2010 (7) TMI 953 - AT - Income Tax

Claim of depreciation - block of plant machinery @ 25% - HELD THAT - the nature of assets i.e. electrical installation that consists of electrical wires, switches, plugs, cables, MCB box and electrical items, which cannot function independently, rather, this is a part of plant machinery and it cannot be classified under furniture and fittings. Accordingly, we are of the view that assessee is eligible for depreciation under the block of plant machinery @ 25%. We allow the claim of the assessee and this issue of the assessee s appeal is allowed. confirming the disallowance of interest - HELD THAT - We find that AO has disallowed interest expenses of ₹ 1,97,226/- on the interest free loan given to others aggregating to ₹ 16,43,558/-. The CIT(A) also confirmed the action of the AO. In view of the facts, once there is surplus share capital and reserve surplus available with the assessee, the interest on advances cannot be disallowed. Accordingly, we reverse the order of lower authorities on this issue. This issue of the assessee s appeal is allowed. CIT(A) in confirming the disallowance of additional depreciation on plant and machinery - The facts in the present case before us are on better footing that the assessee-company s installed capacity in made-ups has increased substantially i.e. more than 25%. From the facts, We also find that the assessee has filed audit report in Form No.3AA under rule 5A as prescribed in respect of made-ups division of the assessee-company, whereby the assessee has increased the capacity of bed sheets from 15.60 lakh to 20 lakh in the present year. The capacity is based on number of sewing machines installed in the year under consideration and according to the auditor there has been substantial addition in the number of sewing machines that resulted into increase in the installed capacity substantially. Respectfully following the decision in the case of Hindustan Newsprint Ltd. 2009 (3) TMI 1006 - KERALA HIGH COURT , we allow the claim of the assessee.

Summary

Issues Involved:
1. Depreciation Rate on Electrical Installation
2. Disallowance of Interest Expenses
3. Disallowance of Additional Depreciation on Plant and Machinery

Issue-wise Detailed Analysis:

1. Depreciation Rate on Electrical Installation:
The first issue concerns the rate of depreciation applicable to electrical installations. The assessee claimed depreciation at 25%, treating the electrical installations as part of the plant and machinery. However, the Assessing Officer (AO) restricted the depreciation to 15%, classifying the electrical installations under furniture and fittings. The CIT(A) upheld the AO's decision, citing that electrical items such as wires, switches, plugs, cables, and MCB boxes fall under the category of electrical installations eligible for 15% depreciation. The Tribunal, however, found that these items are integral to the functioning of the plant and machinery and cannot be independently classified under furniture and fittings. Consequently, the Tribunal allowed the assessee's claim for a 25% depreciation rate, reclassifying the electrical installations as part of the plant and machinery.

2. Disallowance of Interest Expenses:
The second issue pertains to the disallowance of interest expenses amounting to Rs. 1,97,226/-. The AO disallowed the interest on the grounds that the assessee provided interest-free loans to suppliers, which aggregated to Rs. 16,43,558/-. The CIT(A) confirmed this disallowance. However, the Tribunal noted that the assessee had sufficient surplus funds, including share capital and reserves amounting to Rs. 2.28 crores and Rs. 6,75,15,229/-, respectively. The Tribunal also observed that the loans were advances to suppliers for business purposes and not for non-business purposes. Given the availability of surplus funds and the business nature of the advances, the Tribunal reversed the lower authorities' decisions and allowed the interest expenses in full.

3. Disallowance of Additional Depreciation on Plant and Machinery:
The third issue involves the disallowance of additional depreciation of Rs. 5,31,797/- under Section 32(1)(iia) of the Income-tax Act. The AO disallowed the claim, stating that the assessee did not achieve the required 25% increase in installed capacity. The CIT(A) upheld this disallowance, noting that the combined capacity increase was only 20.90%. The Tribunal, however, found that the assessee had indeed increased the installed capacity of "made-ups" (bed sheets) from 15.60 lakhs to 20 lakhs, which constitutes a substantial increase. The Tribunal referred to the Kerala High Court's decision in the case of CIT v. Hindustan Newsprint Ltd., which held that an increase in the installed capacity of an intermediary product qualifies for additional depreciation. Following this precedent, the Tribunal concluded that the assessee's increase in the capacity of "made-ups" met the criteria for additional depreciation. Therefore, the Tribunal allowed the claim for additional depreciation.

Conclusion:
The Tribunal allowed the appeal in favor of the assessee on all three issues. The order pronounced on 23rd July 2010 concluded that the assessee was entitled to a 25% depreciation rate on electrical installations, full allowance of interest expenses, and additional depreciation on the increased capacity of plant and machinery.