JT. COMMISSIONER OF INCOME TAX, VALSAD, GUJARAT vs. M/S.UNITED PHOSPHOROUS LTD.

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CIVIL APPEAL No. 1183/2008Supreme Court[2008] 2 S.C.R. 65808 February 2008Bench: 2 JudgesAuthor: S.H. KAPADIA, B. SUDERSHAN REDDY4 pages
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What did the Supreme Court hold?

The Supreme Court addressed two questions. Firstly, it held that interest paid on borrowings for capital assets not put to use in the concerned financial year is an allowable deduction under Section 36(1)(iii) of the Income-tax Act, 1961. This decision was based on the Court's prior ruling in Dy. Commissioner of Income Tax, Ahmedabad v. M/s. Core Health Care Ltd. Secondly, regarding the option to claim partial depreciation on a block of assets, the Court found that the High Court's reliance on the Mahendra Mills case was problematic because the concept of 'block of assets' was not present in that case, and Section 34(1) of the Act had been omitted effective April 1, 1988. Consequently, the Court remitted this second question back to the High Court for reconsideration, directing it to examine whether the assessee has a legal option to claim partial depreciation on a block of assets, considering the omission of Section 34(1), the applicability of the Mahendra Mills judgment to the assessment years in question, and the scope of Explanation 5 to Section 32(1) as amended by the Finance Act, 2001.

What were the facts?

This case involves an appeal by the Joint Commissioner of Income Tax, Valsad, Gujarat, against M/s. United Phosphorous Ltd. The appeal concerns two main questions of law. The first question relates to the allowability of interest paid on borrowings for capital assets that were not put to use in the relevant financial year, under Section 36(1)(iii) of the Income-tax Act, 1961. The second question pertains to whether the assessee had a legal option to claim partial depreciation on a block of assets. The High Court had previously relied on the case of Mahendra Mills to hold that the assessee had such an option. The Department has appealed this decision.

What were the issues?

1. Whether interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as an allowable deduction under Section 36(1)(iii) of the Income-tax Act, 1961? - Assessee's contention: Not explicitly recorded, but the Supreme Court answered in their favour. - Revenue's contention: Not explicitly recorded, but the Supreme Court answered against them. 2. Whether the respondent-assessee had an option in law to claim partial depreciation in respect of any block of assets? - Assessee's contention: The High Court relied on the case of Mahendra Mills, suggesting an option exists. - Revenue's contention: The omission of Section 34(1) w.e.f. 1.4.1988 and the absence of the 'block of assets' concept in Mahendra Mills case are relevant. The revenue likely argued that the option to claim partial depreciation is not available under the current legal framework, especially considering the omission of Section 34(1) and the introduction of Explanation 5 to Section 32(1) by the Finance Act, 2001.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 34(1),Section 32(1),Section 260A

AI-generated summary — verify with the full judgment below

[2008) 2 S.C.R. 658 A JT. COMMISSIONER OF INCOME TAX, VALSAO, GUJARAT ,._... .. B II. MIS.UNITED PHOSPHOROUS LTD. (Civil Appeal No. 1183 of 2008) FEBRUARY 8, 2008 [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.] Income Tax Act, 1961: s.36(1)(iii) - Interest paid in respect of borrowings on C capital assets not put to use in the concerned finanCial year - Held: Can be permitted as allowable deduction under s. 36(1 )(iii). s.34(1) and Expln. 5 to s.32(1) - Option to claim partial D depreciation in respect of block of assets - If available - High Court relied upon Mahendra Mills case, in which it was held that assessee has option to claim depreciation - Held: In Mahendra Mills case, the concept of block of assets was not there -Also, s. 34( 1) has been omitted w. e. f 1. 4. 1988 - Hence, E matter remitted to High Court for re-consideration. The two questions which arose for consideration in the present appeal are 1) Whether interest paid in respect of borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable F deduction under s.36(1 )(iii) of the Income-tax Act, 1961 and 2) Whether respondent-assessee had an option in law to claim partial depreciation in respect of any block of assets. Partly allowing the appeal, by answering the first question in favour of the assessee and remitting the G second question to the High Court, the Court . ·" HELD: 1. Question No.1 is squarely covered by :,.... decision of this Court in favour of the assessee and against the Department in the Core Health Care Ltd. case H 658 ..

JT. COMMNR. OF INCOME TAX, VALSAD, GUJARAT v. 659 M/S. UNITED PHOSPHOROUS LTD . .,__ --'< [Para 4] .(660-D] A . ""' . Dy. Commr. of Income Tax, Ahmedabad v. Mis. Core Health Care Ltd. (2008) 2 SCALE 327 - relied on.

2.

Regarding Question No.2, the High Court has relied upon the judgment of this Court in the case of s Mahendra Mills in which it has been held that the assessee -+. has an option to claim depreciation. However, s.34(1) of ~ the Income-tax Act, 1961 has been omitted w.e.f. 1.4. 88. Therefore, the matter is being remanded to the High Court, with the direction to consider: whether the assessee has C an option in law to claim partial depreciation in respect of block of assets. In the case of Mahendra Mills the concept of block of assets was not there. Substantial question of law did arise for determination before the High Court under s.260A of the 1961 Act, particularly when s.34(1) of the 1961 Act stood omitted w.e.f. 1.4. 88. The High Court is D also requested to consider whether the judgment of this Court in the case of Mahendra Mills would apply to the assessment years under consideration. In this connection the High Court is also requested to take into account the scope of Explanation 5 to s. 32(1) of the E 1961 Act, made by the Finance Act, 2001. [Para 5] (660-E-H, 661-A, B] Commissioner of Income-tax v. Mahendra Mills and Anr. (2000) 243 ITR 56 - referred to. CIVILAPPELLATE JURI ICTION: Civil Appeal No. 1183 of 2008 From the Judgment and Order dated 08.01.2002 of the High Court of Judicature of Gujarat atAhmedabad in Tax Appeal F No. 2 of 2002. G P. Vishwanatha Shetty, T. Srinivasa Murthy, GauravAgrawal and B.V. Balaram Das for the Appellant. Pardiwala, Jay Savla and Reena Bagga for the Respondent. H

660 A SUPREME COURT REPORTS [2008) 2 S.C.R. The Judgment of the Court was delivered by KAPADIA, J.

1.

Delay condoned. · 2. Leave granted.

3.

In this civil appeal filed by the Department two questions 8 of law arise for determination which questions are as follow: c . o (1) Whether interest paid in respect of. borrowings on capital assets not put to use in the concerned financial year can be permitted as allowable deduction under Section 36(1 )(iii) of the- Income-tax Act, 1961? (2) VVhether respondent-assessee had an option in law to claim partial depreciation in respect of any block of assets .

4.

Our answer to the above-mentioned question No.(1) is squarely covered by our decision in favour~of the assessee and against the Department in the case of Dy ... Commr. of Income Tax, Ahmadabad v. Mis. Core Health Care Ltd. in Civil E Appeal· Nos.3952-55 of 2002. 5. Regarding the question No.(2), quoted above, it may be noted that the High Court has relied upon the judgment of this Court in Commissioner of Income-tax v. Mahendra Mills & Anr. - (2000) 243 ITR 56 in which it has been held that the · F assessee has an option to claim depreciation. However, Section 34(1) of the Income-tax Act, 1961 (for short, "1961 Act") has been omitted w.e.f. 1.4. 88. Therefore, we are remanding the matter to the High Court after setting aside the impugned order of the High Court on this question, with the direction to the High G Court to consider : whether the assessee has an option in law to claim partial depreciation in respect of block of assets. in the case of Mahendra Mills (supra) the concept of block cf assets was not there. In our view, substantial question of law did arise for determination before the High Court under Section 260A of H the 1961 Act, particularly when Section 34(1) of the 1961 Act )

JT. COMMNR. OF INCOME TAX, VALSAD, GUJARAT v. 661 MIS.UNITED PHOSPHOROUS LTD. [KAPADIA, J.] stood o.mitted w.e.f. 1..4. 88. The High Court is also requested to A consider whether the judgment of this Court in the case of Mahendra Mills (supra) would apply to the assessment years under consideration. In this connection the High Court is also requested to take into account the scope of Explanation 5 to Section 32(1) of the 1961 Act, made by the Finance Act, 2001. 8

6.

Accordingly question No.(1) is answered in favour of assessee and against the Department and question No.(2) is remitted to the High Court. Consequently the Department's civil appeal is partly allowed with no order as to cost. B.8. 8. Appeal partly allowed. c

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