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Tax Publishers ACIT v. Nicholas Piramal India Ltd. [ITA No. 1939/Mum/2005, dt. 16-9-2020] : 2020 TaxPub(DT) 3681 (Mum-Trib) 1. Whether depreciation is mandatory prior to CIT v. Mahendra Mills Ltd. (2000) 159 CTR 381 (SC) : 2000 TaxPub(DT) 1304 (SC) given the wording of Explanation 5 to section 32. 2. Expenditure incurred for an aborted ADR issue -- Allowability thereof *Facts:* 1. Assessee had taken over Boehringer Mannheim India Ltd. (BMIL) where in the erstwhile BMIL had not claimed depreciation on its block of assets for assessment year 1995-96/1996-97. Post take over assessee claimed depreciation on the block as they were taken over. The department allowed the depreciation on the presumed net block as though depreciation was mandatorily claimed for assessment year 1995-96/1996-97 which was reversed by the CIT(A) holding Mahendra Mills case. On higher appeal by the department. 2. Assessee had spent amount for a futile ADR issue which had to be aborted -- this was disallowed by assessing officer, allowed by Commissioner (Appeals). On higher appeal - 1. Held in favour of the assessee that depreciation though a mandatory statutory claim to be allowed to assessee irrespective whether they claim or otherwise this cannot be stretched to prior assessment years to assessment year 2002-03 where in Explanation 5 to section 32 did not exist. In short the wording of Explanation 5 to section 32 cannot be read retrospective in law -- "After the omission of sub-section (1) and (2) of section 34 and rule 5AA with effect from 1-4-1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Explanation 5 to 32 was introduced by the Finance Act, 2002 with effect from 1-4-2002 and it provides as follows :-- Explanation 5.--For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; Thus, it can be safely said that omission of section 34 has not affected the assessee's choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Explanation 5 in section 32 with effect from 1-4-2002, from assessment year 2002-03 onwards. In CIT v. Sree Senhavalli Textiles (P) Ltd., (2003) 259 ITR 77 (Mad) : 2003 TaxPub(DT) 0541 (Mad-HC), the Hon'ble Madras High Court has held that though after judgment was rendered by the apex Court in CIT v. Mahendra Mills (2000) 159 CTR (SC) 381 : (2000) 243 ITR 56 (SC) : 2000 TaxPub(DT) 1304 (SC), Explanation 5 was inserted in section 32(1) by the Finance Act, 2001, with effect from 1-4-2002, declaring that 'for the removal of doubts' the provisions of sub-section (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the Apex Court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the apex court will remain the binding law for the period to the amendment. The newly added Explanation takes effect only on and from 1-4-2002, and will not be applicable for prior years. If claim made in the original return had been given up in the revised return, there was no obligation to consider the claim for depreciation. 27. The Hon'ble Supreme Court in the case of Mahendra Mills (supra) had made the following observations :-- ".......Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions "actually allowed" to the assessee for the past years. "Actually allowed" does not mean "notionally allowed". If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is "allowed" when it is claimed. A subtle distinction is there when we examine the language used in section 16 and sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation. The assessing officer cannot grant depreciation allowance when the same is not claimed by the assessee." *Editorial Note:* Explanation 5 to section 32 was introduced to counter Mahendra Mills decision of Apex Court. 2. Held in favour of the assessee that the aborted ADR issue did not bring forth an enduring benefit and thus the expenses were allowable.

Tax Publishers

ACIT v. Nicholas Piramal India Ltd. [ITA No. 1939/Mum/2005, dt. 16-9-2020] : 2020 TaxPub(DT) 3681 (Mum-Trib)

1. Whether depreciation is mandatory prior to CIT v. Mahendra Mills Ltd. (2000) 159 CTR 381 (SC) : 2000 TaxPub(DT) 1304 (SC) given the wording of Explanation 5 to section 32.

2. Expenditure incurred for an aborted ADR issue -- Allowability thereof

Facts:

1. Assessee had taken over Boehringer Mannheim India Ltd. (BMIL) where in the erstwhile BMIL had not claimed depreciation on its block of assets for assessment year 1995-96/1996-97. Post take over assessee claimed depreciation on the block as they were taken over. The department allowed the depreciation on the presumed net block as though depreciation was mandatorily claimed for assessment year 1995-96/1996-97 which was reversed by the CIT(A) holding Mahendra Mills case. On higher appeal by the department.

2. Assessee had spent amount for a futile ADR issue which had to be aborted -- this was disallowed by assessing officer, allowed by Commissioner (Appeals). On higher appeal -

1. Held in favour of the assessee that depreciation though a mandatory statutory claim to be allowed to assessee irrespective whether they claim or otherwise this cannot be stretched to prior assessment years to assessment year 2002-03 where in Explanation 5 to section 32 did not exist. In short the wording of Explanation 5 to section 32 cannot be read retrospective in law --

"After the omission of sub-section (1) and (2) of section 34 and rule 5AA with effect from 1-4-1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Explanation 5 to 32 was introduced by the Finance Act, 2002 with effect from 1-4-2002 and it provides as follows :--

Explanation 5.--For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;

Thus, it can be safely said that omission of section 34 has not affected the assessee's choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Explanation 5 in section 32 with effect from 1-4-2002, from assessment year 2002-03 onwards. In CIT v. Sree Senhavalli Textiles (P) Ltd., (2003) 259 ITR 77 (Mad) : 2003 TaxPub(DT) 0541 (Mad-HC), the Hon'ble Madras High Court has held that though after judgment was rendered by the apex Court in CIT v. Mahendra Mills (2000) 159 CTR (SC) 381 : (2000) 243 ITR 56 (SC) : 2000 TaxPub(DT) 1304 (SC), Explanation 5 was inserted in section 32(1) by the Finance Act, 2001, with effect from 1-4-2002, declaring that 'for the removal of doubts' the provisions of sub-section (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the Apex Court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the apex court will remain the binding law for the period to the amendment. The newly added Explanation takes effect only on and from 1-4-2002, and will not be applicable for prior years. If claim made in the original return had been given up in the revised return, there was no obligation to consider the claim for depreciation.

27. The Hon'ble Supreme Court in the case of Mahendra Mills (supra) had made the following observations :--

".......Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions "actually allowed" to the assessee for the past years. "Actually allowed" does not mean "notionally allowed". If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is "allowed" when it is claimed. A subtle distinction is there when we examine the language used in section 16 and sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation. The assessing officer cannot grant depreciation allowance when the same is not claimed by the assessee."

Editorial Note: Explanation 5 to section 32 was introduced to counter Mahendra Mills decision of Apex Court.

2. Held in favour of the assessee that the aborted ADR issue did not bring forth an enduring benefit and thus the expenses were allowable.