Section 32

Section 32 — the law in short

What the courts have decided on section 32, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Sharp Business System v CIT-III Supreme CourtHelps taxpayerNo later treatment found
  Is a lump sum non-compete fee paid to keep a former partner out of the market capital expenditure, or is it deductible as revenue expenditure under s.37(1)?
  On these facts it was revenue expenditure and deductible under s.37(1). Because the payment was held to be on revenue account, the alternative claim for depreciation on a non-compete right as an intangible asset did not arise and was left undecided.
• Pride Foramer S.A. v CIT Supreme CourtHelps taxpayerNo later treatment found
  A non-resident had no contract in India for several years but kept trying for one. Had its business ceased, so that expenditure and unabsorbed depreciation fall away?
  No. A business going through a lean period which could be revived if circumstances permitted is a lull in business, not a cessation. The test is the assessee's conduct judged as a prudent businessman would judge it, not whether a contract was actually obtained. Expenditure of the lull years remained deductible and could be set off, and unabsorbed depreciation carried forward.
• CIT v Rajasthan and Gujarati Charitable Foundation Supreme CourtHelps taxpayerSuperseded by amendment
  We treated a building's full cost as application of income. Can we also claim depreciation on it?
  Yes on the law as it stood, but read the editor's note before using this for a current year. The Court held that treating the whole acquisition cost as application under s.11(1)(a) does not bar a s.32 depreciation claim on the same asset, rejected the double benefit objection, and allowed the depreciation to be carried forward.
• I.C.D.S. Ltd v CIT Supreme CourtHelps taxpayer
  I am a finance company. I bought the vehicles, I lease them to my customers, and the customer is shown as the owner in the registration certificate. The assessing officer says that makes the customer the owner and refuses me depreciation. Is he right?
  No. The Supreme Court held that the lessor, not the lessee, is entitled to depreciation on vehicles leased out in the course of a leasing business. Two conditions have to be met under section 32 - ownership and use for the purposes of the business - and the Court held both were satisfied. On ownership, the lease agreement provided that the assets remain at all times the sole and exclusive property of the lessor, and the lessor kept the right to repossess, to inspect and to require the vehicles back; the entry of the lessee as owner in the registration certificate does not displace that, because section 2(30) of the Motor Vehicles Act is a deeming provision creating a fiction of ownership in favour of the lessee only for the purposes of that Act. As long as the assessee has a right to retain the legal title of the vehicle against the rest of the world, it is the owner in the eyes of law. On use, the Court held that section 32 requires the asset to be used for the purposes of business but does not require the assessee to use it himself; leasing was this assessee's business and the lease income was its business income. The Court went further and held the assessee entitled to the higher rate as well, because its main activity was leasing out or hiring the vehicles. The appeals were allowed and the High Court's judgments set aside.
• CIT v Smifs Securities Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  Can I claim depreciation on the goodwill that arose when I took over another company on amalgamation?
  Not any longer. This case held that goodwill falls within 'any other business or commercial rights of similar nature' in Explanation 3(b) to s.32(1) and is eligible for depreciation, and that the excess of consideration over the value of net assets taken over is itself the goodwill, so payment had been made for it. The Finance Act 2021 has since removed goodwill from depreciation altogether with effect from assessment year 2021-22.
• Techno Shares & Stocks Ltd v CIT Supreme CourtHelps taxpayer
  I bought a Bombay Stock Exchange membership card — can I claim depreciation on it as an intangible asset under section 32(1)(ii)?
  Yes, on these facts. The Supreme Court held on 9 September 2010 that the right of membership of the Bombay Stock Exchange, which includes the right of nomination, is a business or commercial right that gives a non-defaulting continuing member access to the Exchange and the ability to trade on its floor. Under Rule 5 membership is a personal permission from the Exchange, which is a licence, and Explanation 3 to section 32(1)(ii) declares a commercial right similar to a licence or franchise to be an intangible asset. The right vests in the Exchange only on default or demise. The Bombay High Court's contrary judgment was set aside.
• CIT v Sri Mangayarkarasi Mills (P) Ltd Supreme CourtHelps department
  I replaced worn out machines in my spinning mill. Is that current repairs or at least revenue expenditure, since the mill is one integrated plant?
  Neither. The Supreme Court held that each machine in a textile mill is an independent and separate asset with its own function, notwithstanding that all of them form part of one integrated manufacturing process. Replacing an old machine with a new one therefore brings a new asset into existence rather than preserving or maintaining an existing one, so it is not current repairs under section 31. It also gives the assessee an enduring benefit of better and more efficient production, so it is capital and not deductible under section 37. The claim of Rs 61,28,150 for assessment year 1995-96 was disallowed and the Assessing Officer's order restored.
• CIT, Dibrugarh v Doom Dooma India Ltd Supreme CourtHelps taxpayer
  I grow and manufacture tea, so only part of my income is taxed under the Income-tax Act. When I carry the written down value forward, does the Assessing Officer deduct the whole year's depreciation or only the taxable proportion?
  Only the taxable proportion. Under s.10(1) read with rule 8 of the Income-tax Rules, 1962, 40 per cent of the income from the sale of tea grown and manufactured in India is the part liable to tax, and the Supreme Court held that in a rule 8 case the depreciation 'actually allowed' within s.43(6)(b) is the proportionate depreciation only. The Department's appeals, which sought to reduce the written down value by 100 per cent of the depreciation computed at the prescribed rate, were dismissed.
• CIT v Anand Theatres Supreme CourtHelps department
  I built a cinema hall (or a hotel) specially for the business. Can I claim depreciation on the building at plant rates?
  No. The Supreme Court held that a building used for running a hotel or carrying on a cinema business is a building, not a plant, and cannot be given depreciation as plant. Section 32 grants depreciation separately for buildings and for machinery or plant, and the inclusive definition of plant in section 43(3) nowhere takes in buildings. That a building is specially designed to suit the trade does not convert it into an apparatus with which the trade is carried on. The Court answered the reference in favour of the Revenue and against the assessee.
• CIT v Mahendra Mills Supreme CourtHelps taxpayer
  I did not claim depreciation in my return because it suits me not to. Can the assessing officer force it on me anyway?
  No, on the law as it then stood. The Supreme Court held that where the assessee neither claims depreciation nor furnishes the prescribed particulars, the Income-tax Officer cannot thrust the allowance on him. Section 32 allows depreciation subject to section 34, and section 34 permits the deduction only if the prescribed particulars are furnished. Section 29 is not a complete code and must be read with section 34. Depreciation is a benefit for the assessee; a privilege cannot be turned into a disadvantage and an option cannot become an obligation. The Revenue's appeal was dismissed.
• Mysore Minerals Ltd v CIT Supreme CourtHelps taxpayer
  I paid part of the price, took possession and am using the building in my business, but the conveyance has not been executed. Can I claim depreciation?
  Yes. The Supreme Court held that owned in section 32(1) carries a wider meaning than legal title. Anyone in possession of property in his own title, exercising dominion so as to exclude others, entitled to use and occupy it and to enjoy its usufruct in his own right, is the owner for section 32, even though no deed has been executed and registered. The Court followed Podar Cement, decided on section 22, and refused to accept a reading that would give the depreciation to nobody: the allottee cannot claim it for want of title, and the Housing Board cannot, not using the building for its business.
• CIT v Madras Auto Service (P) Ltd Supreme CourtHelps taxpayer
  I demolished my landlord's building and put up a new one at my own cost, and the new building belongs to him. I got a 39-year lease at a fraction of the market rent for it. Is what I spent capital or revenue?
  Revenue, on these facts. The Supreme Court held that the expenditure has to be looked at from a commercial point of view and asked what advantage the assessee actually got. It got no capital asset, because the building belonged to the lessor from the moment the first brick was laid, and it could therefore claim no depreciation. What it got was a long lease of suitable premises at a rent far below the market, which is a saving of future rent - a saving in the revenue field. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure.
• CIT v P.J. Chemicals Ltd Supreme CourtHelps taxpayerSuperseded by amendment
  I received a central or state capital subsidy worked out as a percentage of my plant cost. Must I reduce the actual cost by it before claiming depreciation?
  No, not a subsidy of that kind. The Supreme Court held that a government subsidy given as an incentive to set up industry in a backward area does not become a payment towards the cost of assets merely because it is quantified as a percentage of the fixed capital cost. The percentage is only a measure for working out the aid. Such a subsidy is therefore not met directly or indirectly towards the actual cost within section 43(1), and depreciation is allowed on the full cost. The Court preferred the view of the majority of the High Courts to that of Punjab and Haryana.
• Escorts Ltd v Union of India Supreme CourtHelps department
  I wrote off the whole cost of a laboratory building and its equipment under the scientific research provision. Can I also take depreciation on the same assets in later years, and can the department deny it for years before 1980 using an amendment made in 1980?
  No to the first, and yes to the second, and the reason for the second is the answer to the first. Section 35(2)(iv) as substituted by the Finance (No.2) Act 1980, with retrospective effect from 1 April 1962, provides that where a deduction is allowed for any previous year under section 35 in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii) and (iii) of section 32(1) for the same or any other previous year in respect of that asset. The petitioners said that was a new burden imposed on closed years and attacked it under Articles 14, 19(1)(g) and 300-A. The Supreme Court dismissed the petitions. It held that even before the 1980 amendment the Act did not permit depreciation on the cost of a capital asset acquired for scientific research to the extent that cost had been written off under the scientific research provision, so the amendment effected no change at all except to set out more clearly and categorically what the provision said even earlier. Being clarificatory, it took away no vested right. The reason the pre-amendment law was already to that effect is the sentence the case is now known for: there is an axiom, unwritten but fundamental, that no legislature could have intended a double deduction for the same business outgoing, and if it is intended it will be clearly expressed.
• Scientific Engineering House (P) Ltd v CIT Supreme CourtHelps taxpayer
  I paid a foreign collaborator a lump sum for drawings and designs that let me start manufacturing. Is that capital spending on which I can at least claim depreciation?
  Yes. The Supreme Court held that the payment was capital expenditure by which the assessee acquired technical know-how, and that the know-how, in the shape of drawings, designs, charts, plans, processing data and other literature, is plant within section 43(3) and so a depreciable asset. The test is functional: does the article fulfil the function of a plant in the assessee's trading activity, and is it a tool of his trade? These documents were the basic tools with which the manufacture was begun, and collectively they are a book. That they perform no mechanical operation does not matter. The appeals were allowed.
• Challapalli Sugars Ltd v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  I borrowed to buy and install my plant and paid interest before production started — can I add that interest to the cost of the plant and claim depreciation on it?
  Yes. The Supreme Court held that interest paid on money borrowed to acquire and install plant and machinery, for the period before production commences, forms part of the actual cost of the asset. 'Actual cost' is not defined in the Act, so it must be read in the sense no commercial man would misunderstand — that is, by the accepted accountancy rule, which brings in all expenditure necessary to bring the asset into existence and put it in working condition. Depreciation and development rebate are therefore admissible on the capitalised interest.
• CIT v Dewas Cine Corporation Supreme CourtHelps taxpayer
  Our firm dissolved and each partner took back the building he had brought in. The officer says the firm sold it to him and wants to tax the depreciation back. Is that a sale?
  No. The Supreme Court held that the return of the two cinema theatres to the partners who had brought them in was not a sale, so the balancing charge under the second proviso to section 10(2)(vii) of the 1922 Act did not apply. Property brought into a firm becomes the firm's property, and on dissolution a partner is entitled to have it applied in paying the firm's debts and to share in the surplus. The distribution of that surplus adjusts the rights of the partners; it is not a transfer. Sale in its ordinary sense is a transfer of property for a price, and this was neither.
• CIT v Alps Theatre Supreme CourtHelps department
  I built a cinema and capitalised the land with the building. Can I claim depreciation on the whole cost, or must the land be taken out?
  The land must be taken out. The Supreme Court held that building in the depreciation provision means the structure and does not include the site. Depreciation is a decrease in value through wear, deterioration or obsolescence, and in that sense land cannot depreciate. The same word is used in the neighbouring clauses on insurance against destruction and on current repairs, neither of which can sensibly cover the site, and the prescribed rates turn on the class of construction, which makes no sense if applied to land. Allowing depreciation on land would give a wrong picture of the real income of the business. Rs 12,000 of land cost was rightly excluded from the Rs 85,091 written off.
• PCIT v Asian Mills P Ltd High CourtHelps taxpayer
  I paid freight without TDS after taking the transporters' PANs. Can the AO still disallow the freight?
  No. The exclusion from the duty to deduct in s.194C(6) is complete the moment its substantive conditions are met, and from that point the payer has no authority to deduct at all; the obligation under s.194C(7) to furnish particulars arises at a much later point and its breach cannot revive a deduction obligation that never existed. Since s.40(a)(ia) operates only where tax was deductible and was not deducted, it had nothing to work on. On the facts the Tribunal had found that no prescribed authority stood nominated to receive the particulars, so filing them with Form 26Q was sufficient compliance. Two other issues went the same way: discounts to customers who took delivery into their own godowns were not rent under s.194-I, and depreciation on cars registered in directors' names but paid for and used by the company was allowed on beneficial ownership.
• Brakes India Ltd v DCIT — balance additional depreciation in the next year, before the Finance Act 2015 proviso High CourtHelps taxpayer
  My machine went into use after 30 September, so I got only half the additional depreciation. The assessment year is before AY 2016-17. Can I claim the balance half in the following year?
  Yes. On the unamended section the Madras High Court held there is nothing that confines additional depreciation under s.32(1)(iia) to the year of acquisition, so the balance fifty per cent of the additional depreciation is allowable in the immediately succeeding year; and it treated the Finance Act 2015 amendment as clarificatory of that position rather than as changing it. From AY 2016-17 the point is no longer arguable: the third proviso to s.32(1) inserted by s.10 of the Finance Act 2015, with effect from 1 April 2016, expressly allows the balance in the immediately succeeding previous year.
• CIT v Y. Ramachandra Reddy High CourtHelps taxpayer
  The officer made a best judgment assessment and fixed my profit at a percentage of receipts. Does that wipe out my claim to depreciation and to interest?
  No. The High Court held that depreciation and interest, which are otherwise deductible in the ordinary course of assessment, keep the same legal character even where the profit is determined on a percentage basis. There was no reason to withhold from the assessee, merely because his profit had been estimated, a facility he would have had on a regular computation. The Revenue's appeal was dismissed. Note the boundary of this: the assessee's receipts were far above the s.44AD threshold, so s.44AD did not apply to him at all. Where income is actually returned under s.44AD, s.44AD(2) provides that deductions under ss.30 to 38 are deemed to have been given full effect, and depreciation under s.32 falls inside that range.
• CIT v Talisma Corporation Pvt Ltd — software development spend is capital expenditure on scientific research deductible under s.35(1)(iv) High CourtHelps taxpayerNo later treatment found
  The Assessing Officer has capitalised my client's product development spend and given it only depreciation. Can we still get it as scientific research expenditure, and can the alternative claim be raised for the first time before the Commissioner (Appeals)?
  The Karnataka High Court held that expenditure on further developing and improving a software product is expenditure on scientific research related to the business, and that even if it is capital in nature it is to be deducted under s.35(1)(iv); it answered both questions of law in favour of the assessee and dismissed the Revenue's appeal. The Court reached that conclusion through the definition in s.43(4), which makes references to scientific research related to a business include any scientific research which may lead to or facilitate an extension of that business. The alternative claim had been raised for the first time before the appellate authority and not before the Assessing Officer, and the Court did not treat that as an obstacle.
• Areva T&D India Ltd v ACIT High CourtHelps taxpayer
  On a slump sale I paid more than the value of the tangible assets and my books show the excess as goodwill. Can I claim depreciation on it under section 32(1)(ii)?
  Yes, where the excess is in truth the price of identifiable business or commercial rights. The Delhi High Court held that "business or commercial rights of similar nature" in section 32(1)(ii) is not confined to things resembling know-how, patents, trademarks, copyrights, licences or franchises individually - those six are themselves quite different from one another. What they share is that they are intangible assets forming part of the tools of trade. Business claims, business information, business records, contracts, skilled employees and know-how acquired on a slump sale fall in the same genus and are depreciable. The entries in the books are not conclusive; the true nature of the transaction governs.
• CIT v Oswal Agro Mills Ltd — depreciation on a block of assets cannot be split asset by asset for non-user High CourtHelps taxpayer
  One of my units has been shut for years. The Assessing Officer has pulled the assets of that unit out of the block and disallowed the depreciation on them. Can he?
  No. The Delhi High Court held that after the 1988 amendment depreciation is allowed on the written down value of the block of assets, individual assets have lost their identity, and the Revenue cannot segregate a particular asset from the block on the ground that it was not put to use. The Revenue's appeals were dismissed even though the unit concerned had been closed for years.
• CIT v BSES Yamuna Powers Ltd — printers, scanners and servers are part of the computer system for the depreciation rate High CourtHelps taxpayer
  The Assessing Officer has taken my printers, scanners and servers out of the computer block and put them in plant and machinery at the general rate. Can I keep them in the computer block?
  Yes. The Delhi High Court agreed with the Tribunal that computer accessories and peripherals such as printers, scanners and servers form an integral part of the computer system and cannot be used without the computer, and so are entitled to depreciation at the rate applicable to computers, which for that year was sixty per cent. The Revenue's appeal was dismissed.
• CIT v Bharat Aluminium High CourtHelps taxpayer
  One machine in my block of assets was not used this year. Can the AO deny depreciation on it?
  No. Once assets are clubbed into a block they lose their individual identity and become an inseparable part of the block, so 'used for the purpose of business' means use of the block and not of any specific item. User of an individual asset is required only in the first year in which that asset is acquired.
• CIT v Yamaha Motor India P Ltd High CourtHelps taxpayerNo later treatment found
  I discarded machinery this year and did not use it. Can I still claim depreciation on it?
  Yes. Once assets enter a block, the identity of the individual item is lost and depreciation is computed on the block, not machine by machine. Actual use in the year of the claim is not required if the asset was used for the business in earlier years, and the residual value after scrap stays in the block.
• Punjab Bone Mills v CIT — s.38(2) proportionate disallowance where plant is shared with sister concerns High CourtHelps departmentNo later treatment found
  The Assessing Officer says my boiler was also used by my sister concerns and has cut my depreciation by two-thirds. Can he do that?
  Yes, if the asset was genuinely not used exclusively for your business. Section 38(2) requires depreciation under s.32 to be restricted to a fair proportionate part, which the Assessing Officer determines having regard to the user of the building, machinery, plant or furniture for the purposes of the business, and the Punjab and Haryana High Court upheld exactly such a restriction where the boiler was used by two sister concerns and the expenses were shared.
• CIT v Texspin Engg & Mfg Works High CourtHelps taxpayer
  My partnership firm became a limited company under Part IX of the Companies Act. The Assessing Officer wants capital gains tax on the market value of the assets. Is that right?
  No, on the law as it stood for assessment year 1996-97. The Bombay High Court held that section 45(4) needs a transfer by way of distribution of capital assets, and statutory vesting on a Part IX conversion is not distribution: vesting takes the properties across as they stand, while distribution presupposes division, realisation and appropriation. Section 45(1) also failed, both because a firm treated as a company is a case of transmission with no counterparty and no incoming consideration, and because even if there were a transfer, full value of consideration in section 48 means what the transferor gets, not the market value of what he parts with.
• Sayaji Iron and Engg. Co. v CIT — a company has no personal use, so no fraction of car expenses or depreciation can be disallowed High CourtHelps taxpayer
  The Assessing Officer has disallowed one-sixth of my company's car expenses and depreciation because the directors used the cars personally. Can he?
  Not where the company is the assessee. The Gujarat High Court held that where the directors were entitled under their terms of appointment to use the company's vehicles for personal purposes, the expenditure is remuneration within the Explanation to s.198 of the Companies Act 1956 and is the company's business expenditure, so no part of the vehicle expenses or depreciation could be disallowed for personal use.
• Capital Bus Service (P.) Ltd. v CIT — passive user: assets kept ready for use are used for the purposes of the business High CourtHelps taxpayer
  Four of my vehicles were kept in running condition all year but were actually plied for barely a month. The Assessing Officer says they were not used, so no depreciation. Is he right?
  No. The Delhi High Court held that 'used for the purposes of the business' bears the wider meaning and includes passive user, so that machinery kept ready for actual use in the business is used for the purposes of the business even if it is not actually worked. Depreciation was allowed on four buses kept ready for use throughout the year although not plied for more than thirty days.
• Hameed Marine Pvt Ltd v ACIT — Explanation 3 to s.43(1) needs a recorded satisfaction and the Joint Commissioner's prior approval ITATHelps taxpayerNo later treatment found
  I bought second-hand machinery and claimed depreciation on what I paid. The Assessing Officer has substituted the previous owner's written down value as my actual cost. Can he do that?
  Not without satisfying the conditions of Explanation 3 to s.43(1). The Chennai Bench held that the Explanation can be invoked only where the Assessing Officer records a satisfaction that the main purpose of the transfer of the assets was the reduction of a liability to income-tax by claiming depreciation on an enhanced cost, and only where he determines the actual cost with the previous approval of the Joint Commissioner; both conditions are mandatory, and neither having been met, the substitution had no jurisdictional basis and the disallowance was deleted.
• Nirma Ltd v DCIT — depreciation on goodwill from amalgamation, and the date the Finance Act 2021 closed it ITATHelps taxpayerSuperseded by amendment
  The Assessing Officer has disallowed depreciation on goodwill that arose when a company amalgamated into mine. Which years can I still claim it for?
  Only assessment years up to AY 2020-21. The Finance Act 2021 removed goodwill of a business or profession from the definition of block of assets in s.2(11) and from s.32, excluded it from Explanation 3(b) to s.32(1), and amended s.43(6)(c)(ii) to require the written down value of goodwill to be reduced from the opening WDV where goodwill already formed part of a block; those amendments apply prospectively from AY 2021-22. For earlier years the Tribunal here allowed the claim on Smifs Securities, and the amendment gives the Assessing Officer no ground to disturb it.
• Striton Properties Private Limited v DCIT ITATCuts both waysNo later treatment found
  I have claimed depreciation on plant and machinery used at a club house and garden. The Assessing Officer says I showed no income from letting them out and is not the owner of the facilities. Can I still claim depreciation under s.57?
  No. The Mumbai Bench held that s.57(ii) has to be read with s.56(2)(ii) and (iii), and that on a conjoint reading the income must actually be chargeable under the head income from other sources before depreciation can be claimed against it. Since no income had been shown, the mandatory condition was not fulfilled and the disallowance was upheld.
• Samsung R&D Institute India Bangalore P Ltd v JCIT ITATHelps taxpayer
  My foreign group companies ship me handsets, network equipment and other test gear free of cost so that I can test the software I write for them, and I send it back or scrap it when the testing is done. The AO has added the value under s.28(iv) as a benefit arising from my business. Can he?
  No, on these facts. The Bangalore Bench deleted an addition of Rs 7,37,33,056 under s.28(iv) on equipment supplied free of cost by the assessee's associated enterprises for testing software the assessee had developed for them. Two things carried it: the equipment was either returned or destroyed after testing, so nothing irretrievable or of enduring nature was made available to the assessee, and the price for the software development services had already been settled under a Mutual Agreement Procedure resolution between the competent authorities of India and Korea, in which the cost of indirect benefits should have been embedded - so if there were a nexus at all it belongs in a transfer pricing adjustment and not in a second addition under s.28(iv). The same order also deleted a s.40(a)(i) disallowance of depreciation on capitalised software, following the coordinate bench in the assessee's own case. Note what the order does not do: it decides nothing under s.194R.
• Pagro Frozen Foods Pvt Ltd v ITO — a government grant-in-aid towards plant reduces the actual cost under Explanation 10 to s.43(1) ITATHelps departmentNo later treatment found
  I received a government grant towards building a cold chain facility. Must I reduce it from the cost of the assets before claiming depreciation?
  Yes, where the grant was given towards the cost of specified assets. The Chandigarh Bench held that actual cost under s.43(1) is the cost to the assessee reduced by so much of it as has been met directly or indirectly by any other person or authority, and upheld the reduction of a Rs. 2.5 crore grant-in-aid from the Ministry of Food Processing Industries from the cost of the assets on which depreciation was claimed. The appeal was dismissed.
• Prashant Vijay Kale v CPC, Bengaluru ITATHelps taxpayerNo later treatment found
  I filed my return on time and then revised it. CPC has ignored the original, treated the revised return as my first return, and charged s.234F fee and s.234A interest. Can that be undone?
  Yes. The Mumbai Bench found that the original return had been filed within the s.139(1) due date and that CPC and the CIT(A) had simply ignored it, and deleted both the Rs 5,000 fee under s.234F and the interest under s.234A charged on the footing that the revised return's date was the date of filing. Revising a return does not make a timely return late.
• C. Eswara Reddy & Co v ACIT ITATCuts both waysSuperseded by amendment
  The officer rejected my firm's books and estimated the profit at a percentage of receipts. Can the firm still deduct salary and interest paid to its partners from that estimated figure?
  For the years this order governs, yes. The Tribunal held that s.44AD(2) deems only the deductions under ss.30 to 38 to have been given full effect; s.40 is not deemed to have been allowed, and the proviso to s.44AD(2) as it then stood said in terms that salary and interest paid to a partner shall be deducted from the income computed under s.44AD(1), subject to the ceiling in s.40(b). Taking a clue from that scheme, the Tribunal directed the officer to allow partner salary and interest from the estimated income. On depreciation it went the other way: because depreciation is allowable under s.32, which falls inside ss.30 to 38, no separate deduction for depreciation was permitted from the estimate. The order concerns assessment years 2003-04 and 2004-05 and rests squarely on a proviso Parliament has since deleted.
• Pro-Quip Corporation v CIT Advance RulingHelps taxpayer
  We bought engineering drawings and designs outright from a US company for our plant. The buyer withheld tax treating it as royalty. Was that right?
  No. The Authority ruled that the amount Pro-Quip Corporation received from Linde Process Technologies India Ltd for the sale of engineering drawings and designs was not taxable in India. The purchase order transferred ownership in the drawings outright, with no reservation of rights, no contingency and no continuing service obligation. That is a sale of property, not consideration for the use of or the right to use property, so article 12 of the India-US convention on royalties and fees for included services was not attracted. Any services attached to the sale fell within the exclusion in article 12(5). The applicant could claim a refund of the tax deducted, with interest. The ruling binds only Pro-Quip.
• Statutory position — s.35(1)(i): revenue expenditure on scientific research needs no approval and is allowed in full CBDT Circulars & InstructionsCuts both ways
  The DSIR would not certify part of my client's research spend. Is there a provision that allows it without any approval at all?
  Yes. Section 35(1)(i) allows, in computing business income, "any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business". It carries no approval requirement of any kind — no DSIR approval of a facility, no Central Government approval of an institution — and no weighting: the deduction is the expenditure, at a hundred per cent. It is the natural fallback wherever a weighted claim under s.35(2AB) is cut down to the figure in Form 3CL, and since AY 2021-22 it gives exactly the same number as s.35(2AB) for revenue expenditure, because the s.35(2AB) proviso has taken that deduction down to the expenditure incurred.
• Statutory position — the s.35(2AB) and s.35(2AA) weighting: two hundred, then one hundred and fifty, then one hundred per cent CBDT Circulars & InstructionsCuts both ways
  What weighting do I put on my client's in-house R&D spend, and from which assessment year did each rate change?
  For s.35(2AB) the weighting was two hundred per cent, fell to one hundred and fifty per cent from AY 2018-19, and falls to a hundred per cent — that is, no weighting at all — for expenditure incurred in a previous year relevant to an assessment year beginning on or after 1 April 2021. The current text reads "a deduction of a sum equal to one and one-half times of the expenditure so incurred", cut down by a proviso which for AY 2021-22 onwards makes the deduction "equal to the expenditure so incurred". Section 35(2AA), for sums paid to a National Laboratory, University, Indian Institute of Technology or specified person for approved research, follows the same shape: one and one-half times the sum paid, reduced by a second proviso to the sum so paid for an assessment year beginning on or after 1 April 2021.
• Statutory position — s.35AD(3) and (4): claim s.35AD and you lose s.10AA and every Chapter VI-A 'C' deduction for that business, for that year and every other year CBDT Circulars & InstructionsCuts both ways
  We claimed section 35AD on a hotel and also want a Chapter VI-A deduction on the profits of the same hotel in a later year. The Assessing Officer says we cannot have both. Is that right, and does it affect only the year of the section 35AD claim?
  The Assessing Officer is right, and the bar is wider than most people expect. Section 35AD(3) provides that where a deduction under section 35AD is claimed AND ALLOWED in respect of a specified business for any assessment year, no deduction shall be allowed under section 10AA or under Chapter VI-A under the heading "C.—Deductions in respect of certain incomes" in relation to that specified business "for the same or any other assessment year". So one year's section 35AD claim closes off the profit-linked deductions for that business permanently, not merely for that year. Section 35AD(4) is the companion rule and works on the expenditure rather than the profits: no deduction of the expenditure referred to in sub-section (1) is allowed under any other section in any previous year, or under section 35AD itself in any other previous year, if the deduction has been claimed or opted by the assessee and allowed under section 35AD. Section 35AD(3) did not always include section 10AA — those words were added by the Finance (No. 2) Act, 2014 with effect from 1 April 2015, so for AY 2014-15 and earlier the bar reached only Chapter VI-A heading C; and the words "or opted" in sub-section (4) came in with the Finance Act, 2020 (Act 12 of 2020) with effect from 1 April 2020, when the deduction itself became optional.
• Statutory position — s.35AD(7A), (7B) and (7C) with s.28(vii): the asset must serve the specified business for eight years, and on breach the deduction comes back net of notional depreciation CBDT Circulars & InstructionsCuts both ways
  A hotel building on which we claimed section 35AD is now being used partly for a different business, and another asset has been sold. What exactly is charged, in which year, and is a sale treated the same way as a change of use?
  Section 35AD(7A) imposes a use condition, not a holding condition: any asset in respect of which a section 35AD deduction is claimed and allowed "shall be used only for the specified business, for a period of eight years beginning with the previous year in which such asset is acquired or constructed". Section 35AD(7B) supplies the consequence of breach. Where such an asset is used for a purpose other than the specified business during that eight-year period, the total deduction claimed and allowed in one or more previous years, AS REDUCED BY the depreciation that would have been allowable under section 32 had no section 35AD deduction been allowed, is deemed to be the assessee's income under "Profits and gains of business or profession" of the previous year in which the asset is so used. Sub-section (7B) expressly carves out a use "by way of a mode referred to in clause (vii) of section 28" — and section 28(vii) charges as business income any sum, whether received or receivable, in cash or kind, on account of any capital asset other than land, goodwill or a financial instrument being demolished, destroyed, discarded or transferred, where the whole of the expenditure on that asset was allowed as a deduction under section 35AD. So a sale, demolition, destruction or discarding is taxed under section 28(vii) on what is received or receivable, and a mere change of use is taxed under section 35AD(7B) on the net deduction. Section 35AD(7C) exempts from sub-section (7B) a company which has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 during the eight-year period. Sub-sections (7A), (7B) and (7C) were inserted by the Finance (No. 2) Act, 2014 with effect from 1 April 2015, so the use condition bites from AY 2015-16.
• Statutory position — the second proviso to s.32(1): where an asset is acquired during the previous year AND put to use for less than 180 days in that year, depreciation is restricted to fifty per cent — the exact words, what the 180 days is counted on, and the further proviso giving the balance of the additional allowance in the succeeding year CBDT Circulars & InstructionsCuts both ways
  We bought plant in February and used it from March. The Assessing Officer has halved the depreciation. Is the 180 days counted from acquisition or from the date the asset was put to use, and what happens to the other half of the additional depreciation under s.32(1)(iia)?
  The proviso is worded on BOTH events, and that is the whole fight. As printed on the most recent departmental edition, it reads: "Provided further that where an asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia), as the case may be :". So the restriction applies only where TWO things are true of the same previous year — the asset was acquired by the assessee during that previous year, and it was put to use for the purposes of business or profession for a period of less than 180 days in that previous year. The 180-day count is on the period of USE ("is put to use ... for a period of less than one hundred and eighty days"); acquisition during the previous year is a separate, cumulative condition, not the thing counted. An asset acquired in an earlier previous year is outside the proviso even if it is used for less than 180 days in the year in question. The further proviso, printed immediately after, gives back the missing half of the ADDITIONAL depreciation only: where an asset referred to in clause (iia) or the first proviso to clause (iia) is acquired during the previous year and put to use for less than 180 days in that year and the deduction is accordingly restricted to fifty per cent, "then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset". The footnote evidence I could read attaches that further proviso to an insertion effective 1 April 2016; the Act number as the departmental page prints it is set out in the editor note and I could not reconcile it.
• Statutory position — s.44DB: when a co-operative bank amalgamates, demerges or converts, the year's deduction under ss.32, 35D, 35DD and 35DDA is split by days, not lost CBDT Circulars & InstructionsCuts both waysNo later treatment found
  Our co-operative bank amalgamated in October. The successor is claiming the whole year's depreciation and amortisation. Is that right, and what happens to our part of it?
  It is not right, and the section says so arithmetically. Section 44DB provides that the deduction under section 32, section 35D, section 35DD or section 35DDA shall, in a case where business reorganisation of a co-operative bank has taken place during the financial year, be allowed in accordance with that section. The predecessor co-operative bank gets A x B / C, where A is the amount of the deduction that would have been allowable had the business reorganisation not taken place, B is the number of days from the beginning of the financial year up to the day before the reorganisation, and C is the total number of days in that financial year. The successor co-operative bank, or the converted banking company, gets the same formula with B taken as the number of days from the date of the reorganisation to the end of the financial year. The section then provides for the continued application of sections 35D, 35DD and 35DDA to the successor for the remaining years. The Explanation defines 'business reorganisation' as the reorganisation of business involving the amalgamation or demerger of a co-operative bank or the conversion of a primary co-operative bank, and defines the amalgamating, amalgamated, predecessor and successor banks, 'co-operative bank' by reference to the Banking Regulation Act, 1949, 'demerger', and 'conversion' by reference to a Reserve Bank of India circular of 27 September 2018.
• M/s. The Plantation Corporation of Kerala Ltd and M/s. The Velimalai Rubber Co. Ltd v ACIT, Kottayam ITATHelps departmentOverruled
  I am a rubber planter. I cleared an old unproductive block and replanted it, and claimed the cost under rule 7A(2). The Assessing Officer has disallowed it. Is there anything I can do?
  Not in Kerala. The Cochin Tribunal dismissed both appeals, holding itself bound by the Kerala High Court in Rehabilitation Plantations Ltd v CIT, which construed rule 7A(2) as covering only infilling — the replacement of dead or useless trees within an existing yielding area — and not the replanting of an area after cutting and removing an old plantation, and held that expenditure on planting and developing a plantation up to maturity must be capitalised. Rule 7A itself makes 35 per cent of the income from the specified rubber products taxable as business income and leaves 65 per cent as agricultural income for the State.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.