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Issues:
- Disallowance of depreciation on preoperative expenses allocated to fixed assets. - Nature of expenses - revenue or capital. Analysis: 1. Depreciation Disallowance: The appeal challenged the disallowance of depreciation amounting to Rs. 2,70,744 on preoperative expenses allocated to fixed assets. The contention was that these expenses were incurred for setting up company assets and should be linked to installation of various assets. However, the Assessing Officer and CIT(A) held these expenses as revenue in nature, not linked to assets post commencement of business. The CIT(A) emphasized that the expenses lacked substantiation for being incurred for fixed asset acquisition, which is a prerequisite under Section 32 of the Income-tax Act, 1961 for depreciation deduction. 2. Nature of Expenses: The assessee argued that all activities before business commencement were focused on setting up fixed assets for manufacturing food products. The expenses were categorized under different heads like administrative expenses, material consumption, rent, and salaries. The assessee justified the capitalization of expenses based on AS-10 guidelines by ICAI, which include costs necessary to bring assets into working condition. The proportionate allocation of expenses was deemed reasonable by the assessee. 3. Legal Precedents: The Tribunal referred to legal precedents to determine the nature of expenses. In the case of Food Specialties Limited, it was established that expenses during trial runs were capital in nature. Similarly, the case of Lucas-TVS Limited (No.2) highlighted that expenses necessary to bring assets into existence and working condition should be included in asset cost. The Tribunal concluded that the expenses incurred by the assessee should be capitalized, following the principles established in these cases. 4. Judgment: Considering the facts and legal precedents, the Tribunal allowed the appeal, stating that the expenses incurred by the assessee should be capitalized. The proportionate allocation method used by the assessee was deemed fair and reasonable, leading to the decision in favor of the assessee. The judgment aligned with the principles set in the Food Specialties Limited and Lucas-TVS Limited (No.2) cases, emphasizing the capitalization of expenses related to asset setup. In conclusion, the Tribunal ruled in favor of the assessee, allowing the appeal and directing the capitalization of preoperative expenses allocated to fixed assets based on established legal principles and fair allocation methods.
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