2019 (8) TMI 107 - HC - Income Tax

Substantial question of Law - addition was revenue neutral - disallowance of depreciation made by AO on enhanced value due to de-merger against original zero cost due to government grant - CIT(A) though upheld the addition but grant deduction u/s 80IC on increased profit due to disallowance - same the fate at ITAT - HELD THAT - It is interesting that as far as the present appeal by the Revenue is concerned, no issue has been urged regarding the benefit of Section 80IC being available to the Assessee. The only ground urged is regarding the Assessee being allowed to claim depreciation in respect of assets acquired by DSL prior to the demerger from out of the government grants made available to DSL in terms of Central Excise (CE) Tariff Notification. Inasmuch as the Revenue does not question the availability of the benefit of the Section 80IC to the Assessee during the AY in question, as noted by the ITAT, the issue concerning depreciation has been rendered revenue neutral and, therefore, academic. Consequently, while leaving the question raised by the Revenue open for consideration in an appropriate case, the Court sees no reason to interfere with the impugned of the ITAT. No substantial question of law arises.

Summary

Issues:
1. Disallowance of depreciation claimed by the Assessee.
2. Benefit of statutory deduction under Section 80IC.
3. Interpretation of Central Excise Tariff Notifications.

Analysis:

Issue 1: Disallowance of depreciation claimed by the Assessee
The Assessing Officer (AO) disallowed the depreciation claimed by the Assessee, stating that the cost of assets should be 'Nil' as it was met by the Central government, referring to Explanation 10 to Section 43(1) of the Income Tax Act, 1961. The Assessee argued that the assets' value was assigned based on the demerger scheme approved by the Court and not subject to Explanation 10. The Commissioner of Income Tax (Appeals) upheld the disallowance, leading to the Assessee's appeal to the ITAT. The ITAT observed that the Assessee could claim the benefit of Section 80IC, making the depreciation issue revenue neutral. The ITAT allowed the Assessee's appeal, emphasizing that the claim of depreciation is revenue neutral when deductions under Chapter VI-A are claimed against disallowances under Section 32.

Issue 2: Benefit of statutory deduction under Section 80IC
The CIT (A) allowed the deduction under Section 80IC, but the AO's decision to disallow depreciation was upheld. The ITAT, however, recognized the Assessee's entitlement to the benefit of Section 80IC in light of CBDT Circular No. 37/2016. The ITAT concluded that the disallowance under Section 32 enhances profits eligible for deductions under Chapter VI-A, making the claim of depreciation revenue neutral. The Revenue did not contest the availability of Section 80IC to the Assessee, rendering the depreciation issue academic.

Issue 3: Interpretation of Central Excise Tariff Notifications
The Revenue did not challenge the availability of Section 80IC to the Assessee, focusing solely on the Assessee's claim for depreciation related to assets acquired by DSL before the demerger from government grants under Central Excise Tariff Notifications. The ITAT deemed the depreciation issue revenue neutral due to the Assessee's eligibility for Section 80IC benefits during the relevant assessment year. The Court, while leaving the Revenue's question open for future consideration, declined to interfere with the ITAT's decision, stating no substantial question of law arose.

In conclusion, the High Court dismissed the appeal by the Revenue, affirming the ITAT's decision regarding the Assessee's entitlement to claim depreciation and the benefit of statutory deduction under Section 80IC, ultimately deeming the depreciation issue revenue neutral and academic in the context of the case.