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In a landmark ruling the Supreme Court in the case of CIT v. Mahendra Mills (243ITR56) held that the assessing officer could not grant depreciation allowance to the assessee when the assessee did not claim the same. In so holding it approved the views expressed by the High Courts of Mumbai, Punjab & Haryana, Karnataka, Andhra Pradesh, Calcutta and Kerala. The Apex Court further held that it is for the assessee to see if the claim of depreciation is to his advantage. Rather the ITO should advice it not to claim depreciation if that course is beneficial to the assessee. Such a procedure would be in the spirit of the board circular dated 11.4.55. The Court further held that the assessee can withdraw the claim of depreciation made in the return by filing a revised return too. Further it held that allowance of depreciation is calculated on the written down value of the asset, which written sown value would be the actual cost of acquisition less the aggregate of all deductions ‘actually allowed’ to the assessee for the past years. ‘Actually allowed’ does not mean ‘notionally allowed’. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. To further explain the position it held that a thing is ‘allowed’when it is claimed and a privilege like depreciation cannot be to a disadvantage and an option under the Act therefore cannot become an obligation of the assessee.

The ratio given in the decision in Mahendra Mills however found irrelevant as far as the quantum of deduction allowable under section 80-IA of the Act. The SC in 398ITR568 held that the deduction has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable under sections 30 to 43D of the Act. Therefore, whether or not the assessee has claimed the deductions allowable under sections 30 to 43D of the Act, the quantum of deduction under section 80-IA has to be determined on the total income computed after deducting all deductions allowable under sections 30 to 43D of the Act. To claim 100 per cent. deduction under section 80-IA , without taking into consideration depreciation under section 32 , would be anathema to the scheme under section 80-IA of the Act which is linked to profits and would allow assessees to inflate the profits linked incentives provided under section 80-IA of the Act which cannot be permitte.


After the insert of explanation 5 after 1.4.2002 depreciation is a mandatory allowance in the computation of income` for all purposes.

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