2011 (1) TMI 26 - HC - Income Tax

Depreciation on custom duty payment - Expenditure on the glow sign board - Depreciation on UPS - Initially capital goods imported under exemption but later customs duty paid on demand - Held that - once the amount has gone out of the coffers of the assessee, the assessee would be entitled to capitalize the same - The assessee has spent the expenditure on the glow sign boards with an object to facilitate the business operation and not with an object to acquire asset of enduring nature. Therefore, the said expenditure was of revenue nature and the Tribunal has rightly treated the same as of revenue nature - depreciation @ 60% on UPS shall be allowed.

Summary

Issues involved:
1. Disallowance of depreciation on custom duty payment
2. Treatment of expenditure on glow sign boards as revenue or capital in nature
3. Disallowance of depreciation on UPS

Issue 1: Disallowance of depreciation on custom duty payment
The assessee imported machinery under a duty exemption certificate but faced a dispute with the Custom Department regarding the certificate. The department demanded a significant amount as differential custom duty, which the assessee paid while contesting the notice. The question arose whether the assessee could capitalize this payment to claim depreciation. The CIT (A) and Tribunal allowed the depreciation, citing precedents like Commissioner Of Income-tax Vs. Shoorji Vallabhdas And Co. The Tribunal emphasized that once the amount left the assessee's possession, it could be capitalized. The High Court concurred with this view, stating that no substantial question of law arose on this issue.

Issue 2: Treatment of expenditure on glow sign boards
The dispute centered on whether the expenditure on glow sign boards should be treated as revenue or capital in nature. The assessee argued that the boards were perishable and used for business promotion, justifying revenue treatment under Section 37 of the Act. The AO considered the expenditure capital due to the material used and the assessee's previous accounting treatment. However, the CIT (A) and Tribunal ruled in favor of revenue treatment, following the Punjab & Haryana High Court's judgment. The High Court upheld this decision, emphasizing that the glow sign boards did not create enduring assets, making the expenditure revenue in nature.

Issue 3: Disallowance of depreciation on UPS
In the Assessment Year 2005-06, the AO disallowed a portion of the depreciation claimed on UPS by the assessee. The AO allowed depreciation at 25% instead of the claimed 60%, resulting in a disallowance. The High Court referred to a previous judgment regarding depreciation on similar items and held that depreciation at 60% should be allowed. Consequently, the court found no merit in the appeals and dismissed them.

In conclusion, the High Court addressed the issues of disallowance of depreciation on custom duty payment, treatment of expenditure on glow sign boards, and disallowance of depreciation on UPS. The court upheld the decisions of the lower authorities in allowing depreciation on the custom duty payment and glow sign boards as revenue expenditure, while also directing the correct depreciation rate for UPS. The court found no substantial legal questions in these matters and dismissed the appeals accordingly.