2011 (5) TMI 653 - AT - Income Tax

Dis-allowance of provision made for obsolete stores/ spares Held that - Such loss cannot be claimed in any year rather it can be claimed only in the year in which such items are actually sold and disposed off. Decided against the assessee. Dis-allowance of expenditure in relation to dividend income(exempt) Held that - The assessee themselves have disallowed a part of the expenses. The Assessing officer should examine whether this disallowance offered by the Assessee themselves is reasonable and if not explain why it is not so. In this view of the matter it is remitted back to the file of the AO to rework the disallowance u/s 14A on a reasonable manner. Partly allowed in favor of assessee for statistical purposes. Prior period expenses - expenses pertained to discount crystallized during the year Held that - Where the deduction is obviously a permissible deduction then the department should not dispute as to the year in which deduction should be allowed. The issue is covered in favour of assessee by the decision of the Tribunal in assessee s own case for the earlier A.Y.s Depreciation on ERP software Held that - Computers including Computer software is entitled to depreciation at 60%. It cannot be considered as intangible assets eligible for depreciation @25%. Decided in favor of the assessee. Amount transferred from special reserve and set off against the depreciation in the Books Held that - The assessee followed the accounting practice of transferring proportionate amount from this Special Reserve and setting off of book depreciation for several years .The set off of special reserve against book depreciation donot affect the income. Also as the amount was received in 1992 therefore the same cannot be treated income of assessee in this year. This was only a mere book entry which was set off against depreciation. Decided in favor of the assessee. Additional depreciation on new plant and machinery installed. Held that - Grant of depreciation and additional depreciation is mandatory, whether claimed by the Assessee or not. Omission to claim depreciation in the return, will not disentitled the assessee to claim additional depreciation to which they are statutorily entitled to. Decided in favor of the assessee.

Summary

Issues Involved:
1. Disallowance of provision made for obsolete stores/spares.
2. Disallowance under Section 14A read with Rule 8D.
3. Deduction of prior period expenses.
4. Depreciation on buildings.
5. Deduction for loss on sale of stores/spares.
6. Depreciation rate applicable to software-ERP system.
7. Addition of amount transferred from special reserve.
8. Grant of additional depreciation on new plant and machinery.

Issue-wise Detailed Analysis:

1. Disallowance of provision made for obsolete stores/spares:
The assessee contested the disallowance of Rs. 35,40,882 for stores and spares and the addition of Rs. 16,37,758 provision. The ITAT upheld the CIT(A)'s decision, confirming the disallowance of the provision but allowing the deduction for the actual sale of stores/spares, in line with the precedent set in the assessee's own case for AY 1997-98. The assessee is permitted to claim the deduction in the year the items are sold, subject to verification by the Assessing Officer (AO).

2. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of Rs. 2,35,68,500 under Section 14A. The CIT(A) followed the Tribunal's decision in Daga Capital Management Ltd., applying Rule 8D retrospectively. However, the jurisdictional High Court in Godrej & Boyce Mfg Co Ltd v DCIT held that Rule 8D is prospective from AY 2008-09. The matter was remitted to the AO to rework the disallowance reasonably, considering the assessee's self-disallowed amount of Rs. 1,37,00,382.

3. Deduction of prior period expenses:
The CIT(A) allowed the deduction of prior period expenses, citing consistency and the Bombay High Court's decision in Nagri Mills Co Ltd. The ITAT upheld this decision, referencing its own ruling for AY 1997-98, where the accounting practice of booking expenses upon receipt of bills/vouchers was accepted.

4. Depreciation on buildings:
The AO disallowed depreciation on a flat used for business purposes, arguing the assessee acquired shares, not the building, and was not the owner. The CIT(A) and ITAT, referencing the assessee's case for AY 1997-98, held that the assessee, by holding specific shares, effectively owned the flat and was entitled to depreciation. The ITAT upheld the CIT(A)'s decision, granting depreciation.

5. Deduction for loss on sale of stores/spares:
As decided in the assessee's appeal, the ITAT confirmed that the assessee is entitled to claim deduction for the actual loss on the sale of stores/spares, not for the provision made. The AO is directed to verify the computation of the loss.

6. Depreciation rate applicable to software-ERP system:
The CIT(A) allowed 60% depreciation on ERP software, following the decision in Tata Consultancy Services and the ITAT's ruling in Datacraft India Ltd. The ITAT confirmed this decision, noting that from AY 2003-04, computer software is entitled to 60% depreciation under the IT Rules.

7. Addition of amount transferred from special reserve:
The CIT(A) deleted the addition of Rs. 18.18 lakhs transferred from a special reserve, used to set off book depreciation. The ITAT upheld this decision, referencing its own ruling for AY 2005-06, where it was held that such set-offs do not affect income and the amount received in 1992 cannot be treated as income in the current year.

8. Grant of additional depreciation on new plant and machinery:
The CIT(A) allowed additional depreciation of Rs. 26,96,923 on new plant and machinery, despite the claim not being made in the return of income. The ITAT confirmed that depreciation is mandatory and can be claimed before the CIT(A) if not claimed in the return. The AO is directed to verify compliance and correctness of the computation.

Conclusion:
The ITAT partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on all issues. The order was pronounced on May 31, 2011.