2016 (12) TMI 42 - AT - Income Tax

Revision u/s 263 - Claim of depreciation on the amount of computers purchased - whether the business of the assessee was set-up during the year under consideration, so as to enable it to claim depreciation? - Held that - The assessee had supplied these computers to its Retail Distributors and also got installed therein requisite software and also carried out trial runs. There may be some debate or discussion on the date of actual user by these Retail Distributors but as far as assessee is concerned, these can be deemed to be put to use the moment these computers and their software were provided by the assessee to its Retail Distributors for online sale of lottery tickets. The assessee had set-up its business during the year under consideration and had also put to use the computers on which depreciation has been claimed on proportionate basis for using the same for less than 180 days and therefore, the claim of the assessee was valid in the eyes of law and facts of this case and therefore, same was rightly allowed by the Ld. AO after examining all the facts in this regard and the same was wrongly denied by the Ld. CIT and therefore his action is reversed. The claim of depreciation is directed to be allowed. Since, we have allowed the claim on merits, the other issue with regard to jurisdictional validity of impugned order passed u/s 263 becomes academic and therefore, we are not going into the same at this stage.

Issues Involved:
1. Whether the Principal CIT erred in setting aside the assessment order passed by the AO on the grounds of erroneous and prejudicial to the interest of the revenue.
2. Whether the Principal CIT was correct in directing the AO to disallow the claim of depreciation on computers.
3. Jurisdictional validity of the order passed under section 263.

Issue-wise Detailed Analysis:

1. Setting Aside the Assessment Order:
The Principal CIT set aside the assessment order passed by the AO, holding it to be erroneous and prejudicial to the interest of the revenue. The CIT argued that the AO allowed depreciation on computers without proper verification of their installation, usage, and the commencement of the business. The CIT contended that the AO did not make specific inquiries or discuss the pre-requisite factors such as the actual use of computers for business during the financial year, details of trial runs, and the commencement of business itself.

2. Disallowance of Depreciation on Computers:
The Principal CIT directed the AO to disallow the claim of depreciation on computers amounting to ?59,55,717/-. The CIT reasoned that since the business did not commence nor operate in F.Y. 2009-10, the entire expenditure incurred in setting up the business should be treated as pre-operative or pre-commencement expenditure and capitalized. The CIT further stated that although computers were installed with software, the system was not ready for use as no evidence was submitted for necessary training and online trial runs.

Assessee's Arguments:
The assessee argued that complete details and documentary evidence were submitted to the AO, which were duly verified. The AO allowed the depreciation after due application of mind and verification of the facts relating to the setting up of the business and the installation and usage of computers. The assessee contended that the business was set up during the year, evident from the AO's action of computing income under the head 'income from business' and making certain disallowances. The assessee relied on the judgment of the Delhi High Court in CIT vs. Hughes Escorts Communications Ltd. 311 ITR 253 (Delhi), which held that expenses are allowable immediately after setting up the business, even if the business is not yet actually commenced.

Revenue's Arguments:
The Revenue argued that the assessee was permitted to make the first sale of lottery tickets on 01.04.2010, and hence, the business could not have commenced during the year under consideration. The CIT-DR contended that the assessee failed to provide conclusive evidence of the actual installation and usage of the computers. The Revenue maintained that the AO did not properly examine the evidence, and therefore, the CIT rightly disallowed the depreciation claimed on computers.

Tribunal's Findings:
The Tribunal examined the submissions and evidence. It noted that the business of the assessee was set up during the year, as the entire infrastructure was put in place to commence the business. The Tribunal referred to section 2(34) and section 3 of the Act, which define the 'previous year' and the date of setting up of the business. The Tribunal cited the Bombay High Court's judgment in Western Indian Vegetables Products Limited v CIT 26 ITR 151, which distinguished between the setting up and commencement of business. It held that expenses incurred after setting up the business but before the actual commencement are permissible deductions.

The Tribunal found that the assessee entered into an agreement with the Punjab Government on 15.01.2010, made requisite arrangements, hired staff, appointed retailers, and installed computers with the necessary software. The AO examined the evidence and allowed the depreciation on computers after due verification. The Tribunal concluded that the assessee's business was set up during the year, and the computers were ready for use. Therefore, the claim of depreciation was valid.

3. Jurisdictional Validity of the Order under Section 263:
Since the Tribunal allowed the claim of depreciation on merits, the issue of the jurisdictional validity of the order passed under section 263 became academic and was not addressed.

Conclusion:
The Tribunal reversed the CIT's action, allowing the depreciation claim on computers. The appeal filed by the Assessee was partly allowed with the Tribunal's directions. The order was pronounced in the open court on 21st September 2016.

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