2022 (5) TMI 158 - AT - Income Tax

Disallowing expenses on account of additional depreciation - appellant has claimed additional depreciation on new plant machinery purchased and installed during the year as per the provisions of section 32(iia) - HELD THAT - As relying on SCIENTIFIC ENGINEERING HOUSE PVT. LIMITED VERSUS COMMISSIONER OF INCOME-TAX, AP 1985 (11) TMI 1 - SUPREME COURT since tools, dies, jigs etc. are used by the appellant for its business of manufacturing switchgear products it is evident that moulds, dies and tools are not independent of the plant and machinery, but are parts of the machinery. Once they are worn out, the machines cannot turn out the product to the business specifications and this has to be obtained only on a replacement of the tools or the dies and moulds. Further also, in assessee s own case in the subsequent years, the revenue has allowed the claim of additional depreciation on these tools etc. and thus the ground raised in the appeal is allowed.

Summary

Issues:
Disallowance of expenses on account of additional depreciation.

Analysis:
The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) concerning the disallowance of additional depreciation claimed by the assessee on new plant and machinery. The appellant asserted compliance with Section 32(iia) of the Income Tax Act to justify the entitlement to additional depreciation. However, the Assessing Officer contended that the section aimed at incentivizing new entrepreneurs setting up manufacturing establishments, emphasizing the need for new plant setup rather than additions or repairs to existing machinery.

The appellant argued that the Finance Act, 2005, amended Section 32 to allow additional depreciation on new machinery and plant acquired after March 31, 2005, without the necessity of being part of a new industrial undertaking or expanding installed capacity. The Commissioner of Income Tax (Appeals) observed that the appellant's claim for additional depreciation on tools under the category of "fixed assets" was incorrect as tools for existing machinery did not qualify for additional depreciation. The Commissioner upheld the Assessing Officer's disallowance of additional depreciation based on this interpretation.

Upon hearing the case, the bench referred to the functional test established by the House of Lords, determining whether the tools, dies, and jigs used by the appellant were integral parts of the machinery essential for manufacturing switchgear products. The bench concluded that these tools were not independent but integral to the machinery, crucial for the production process. Additionally, the bench noted that in subsequent years, the revenue had allowed the claim of additional depreciation on these tools. Consequently, the ground raised in the appeal was allowed, and the appeal of the assessee was allowed.

In conclusion, the judgment resolved the issue of disallowance of expenses on account of additional depreciation by analyzing the interpretation of relevant provisions of the Income Tax Act and the functional test to determine the eligibility of tools for additional depreciation claims. The decision emphasized the integral nature of tools to machinery in manufacturing processes and considered past practices in allowing such claims.