2013 (9) TMI 961 - HC - Income Tax

Depreciation on spare parts u/s 32 of the Income tax act Whether spares can be capitalized and depreciation claimed on it even when they are not used Held that - Accounts were maintained as per the accounting standard II issued by the Institute of Chartered Accountants of India, and the said standard is mandatory for all the companies. Hence, the assessee has capitalized the value of spare parts along with the equipments. The spare parts were supplied along with the equipments to keep the same in workable conditions. It may be mentioned that the spare parts cannot be utilized independently and the same will have to be used along with the equipments. When the depreciation is allowed on the equipments, then it is also allowable on its spare parts Decided against the Revenue. Addition towards short provision of interest on Government loan for Financial Year 2001-02 and towards short provision of DA arrears of employees Held that - Section 43B is not applicable to the interest on government loans and for DA arrears of employees. If the liability had finalized in the year under consideration, then the same would be allowed. The short fall in the provision was pointed out by the AG Auditors, so the A.O. made an addition - But fact remains that assessee has filed the revised return - Interest if any earned on the loan, the same will go to the State and it is the duty of the assessee to return it to the State as per G.O. issued in 1976 as well as terms and conditions of the loan Decided against the Revenue.

Summary

Issues:
1. Interpretation of Section 43-B of the Income Tax Act regarding interest on unsecured loan granted by the Government.
2. Capitalization of spares and claiming depreciation on them even if not used, under Section 32.
3. Justification of Income Tax Appellate Tribunal in deleting additions towards short provision of interest on Government loan and DA arrears of employees.

Interpretation of Section 43-B - Interest on Unsecured Loan:
The case involved a dispute over the applicability of Section 43-B of the Income Tax Act to the interest on an unsecured loan granted by the Government. The tribunal had deleted an addition made by the Assessing Officer, and the High Court upheld this decision. The court found that the money was kept in a current account where no interest could be earned, thus no tax liability arose. The court concluded that the impugned order of the tribunal on this issue was justified.

Capitalization of Spares and Depreciation Claim:
The department contested the allowance of depreciation on spare parts purchased for equipment used in electricity generation. The Assessing Officer disallowed the claim, which was later overturned by the appellate authorities. The court noted that the spare parts were essential for the functioning of the equipment and were capitalized as per accounting standards. Since the spare parts were integral to the equipment and depreciation was allowed on the equipment, the court upheld the tribunal's decision to allow depreciation on the spare parts as well.

Deletion of Additions for Short Provision of Interest and DA Arrears:
The final issue concerned the deletion of additions towards short provision of interest on a government loan and DA arrears of employees by the Income Tax Appellate Tribunal. The court analyzed Section 43-B of the Income Tax Act, which specifies deductions only on actual payment. The court found that this section did not apply to the interest on government loans or DA arrears. The court noted that the liability had been finalized in the relevant year and that the appellate authorities had rightly allowed the claim of the assessee. The court upheld the tribunal's decision and ruled in favor of the assessee against the department.

In conclusion, the High Court dismissed the appeal filed by the department, upholding the decisions of the Income Tax Appellate Tribunal on all the substantial questions of law raised in the case. The court found in favor of the assessee on the interpretation of Section 43-B, capitalization of spares, and the deletion of additions for short provision of interest and DA arrears.