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2006 (4) TMI 243 - AT - Income TaxActual Cost - allowance of depreciation - Whether on written down value as per the books of account treating all the depreciation provided in the books, by treating the same as actually allowed or it should be taken on the original cost of the assets as reduced by the depreciation actually allowed under the Income-tax Act - HELD THAT - In the instant case the assessee, Kandla Port Trust was not assessed to tax till assessment year 2002-03 by virtue of provisions of section 10(20) and thus was not required to compute profits and gains of business or profession under the I.T. Act. Thus mere passing of accounting entry made for depreciation in the books of account was not the depreciation actually allowed, as there was no liability to tax and as there was no assessment till assessment year 2002-03. Thus, WDV as on 1-4-2002 would be original cost less nil i.e., original cost. We are inclined to agree with the learned A.R. that the assessee is entitled to claim depreciation as per sub-clause (b) of section 43(6) according to which written down value of the assets acquired before the previous shall be actual cost of the assets less depreciation actually allowed in respect of that assets under Income-tax Act, 1961, if any, and not the depreciation provided by way of book entry, without any relevance of computation of income for the purpose of Income-tax Act. Whether a structure is 'plant' or 'building', one has to see if building or structure constituted an apparatus or tool of taxpayer by means of which business activities are carried out, or the structure played no part in the carrying on those activities but merely constituted a place wherein they were carried on - From the record we found that in the instant case all these assets are necessary and critical apparatus/tools with which the port carries on its business and are so designed to equip itself with heavy machinery such as cranes, railway wagons and slidings, heavy goods vehicles, loader, etc., and is not merely concrete structure which can be said to be building. As per the nature of work undertaken by ports, the ports create facilities for reception of vessels and the vessels are docked and undocked at the Wharf/Jetty/Quay/mooring, etc. Once the vessels are berthed, the cargo loading and unloading operations are done by using the wharf with equipments like cranes, unloading arms, etc. As such, the assets like wharf, jetty, piers, railway sidings, docks including dry docks, platforms, etc., are core assets for the business of the port and the revenue is earned out of these assets. We also found that income generated by deployment of these assets accounts for more than 50 per cent of the total income of the port. In We are of the considered view that if assets used in the business are tools or apparatus of assessee by means of which it carries on his business then it can be classified as plant. wharves, pavements, docks, including dry docks, drains, jetties, railway wagons and slidings rolling stock and various platforms are principal apparatus of port with which it carries on its business and they are so equip to take care of heavy machinery and that is the reason all the above assets are classified under Block VI as Plant and Machinery and depreciation applicable to plant and machinery is to be allowed. We also found that in the case of instant assessee-port, without these assets the port cannot perform its function as a port and there will be no revenue irrespective of whether machinery, highly qualified personnel available with the port. We also found that in the absence of docks, wharves, pavements, jetties, one can say that the entire 'coastal area is a port, provided ships can come alongside. Thus, applying the functional tests to each and every item described hereinabove, we are persuaded to agree with the learned A.R. that docks, wharves, pavements, jetties, are not building but plant of the port, on which the assessee is entitled to claim depreciation at the higher rates which are applicable on the plant and machinery. In the result we are inclined to reverse the findings and conclusions of lower authorities both on the point of determining the written down value of assets on which depreciation is to be allowed, as well as the treatment of various assets discussed hereinabove as building instead of plant. In the result, the appeal of the assessee is allowed.
Issues Involved:
1. Adoption of Written Down Value (WDV) for depreciation calculation. 2. Classification of assets as Plant or Building for the purpose of depreciation. Issue-wise Detailed Analysis: 1. Adoption of Written Down Value (WDV) for Depreciation Calculation: The primary issue revolves around whether depreciation should be computed based on the original cost of the assets or the WDV as per the books of account. The assessee, a major port trust, was exempt from income tax under Section 10(20) of the Income-tax Act until 31-3-2002. Consequently, it filed its first return for the assessment year 2003-04. The assessee claimed depreciation based on the original cost of the assets, arguing that no depreciation had been "actually allowed" under the Income-tax Act in previous years due to the tax exemption. The Assessing Officer (AO) disagreed, allowing depreciation on the book value of the assets, which accounted for depreciation provided in the books of account until 31-3-2002. The AO's rationale included the systematic provision of depreciation in the books, the old age and deteriorated condition of the assets, and the potential for granting depreciation on assets with negligible value. The CIT(A) upheld the AO's decision, stating that the difficulty in working out depreciation as per the Income-tax Act should not preclude adherence to legal provisions. The CIT(A) also treated various apparatus used by the assessee in its port operations as buildings, not plant, and confirmed the lower rate of depreciation. Upon appeal, the Tribunal considered Sections 32(1)(ii) and 43(6) of the Income-tax Act, which define WDV and depreciation. The Tribunal emphasized that "depreciation actually allowed" refers to depreciation granted and given effect to by the Assessing Officer in computing taxable income, not merely provided in the books of account. Since the assessee was exempt from tax until the assessment year 2002-03, no depreciation was "actually allowed" under the Income-tax Act. Consequently, the WDV as on 1-4-2002 should be the original cost less nil, i.e., the original cost. The Tribunal cited various judicial precedents, including the Supreme Court's decision in Madeva Upendra Sinai v. Union of India [1975] 98 ITR 209, which supported the view that depreciation "actually allowed" means depreciation allowed by an income-tax authority, not merely provided in the books. The Tribunal concluded that the assessee is entitled to claim depreciation based on the original cost of the assets, as no depreciation was "actually allowed" under the Income-tax Act in previous years. 2. Classification of Assets as Plant or Building for Depreciation: The second issue pertains to whether certain assets, such as wharves, pavements, docks, jetties, and railway sidings, should be classified as plant or building for the purpose of depreciation. The assessee claimed depreciation at the higher rate applicable to plant and machinery, arguing that these assets are essential tools of trade for port operations. The AO treated these assets as buildings and allowed depreciation at a lower rate. The CIT(A) confirmed this view, treating the assets as buildings rather than plant. Upon appeal, the Tribunal applied the functional test to determine whether the assets constituted an apparatus or tool of the taxpayer's business activities or merely a place where the activities were carried out. The Tribunal found that the assets in question are critical apparatus/tools necessary for port operations and are designed to accommodate heavy machinery and equipment. These assets generate significant revenue for the port and are integral to its business activities. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in CIT v. Dr. B. Venkata Rao [2000] 243 ITR 81, which applied the functional test to classify assets as plant. The Tribunal concluded that the assets in question, such as wharves, docks, jetties, and railway sidings, are not buildings but plant, and the assessee is entitled to claim depreciation at the higher rate applicable to plant and machinery. Conclusion: The Tribunal reversed the findings and conclusions of the lower authorities on both issues. It held that the assessee is entitled to claim depreciation based on the original cost of the assets, as no depreciation was "actually allowed" under the Income-tax Act in previous years. Additionally, it classified the assets in question as plant, allowing the assessee to claim depreciation at the higher rate applicable to plant and machinery. The appeal of the assessee was allowed.
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