Recently, the Finance Minister, Mr P. Chidambaram, stated: "There is a myth in this country that India's tax laws and tax returns are most complex. Our tax laws certainly can be simplified but our tax return forms are among the simplest in the world."
Two recent decisions
Depreciation is one of the incentives in the tax law meant to enable the taxpayer replace an asset after its useful life. An asset, whether used or not, will erode in value due to efflux of time.
The claim of depreciation whether to be allowed only upon actual use of asset or even when it is `fit for use' has been debated for long and the concept of `passive user' has been accepted by courts. Few decisions are such as in CIT vs. Geo Tech Construction Corpn. (244 ITR 452;Ker); Whittle Anderson Ltd vs. CIT (79 ITR 613; Bom); Capital Bus Service (P) Ltd vs. CIT (123 ITR 404; Del); CIT vs. Pepsu Road Transport Corporation (253 ITR 303; P&H).
In Dy. CIT vs. Yellamma Dasappa Hospital (290 ITR 353; Karn) the assessee claimed depreciation on both indigenous and imported machinery for the assessment year 1989-90.
The Assessing Officer called for copies of invoices for the acquisition and the assessee admitted that it had started functioning from February/March 1989. The assessee was also directed to produce evidence for use of machinery. Since no evidence was produced as regards the actual use of plant and machinery the claim of depreciation was disallowed.
The court held that for the purpose of depreciation the machinery has to be used actually in terms of the statute. The `kept ready' theory will not entitle claim of depreciation nor its allowance.
While deciding the case the precedent set in Dineshkumar Gulabchand Agrawal vs. CIT (267 ITR 768) by the Bombay High Court was followed. In this case, the actual use of asset during the year was taken as a pre-condition for allowance of depreciation. These two decisions would stand apart from the host of other decisions favouring the taxpayers.
Infraction of law
Section 37 provides for allowance of any expenditure laid out or expended wholly and exclusively for the purpose of business or profession. The Explanation to the Section forbids allowance of any expenditure if incurred for an offence or which is prohibited by law.
In Tam Tam Pedda Guruva Reddy vs. Joint CIT (291 ITR 44) the Karnataka High court held that the penalty paid by the contractor towards exaggerated measurements to the contractee the Konkan Railway Corporation was a `penalty' and hence not eligible for deduction. The argument of the assessee that the payment was towards a mere breach of contractual obligation was negatived by the appellate authorities.
Between the `contractor and contractee' or between `seller and buyer' there could be instances of paying a certain sum towards defect in performance or supply or claim made and how this could be a `penalty' for applying Explanation to Section 37 requires further elucidation to dispel the so called `myth' about taxing statutes.
V. K. Subramani (The author is an Erode-based chartered accountant.)