2023 (4) TMI 1117 - HC - Income Tax

Rectification of mistake u/s 154 - disallowing the excess depreciation claimed on account of machinery being put to use in March, 2007 - assessee had claimed and allowed full depreciation and additional depreciation of substantial part of addition, which was allowable @50% as the assessee had put these assets to use in February, 2007 and the period of less than 180 days for the assessment year 2007-08 - HELD THAT - As per the order passed u/s 147 assessee had claimed benefit of depreciation for the whole year for purchase of new machinery. Reference was made to Section 36(1)(iii) of the Act, which provided that any amount of interest paid in respect of capital borrowed for acquisition of an asset, shall not be allowed as deduction till the date on which, such asset was first put to use. As per the assessee itself, the machinery purchased was put to use in February, 2007 and this fact was not noticed by the AO while passing the impugned order - In the said order, 100% depreciation was given by taking the date of putting the machinery to use by 21.08.2006. Assessee had produced the Fixed Assets Register for the financial years 2005-06 and 2006-07 showing the date of purchase, installation and date of put to use of these assets; certificate of M/s Power Tracks approved Chartered Engineers, to prove the date of installation of the new plant and machinery; and certificate of Central Excise Department regarding installation of new plant and machinery, which showed that the assets were installed by August, 2006 and details of WIP provided by the assessee showed that the above said machinery was capitalized in the month of February, 2007 and it had been put to use in less than 180 days. The above said evidence was sufficient to return a finding of fact that the claim on depreciation had to be allowable at 50% due to less use during the assessment year in question. No occasion to conduct further investigation with regard to putting of use of this machinery for less than 180 days as the evidence before the AO showed that the machinery had been put to use in February, 2007, as per the details provided by the assessee. In these circumstances, it is held that proceedings u/s 154 of the Act were correctly initiated.

Summary

Issues involved:
The issues involved in the judgment include disallowance of interest paid on capital work in progress under Section 36(1)(iii) of the Income Tax Act, 1961, and the disallowance of excess depreciation claimed on machinery being put to use in March 2007.

Disallowed Interest on Capital Work in Progress:
The respondent-assessee, a manufacturer and exporter of terry towel, filed its return of income for the assessment year 2007-08 claiming a loss of Rs. 86,40,279. Disallowance of interest paid on capital work in progress was made under Section 36(1)(iii) due to the assessee showing an amount of Rs. 6,43,261 as capital work in progress in the balance sheet. Reassessment proceedings were initiated by the Assessing Officer on the ground of escapement of income amounting to Rs. 73,44,534. The assessee contended that all interest on loans taken for business expansion had been capitalized, and no interest was claimed as revenue expenditure. The Assessing Officer disallowed a net interest amount of Rs. 48,62,035. A notice under Section 154 was issued, which was challenged by the Tribunal. The Tribunal held that the proceedings under Section 154 were bad in law and quashed the order, setting aside the CIT(A)'s decision.

Excess Depreciation Claim:
The Assessing Officer disallowed excess depreciation claimed by the assessee on machinery put to use in March 2007. The assessee had added assets worth Rs. 13,33,68,281 during the year, with depreciation reworked on plant, machinery, and electrical installation. The assessee was allowed excess depreciation of Rs. 1,94,75,052, which was found to be in excess. The Tribunal held that the issue was debatable and required further investigation, which was not permissible under Section 154 of the Act. The Tribunal set aside the orders passed by the authorities under Section 154. The appellant argued that the evidence provided by the assessee regarding the installation of machinery justified the initiation of proceedings under Section 154. However, the respondent contended that the issue of claim of depreciation was debatable and required further investigation, not permissible under Section 154.

Judgment:
The High Court allowed the appeal, setting aside the Tribunal's order. It was observed that the evidence provided by the assessee regarding the installation of machinery justified the initiation of proceedings under Section 154. The evidence showed that the machinery had been put to use in February 2007 for less than 180 days, making the depreciation allowable at 50%. The Court held that no further investigation was required as the evidence before the Assessing Officer established the date of putting the machinery to use. Therefore, the proceedings under Section 154 were correctly initiated, and the appeal was allowed.