2019 (2) TMI 1142 - HC - Income Tax

Claim of depreciation at 100% in the very same year in which the purchase was made - capitalisating the expenses incurred on purchase of tools, can the assessee - assessee admits that it had capitalised the amounts spent on small value tools in the very same year however, noticing the discrepancy reversed it and written off the entire value in the very same year in which they were rendered useless after use in the manufacturing process. The claim in the return was as a revenue expenditure - HELD THAT - The write off was on account of the tools being rendered useless after use in the manufacturing process. This necessitates frequent purchase of the said tools for continuous manufacturing process. In the nature of the industry, the same is allowable as a revenue expenditure. The adjustment made by the assessee was wrongly understood by the AO at the first instance. If it had been properly understood, then, the entire amounts would have been allowed as a revenue expenditure. In such circumstances, we do not think that there is any cause for interference with the order of the Tribunal. The question framed does not at all arise as one on law. The Income Tax Appeal is, hence, rejected.

Summary

Issues:
1. Claim of depreciation at 100% in the year of purchase after capitalizing expenses on tools.

Analysis:
The primary issue in this case revolved around whether the assessee could claim depreciation at 100% in the same year in which the purchase of tools was made after capitalizing the expenses. The Assessing Officer initially allowed this claim, but it was later sought to be rectified under Section 154 of the Income Tax Act, 1961. The first appellate authority reversed the rectification, a decision that was upheld by the Income Tax Appellate Tribunal. The Tribunal concluded that the tools in question were small value tools with a short lifespan of less than one year, indicating no enduring benefit, and the assessee had wrongly capitalized them.

Furthermore, the Tribunal found that the assessee should have treated the expenses as revenue expenditure instead of capitalizing them. The assessee admitted to capitalizing the amounts spent on small value tools in the same year but later reversed this decision, writing off the entire value in the same year when the tools became useless after use in the manufacturing process. The claim in the return was treated as a revenue expenditure, aligning with the correct accounting treatment.

Moreover, the counsel for the assessee cited a precedent to support the claim that loss on revaluation of tools is permissible as an accountancy practice. The court in the cited case had deemed the revaluation of tools as an accountancy procedure and not actual expenditure, without any depreciation claimed. Similarly, in the present case, the write-off of tools was due to their obsolescence after use in the manufacturing process, necessitating frequent purchases for continuous operations, making it allowable as a revenue expenditure.

Ultimately, the High Court found that the adjustment made by the assessee was misunderstood by the Assessing Officer initially. If properly understood, the entire amounts would have been allowed as a revenue expenditure. Consequently, the court concluded that there was no legal basis for interference with the Tribunal's order, as the question raised did not pertain to a legal issue. Therefore, the Income Tax Appeal was rejected, with no order as to costs.