IN THE HIGH COURT OF KERALA AT ERNAKULAM
Justice C.N.Ramachandran Nair and Justice C.K.Abdul Rehim
S.T.R. No. 134 of 2008
Advocates appearing for the Parties : Government Pleader; A. Kumar
J U D G M E N T
RAMACHANDRAN NAIR, J.
1 State has filed this revision petition challenging the appellate order issued by the Tribunal granting deduction towards depreciation in the computation of taxable turnover for works contract of the respondent for the year 1997-98. We have heard Government Pleader appearing for the petitioner and counsel appearing for the respondent.
2. Respondent was engaged in metal fabrication work for various parties. In fact, among the several contracts executed by the respondent during the year 1997-98, they paid tax at compounded rate under Section 7(7A) for some items of work which is 70% of the rate of tax payable on the entire contract amount for the item of work under the IVth Schedule to the Act. So far as the contract receipt for the balance items of work are concerned, respondent claimed assessment under Section 5(C) of the KGST Act (hereinafter called "the Act") which provides for various deductions from the contract receipts for determination of the taxable turnover. Even though various deductions including labour charges were claimed under Section 5C, respondent did not claim any amount towards depreciation in assessment. In the appeal filed against assessment before the first appellate authority also, no claim of deduction towards depreciation of machinery was made in the determination of taxable turnover. However, when second appeal was filed before the Tribunal, a fresh ground was taken by the respondent stating that they are entitled to depreciation of machinery as a deduction under Section 5C(1)(c)(ii) of the Act. Even though department raised objection against maintainability of the ground and against allowing the claim which is not specifically provided in the above Section, Tribunal still held that depreciation is allowable under the word "otherwise" used in the sub-section. It is against this order of the Tribunal State has filed the revision contending in the first place that the Tribunal is not entitled to entertain a new claim on facts and that the claim in any case should not have been allowed by the Tribunal because the Section does not allow deduction of depreciation on machinery in the computation of taxable turnover of works contract.
3. In order to appreciate the contentions raised by the parties, we have to necessarily refer to the relevant provision which is extracted hereunder:
"S.5C(1) Deduction of certain amounts in arriving at the taxable turnover of a dealer in respect of transfer of property in the execution of works contract:- The taxable turnover of a dealer in respect of the transfer of property involved in the execution of works contract shall, [from the 1st day of April, 1984] be arrived at after deducting the following amount from the total amount received or receivable by the dealer for the execution of the contract-
(c) all amounts towards labour charges and other service charges such as–
(i) charges for planning and designing and the architect's fee;
(ii) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
(iii) cost of consumables used;
(iv) cost of establishment of the dealer to the extent it is relatable to the supply of labour and services;
(v) profit earned by the dealer to the extent it is relatable to supply of labour and services: not involving any transfer of property in goods, and actually incurred in connection with the execution of the works contract; or such amounts calculated at the rate specified in column (3) of the Table below, if they are not ascertainable from the books of accounts maintained and produced by the dealer." The contention of the Government Pleader is that the respondent did not make any claim of deduction of depreciation on machinery in the computation of taxable turnover of works contract. In fact, the claim was not made in first appeal before the appellate authority also. However, respondent made claim before the Tribunal for the first time, which should not have been considered by the Tribunal in second appeal filed before it. It is seen from the Tribunal's order that a misleading statement is made before the Tribunal by the respondent that the claim was raised before the assessing authority and it was allowed. It was stated in the grounds of appeal that the claim of depreciation on machinery was made by the respondent before the Assessing Officer who allowed it and the appellate authority disallowed it as it is not an allowable deduction under Section 5C(1)(c) of the Act. Admittedly this is a wrong statement in the Tribunal's order and the claim was made before the Tribunal for the first time. It is the settled position by virtue of decision of the Supreme Court in NATIONAL THERMAL POWER CO. LTD. V. COMMISSIONER OF INCOME-TAX (1998) 229 ITR 383 that the Tribunal can only entertain new questions of law arising from facts found by the Income Tax authorities. In other words, Tribunal should not allow fresh facts and grounds based on the same to be raised before it. Therefore, on the face of it, we are of the view that claim of depreciation raised by the respondent before the Tribunal in second appeal for the first time should not have been entertained by the Tribunal. However, since Tribunal has decided the eligibility on merits, we proceed to consider respondent's entitlement for claim of depreciation as a deduction in the taxable turnover for works contract under Section 5C(1)(c)(ii) of the Act. Government Pleader contended that the clause relied on by the respondent before the Tribunal does not provide for deduction of any depreciation and all what is covered is charges paid by the assessee for obtaining machinery on hire or otherwise. According to the Government Pleader, "expenditure" referred to under the term "otherwise" in the Section will cover only similar expenditure such as rent, lease charges or the like paid for the machinery or tools taken by the assessee from others for execution of the work. Counsel for the respondent has relied on decisions of the Supreme Court in STATE OF JHARKHAN AND OTHERS V. VOLTAS LTD. (2007) 7 VST 317, MOHAMMAD ALI KHAN V. COMMISSIONER OF WEALTH- TAX (1997) 224 ITR 672, KANPUR DEVELOPMENT BOARD V. COMMISSIONER, SALES TAX, U.P. (1963) 14 STC 493 and the Constitution Bench judgment in ASST. COMMISIONER (INTELLIGENCE) V. M/S.NANDANAM CONSTRUCTION COMPANY (1999) 7 KTR 651 and contended that the word "otherwise" referred to in clause (ii) should be given a purposive interpretation to cover an expenditure similar to hire charges for machinery and tools allowable under the first part of the sub-clause referred above. Admittedly there is no decision of the Supreme Court or of any High Courts on the above Section which does not specifically grant deduction of depreciation on machinery. Government Pleader pointed out that clause (c) will control sub-clause (ii) thereunder and under the said sub-clause only labour charges and other service charges are allowable. However, counsel for the respondent pointed out that the sub-heading of the Section does not control the specific provisions under the said sub-clause which includes deduction of cost of consumables, cost of establishment of the dealer to the extent related to supply of labour and services, and profit earned by the dealer to the extent relatable to supply of labour and services. Even though sub- clause (c)(ii) may not control the entries specifically covered therein, we notice that what are allowable under sub-clause (ii) are charges incurred by the contractor for taking on hire machinery or tools or similar expenses. The word "otherwise" according to counsel for the respondent should take in depreciation on machinery used by the contractor because instead of hiring machinery, contractor is free to purchase machinery and use the same. According to counsel, hire charges is the rent payable for taking machinery on hire, whereas depreciation is a facility for writing off the value of the machinery used in the work in a phased manner to cover up for wear and tear, obsolescence etc. Even though argument is logically tenable, we do not think concept of depreciation is visualised in sub-clause (ii) because all what is allowable as deduction is only outgoing in the nature of expenditure incurred by a contractor. Depreciation on the other hand is the allowance which a business man is entitled to in the computation of profit which is writing off the cost of machinery on an yearly basis to cover up for it's wear and tear. Depreciation has a definite meaning and content and it's rates are varying both for the purpose of income tax and for preparing Profit and Loss Account and Balance Sheet under the Companies Act. Therefore, if the Legislature ever intended to provide for deduction of depreciation in the computation of taxable turnover on works contract, we are sure that it would have been specifically provided in Section 5C along with other deductions specifically provided. If the Tribunal's reasoning that depreciation is also covered by sub-clause (2) of Section 5C(1) under the head "charges otherwise incurred on machinery and tools for the execution of works contract", then the provision becomes vague in as much as what is the rate of depreciation to be granted and whether it should be straight line method or written down value method, should have been mentioned in the Section itself. In the absence of any specific provision in Section 5C, we feel depreciation on machinery or tools is not eligible for any deduction in the computation of taxable turnover on works contract. Besides this, in our view, "charges for obtaining on hire or otherwise" in sub-clause c(ii) can only mean charges paid for obtaining machinery or tools under any other arrangement other than hire. In other words, if the charges are paid on any other terms, i.e. other than on hire arrangement for availing the facility of machinery and tools, then only such charges are eligible for deduction, which certainly does not include depreciation because notional expenditure in the form of amortisation of cost of machinery and tools owned by the contractor is not visualised in Section 5C(1)(c) (ii) of the Act.
4. In view of our above findings, we hold that the respondent is not entitled to any deduction of depreciation on machinery and tools in the computation of taxable turnover on works contract. We, therefore, allow the Sales Tax Revision case by reversing the order of the Tribunal and restore the assessment confirmed in first appeal.