Income Tax | Non-Examination Is Not a View—100% Depreciation Without Scrutiny Is Error in Law: Karnataka High Court

“When the Assessing Officer has not applied his mind, it cannot be presumed he formed a view—mere silence in assessment is not a shield against revision”, In a pivotal judgment Karnataka High Court upheld the revisionary jurisdiction under Section 263 of the Income Tax Act invoked against the company for claiming 100% depreciation on leasehold improvements. The Court ruled that the Assessing Officer had failed to examine the claim at all, and thus, the original assessment was both erroneous and prejudicial to the interests of the Revenue.

A Division Bench comprising Justice V. Kameswar Rao and Justice S. Rachaiah dismissed the appeal by Herbalife, stating: “Depreciation was a non-issue before the Assessing Officer. The record shows no material to prove that any enquiry was ever made. A silent assessment order cannot shield the assessee.”

Company Claimed ₹2.28 Crore as Leasehold Improvement Costs, Sought 100% Depreciation

Herbalife India had claimed ₹2.28 crore as leasehold improvement expenses across multiple cities—Bengaluru, Mumbai, Kolkata, and Guwahati—under the Income Tax Return for AY 2008–09, and claimed 100% depreciation treating the expenditure as temporary structures and fixtures.

Though the original Assessment Order dated 29 October 2012 accepted this claim without objection, the Commissioner of Income Tax initiated revisionary proceedings under Section 263, contending that the allowance of full depreciation without inquiry violated Rule 5 of the Income Tax Rules, which provides only 10% depreciation on leasehold improvements unless proven otherwise.

“There is neither whisper nor mention of this issue in the assessment order… nor is there anything in the assessee’s submission to show this claim was scrutinised.”

Tribunal and CIT Records Show: “No Enquiry, No Mind Application—Assessment Is Vitiated”

Both the Income Tax Appellate Tribunal and the CIT (Appeals) concluded that the Assessing Officer had not even raised a query on the leasehold improvement claim, despite the large amount involved.

The CIT specifically noted that Herbalife’s own authorised representative admitted during revision proceedings that the issue had not been examined during the original assessment.

“An order passed without application of mind amounts to an erroneous order in law,” the Court quoted from the ruling in Malabar Industrial Co. v. CIT.

Herbalife’s Argument That Prior Years Allowed 100% Depreciation Rejected

Herbalife argued that in AY 2001–02 and 2002–03, similar claims were allowed, and therefore the Assessing Officer in 2008–09 must be presumed to have followed a consistent line.

But the High Court ruled that consistency is not presumed in the absence of demonstrable examination, especially when the nature of the improvements varies from year to year.

“The assessee's reliance on earlier ITAT decisions in its own case is of no consequence as the nature of expenditure may be different in each year.”

“AO Did Not Even Raise a Question”—Court Dismisses Appeal, No Substantial Question of Law Found

The Bench concluded that there was no “conscious view” formed by the AO. Relying on detailed records of correspondence and assessment files, the Court emphasized that a silent order is not proof of scrutiny, and thus cannot be shielded from revision:

“Passing of an order of assessment is the prerogative of the Assessing Officer… but if the discussion is not discernible from the order, higher forums can examine the record to assess whether mind was applied.”

Ultimately, the Court dismissed the appeal, holding:

“We find no merit in the appeal. No substantial question of law arises in favour of the appellant.”

The ruling is a strong reinforcement of the principle that failure to inquire is not equivalent to acceptance, and that Section 263 empowers the tax department to reopen cases where assessments are made without basic diligence. For large corporate taxpayers, this serves as a warning that unexamined claims—even if previously allowed—do not insulate future years from scrutiny.

“Silence is not scrutiny. Non-examination is not adjudication. For tax justice to prevail, application of mind is essential.”

Date of Decision: 20 May 2025