the profits or gains, of business, profession or vocation. It is here, pertinent to note that subsection (2) of section (10) makes the various allowances admissible "subject to the provisions, of the Act". The provision of section 2(11) of the Act, as already stated, covers the discretionary power in the Income‑tax Officer to agree to the change of accounting date upon such condition as he may think fit to impose. It is an admitted fact that with the exercise of option changing year to year from 23‑3‑1975 to 30‑11‑1974 the assessee was to be assessed in respect of his income only for a period of eight months. Had it not been the case of exercise of option under clause 1(a) of subsection (11) of section 2, the assessee would have been entitled to the allowance of depreciation for the asset in question for the entire year irrespective of the fact that the building machinery etc. has been used only for fraction of the year. But since the assessee wanted to opt for the accounting date from 28‑3‑1975 to 30‑11‑1974, it could not do so without obtaining the prior consent of the Income‑tax Officer. While according his consent the Income‑tax Officer is further vested with an absolute discretion to put such conditions as he may thin fit to impose. While exercising his discretionary powers he may refuse to allow certain allowance which would otherwise have been admissible to the assessee under section 10(2) of the Income‑tax Act. The various allowances under subsection (2) of section 10 which as stated, to be allowed subject to the provisions of the Act. The provision of the Act embodied in subsection (11 confers the discretionary power in the Income‑tax Officer to impose any condition which may be for non‑allowance or partial allowance out of the said allowance. We are clearly of the opinion that the Income‑tax Officer has not acted harshly or unreasonably in the exercise of his discretionary power and hence there is no justification for us to interfere with his order in this behalf. The contention of the counsel for the assessee to the effect 'ha the discretionary power has been exercised discriminately is without substance inasmuch as, no material is available on record nor our attention is draw to any such material on the basis of which this contention could be hell valid.
11. For the foregoing reasons we would allow the departmental appeal. In the result, the order of the learned Appellate Assistant Commissioner is vacated and that of the Income‑tax Officer's restored.
12. Appeal allowed.