A.I. KURIAN Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The petitioner is challenging revisional orders of the CIT issued for the asst. yrs. 1995-96 and 1996-97 sustaining disallowance of petitioner's claim for deduction of salary paid to driver and depreciation in respect of car made by the AO in the course of proceedings issued under Section 143(1)(a) of the IT Act (hereinafter called "the Act"). The petitioner assessee returned income under the head "Income from salary, income from house property, capital gains and also income from other sources" for both the assessment years. It is seen in the statements accompanying the returns that the assessee claimed deduction of salary paid to driver amounting to Rs. 32,000 and Rs. 20,000 towards depreciation for the car for both the years in the computation of income under the head "Income from other sources". The AO accepted the return in all other respects except in regard to claim of deduction towards driver's salary and depreciation in respect of car made by the petitioner under the head "Income from other sources". These amounts are added back, income determined and tax demanded through proceedings issued under Section 143(1)(a) of the Act. The assessee challenged these orders in revision petitions filed before the CIT under Section 264 of the Act on the ground that the deductions claimed are not items prima facie inadmissible for addition under Clause (iii) of first proviso to Section 143(1)(a) of the Act. However, the CIT vide Ext. P7 rejected the revision petitions on the ground that claim of salary paid to driver is inadmissible by virtue of law settled by decision of the Supreme Court in Vijaya Laxmi Sugar Mills Ltd. v. CIT and so far as aUowance of depreciation is considered, the claim is prima facie inadmissible because petitioner returned no income from hire charges against which only allowance of depreciation is provided while computing income under the head income from other sources under Section 57(ii) of the Act. It is against this common order that petitioner has filed this writ petition.

(2.) I heard counsel for the petitioner and senior counsel Sri P.K.R. Menon, appearing for the respondents. Counsel for the petitioner contended that the claim of deduction of depreciation and driver's salary are not items which could be disallowed as prima facie inadmissible while issuing proceedings under Section 143(1)(a) of the Act. According to him, the claim is obviously made under Section 57(iii) of the Act which is a residuary clause providing for deductions in the computation of income from other sources and the nature of the claim and the section under which it is claimed are such that, the issue cannot be settled without an objective consideration or in other words, the issue calls for an adjudication as to whether petitioner will ultimately succeed or not. So much so, his contention is that the issues were such that disallowance could be done only in a proceedings under Section 143(3) and after issuing notice and giving opportunity to the petitioner under Section 143(2) of the Act. Senior counsel for respondents on the other hand contended that the nature of the claim is clear from petitioner's own statement and so long as the claim is not allowable either based on law declared by the Supreme Court or based on express provision of the statute, there is no need for any adjudication and the officer could disallow the claim as prima facie inadmissible under Clause (iii) of first proviso to Section 143(1)(a) of the Act. According to him, by virtue of decision of the Supreme Court relied on by the CIT, salary paid to driver is a claim inadmissible under the head of income under which petitioner's income falls. Similarly, depreciation is allowable under Section 57(ii) of the Act which can be granted only against income from hire charges. So long as petitioner has not returned any income from hire charges, petitioner is not entitled to any deduction under Section 57(ii) and so much so, the claim was rightly declined as prima facie inadmissible is his argument.

(3.) Section 143(1)(a) of the Act mandates that on processing the return by following the procedure prescribed therein, if it is found that any tax or other amount is due from the assessee or any refund is due to the assessee, an intimation has to be sent to the assessee. Apart from correction of arithmetical errors in the returns, accounts or documents accompanying the same, the AO in the course of processing of the returns is authorised under Clause (iii) of first proviso to Section 143(1)(a) to grant prima facie admissible deductions and allowances or set off of carry forward loss claimed by the assessee. The question to be considered is whether disallowance of the two items of claims of deduction made by the assessee were prima facie inadmissible to justify disallowance by the officer in exercise of authority vested in him under Clause (iii) of first proviso to Section 143(1)(a) of the Act. The Act is silent as to which are the items of allowances and deductions that could be disallowed as prima facie inadmissible. However, the Circular No. 689, dt. 24th Aug., 1994 issued by the CBDT among other things states that claims which are patently inadmissible in law could be disallowed under Clause (iii) of first proviso to Section 143(1)(a). Return is always accompanied by a statement of computation of income and tax liability which would certainly show the head of income under which income is computed claiming deductions and allowances. The AO should therefore consider prima facie admissibility of claim with reference to the relevant provisions applicable to the head of income under which income is declared. If the statute expressly, prohibits the allowance or deduction claimed, then the claim is patently inadmissible in law and so much so, it is within the powers of the officer to disallow the claim under the clause above referred. On the other hand if the claim of deduction or allowance is maintainable under any provision of the Act, the disallowance whether in full or in part, calls for adjudication and in that event, the officer cannot disallow the claim as one prima facie inadmissible. In this view of the matter, I find the disallowance of depreciation claimed by the petitioner on car against income from other sources is rightly rejected as a claim prima facie inadmissible by the AO which is confirmed by the CIT in revision because the only provision under which depreciation could be allowed against income from other sources is Section 57(ii) which can be granted only against income on hire charges received for machinery, plant or furniture, etc., falling under Section 56(2)(iii) of the Act. It is clear from the statement accompanying the return filed by the petitioner that the only two items of income returned by the petitioner under the head "Income from other sources" are interest income and dividends and no hire charges falling under Section 56(2)(iii)' of the Act is accounted by the petitioner. Even though counsel for the petitioner submitted that the claim of depreciation can come under Section 57(iii) of the Act, I am unable to accept this contention because the said provision provides for deduction of "any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income". Depreciation is not an expenditure, but an allowance which is separately provided under Section 32 of the Act, allowable in the computation of income from business or profession. In fact, depreciation is generally allowed only under Section 32 i.e. in the computation of income from business and profession and Section 57(ii) providing for depreciation is only an exception to the said provision which is allowed only in the computation of income received on hire of machinery, plant, furniture, etc., under the head "Income from other sources". In other words, Section 57(iii) does not visualise granting of any allowance like depreciation but provides for expenditure other than capital expenditure laid out or expended for the purpose of earning income of the nature falling under Section 56. Therefore, the disallowance of depreciation on car claimed against income from other sources as prima facie inadmissible is perfectly justified and I uphold the impugned order on this issue.