2016 (1) TMI 945 - HC - Income Tax

Depreciation on the de-capitalized assets on the written down value ( WDV ) basis on the block of assets in terms of Section 43(6) (c) - itat allowed the claim - as per revenue some of the assets had been converted into stock-in-trade at nominal value - Held that - As noted by the ITAT this method of de-capitalising assets which have ceased to be of utility has been consistently followed by the Assessee. The Revenue has been unable to demonstrate how the Revenue s interest is adversely affected thereby or if there is any escapement of income from assessment. On the other hand if indeed the profit as a result of subsequent sale of the asset is offered to tax, there cannot be any prejudice to the Revenue. Consequently, this Court finds no reason to disagree with the reasoning or conclusion of the ITAT in this regard and therefore is not inclined to frame question on this issue. - Decided against revenue Revenue recognition in respect of certain types of sales made - Held that - The change in the accounting policy is required to be satisfactorily explained by the Assessee and there has to be a consistency in adopting such a change. It is not the Revenue s case that the above change of accounting policy is not a bona fide. It is consistent with Accounting Standard 9 issued by the Institute of Chartered Accountants of India. The explanation for the change has been furnished by the Assessee as part of its audited accounts. It is pointed out that in subsequent AY the change was recognized and accepted by the Revenue.- Decided against revenue

Summary

Issues:
1. Acceptance of depreciation on de-capitalized assets by ITAT.
2. Revenue recognition in specific sales by the Assessee.

Issue 1: Acceptance of depreciation on de-capitalized assets by ITAT:
The first issue in the judgment revolves around the acceptance by the Income Tax Appellate Tribunal (ITAT) of the Assessee's case for allowing depreciation on de-capitalized assets on the written down value (WDV) basis. The Assessee argued that certain fixed assets, not usable for captive consumption, were discarded from the block of assets for conversion into stock-in-trade. The ITAT highlighted an example where even after de-capitalization of an asset, depreciation on the remaining value was allowed. The Revenue contended that the conditions under Section 43(6)(c) were not met, and depreciation should not be allowed. The Assessee maintained a consistent practice of de-capitalizing assets not in use, transferring them to stock-in-trade, and offering the subsequent profit for taxation. The ITAT found the Assessee's method consistent and beneficial to the Revenue, leading the High Court to agree with the ITAT's conclusion.

Issue 2: Revenue recognition in specific sales by the Assessee:
The second issue pertains to 'revenue recognition' in sales made by the Assessee. The Assessee explained the revenue recognition process in its financial statements, detailing recognition upon dispatch, title endorsement, installation completion, service rendering, and rental basis. A change in accounting policy regarding revenue recognition on sale of goods was highlighted, impacting reported figures. The Revenue sought to add the effect of this change to the profit. The Assessee justified the change, citing compliance with Accounting Standard 9 and providing explanations in audited accounts. The High Court found the change in policy satisfactory, consistent, and in accordance with accounting standards, leading to the dismissal of the appeal as no substantial question of law arose in this regard.

In conclusion, the High Court upheld the ITAT's decision on both issues, emphasizing the consistency and compliance demonstrated by the Assessee in its practices and accounting policies.