2014 (5) TMI 661 - AT - Income Tax

Calculation of depreciation Adjustment of grants-in-aid received towards cost of asset u/s 43(6) of the Act Held that - Interpreting the issue of depreciation actually allowed in a case where assessee was not taxable under the Income Tax Act till a particular A.Y. in Kandla Port Trust vs. ACIT 2006 (4) TMI 243 - ITAT RAJKOT it has been held that in the case of such previously exempt entity, since there was no liability to tax, there was no occasion to compute the income of such assessee under the provisions of Income Tax Act - the depreciation provided in the books in the years when the income was exempt cannot be treated as the depreciation actually allowed - when the assessee was not required to compute profits and gains of business or profession under the Income Tax Act, mere passing of accounting entry made for depreciation in the books of accounts was not the depreciation actually allowed as there was no liability to tax and hence, no assessment for the period - written down value for the purpose of assessment would be the original cost, less, NIL - the original cost becomes WDV. Assessee was exempt from Income Tax u/s 10(20) up to A.Y. 2002-03 - Explanation-6 to section 43(6) is applicable to the assessee s case - the amount of depreciation provided in the books of accounts up to the previous year relevant to the AY shall be considered as depreciation actually allowed under the Act - the WDV as per the books at the beginning of the A.Y.2003-04 becomes WDV for the purpose of section 43(6) - since Explanation-6 has overriding effect and is clearly applicable to the assessee s case, the entire exercise of re-determining the WDV from year of inception till AY 2002-03 cannot be upheld at all - assessee s contention that WDV at the beginning of A.Y. 2003- 04 in the books of accounts should be considered as WDV for the purpose of Income Tax Act is upheld the AO is directed to verify and allow the depreciation keeping in mind facts and law, specifically the Explanation-6 of Sec.43(6) - the claim of depreciation is to be remitted back to the AO for adjudication Decided in favour of Assessee. Validity of re-opening of assessment Held that - Assessee raised various issues on reopening of the assessment in A.Y. 2003-04 considering that depreciation details were not given fully even as of today so as to consider the depreciation allowable - the reopening of assessment is to be upheld at least for the purpose of determining the depreciation allowable in A.Y. 2003-04, so that WDV for A.Y. 2004-05 can be arrived at - even though assessee has raised certain legal issues on issue of reopening, the reopening for A.Y. 2003-04 is also upheld on the same reasons as in AY 2004-05 Decided in favour of Assessee.

Summary

Issues Involved:
1. Reopening of assessment under section 147.
2. Calculation and adjustment of depreciation under section 43(6).
3. Adjustment of capital grants-in-aid received towards the cost of assets.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment for A.Y. 2003-04. The original assessments for both A.Y. 2003-04 and 2004-05 were completed under section 143(3) accepting the net loss declared by the assessee. However, the A.O. initiated proceedings under section 147 following audit objections. The ITAT upheld the reopening of the assessment for A.Y. 2004-05, and the assessee did not press the issue further. For A.Y. 2003-04, considering the necessity to determine the allowable depreciation, the reopening was upheld. The ITAT emphasized that this decision was specific to the facts of this case and should not be taken as a precedent.

2. Calculation and Adjustment of Depreciation under Section 43(6):
The primary issue revolved around the adjustment of grants-in-aid received towards the cost of assets and the calculation of Written Down Value (WDV) for depreciation purposes. The A.O. and Special Auditor re-determined the WDV from the inception of the assessee, which the ITAT found incorrect. The ITAT highlighted Explanation-6 to section 43(6), which specifies that the WDV as per the books at the beginning of A.Y. 2003-04 should be considered for depreciation purposes. The ITAT directed that the WDV at the beginning of A.Y. 2003-04 should be taken as per the books of accounts, and only the capital grants received specifically for asset creation should be adjusted from the actual cost capitalized during the year.

3. Adjustment of Capital Grants-in-Aid Received Towards the Cost of Assets:
The A.O. and Special Auditor's approach to adjusting capital grants was found to be flawed. The Special Auditor incorrectly considered the entire amount of assets capitalized during the year as capital grants without examining the actual grants received. The ITAT noted that the grants received up to A.Y. 2002-03 should not be considered as the assessee was not taxable during those years. The ITAT rejected the Special Auditor's report and directed the A.O. to verify the capital grants specifically sanctioned for asset creation and adjust them accordingly.

Conclusion:
The appeals were partly allowed for statistical purposes. The ITAT directed the A.O. to:
1. Consider the WDV at the beginning of A.Y. 2003-04 as per the books of accounts for depreciation purposes.
2. Adjust only the capital grants received specifically for asset creation from the actual cost capitalized during the year.
3. Verify and allow the depreciation in accordance with the facts and law, specifically considering Explanation-6 of section 43(6).

The reopening of the assessment for A.Y. 2003-04 was upheld to determine the allowable depreciation, aligning with the decision for A.Y. 2004-05. The ITAT emphasized that this order should not be taken as a precedent for other cases.