2006 (5) TMI 440 - AT - Income Tax

Summary

Issues Involved:
1. Capitalization of certain expenses for depreciation purposes.
2. Treatment of receipts from the sale of unusable materials.
3. Disallowance of depreciation due to the period of asset usage.
4. Disallowance of depreciation on the assumption of incorrect claims.
5. Rejection of capitalization of depreciation for the period prior to business commencement.

Issue-wise Detailed Analysis:

1. Capitalization of Certain Expenses for Depreciation Purposes:
The first ground of appeal pertains to the confirmation by the Commissioner of Income-tax (Appeals) of the Assessing Officer's finding that expenditure of Rs. 6,28,588 cannot be added to the actual cost of the project for the purposes of allowing depreciation under section 32 of the Income-tax Act. The Assessing Officer accepted the principle of capitalizing expenses incurred before the commencement of business but disallowed specific expenses such as entertainment, guest house expenditure, and gifts. The Commissioner of Income-tax (Appeals) upheld this finding. However, the Tribunal, after considering the arguments and relevant case laws, directed the Assessing Officer to allow capitalization of entertainment expenses of Rs. 5,09,734 and guest house expenses of Rs. 15,439, while disallowing the expenditure on gifts.

2. Treatment of Receipts from the Sale of Unusable Materials:
The second ground of appeal involves the confirmation of an addition of Rs. 46,05,942 made by the Assessing Officer by treating the receipts from the sale of unusable materials as revenue income. The assessee contended that these receipts should be deducted from the cost of the project. The Tribunal, after considering the Supreme Court decision in the case of CIT v. Bokaro Steel Ltd., reversed the order of the Commissioner of Income-tax (Appeals) and directed the Assessing Officer to exclude the sum from the total income of the assessee and reduce it from the cost of the project.

3. Disallowance of Depreciation Due to the Period of Asset Usage:
The third ground pertains to the disallowance of depreciation of Rs. 18,98,300. The Assessing Officer disallowed the claim solely on the ground that the depreciation was disallowed while processing the return under section 143(1)(a). The Tribunal upheld the view that since the business commenced in March 1995, the assets were used for less than six months, and therefore, depreciation was allowable only at 50% of the normal rate. The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) on this issue.

4. Disallowance of Depreciation on the Assumption of Incorrect Claims:
The fourth ground involves the disallowance of Rs. 6,45,90,327 made by the Assessing Officer on the assumption that the assessee claimed full depreciation instead of 50% of the normal rate. The Tribunal noted that the assessee had claimed depreciation correctly at 50% of the normal rate for plant and machinery. The issue was restored back to the Assessing Officer for fresh consideration with directions to allow adequate opportunity to the assessee to establish the correctness of the claim.

5. Rejection of Capitalization of Depreciation for the Period Prior to Business Commencement:
The final ground pertains to the rejection of the assessee's claim for capitalization of Rs. 97,39,722 being depreciation for the period prior to the commencement of business. The Tribunal held that such notional depreciation cannot be added to the actual cost of the assets. The actual cost of the assets cannot be increased by adding notional depreciation. The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) on this issue.

Conclusion:
In the result, the assessee's appeal was partly allowed. The Tribunal directed the Assessing Officer to allow capitalization of certain expenses and to exclude the sum from the sale of unusable materials from the total income of the assessee. However, the Tribunal upheld the disallowance of depreciation for the period of less than six months and rejected the claim for capitalization of notional depreciation prior to business commencement.