2015 (1) TMI 701 - HC - Income Tax

Depreciation disallowed - interest expenditure on unpaid purchase consideration - AO invoked the Explanation - 3 of Section 43(1) - Tribunal deleted addition holding that claim of depreciation on enhanced value of assets by the assessee was not with an intention to reduce tax liability - Held that - It can be noted from the record that at the time of transfer of the assets, the assessee had no income for it to reduce its tax liabilities by way of such transfer, and therefore, both the CIT A and the Tribunal had rightly concluded that the Assessing Officer was in error in invoking Explanation 3 to Section 43 for determining actual cost in the said deal. Thus no mistake in CIT A as well as Tribunal in concluding that Explanation 3 to Section 43 of the Act was not required to be invoked. The first issue need no consideration therefore as no substantial question of law has arisen. Decided against revenue. For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset.The Tribunal has relied upon a decision of the Apex Court in the case of TRF Ltd. Vs. CIT reported in (2010 (2) TMI 211 - SUPREME COURT ) and observed that suitable test is required to be applied to examine as to whether the said bad debts have been actually written off as irrecoverable in the account books or not. We are in complete agreement with the reasonings adopted by the Tribunal and do not see any reason for interference. In the premises aforesaid, no substantial question of law requires adjudication afresh. Appeals stand dismissed accordingly. - Decided against revenue.

Summary

Issues:
- Disallowance of depreciation on enhanced value of assets
- Disallowance of interest expenditure on unpaid purchase consideration

Analysis:
1. Depreciation Disallowance: The appellant challenged the disallowance of depreciation on enhanced asset value by the Assessing Officer. The company acquired a business at a slump price, and the AO disallowed excess depreciation due to the assets' higher book value. The CIT(A) allowed the appeal, stating that lower depreciation did not evade tax liability. The revenue appealed to the Tribunal, which affirmed the CIT(A)'s decision. The Tribunal directed the AO to verify bad debts claimed. The High Court held that Explanation-3 of Section 43(1) could not be invoked as the transfer did not aim to reduce tax liability. The Court cited a previous decision and concluded that no substantial question of law arose.

2. Interest Expenditure Disallowance: The appellant contested the disallowance of interest expenditure on unpaid purchase consideration. The Tribunal relied on a Supreme Court decision to assess if bad debts were written off. The High Court agreed with the Tribunal's reasoning, stating that no interference was needed. The Court dismissed the appeals, as no substantial question of law required fresh adjudication based on the provided facts and legal precedents.

Overall, the High Court upheld the Tribunal's decisions on both issues, emphasizing that the appellant's contentions did not warrant consideration. The judgments were based on legal provisions, previous court decisions, and factual findings, ensuring a comprehensive analysis of the tax matters at hand.