Facts of the Case

The assessee, Vedanta Limited (successor to Cairn India Limited), filed its revised return claiming normal depreciation of ₹503.24 crore and additional depreciation of ₹538.66 crore under Section 32(1)(iia). Subsequently, during assessment proceedings, the assessee withdrew the claim for additional depreciation through a letter dated 07.01.2005, resulting in an increase in its Section 80IB deduction claim from ₹2042.81 crore to ₹2579.07 crore.

However, the Assessing Officer allowed the additional depreciation claim by invoking Explanation 5 to Section 32, treating depreciation as mandatory irrespective of whether claimed by the assessee. The assessee challenged this before the ITAT, which upheld the Assessing Officer’s view.

Additionally, issues arose regarding disallowance under Section 14A and transfer pricing adjustments concerning transactions with Associated Enterprises and redeemable preference shares.

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D(2)(iii) was legally sustainable.
  2. Whether transactions with Associated Enterprises could be disregarded for Arm’s Length Price determination under Section 92C.
  3. Whether additional depreciation under Section 32(1)(iia) is mandatory even if the assessee withdraws its claim during assessment proceedings.
  4. Whether the ITAT was justified in remanding transfer pricing issues instead of deciding them on merits.

Petitioner’s Arguments (Assessee’s Contentions)

  • The assessee argued that additional depreciation under Section 32(1)(iia) is an incentive provision and cannot be equated with normal depreciation.
  • It was contended that Explanation 5 to Section 32 applies only to normal depreciation under Section 32(1)(ii) and not to additional depreciation under Section 32(1)(iia).
  • The assessee submitted that the legislative intent behind additional depreciation was to provide accelerated incentive benefits, making it optional and not compulsory.
  • It was argued that once the claim was withdrawn, the Assessing Officer could not force such allowance upon the assessee.

Respondent’s Arguments (Revenue’s Contentions)

  • The Revenue contended that Explanation 5 to Section 32 makes depreciation mandatory, irrespective of whether the assessee claims it.
  • It was argued that additional depreciation under Section 32(1)(iia) is part of the depreciation mechanism and is allowable as deduction under Section 32(1)(ii).
  • Therefore, Explanation 5 extends to additional depreciation as well.
  • The Revenue justified the Assessing Officer’s action in granting additional depreciation despite withdrawal by the assessee.

Court Findings / Court Order

1. On Additional Depreciation under Section 32(1)(iia)

The Delhi High Court held that the statutory language of Explanation 5 to Section 32 is clear and unambiguous. The phrase “this sub-section” extends to the entire Section 32(1), including clause (iia). Therefore, additional depreciation is mandatory and cannot be avoided by the assessee merely by withdrawing the claim.

2. On Section 14A Disallowance

The Court admitted the appeal for examination of the legal issue regarding disallowance under Section 14A read with Rule 8D.

3. On Transfer Pricing under Section 92C

The Court observed that the ITAT should have independently decided the transfer pricing issue instead of remanding it merely because a similar issue was pending for another assessment year before the CIT(A). The remand direction was modified, and the ITAT was directed to decide the issue afresh on merits.

Final Order

  • Appeal admitted on substantial questions of law relating to Section 14A and Section 92C.
  • The issue of transfer pricing remand modified.
  • Additional depreciation issue decided against the assessee.

Important Clarification

This judgment clarifies that additional depreciation under Section 32(1)(iia) is not optional once the statutory conditions are satisfied. Even if an assessee seeks to withdraw such claim, the Assessing Officer is duty-bound to grant it by virtue of Explanation 5 to Section 32. The Court emphasized that statutory deductions cannot be defeated by strategic withdrawal for tax optimization.

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:1930-DB/SRB19032018ITA3102018.pdf 

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