2017 (11) TMI 1971 - AT - Income Tax

Higher rate of depreciation on Enclosed Withering Trough Machine - Scope of functional test - this is an energy-saving device and a pollution controlling equipment - AO was of the view that these machines are called Withering Trough Machinery and are required in all tea making factories and are integral part of the factories - HELD THAT - Enclosed Withering Trough Machines , is not comparable with any of the energy-saving devices listed in the New Appendix-I to the Income Tax Rules, 1962. The assessee further claims that Enclosed Withering Trough Machines , is pollution control equipment, but he has not specified as to under which item of the New Appendix-I to the Income Tax Rules, 1962, this equipment falls.This claim on the ground that the functional test satisfies the requirement is also to be rejected. Hence we hold that the assessee failed to substantiate his claim that Enclosing Withering Trough Machine is an energy-saving device or pollution control equipment , which is entitled to higher rate of depreciation. Just because the Assessing Officer had not disturbed this claim of the assessee in the Assessment Year 2012-12, this claim cannot be allowed. The findings in those cases are that the machines therein fall within this category. We have given a factual finding otherwise. Before us, the assessee has not advanced any arguments on its claim for allowing this expenditure as revenue expenditure. We find that this so called alternative claim is a contradictory claim. The argument is that a machine is fabricated, and it is entitled to depreciation. This means that it is capital expenditure. Just because higher rate of depreciation is not allowed on an asset, it does not lead to a conclusion that the expenditure incurred for acquiring an asset is revenue expenditure. This is an untenable claim. In the result, we uphold the findings of the Assessing Officer on this issue and reverse the order of the ld. CIT(A). Allowability of depreciation on good-will - claim for allowance of depreciation on the ground that it had acquired intangible assets through this conveyance deed - claim was not made by the assessee in the return of income and was made before the ld. CIT(A) - HELD THAT - When a registered conveyance deed has been entered into between the two parties and the cost of each asset purchased and sold is specified in that particular deed, then it cannot be altered unilaterally by one party at its convenience. It is not open for the assessee to reduce the cost of land and plantation and reallocate such reduction in cost of tangible fixed asset to an intangible asset and thereafter claim depreciation. Cost of purchase of land and plantation cannot be reduced. The assessee has not filed details as to the cost of which asset has been reduced, so as to enable it to create a new asset called intangible asset/goodwill and thereafter claim depreciation on such asset, for which there is no cost of purchase. All the papers justifying the arriving at of the value of ₹ 325 Lakhs, as the cost of intangible assets are self-serving documents. The assessee has neither purchased nor has the seller sold any intangible asset in this case. The assessee s claim that its request to the seller to make such an allocation was rejected by the seller. The vendors were very clear that no intangible property of their is being sold to the company. What was sold intangible property - claim made by the assessee that it incurred the cost to purchase intangible asset is factually incorrect and false. This is a wrong and unjustified claim. It is an indirect way of claiming depreciation on land and plantation which is patently wrong and misleading. Hence, the claim of the depreciation on such intangible asset is devoid of merit. MAT applicability - Whether Section 115JB of the Act is applicable only when there is no positive total income for the assessee? - HELD THAT - On a plain reading of this section 115 JB, we are of the considered opinion that the same is attracted whenever the book profit as calculated under this Section is in excess of the income computed under the regular provisions of the Act. There is no requirement that the normal profit computed under the act should be a positive figure and that should be payable on the same, in order to attract the special provisions under section 115 JB of the Act. No such requirement is mentioned in this Section. In fact such introspection would defeat the very objection of introduction of this Section.Thus, we uphold the contention of the revenue and allow this ground of the revenue. Deduction u/s. 80IE which had not been claimed in the return nor any Audit Report has been filed in that regard - HELD THAT - FAA has not admitted this claim but has held that the assessing officer should have granted the deduction under section 80 IE equal to 100 percent of the profits of Dullabcherra Tea Estate, as the fact that the assessee is eligible for deduction under section 80 IE is not in dispute. How the ld. CIT(A) has come to a conclusion that the fact of the assessee being eligible for claim of deduction u/s 80-IE of the Act and that this fact is not in dispute is not known. There are no basic facts record and no authority has examined the facts and have come to a conclusion that the statutory requirements for claim of deduction u/s 80-IE have been complied by the assessee. In our view, this finding is perverse. The assessing officer nor the ld. CIT(A), have examined the basic facts or have come to the conclusion that the assessee is eligible for deduction under section 80 IE equal to 100 per cent of the profits for the Dullabcherra Tea Estate. Without doing such an exercise the ld. CIT(A), has directed grant of this deduction. This is bad in law. Interest subsidy received - capital receipt or revenue received - assessee had acquired Dullabcherra Tea Estate and as claimed that the unit Dullabcherra Tea Estate received certain interest subsidy, which pertains to a period prior to the acquisition of Dullabcherra Tea Estate - CIT(A), had held that this is interest subsidy and hence a capital receipt - HELD THAT - This finding of the ld. CIT(A), is not correct. The interest subsidy in question pertains to a period prior to the acquisition of Dullabcherra Tea Estate by the assessee. The ld. Counsel for the assessee submits that, if the claim for refund of this amount of interest subsidy received is made by the former owners of Dullabcherra Tea Estate, then this amount needs to be returned, as it was not factored in computing the purchase price of the estate. In our view, this receipt had accrued during the year and the assessee got the right to receive the interest in this year only, as it is a successor of Dullabcherra Tea Estate. The nature of receipt is not interest subsidy in the hands of the assessee. There is no claim from the vendors of Dullabcherra Teas Estate till date on the assessee for return of this amount to them. Hence the receipt is in the revenue field and it has accrued and arisen during the year. Thus this ground of the revenue is allowed. Allowability of deduction u/s 80 IE - assessee had not claimed deduction under section 80 IE, for this year in the return of income as the gross total income was negative - HELD THAT - On profits from Dullabcherra Tea Estate, or not has to be examined in the initial assessment year. Initial Assessment Year has been defined for the purpose of this section as means the Assessment Year relevant to the previous year in which the undertaking begins the manufacturing or produces articles or things or completes substantial expansions. Ten consecutive years commence from this initial Assessment Year. The assessee claims that it completed substantial expansion during the Financial Year 2007-08, relevant to the Assessment Year 2008-09. This claim has not been examined by any authority.The assessing officer has not examined this issue in any of the earlier years. The deduction in the 3rd year has been allowed as if the entire facts have been considered in the earlier years. When no authority has verified the fact as to whether the assessee has complied with the statutory conditions laid down u/s 80IE of the Act, in any of the years, we cannot understand as to how the Assessing Officer decided to allow the claim for the first time in the 3rd year.Assessing Officer has failed to conduct a proper enquiry. CIT(A) has also failed in his duty on this issue. Thus we set aside this issue to the file of the AO, for fresh adjudication, in accordance with law. The Assessing Officer is directed to examine whether the conditions laid down u/s 80IE of the Act, have complied with by the assessee company in the Initial Year and then only come to a conclusion on this issue. We draw strength for this proposition, from the judgement of the Hon ble Delhi High Court in the case of CIT vs. Delhi Patra Prakashan Ltd 2013 (6) TMI 70 - DELHI HIGH COURT . Disallowance of club expenses - HELD THAT - What is to be seen, is as to whether these expenses are incurred for official purposes or personal purposes. If it is incurred for personal purpose, then the same has to be disallowed. Hence this matter is set aside to the file of the assessing officer for fresh adjudication, in accordance with law, after examining the vouchers of club expenses.In the result, this ground of the assessee is allowed for statistical purposes. Disallowance u/s 14A - HELD THAT - As decided in WINSOME TEXTILE INDUSTRIES LTD. 2009 (8) TMI 220 - PUNJAB AND HARYANA HIGH COURT disallowance made u/s 14A, cannot exceed the dividend earned. Keeping in this position of law, we uphold the contention of the assessee and delete this addition made under section 14 A, to the extent of ₹ 63131/-. DMAT charges of ₹ 1433/-, is disallowed by the Assessing Officer twice. Hence the disallowance is deleted as it was a double disallowance.

Summary

Issues Involved:
1. Higher depreciation rate on "Enclosed Withering Trough Machine"
2. Depreciation on goodwill
3. Applicability of MAT (Minimum Alternate Tax) under Section 115JB
4. Deduction under Section 80IE
5. Classification of interest subsidy as capital or revenue receipt
6. Disallowance under Section 14A
7. Allowability of club expenses
8. Initial depreciation under Section 32(1)(iia)
9. Computation of book profits under Section 115JB

Detailed Analysis:

1. Higher Depreciation Rate on "Enclosed Withering Trough Machine":
The assessee claimed higher depreciation on "Enclosed Withering Trough Machine" as an energy-saving device or pollution control equipment. The Assessing Officer (AO) rejected this claim, stating that these machines are integral to tea factories and not specifically listed as energy-saving devices. The CIT(A) allowed the claim, but the Tribunal reversed this decision, stating that there was no evidence to support the claim that enclosing the withering trough machines converted them into energy-saving or pollution control equipment. The Tribunal upheld the AO's decision to allow depreciation at the normal rate.

2. Depreciation on Goodwill:
The assessee claimed depreciation on goodwill, which was created by reallocating the purchase cost of "Dullabhcherra Tea Estate." The AO rejected this claim, and the CIT(A) allowed it. The Tribunal reversed the CIT(A)'s decision, stating that no intangible asset was sold or purchased as per the conveyance deed. The Tribunal held that the reallocation of cost to create an intangible asset was unjustified and upheld the AO's decision.

3. Applicability of MAT under Section 115JB:
The assessee argued that MAT under Section 115JB should apply only when there is positive income. The Tribunal rejected this argument, stating that Section 115JB is applicable whenever the book profit exceeds the income computed under regular provisions, irrespective of whether the normal profit is positive or not.

4. Deduction under Section 80IE:
The assessee claimed deduction under Section 80IE, which was not claimed in the return of income nor supported by an audit report. The Tribunal held that the assessee should have made the claim in the return or by filing a revised return. The Tribunal set aside the issue to the AO for fresh adjudication, directing the AO to examine whether the statutory conditions for deduction under Section 80IE were met in the initial assessment year.

5. Classification of Interest Subsidy as Capital or Revenue Receipt:
The assessee claimed that interest subsidy received for a period prior to acquiring "Dullabhcherra Tea Estate" was a capital receipt. The Tribunal disagreed, stating that the interest subsidy accrued during the year and was a revenue receipt. The Tribunal allowed the revenue's ground on this issue.

6. Disallowance under Section 14A:
The AO made a disallowance under Section 14A for expenses incurred to earn exempt income. The Tribunal found that the AO did not record satisfaction that the assessee's claim of not incurring any expenses was incorrect. The Tribunal deleted the disallowance, holding that it cannot exceed the dividend earned and that DMAT charges were disallowed twice.

7. Allowability of Club Expenses:
The assessee claimed club expenses as business expenses. The Tribunal remanded the issue to the AO to examine whether the expenses were incurred for official or personal purposes, directing the AO to allow the expenses if they were for official purposes.

8. Initial Depreciation under Section 32(1)(iia):
The assessee claimed initial depreciation on new plant and machinery. The Tribunal found that the CIT(A) allowed initial depreciation at 10% as the machinery was used for less than 180 days. The Tribunal dismissed the revenue's ground on this issue, stating that the CIT(A)'s decision was correct.

9. Computation of Book Profits under Section 115JB:
The Tribunal upheld the revenue's contention that Section 115JB applies whenever the book profit exceeds the income computed under regular provisions. The Tribunal allowed the revenue's ground on this issue and dismissed the corresponding ground of the assessee.

Conclusion:
The Tribunal's judgment comprehensively addressed each issue, upholding the AO's decisions on higher depreciation rate, depreciation on goodwill, and classification of interest subsidy, while remanding the issue of deduction under Section 80IE for fresh adjudication. The Tribunal also provided clarity on the applicability of MAT under Section 115JB and the computation of book profits, ensuring that the legal principles were correctly applied.