DY. C.I.T. vs. GUJARAT FILAMENTS LTD.

Facts

The assessee, Gujarat Filaments Ltd., engaged in manufacturing filaments, filed its return for AY 1989-90 declaring an income of Rs. 6,69,000. The Assessing Officer (AO) determined the taxable income at Rs. 35,69,270. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted an addition of Rs. 96,67,300 made by the AO to the book profit on account of additional depreciation. The AO had made this addition because the assessee changed its depreciation method from Straight Line Method (SLM) to Written Down Value (WDV) method retrospectively, resulting in a shortfall in depreciation debited in earlier years. The CIT(A) allowed the appeal in part, directing the AO to recompute the book profit. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s order. The Revenue appealed this decision to the High Court.

Held

The High Court upheld the order of the Income Tax Appellate Tribunal. The Court noted that the assessee had changed its depreciation method from SLM to WDV, and the resultant shortfall in depreciation was charged to the Profit & Loss Account for the current year. Both the CIT(A) and the ITAT found that this change was in accordance with accounting standards and not prohibited by the Companies Act or Section 115J. The Court referred to its own prior decision in Tax Appeal No. 390 of 1999, which dealt with an identical issue and was decided in favour of the assessee, relying on the Supreme Court decision in Apollo Tyres Ltd. vs. CIT. Therefore, the Tribunal was correct in upholding the CIT(A)'s deletion of the addition made by the AO. The appeal was dismissed.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law and on facts in upholding the order of the Commissioner of Income Tax (A) deleting the addition of Rs.96,67,300/- made by the Assessing Officer to the book profit on account of additional depreciation debited in the accounts for the earlier years because of change in the method of providing depreciation retrospectively? Assessee's Contention: The assessee argued that the change in depreciation method from SLM to WDV was permitted by accounting standards and not barred by the Companies Act or Section 115J of the Income Tax Act. They relied on the Tribunal's decision in DCIT vs. M/s. Rubamin (P) Ltd. and the High Court's decision in Apollo Tyres Ltd. vs. CIT. Revenue's Contention: The Revenue contended that the AO was right in disallowing the claim as depreciation could not be claimed for earlier years if not provided for in the books of accounts for those years. They relied on Section 205 of the Companies Act, 1956, read with Section 35D, and the Supreme Court decision in McDowell and Co. Ltd. vs. Commercial Tax Officer.