2016 (12) TMI 1140 - AT - Income Tax

Depreciation on new Windmill - whether an asset, ready to be used, is actually used? - Held that - The assessee s claim for depreciation is without basis, both on facts and in law. We have, after visiting the law, based on factual findings and on the basis of material on record, found the assessee s case, resting on claim of trial production, as completely unfounded, even exhorting the assessee qua any further material to evidence it s claim of trial production, which is facile in the absence of any material on record, nay, even generation of any electricity, a fact emphasized by the Assessing Officer (AO) and confirmed by us during hearing. Rather, the trial production should lead to the removal of operational glitches or defects, even as explained by the assessee itself per its submissions before the Revenue authorities finding reproduction in their orders, leading to regularizing its authorization, and of which the assessee ought to have adequate evidence in the regular course. The allowance by the ld. CIT(A) is on the ground of trial production, a claim we find as without basis in-as-much as there is nothing to show that the Windmill worked or even any electricity generated, by 31.3.2010. How could there be, one may ask, trial production without any production? The question of it being concluded successfully, removing all operational glitches, etc., as is required to be, is farfetched - Decided against assessee Short-term capital gain (STCG) on the sale of the old Windmill - Held that - We have already adjudicated on the eligibility of the new Windmill, purchased on 31.3.2010, for depreciation, deciding against it in view of its non-user (refer paras 3 & 4 of this order). The same would, therefore, not enter the block of assets as at the relevant year-end, and its correct representation in the final accounts (as at the year end) is as (part of) capital work-in-progress . The WDV of the relevant block (i.e., comprised of Windmills) would therefore stand to be computed without including the same, with consequential effect on the computation of STCG u/s. 50. The said provision, we may further add, is by way of a legal fiction, which however is limited to the computation of the gain arising on the transfer of depreciable assets, i.e., modifies the computational provisions of ss. 48 & 49 only. The character of the gain, nevertheless, and even as explained in CIT vs. Ace Builders (P) Ltd. 2005 (3) TMI 36 - BOMBAY High Court would remain the same. As such, where the capital asset (old Windmill) transferred is beyond the minimum holding period prescribed in its respect (thirty six months), the same would be a long term capital gain, subject to tax u/s. 112 of the Act. We decide accordingly. This decides Gd. of the Revenue s which has taxed the gain as STCG, appeal partly in its favour. Disallowance of commission allowed to foreign agents - non deduction of tds - Held that - In the facts of the case, the commission is for soliciting sale orders. No part of the said activity is stated as carried out in India, where there is admittedly no permanent establishment (PE) of the non-resident agents. The income is by way of commission per se, so that no part of it can be said to be taxable in India, as clarified by the Apex Court in Toshoku Ltd. (1980 (8) TMI 2 - SUPREME Court ). The sales in the instant case, on the supply of goods in pursuance to the purchase order booked by the agents, and for which therefore commission is allowed to them, takes place outside India, thus the provisions of section 195 of the Act and, consequently, of section 40(a)(i), are inapplicable. We decide accordingly, and the assessee succeeds. Disallowance of the claim for damaged goods - Held that - We agree that the candid declaration before us materially alters the nature of the assessee s claim, so that the Revenue s stance would also be required to be revised. It is unfortunate that the assessee comes out with the facts at a much later stage and not before the Revenue, particularly before the assessing authority. Be that as it may, the same, in view thereof, is to be regarded as a trade discount allowed by the assessee to its foreign buyers. Under the circumstances, we only consider it proper that the matter is restored to the file of the A.O. to examine the assessee s claim which is to be looked at from a businessman s point of view, in light of the facts admitted before us, and who shall decide the same in accordance with the law, be it u/s. 37(1) or u/s. 36(1)(vi), issuing definite findings of fact. Depreciation at 80%, i.e., the rate exigible on Windmil on expenditure, being components of its cost, viz.development rights for restoration, paid to the State Government of Andhra Pradesh,Erection and commissioning expenditure and Transportation expenditure, as against at 15% allowed to it - Held that - We find no reason not to accept the assessee s claim or to take any different view in the matter in the admitted facts of the case, i.e., each of the expenditure forming part of the cost of the windmill, i.e., up to its commissioning stage, on which, therefore, depreciation is allowed. It is well settled that all the expenditure up to the commissioning of the plant is to be capitalized and, therefore, no differentiation could be made between one expenditure and another; all the expenditure incurred to bring the capital asset to the condition and location of its intended use forming part of, and is to be accordingly capitalized at its cost. We decide accordingly, and the assessee succeeds. Foreign travel expenditure of wife of partner in the assessee- firm - Held that - We find some merit in the argument, which was also advanced before the ld. CIT(A). The product sold, i.e., footwear, is an item of common, daily wear/use, and of which its design and fashion are important aspects, and qua which she, as an informed consumer, can definitely contribute, even if informally. It is only presumable that she, accompanying her husband, engages herself physically and mentally on such tours, i.e., as claimed. The nature of evidence to prove a claim would depend on its nature, and a direct proof may not be forthcoming qua every claim. The impugned expenditure, however, is not proven to be incurred wholly and exclusively for business purposes. We, accordingly, consider it proper to restrict its allowance to 50%, so that the assessee gets part relief.

Summary

Issues Involved:
1. Depreciation on new Windmill.
2. Assessment of short-term capital gain (STCG) on the sale of the old Windmill.
3. Disallowance of commission to foreign agents due to non-deduction of tax at source.
4. Disallowance of claim for damaged goods.
5. Depreciation rate on specific expenditures related to Windmill.
6. Foreign travel expenditure of a partner's spouse.

Detailed Analysis:

1. Depreciation on new Windmill:
The primary issue was whether the assessee was eligible for depreciation on a new Windmill acquired on 31.03.2010. The Revenue argued that the Windmill was not put to use since no electricity was produced by 31.03.2010, and the authorization for trial run and commissioning was dated 30.03.2010. The Tribunal examined the legal requirement under Section 32(1) of the Income Tax Act, which mandates that an asset must be "used" for business purposes to qualify for depreciation. The Tribunal referred to various case laws, emphasizing that a "ready to use" state does not suffice for depreciation unless it constitutes passive use. The Tribunal concluded that the assessee's claim for depreciation was unfounded as there was no evidence of trial production or electricity generation by 31.03.2010. Thus, the assessee's claim for depreciation was denied.

2. Assessment of short-term capital gain (STCG) on the sale of the old Windmill:
The second issue was whether the short-term capital gain should be assessed on the sale of the old Windmill. The Revenue contended that the value of the block should be considered as on the date of sale, resulting in a surplus. The Tribunal agreed with the first appellate authority that the status of the block at the year-end is relevant. However, it clarified that a particular asset could only be part of the block if it met the condition of depreciation for the relevant year. Since the new Windmill was not used, it would not enter the block of assets. Consequently, the Tribunal held that the surplus from the sale of the old Windmill should be treated as long-term capital gain, subject to tax under Section 112 of the Act.

3. Disallowance of commission to foreign agents due to non-deduction of tax at source:
The third issue involved the disallowance of commission paid to foreign agents due to non-deduction of tax at source. The Revenue argued that the right to receive the commission arose in India. The Tribunal referred to the Supreme Court's decision in CIT vs. Toshoku Ltd., which clarified that no part of the commission income could be said to arise in India if the services were rendered outside India. Since the commission was for soliciting sale orders and no part of the activity was carried out in India, the Tribunal held that the provisions of Section 195 and Section 40(a)(i) were inapplicable, allowing the assessee's claim.

4. Disallowance of claim for damaged goods:
The fourth issue was the disallowance of the claim for damaged goods. The Revenue disallowed the claim due to a lack of evidence. The Tribunal questioned why defects were not identified upon receipt of the goods and why there was no evidence of pursuing insurance claims. The assessee later clarified that the claim was for a reduction in the amount receivable on sale, accepted due to the continuity of trade. The Tribunal restored the matter to the Assessing Officer to examine the claim as a trade discount and decide accordingly.

5. Depreciation rate on specific expenditures related to Windmill:
The fifth issue was the depreciation rate on specific expenditures related to the Windmill, such as development rights, erection and commissioning expenditure, and transportation expenditure. The assessee claimed depreciation at 80%, while the Revenue allowed 15%. The Tribunal accepted the assessee's claim, noting that all expenditures up to the commissioning of the plant should be capitalized and depreciated at the same rate as the Windmill.

6. Foreign travel expenditure of a partner's spouse:
The final issue was the foreign travel expenditure of a partner's spouse. The Revenue disallowed the claim due to a lack of evidence. The Tribunal found some merit in the assessee's argument that the spouse contributed informally during business trips. However, it restricted the allowance to 50% of the claimed expenditure, granting partial relief to the assessee.

Conclusion:
The Tribunal partly allowed both the Revenue's and the assessee's appeals, providing detailed reasoning for each issue based on the legal provisions and factual findings. The decision emphasized the importance of evidence and compliance with statutory requirements for claiming deductions and allowances under the Income Tax Act.