2017 (5) TMI 1685 - AT - Income Tax

Additional depreciation u/s.32(1)(iia) - disallowance of claim as no increase in the installed capacity during the previous year to the extent of 25% as required u/s.32(i)(iia) to allow the additional depreciation - whether no solid backing has been provided to substantiate its claim for additional depreciation ? - HELD THAT - AO brushed aside the Certificate issued by Chartered Engineer without verifying the facts of the case. If the AO is having some reservations regarding the capacity installation and for admission of the Chartered Engineers Certificate as an evidence, he should have examined the Chartered Engineer Certificate regarding the increase in capacity as per the provisions of the Income Tax Act before brushing aside the Chartered Engineers Certificate. The other alternative available for the AO is to make a personal visit along with Chartered Engineer and examine the correctness of increase in the installed capacity or refer the matter to DVO. Instead, the AO simply relied on the annual accounts in spite of the fact that the assessee has explained that the assessee it is engaged in manufacturing, the machinery which is unique to each customers custom built non-homogenous product and non-repetitive in nature which makes the measure of installed capacity as a subjective affair. CIT(A) made the personal visit to the factory and had discussed with reference to the measurement of the installed capacity on the basis of material removal ratio and given a finding that increase in capacity as percentage w.r.t. the earlier year is above 25%. For a query from the bench, the Ld.DR replied that the there was an increase in production more than 25% after installation of the plant and machinery and there were substantial increase in power consumption and other related items of productions. Considering totality of the facts that the CIT(A) has given clear analysis of measurement and made personal visit and given a finding that the increase in capacity as percentage is more than 25%. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of additional depreciation under Section 32(1)(iia).
2. Lack of solid backing to substantiate the claim for additional depreciation.
3. Absence of Certificate under Rule 5A in Form 3AA.
4. Consideration of production capacity elements (license capacity, installed capacity, and utilized capacity).
5. Verification by a Chartered Engineer.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Additional Depreciation under Section 32(1)(iia):
The assessee claimed additional depreciation for AYs 2003-04 and 2004-05, which was disallowed by the AO due to the absence of evidence showing a 25% increase in installed capacity. The matter was previously remitted by ITAT to the AO to reconsider with any additional evidence. The assessee submitted a Chartered Engineer’s Report, which the AO dismissed as a postmortem report. The CIT(A) allowed the appeal, citing a detailed analysis of Material Removal Ratio (MRR) and a personal visit to verify the increase in installed capacity. The ITAT upheld the CIT(A)’s decision, confirming the substantial increase in capacity and dismissing the Revenue’s appeal.

2. Lack of Solid Backing to Substantiate the Claim for Additional Depreciation:
The AO initially disallowed the claim due to insufficient evidence of a 25% increase in installed capacity. The ITAT noted the substantial increase in machinery value, power consumption, and manpower, suggesting a probable increase in capacity. The CIT(A) later confirmed the increase based on MRR calculations and a personal visit, supporting the claim for additional depreciation.

3. Absence of Certificate under Rule 5A in Form 3AA:
The AO highlighted the absence of a Certificate under Rule 5A in Form 3AA signed by an authorized person. The ITAT and CIT(A) focused on the substantive evidence of capacity increase rather than the procedural lapse, considering the Chartered Engineer’s Report and other supporting documents.

4. Consideration of Production Capacity Elements (License Capacity, Installed Capacity, and Utilized Capacity):
The AO relied on the annual report showing no change in installed capacity. The ITAT emphasized the increase in plant and machinery, suggesting a probable increase in installed capacity. The CIT(A) provided a detailed analysis of MRR, confirming a capacity increase exceeding 25%, thus supporting the claim for additional depreciation.

5. Verification by a Chartered Engineer:
The AO dismissed the Chartered Engineer’s Report as postmortem and unreliable. The CIT(A) verified the report through a personal visit and detailed analysis, confirming the capacity increase. The ITAT upheld this verification, dismissing the Revenue’s appeal.

Conclusion:
The ITAT upheld the CIT(A)’s decision to allow additional depreciation based on substantial evidence of increased capacity, detailed analysis of MRR, and personal verification. The Revenue’s appeals for AYs 2003-04 and 2004-05 were dismissed.