2015 (3) TMI 234 - AT - Income Tax

Disallowance of depreciation - Revaluation of stock - Method of calculation - Held that - The assessee company having followed consistent policy of claiming of depreciation on loose tools every year below ₹ 10,000/- by charging to P&L account and the same is allowable as deduction. In the assessment year under consideration the assessee quantified the total loose tools at ₹ 3,30,09,993/-. Out of this, the tools which cannot be traceable or lost, which works out to ₹ 95,65,385/- and the same was charged to P&L account. Accordingly, the ld AR pleaded before us that this method has been following consistently and it is not claiming the deprecation rather revalued the stock at the end of each year and it has followed the same method of valuing the stock at market price or cost whichever is less as the loose tools are stock in-trade. In our considered opinion the method followed by the assessee is correct considering the actual stock of loose tools as stock-in-trade, which is acceptable method in accordance with accounting Policies. Accordingly, we do not find any reason to interfere with the order of the CIT(A), which is confirmed. - Decided against Revenue.

Summary

Issues:
1. Allowance of depreciation at 30% on loose tools.

Analysis:
The appeal by the revenue challenged the order of the CIT (A) for the AY 2005-06 regarding the allowance of depreciation at 30% on loose tools. The AO disallowed the claim, stating that loose tools were capital in nature but with a short period of use. The AO argued that since loose tools were grouped under 'inventories', they did not qualify for depreciation at the rates prescribed by the Rules. The AO allowed only 15% depreciation, disallowing the excess claim of Rs. 47,82,693. On appeal, the CIT(A) accepted the treatment adopted by the assessee, who revalued the loose tools annually and claimed a loss at 30% of the book value. The CIT(A) observed that loose tools were not fixed assets and could not be categorized as plant and machinery. Therefore, the CIT(A) deleted the addition made by the AO, leading to the revenue's appeal before the ITAT.

The revenue contended that there was no provision under the IT Rules to allow depreciation at 30% on loose tools, advocating for the 15% rate allowed. Conversely, the assessee argued that they did not claim depreciation but revalued the loose tools annually, charging 1/3rd of the value to the P&L account. The assessee consistently followed this method without claiming depreciation year to year. The ITAT noted that the assessee's policy of valuing loose tools as stock-in-trade and revaluing them at market price or cost, whichever is lower, was an acceptable accounting practice. The ITAT upheld the CIT(A)'s decision, dismissing the revenue's appeal.

In conclusion, the ITAT dismissed the revenue's appeal, affirming the CIT(A)'s decision to allow the assessee's treatment of revaluing loose tools annually without claiming depreciation, as it was in line with accepted accounting practices and consistent with the assessee's method of valuing stock as stock-in-trade.