2005 (10) TMI 242 - AT - Income Tax

Summary

Issues Involved:

1. Legality of reopening the case under section 263 after settlement under Kar Vivad Samadhan Scheme (KVSS), 1998.
2. Disallowance of depreciation on Electronic Yarn Clearer (EYC) system.

Issue-wise Detailed Analysis:

1. Legality of Reopening the Case under Section 263:

The assessee contended that their case had been settled under the Kar Vivad Samadhan Scheme (KVSS), 1998, and the due tax had been deposited, with a certificate issued under section 90(2) r/w section 91 of the Finance (No. 2) Act, 1998. Therefore, reopening the case under section 263 was deemed illegal, arbitrary, unjustified, erroneous, and deserving of annulment.

The CIT observed that excessive depreciation on the EYC system was allowed, which was erroneous and prejudicial to the interest of the Revenue. The CIT did not agree with the assessee's contention that the case could not be reopened due to the settlement under KVSS.

The Tribunal analyzed the relevant provisions of the KVSS. Section 90(3) of the Scheme provides that every order determining the sum payable under the scheme shall be conclusive and no matter covered by such order shall be reopened in other proceedings. However, Section 94 clarifies that nothing in the Scheme shall confer any benefit, concession, or immunity on the declarant in any assessment proceedings other than those related to the declaration made. The Tribunal concluded that the KVSS deals with the settlement of tax arrears and not the determination of income, which are not settled under KVSS. Therefore, the CIT was justified in exercising revisional power under section 263, as the issue of excessive depreciation was not covered by the KVSS settlement. This ground was not allowed.

2. Disallowance of Depreciation on EYC System:

The assessee claimed 100% depreciation on the cost of EYC systems, arguing that each node of the EYC system was less than Rs. 5,000 and hence entitled to full deduction. The CIT disallowed this, stating that EYC nodes did not function independently but as part of a system, and hence depreciation should be at the normal rate of 25%.

The Tribunal examined expert opinions and technical reports. The assessee provided evidence that each EYC node functioned independently and was connected to a control panel to detect and remove imperfections in yarn. The Tribunal noted that the Department failed to provide any counter-expert opinion. Based on the technical reports and expert opinions submitted by the assessee, which indicated that each EYC node operated independently, the Tribunal concluded that the assessee was entitled to 100% depreciation as claimed. This ground was allowed.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the CIT's jurisdiction under section 263 despite the KVSS settlement but allowed the assessee's claim for 100% depreciation on the EYC system.