2015 (2) TMI 56 - AT - Income Tax

Additional depreciation on plant and machinery - disallowance as appellant was not engaged in manufacture or production of an article or thing as required under Section 32(1)(iia) - Held that - the post amended provision of Section 32(1)(iia) clearly stipulate that there should be manufacture or production of article or thing. The Tribunal in AY 2004-05 had categorically held that the intermediary Bitumen mix is not article or thing manufactured or produced by the assessee, therefore, the order of the Tribunal in assessee s own case for AY 2004-05 is squarely applicable to the instant case. Therefore, we uphold the order of the CIT(A) in upholding the disallowance of additional depreciation as correct and in accordance with law and no interference is called for. - Decided against assessee. Re-computation of normal depreciation u/s 32(1)(ii) with reference to the enhanced value of the assets on which additional depreciation was disallowed in the earlier assessment year - Held that - Under the scheme of the act, depreciation is to be allowed as a percentage of written down value of the assets. Thus, for one year if the claim of depreciation is not allowed then the opening written value of the same assets in the succeeding year to the extent of disallowance gets enhanced. In the instant case, in the earlier assessment years additional depreciation claimed by the assessee was not allowed by the Assessing Officer. The view of the Assessing Officer was confirmed by the ITAT. Since the additional depreciation was disallowed in earlier years to the extent of disallowance the written down value is to be enhanced and the depreciation is to be computed accordingly. This claim of the assessee is reasonable and justified and accordingly we direct the AO to compute normal depreciation u/s 32(I)(II) of the Act with reference to the enhanced value of the assets on which additional depreciation is disallowed in the earlier assessment year. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of additional depreciation on plant and machinery.
2. Re-computation of normal depreciation with reference to enhanced value of assets.

Detailed Analysis:

Issue 1: Disallowance of Additional Depreciation on Plant and Machinery

The primary issue revolves around the disallowance of additional depreciation amounting to Rs. 8,58,60,045 on plant and machinery. The Assessing Officer (AO) disallowed the claim on the grounds that the assessee was not engaged in the "manufacture or production of an article or thing" as required under Section 32(1)(iia) of the Income Tax Act, 1961. The AO's position was that the activity of mixing cement, sand, aggregate, and admixture to form concrete did not qualify as manufacturing or production.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, relying on the Supreme Court's decision in CIT vs. NC Buddhiraja (204 ITR 307) and the Delhi Tribunal's decision in the assessee's own case for AY 2004-05, which held that construction activities do not amount to manufacturing or production of an article or thing.

The assessee contended that the Tribunal's order for AY 2004-05 was not applicable due to the amendment to Section 32(1)(iia) by the Finance Act, 2005, effective from 01.04.2006. However, the Tribunal noted that the amended section still required the engagement in the business of manufacturing or production of an article or thing. The Tribunal found that the intermediary Bitumen mix did not qualify as an article or thing manufactured or produced by the assessee. Consequently, the Tribunal upheld the CIT(A)'s order, rejecting Grounds No. 1, 2.1 to 2.4.

Issue 2: Re-computation of Normal Depreciation with Reference to Enhanced Value of Assets

The second issue pertains to the assessee's plea to recompute normal depreciation under Section 32(1)(ii) of the Act with reference to the enhanced value of assets on which additional depreciation was disallowed in earlier years. The CIT(A) dismissed this plea, stating that the issue was premature as the assessee had appealed against the ITAT's order, and the matter was pending before the High Court. Additionally, the assessee had not raised this issue during the assessment proceedings.

The Tribunal, however, recognized that under the scheme of the Act, depreciation is to be allowed as a percentage of the written down value (WDV) of the assets. If the claim for depreciation is disallowed for one year, the opening WDV for the succeeding year should be enhanced to the extent of the disallowance. The Tribunal directed the AO to compute normal depreciation with reference to the enhanced value of the assets, acknowledging that the claim was reasonable and justified. The Tribunal also noted that the Revenue could take remedial measures if the assessee succeeded in obtaining a favorable judgment from the High Court regarding additional depreciation.

Conclusion:

The Tribunal upheld the disallowance of additional depreciation on the grounds that the assessee's activities did not qualify as manufacturing or production of an article or thing. However, it allowed the re-computation of normal depreciation with reference to the enhanced value of assets, subject to the outcome of the pending High Court appeal. The appeal was thus partly allowed.

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