2018 (9) TMI 1791 - AT - Income Tax

Benefit of deduction u/s 80IC as allowable on profits enhanced by the disallowance made u/s 32 - enhancement of the profits of the eligible business - Held that - Bare perusal of the operative part of the Circular No.37/2016 dated 02.11.2016 issued by the CBDT goes to prove that disallowance made by the assessee u/s 32 relating to business activity against which deductions have been claimed under Chapter VI-A, as in the instant case, results in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on profits so enhanced by the disallowance. The claim of depreciation made by the assessee company is allowable deduction and as such, the benefit of deduction u/s 80IC is allowable on profits enhanced by the disallowance made u/s 32 and in these circumstances, the claim of depreciation is revenue neutral. So far as question of treating the refund of excise duty as part of the cost is concerned, it is the case of the assessee that the entire cost has been paid by the assessee for plant & machinery and as such, it cannot be reduced from the cost of asset. Assessee relied upon order passed by CIT (A) dated 15.07.2016 in assessee s own case for AYs 2012-13 & 2013-14 wherein excise duty refund has not been treated in the form of capital subsidy or grant which can be reduced from the cost of assets. Since findings returned by the CIT (A) are based upon the decision rendered in CIT vs. Meghalaya Steels Ltd. (2016 (3) TMI 375 - SUPREME COURT) we are of the considered view that the excise refund is in the nature of revenue receipt forming part of profits and gains arising from the business and as such cannot be reduced from the cost of plant & machinery. So, the findings returned by CIT (A) on this issue are confirmed. AO as well as CIT (A) have erred in making addition by disallowing the claim of depreciation of the asset made u/s 32 which would further entitle to the assessee the benefit of deduction u/s 80IC on profits enhanced by such disallowances made u/s 32 of the Act. Consequently, appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of Depreciation without search material
2. Compliance with ICAI recommendations and Accounting Standards
3. Disallowance of excess depreciation claim
4. Availability of statutory deduction u/s 80IC on disallowed depreciation
5. Treatment of excise refund in cost calculation

Issue 1: Disallowance of Depreciation without search material
The appellant contested the disallowance of depreciation made under section 153A without any search material found during the search by the Assessing Officer (AO). The appellant argued that such disallowance is not permissible in law. The appellant also highlighted compliance with ICAI recommendations for recording Excise Refunds in the books of accounts and following the Accounting Standard on "Deferred Government Grant."

Issue 2: Disallowance of excess depreciation claim
The appellant declared a net loss in business and claimed depreciation under section 44AB. The AO disallowed the excess depreciation claim made by the appellant, amounting to a significant sum, by recomputing the claim under section 32(1) of the Income-tax Act. The AO held that the Excise Refunds used by the appellant were not part of Government grants.

Issue 3: Availability of statutory deduction u/s 80IC on disallowed depreciation
The appellant sought to raise additional grounds challenging the availability of the benefit of deduction under section 80IC on the additional income arising from the disallowance of the depreciation claim. The appellant argued that the claim of depreciation is revenue neutral, citing a CBDT Circular supporting their position.

Issue 4: Treatment of excise refund in cost calculation
The dispute arose regarding the treatment of the excise refund in the cost calculation of assets. The appellant contended that the entire cost of assets was paid by them and should not be reduced from the cost of the asset. The Tribunal upheld the appellant's position, stating that the excise refund is a revenue receipt forming part of profits and gains from the business, and thus cannot be deducted from the cost of plant and machinery.

In conclusion, the Tribunal partly allowed the appeal, stating that the disallowance of depreciation made by the AO was incorrect. The Tribunal held that the appellant is entitled to the benefit of deduction under section 80IC on profits enhanced by such disallowances. The Tribunal confirmed that the excise refund should not be reduced from the cost of the asset.