2018 (10) TMI 131 - AT - Income Tax

Depreciation on plant and machinery without reducing the compensation received - Held that - As relying on earlier AYs in view of the non-cooperation of the assessee in presenting the details the WDV for the year under consideration which in-turns is to be adopted for working the depreciation for the year cannot be determined. In the interest of justice, we deem it fit to restore the issue back to the file of the Assessing Officer to determine the WDV for the year under consideration in line with the WDV determined for the preceding years and allow the claim of the assessee as per law. A reasonable opportunity of hearing to the assessee shall be afforded - Appeal of Revenue is allowed for statistical purposes.

Summary

Issues:
- Disallowance of depreciation on plant and machinery without reducing compensation received

Analysis:
1. The appeal by the Revenue challenged the order of the CIT(A) directing the AO to allow depreciation on plant and machinery without reducing the compensation received by the assessee. The dispute arose from the compensation of DM 7 Million received by the assessee during AY 1999-2000 from a German supplier, which was equivalent to ?17,58,40,000. The assessee claimed this as a revenue receipt, but the AO disallowed the claim, reducing the WDV of plant and machinery by ?16,05,29,977. The CIT(A) consistently allowed the claim in previous years, holding that the compensation was not paid in lieu of the plant and machinery but to compensate for losses due to defects. The Tribunal had set aside assessments for AY 2001-02 and 2000-01, remanding the issue back to the AO for fresh determination of depreciation. The current appeal followed a similar pattern, with the Tribunal restoring the issue to the AO for determination of WDV and allowing the appeal for statistical purposes.

2. The AO's disallowance of depreciation was based on the view that the compensation received was on capital account and should reduce the WDV of plant and machinery. However, the CIT(A) disagreed, emphasizing that the compensation was not in exchange for the assets but to cover losses from defective machinery. The Tribunal's decision to remand the issue back to the AO for fresh determination aligns with previous orders, indicating a recurring nature of the dispute across multiple assessment years. The Tribunal's stance underscores the need for a detailed assessment of the compensation's nature and its impact on depreciation calculations.

3. The Tribunal's order reflects a consistent approach in favor of the assessee regarding the treatment of compensation received for defective plant and machinery. By directing the issue back to the AO for reevaluation, the Tribunal aims to ensure a fair and accurate determination of depreciation allowances. The decision highlights the importance of distinguishing between capital receipts and revenue expenses in assessing the impact on asset valuation and depreciation claims. The Tribunal's emphasis on providing a reasonable opportunity for the assessee to present details underscores the principles of natural justice and procedural fairness in tax assessments.

4. Overall, the judgment underscores the complexity of distinguishing between capital and revenue transactions in tax assessments, particularly concerning compensation received for asset-related issues. The Tribunal's decision to remand the issue for fresh assessment signifies a commitment to thorough deliberation and adherence to legal principles in determining depreciation allowances. The case exemplifies the iterative nature of tax disputes and the significance of consistent judicial interpretation to ensure equitable outcomes in tax matters.