2018 (6) TMI 1823 - AT - Income Tax

Disallowance of depreciation on the amount of cost of plant machinery incurred as reimbursement to Gulbrandsen Chemicals Inc., USA - as alleged that the assessee has neither reduced the amount form the cost of asset nor disallowed the depreciation - HELD THAT - We find that the expenditure were pertaining to professional fees for setting-up of the Plant and the travelling cost of the Architects etc. which were incurred by Gulbrandsen Chemicals Inc., USA, and were paid by it on behalf of the appellant to external third parties during the period from 2000 to 2002. We noticed that before the AO that it had set-up its Plants during the period of 2000 to 2002 in India. As per the appellant in this phase, it had very limited organizational and functional resources and therefore Gulbrandsen Chemicals Inc., USA assisted it in Plant set up phase engaging external service providers (such as Plant Consultant, Architect etc.). We hold that any expenditure incurred in relation to creation of a capital asset should be capitalized to the relevant asset. Appellant accordingly it also capitalized the amount of Rs. 1,42,66,483/- spent for setting up of the Plants to the respective plants account in FY 2006-07 when it received debit notes from Gulbrandsen Chemicals Inc., USA for such reimbursement. They made the payment. A.O. has invoked Section 43A on the basis of misconception in as much as receipt was for reimbursement from the company and same was the debit to the company and this aspect is not disputed. On account of aforesaid discussion, we allow the appeal of the appellant and direct the A.O. to allow excess depreciation - We allow this ground of appeal.

Summary

Issues:
1. Disallowance of depreciation amount in reassessment.
2. Disallowance of depreciation claimed on reimbursement amount.
3. Justification for levy of penalty under section 271(1)(c).
4. Disallowance of set off of unabsorbed depreciation/loss.

Analysis:
1. The appellant contested the disallowance of depreciation amount in reassessment, arguing that it was allowed in the original assessment and should not be disallowed merely on a change of opinion. The Tribunal found that the expenditure incurred for setting up a capital asset should be capitalized, as per AS-16. The appellant had capitalized the amount received from Gulbrandsen Chemicals Inc., USA for reimbursement, and the depreciation claimed was in accordance with the law. The Tribunal allowed the appeal and directed the Assessing Officer to allow the excess depreciation claimed.

2. The disallowance of depreciation claimed on the reimbursement amount was challenged by the appellant. The Tribunal noted that the amount received for reimbursement was correctly capitalized by the appellant, and the disallowance was based on a misconception regarding the nature of the transaction. The Tribunal allowed the appeal and directed the Assessing Officer to allow the excess depreciation claimed.

3. The Tribunal addressed the issue of penalty under section 271(1)(c) for filing inaccurate particulars of income. It was argued that the appellant's claim for set off of unabsorbed depreciation/loss, based on previous assessment years, was not inaccurate. The Tribunal found that the initiation of penalty based on this claim was unjustified, and the appellant's appeal in this regard was allowed.

4. The disallowance of set off of unabsorbed depreciation/loss was also contested by the appellant. The Tribunal found that the appellant's actions were in accordance with the law, and the disallowance based on disputed claims before the appellate authorities was unwarranted. The Tribunal allowed the appeal and quashed the initiation of penalty in this respect.

In conclusion, the Tribunal allowed both appeals, directing the Assessing Officer to allow the excess depreciation claimed and rejecting the grounds related to penalty initiation. The judgment highlighted the importance of correctly capitalizing expenditure related to capital assets and upheld the appellant's claims in this regard.