2013 (1) TMI 370 - AT - Income Tax

Jurisdiction power u/s 263 by CIT(A) - disallowing depreciation granted by the A.O. consequent to R&D expenses being assessed as being capital in nature - Held that - The assessee had claimed this expenditure as revenue expenditure however, the A.O. added it being treated this expenditure as capital expenditure on which depreciation @ 25% was allowed. The appellant has carried this matter before the CIT(A), which is pending. Thus, the order of the A.O. had been merged with CIT(A). Therefore, CIT does not have any jurisdiction to consider this aspect. The ld. A.O. has inquired and gone through the details of expenses which has been found by him as enduring nature on which even depreciation @ 25% has been allowed by him. Therefore, it is tantamount to change of opinion. The addition made in original order by A.O. had been disputed by the assessee before the CIT(A). The order of A.O. had been merged with CIT(A) on these issues. Thus, we set aside the order of CIT-III, Baroda. It is clarified that we have not expressed any view on nature of expenses whether it is capital or revenue and also whether depreciation is allowable or not. Therefore, the lower authorities are free to take decision as per law.

Summary

Issues:
1. Disallowance of depreciation on Research & Development expenses
2. Disallowance of depreciation on Non-factory building

Analysis:

Issue 1: Disallowance of depreciation on Research & Development expenses
The appellant contested the disallowance of depreciation amounting to Rs.1,80,58,339/- on Research & Development expenses claimed as revenue expenditure. The Assessing Officer (A.O.) had initially allowed depreciation @ 25% on these expenses, considering them as capital in nature due to enduring benefit. The appellant argued that no asset was generated from these expenses, thus they should be treated as revenue expenditure. The CIT-III, Baroda directed the A.O. to withdraw the depreciation, stating that no asset existed for depreciation to be allowed. The appellant challenged this decision, asserting that the A.O.'s order had merged with the CIT(A) and the CIT-III did not have jurisdiction to reconsider the matter. The Tribunal held that the A.O. had already considered the nature of expenses and allowed depreciation, making the CIT-III's direction a change of opinion. The Tribunal set aside the CIT-III's order, leaving the decision on the nature of expenses and depreciation allowance to the lower authorities.

Issue 2: Disallowance of depreciation on Non-factory building
The appellant also contested the disallowance of depreciation on a Non-factory building, arguing that the A.O. had allowed depreciation even after the CIT-III's order under section 263. The Revenue argued that depreciation cannot be claimed on assets that do not exist. The Tribunal noted that the A.O. had allowed depreciation without proper inquiry, and the CIT-III's direction was considered a change of opinion. Consequently, the Tribunal set aside the CIT-III's order, allowing the appellant's appeal on this issue.

In conclusion, the Tribunal allowed the assessee's appeal, emphasizing that it had not expressed any view on whether the expenses were capital or revenue in nature, or on the allowance of depreciation. The lower authorities were granted the freedom to make decisions in accordance with the law, highlighting the importance of proper inquiry and avoiding changes of opinion in such matters.