2022 (2) TMI 432 - AT - Income Tax

Depreciation claim on expenditure incurred for construction of model house, project office, marketing office, stores etc - According to the assessee, for the purpose of its business, these structures were put up and were destroyed/dismantled once the project was completed and the structure did not have life for more than three years and were temporary in nature and hence, entitled to 100% depreciation - HELD THAT - The assessee has filed additional evidence in the form of a certificate of the Architect which clearly states that the expenditure incurred on construction amounting to ₹ 1,75,55,286 are temporary structures such as model house, project office, marketing office, storage of building material, etc. It is further stated in the Architect's letter that these were demolished immediately after the completion of the project. In the petition for admission for additional evidence, the assessee states that the assessee was under the bona fide belief that its explanation, ledger extracts and submissions would be sufficient to allow the claim. It was stated that for interest of justice and equity since the additional evidence goes to the root of the issue, the same may be admitted on record. We find that the additional evidence now sought to be admitted goes to the root of the issue. Therefore, for substantial cause and justice, we admit the same on record. The assessee has now claimed before the Tribunal that the expenditure incurred is revenue expenditure. Alternatively, it is submitted that the expenditure incurred is for putting up temporary structures and entitled to 100% depreciation. In the interest of justice and equity since the additional evidence has been admitted on record, it is necessary that the issue now raised before the Tribunal needs to be examined afresh by the A.O. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Eligibility of expenditure for deduction related to construction of temporary structure.
2. Determination of the nature of expenditure as capital or revenue.
3. Allowance of depreciation at 10% for temporary structures with a life span of less than 3 years.

Issue 1: Eligibility of Expenditure for Deduction
The appellant challenged the CIT(A)'s decision disallowing the expenditure of ?1,57,99,757 for the construction of temporary structures, arguing that the structures were temporary in nature and thus entitled to 100% depreciation. The Assessing Officer (A.O.) disallowed the excess depreciation claimed, stating that the assets were not purely temporary as per IT Rules since they were used for three to four years. The CIT(A) upheld this view, considering the structures to have an enduring benefit and not meeting the criteria for temporary structures under the Income Tax Rules.

Issue 2: Nature of Expenditure - Capital or Revenue
The CIT(A) noted that the appellant's financials mentioned that temporary structures were depreciated over the life of the project, which was 3 to 4 years. The CIT(A) observed that the structures had enduring benefits and value, even though they were dismantled after the project completion, and thus, the expenditure resulted in an asset of enduring nature. The CIT(A) referred to the Income Tax Rules, stating that depreciation at 100% was allowed for temporary erections like wooden structures, emphasizing that the expenditure incurred by the appellant did not qualify as temporary under the rules.

Issue 3: Allowance of 10% Depreciation
The appellant contended that allowing depreciation at 10% for structures with a lifespan of less than 3 years was not in accordance with the law. The Tribunal admitted additional evidence, a certificate from the Architect stating that the structures were temporary and demolished after project completion. The Tribunal directed the A.O. to reconsider whether the expenditure should be treated as revenue expenditure or qualify for 100% depreciation for temporary structures. The appeal was allowed for statistical purposes, emphasizing the need for fresh examination by the A.O. based on the additional evidence presented.

This detailed analysis of the judgment highlights the key issues raised, the arguments presented by the parties, and the Tribunal's decision to admit additional evidence for a fresh examination by the Assessing Officer.