2014 (8) TMI 205 - HC - Income Tax

Depreciation on machinery installed in contractors premises acquisition of machinery contrary to contract terms - Held that - In order to claim depreciation under Sec.32, the condition to be satisfied is, the assessee should own wholly or partly the machinery used for the purpose of business or profession. Therefore how the machinery is acquired, whether acquisition of machinery is contrary to the terms of the contract between the parties, is totally irrelevant - Assessee has produced documents showing that he owns the machinery - the Assessing Authority seems to think the assessee has to demonstrate before him in the Income Tax office how this machinery is used in manufacturing the products and the same is not produced - asessee is entitled to depreciation as provided u/s 32 of the Act Decided against Revenue. Nature of asset - Whether the character of the said equipment changes from revenue expenditure to capital asset Held that - The machinery given to doctors for demonstration purposes is also a part of promoting sale of the said machinery - It is only on such demonstration, the assessees goods are accepted in the market Tribunal has rightly recorded that it amounts to revenue expenditure and not capital asset Decided against Revenue.

Summary

Issues:
1. Verification of TDS payment for allowing expenditure under Section 40(a)(i) of the Act.
2. Allowance of depreciation for machinery used in the business of the assessee.
3. Allowability of deduction for quality control tests without TDS deduction.
4. Verification of liability to reimburse expenditure for quality control tests.

Analysis:

Issue 1:
The primary contention was regarding the applicability of Section 40(a)(i) concerning TDS payment verification. The Revenue argued that the provision was substituted in 2004 and was not applicable for assessment years before 2005. However, the court found no substantial difference between the pre and post-amendment provisions, concluding that the benefit was available to the assessee even before the amendment. Therefore, the court ruled in favor of the assessee.

Issue 2:
The dispute centered around the depreciation claim for machinery used in manufacturing pharmaceutical products. The assessee had purchased machinery installed at the contractor's premises. The Revenue contended that the machinery was not used for the assessee's business. However, the Tribunal found that since the goods were recognized as manufactured by the assessee and sold under their brand name, the machinery was indeed used for the business. The court upheld the Tribunal's decision, emphasizing ownership and usage for business purposes as the key factors for depreciation allowance.

Issue 3:
Regarding the deduction for quality control tests without TDS deduction, the Tribunal allowed the deduction, considering the manufacturing agreement between the parties. The court agreed with the Tribunal's finding that the expenditure was revenue in nature and not a capital asset, as it was essential for promoting sales. Therefore, the deduction was deemed allowable as revenue expenditure.

Issue 4:
The Tribunal remanded the matter for fresh consideration by the Assessing Authority regarding the liability to reimburse expenditure for quality control tests. As this issue was not necessary for immediate resolution, the court declined to answer it in the judgment.

In conclusion, the court dismissed the appeals based on the detailed analysis of each issue, ruling in favor of the assessee on multiple grounds related to TDS verification, depreciation allowance, and deduction for quality control tests.