2022 (6) TMI 258 - AT - Income Tax

Adjustment due change in the depreciation rate - adjustment due acceleration in the depreciation rate owing to reworking of useful like of depreciable assets - HELD THAT - As identical issue has arisen in its own case in Assessment Year 2012-13 2018 (12) TMI 279 - ITAT DELHI where the issue was set aside to the file of the Assessing Officer with certain directions. The fact and issue being the same, direction of the Assessee Officer should apply mutatis mutandis in the instant case. In view of the consensus arrived in the matter we restore the issue back to the file of the Assessing Officer to implement the directions as applicable in AY 2012-13 in terms of the order of Co-ordinate Bench. MAT computation - Disallowances on account of loss on revaluation of fixed assets and corresponding increase in 'book profits' for the purposes of Section 115JB - HELD THAT - On perusal of the audit report of the Assessee-company, we observe that the Independent Statutory Auditor has expressed 'qualified' opinion on the financial statement and one of the qualifications relates to claim of loss on revaluation of assets in question. The qualification of Auditor has the effect of stating that book profits declared by the Assessee do not bear the trappings of true and fair expression of 'statement of profit and loss'. This being so, it cannot be said that book profits disclosed in the financial statement is sacrosanct and assessee acquires indefeasible right in the matter of its declaration of book profits. Secondly, we also find merit in the plea of the Revenue that notwithstanding the fact that 'loss on account of revaluation of fixed asset' does not arise by way of provision for diminution in the value of asset but an actual loss, such capital loss is not a deductible loss in nature nevertheless. The expression 'income defined under Section 2(24) of the Act does not include such capital losses. The capital loss claimed on account of impairment of assets, in our view, is liable to be adjusted for the purposes of determination of book profit similar to the adjustment available in respect of capital receipts not taxable under the normal provisions of the Act. This view is supported by the decision of the Coordinate Bench of ITAT in ITO vs. Ganesh Sagar Infrastructure (P.) Ltd. 2021 (11) TMI 1072 - ITAT AHMEDABAD Assessee is not entitled to reduce the book profit by the capital loss debited to the P L account which is subject matter of qualification by Auditors. Such capital loss is neither eligible for deduction under the normal provisions nor under the alternate provisions of taxation. We thus set aside the action of the CIT(A) on this score and restore the position taken by the Assessing Officer.- Decided in favour of revenue.

Summary

Issues:
1. Adjustment due to change in depreciation rate.
2. Disallowance of loss on revaluation of fixed assets for book profit calculation under Section 115JB.

Issue 1: Adjustment due to change in depreciation rate:
The Revenue appealed against the CIT(A)'s deletion of an addition of Rs. 5,78,00,000 made by the AO due to a change in the depreciation rate. The matter involved reworking the useful life of depreciable assets, akin to a previous case in AY 2012-13. The Co-ordinate Bench's order highlighted that higher rates of depreciation must stem from a bona fide technological evaluation by competent individuals. It emphasized the need for a genuine evaluation to avoid tax evasion. The Bench also noted the importance of Registrar of Companies' examination to ensure compliance with the Companies Act. However, the absence of details regarding the committee's decision-making process led to the matter being remanded to the AO for a fresh decision, aligning with the directions in the AY 2012-13 case.

Issue 2: Disallowance of loss on revaluation of fixed assets for book profit calculation:
The second ground involved disallowance of loss on revaluation of fixed assets for book profit calculation under Section 115JB. The assessee contended that the loss was due to settlement and not revaluation, thus not subject to adjustment in book profits. The Revenue argued that such capital losses, whether through revaluation or write-off, should be adjusted for book profit determination. The ITAT agreed with the Revenue, stating that capital losses on asset impairment are not deductible under normal or alternate tax provisions. The Auditor's qualified opinion on the financial statement further supported the view that the loss on revaluation was not a deductible loss. Citing a relevant ITAT decision, the ITAT allowed the Revenue's appeal on this issue.

In conclusion, the ITAT allowed the Revenue's appeal on both issues. The first issue was remanded to the AO for a fresh decision based on directions from a previous case. The second issue involved disallowance of the loss on revaluation of fixed assets for book profit calculation under Section 115JB, aligning with the Revenue's argument that such capital losses are not deductible for tax purposes.