2012 (12) TMI 183 - AT - Income Tax

Depreciation - WDV u/s 43(6) - whether depreciation to be computed on original cost or cost reduced by notional depreciation for the earlier years - held that - It is not in dispute that the provisions do not envisage any notional allowance and the Assessing Officer thus cannot work out such notional allowance and reduce the same from the depreciation claimed. The words actually allowed means actually allowed in the course of assessment. The assessee was not liable to be taxed and hence, no assessments were framed for the earlier years - Decided in favor of assessee. Change in method of accounting - bonafide or not - change from cash basis to accrual basis - interest income - held that - Once the fact is admitted that for the said period, the assessee was not liable to tax, to say that the assessee should not have changed the method of accounting for the said period is ignoring the obvious, namely, the change is based on the advice received from the Consultant to adopt the prescribed accounting standards. - Decided in favor of assessee.

Issues Involved:
1. Computation of depreciation on assets acquired more than 10 years back.
2. Addition of interest income following a change in the method of accounting.
3. Taxability of interest earned on project funds.
4. Deductibility of grants given to cooperative societies.
5. Disallowance of contributions to Employees' Recreation Trust under section 40A(9).
6. Deduction under section 36(1)(viii) for producing milk and milk products.
7. Computation of depreciation in view of retrospective amendment to section 43(6).

Issue-wise Detailed Analysis:

1. Computation of Depreciation on Assets Acquired More Than 10 Years Back:
The Revenue challenged the computation of depreciation on the written down value (WDV) for A.Y. 2003-04, arguing that notional depreciation should be considered for assets acquired over 10 years ago. The Tribunal followed its earlier decision for A.Y. 2003-04, which was upheld by the Hon'ble Gujarat High Court and the Supreme Court, stating that depreciation should be computed on the original cost of the assets as no depreciation was actually allowed in the past. The Tribunal dismissed the Revenue's ground, holding that the WDV means the actual cost to the assessee less depreciation actually allowed.

2. Addition of Interest Income Following a Change in the Method of Accounting:
The AO added interest income of Rs.32,11,90,382/- for A.Y. 2004-05 and Rs.8,35,26,671/- for A.Y. 2005-06, arguing that the assessee switched from cash to mercantile system retrospectively to escape tax. The Tribunal, following its decision for A.Y. 2003-04 and the Hon'ble Gujarat High Court's ruling, held that the change in the method of accounting was bona fide and in line with accounting standards. The Tribunal dismissed the Revenue's ground, stating that the interest income accrued in earlier years when the assessee was non-taxable could not be taxed in the year of receipt.

3. Taxability of Interest Earned on Project Funds:
The assessee argued that interest earned on project funds amounting to Rs.1,22,05,405/- (A.Y. 2004-05) and Rs.1,16,92,827/- (A.Y. 2005-06) should not be taxed as it acted as a nodal agency. The Tribunal, consistent with its earlier decision, held that the interest had accrued to the assessee and dismissed the assessee's grounds.

4. Deductibility of Grants Given to Cooperative Societies:
The assessee claimed deduction for grants given to cooperative societies under section 36(1)(xii). The Tribunal, following its decision for A.Y. 2003-04 and the case of Oil Industry Development Board, restored the matter to the AO for verification of non-refundable grants. The Tribunal allowed the grounds for statistical purposes.

5. Disallowance of Contributions to Employees' Recreation Trust under Section 40A(9):
The Tribunal upheld the disallowance of Rs.2,39,924/- (A.Y. 2004-05) and Rs.4,75,394/- (A.Y. 2005-06) for contributions to Employees' Recreation Trust, consistent with its decision for A.Y. 2003-04, stating that section 40A(9) disallows such contributions unless they fall under sections 36(1)(iv) and (v). The Tribunal dismissed the assessee's grounds.

6. Deduction under Section 36(1)(viii) for Producing Milk and Milk Products:
The Tribunal, consistent with its decisions for A.Y. 2003-04 and A.Y. 2006-07, held that the assessee did not comply with the conditions prescribed under section 36(1)(viii) and dismissed the assessee's ground for A.Y. 2005-06.

7. Computation of Depreciation in View of Retrospective Amendment to Section 43(6):
The Tribunal allowed the assessee's ground for A.Y. 2005-06, holding that notional depreciation could not be considered, and directed the AO to recompute the WDV correctly. The Tribunal allowed the additional ground for A.Y. 2005-06, ensuring the correct WDV computation.

Conclusion:
For A.Ys. 2004-05 and 2005-06, the Tribunal dismissed the Revenue's appeals and partly allowed the assessee's appeals for statistical purposes, restoring certain matters to the AO for reconsideration.

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