2024 (10) TMI 80 - AT - Income Tax

Revision u/s 263 - claim of prior period depreciation - HELD THAT - Assessee submitted that it was a company assessee paying taxes at a fixed rate. A detailed table was filed before us showing that the assessee had paid taxes in all the preceding year and by allowing depreciation of prior periods in the relevant earlier years to which it pertained would have resulted in refund of equivalent amount being generated as of the tax demand being sought to be raised in the impugned year by disallowing the same. Therefore the entire exercise of allowability of claim of depreciation of earlier years in the impugned year or the year to which it pertained was a tax neutral exercise. Even otherwise, we are aware, that even if the assessee had returned losses in any preceding year, the assessee was entitled to claim the unabsorbed depreciation of that year as the depreciation of the succeeding year in terms of section 32(2) of the Act. Irrespective of the fact of the assessee having returned profits or losses in the preceding years, the allowance of claim of depreciation of earlier years in the impugned year or the year to which it pertained was clearly a tax neutral exercise. There is therefore no loss of revenue to the department by allowing the claim of prior period depreciation in the impugned year. The assessee could not have been denied depreciation in preceding years for not having claimed so and if so allowed, there is no loss of Revenue to the Department as noted above by us. There is no prejudice therefore caused to the Revenue and exercise of revisionary jurisdiction, therefore, in the present case is, unwarranted since it fails to satisfy the twin primary conditions of the assessment order being erroneous and causing prejudice to the Revenue, both of which conditions need to be satisfied for a valid exercise of revisionary power u/s 263 of the Act. We do not agree with the ld.Pr.CIT of the assessment order being erroneous causing prejudice to the Revenue for having allowed the claim of prior period depreciation and the order passed by the ld.Pr.CIT, therefore, on this count is set aside. Issue of tax deducted at source on rent not being examined by the AO . - Assessee fairly agreed that the same was not examined during the assessment proceedings. But he pointed out that it was explained to the CIT that the assessee had deducted TDS on rent on which provisions of TDS was applicable pointing out that while the assessee had claimed rent expenditure of Rs.2.50 crores, TDS had been deducted on the expenses of Rs.55,34,961/- while the balance amount of expenditure of Rs.1,95,22,321/- did not attract provisions of TDS at all. The ld.counsel for the assessee further pointed out that in the assessment order passed by the AO in consequence to the order passed u/s 263 of the Act, the AO was satisfied with the explanation of the assessee, and no addition had been made to the income of the assessee on account of non-deduction of TDS on rent expenses as per the provisions of section 40(a)(ia) of the Act. Admission of assessee that the issue of tax at source on rent expenses was not examined by the AO at all, we do not find any infirmity in the order of the ld.Pr.CIT holding the assessment order erroneous on this count. The order of the PCIT u/s. 263 of the Act is partly confirmed on the issue of non-examination by the AO of TDS on rent expenses, while his finding of the assessment order being erroneous causing prejudice to the Revenue on account of allowance of claim of prior period depreciation is set aside. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Nullity of the order under Section 263 of the Income Tax Act.
2. Disallowance of depreciation due to reclassification of assets.
3. Disallowance under Section 40(a)(ia) for short deduction of TDS on rent expenses.
4. Initiation of penalty proceedings.

Issue-wise Detailed Analysis:

1. Nullity of the Order under Section 263:
The appellant challenged the order passed under Section 263 of the Income Tax Act, 1961, by the Principal Commissioner of Income Tax (Pr. CIT), arguing that it should be considered null and void. The Tribunal found that the Pr. CIT's order holding the assessment order as erroneous and prejudicial to the interest of the Revenue was not sustainable. The Tribunal reasoned that the Pr. CIT could not conclusively prove that the claim of prior period depreciation was wholly untenable in law. The Tribunal agreed with the appellant that the view taken by the Assessing Officer (AO) was a plausible one and did not cause any prejudice to the Revenue.

2. Disallowance of Depreciation due to Reclassification of Assets:
The Pr. CIT found the AO's allowance of depreciation for prior periods amounting to Rs. 1,68,21,472/- to be erroneous. The Pr. CIT argued that the reclassification of assets from Plant & Machinery to Right of Way (ROW)/Right of Use (ROU) as intangible assets was not permissible under Section 32 and Section 37(1) of the Act. The Tribunal, however, disagreed, stating that the change in accounting policy and the resultant recalculation of Written Down Value (WDV) was a plausible view. The Tribunal also noted that the reclassification did not result in any loss of revenue, making the exercise tax-neutral. Consequently, the Tribunal set aside the Pr. CIT's order on this count.

3. Disallowance under Section 40(a)(ia) for Short Deduction of TDS on Rent Expenses:
The Pr. CIT held that the AO did not examine the issue of rent payment of Rs. 58,56,612/- concerning non-deduction of tax at source. The appellant admitted that this issue was not examined during the assessment proceedings. However, it was explained to the Pr. CIT that TDS was deducted on the applicable rent expenses, and the balance amount did not attract TDS provisions. The Tribunal found no infirmity in the Pr. CIT's order on this issue, thus confirming the order partially.

4. Initiation of Penalty Proceedings:
The appellant requested the quashing of penalty proceedings initiated. However, there is no detailed discussion or separate judgment provided on this issue in the Tribunal's order.

Conclusion:
The Tribunal's final order partly confirmed the Pr. CIT's findings regarding the non-examination of TDS on rent expenses while setting aside the findings related to the allowance of prior period depreciation. The appeal was thus partly allowed.