2025 (1) TMI 1011 - HC - Income Tax

Disallowance of depreciation - whether pipeline eligible for depreciation? - AO held that the liability provided in the books was of mere contingent liability which cannot be considered as installation cost of the pipeline and therefore the depreciation in respect was disallowed also confirmed by ITAT - HELD THAT -Tribunal arrived at the finding of the fact after taking into consideration the terms of the Memorandum of Understanding (MOU) between the KPT and GMB and came to conclusion that the detailed working of the estimated liability worked out by the appellant company for the year under consideration is without making any contractual payment to KPT or GMB and as such liability was not agreed by the KPT or GMB and the proposal made by the appellant was rejected. No substantial question of law.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment from the Gujarat High Court involves the following core legal questions:

(i) Whether the Income Tax Appellate Tribunal was correct in law in confirming the disallowance of depreciation amounting to Rs. 2,81,25,000/- crores?

(ii) Whether the Tribunal was correct in not treating Rs. 20 crores as the cost of the pipeline eligible for depreciation?

(iii) Whether the Tribunal was correct in treating the minimum liability payable to the Gujarat Maritime Board and the Kandla Port Trust of Rs. 10 crores each as neither contractual nor legal, but a contingent liability, thereby not treating Rs. 20 crores as the cost of the pipeline eligible for depreciation?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Disallowance of Depreciation

Relevant legal framework and precedents: The case revolves around the provisions of the Income Tax Act, 1961, particularly concerning the eligibility for depreciation deductions. The relevant legal precedent includes the decision of the Supreme Court in the case of Bharat Earth Movers, which discusses the conditions under which a business liability can be considered to have arisen.

Court's interpretation and reasoning: The court upheld the Tribunal's decision, agreeing that the depreciation claimed included amounts that were not legally or contractually agreed upon as liabilities. The court emphasized the absence of a binding agreement between the appellant and the two corporations.

Key evidence and findings: The court noted that the appellant unilaterally created the liability in its books without any mutual agreement or legal obligation from the KPT and GMB.

Application of law to facts: The court applied the principles from the Indian Contract Act, emphasizing that a contract requires mutual consent and cannot be based solely on one party's assertions.

Treatment of competing arguments: The appellant argued for the recognition of the liability based on its accounting practices, but the court found this insufficient without a formal agreement.

Conclusions: The court concluded that the depreciation claim was not justified as the liability was contingent and not contractually agreed upon.

Issue (ii) & (iii): Treatment of Rs. 20 Crores as Cost of Pipeline

Relevant legal framework and precedents: The court examined the principles of contingent liabilities and the requirements for a liability to be recognized for depreciation purposes.

Court's interpretation and reasoning: The court agreed with the Tribunal that the liability was contingent, as there was no enforceable agreement with KPT and GMB. The court highlighted the lack of acceptance of the liability by these entities.

Key evidence and findings: The court observed that the appellant's proposal for a one-time payment was rejected by both KPT and GMB, further supporting the contingent nature of the liability.

Application of law to facts: The court applied the legal standards for recognizing liabilities, noting that the appellant's actions did not meet these standards due to the absence of mutual consent.

Treatment of competing arguments: The appellant's reliance on previous case law was dismissed, as the facts did not support the existence of an agreed liability.

Conclusions: The court concluded that the Rs. 20 crores could not be treated as part of the pipeline's cost for depreciation purposes due to its contingent nature.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The tribunal noted, "The assessee has unilaterally created the liability and this liability has not been accepted by KPT and GMB. Therefore, this liability cannot be allowed as deduction and this is only recreated liability."

Core principles established: The judgment reinforces the principle that liabilities must be legally or contractually recognized to be eligible for depreciation. Contingent liabilities, without mutual agreement, do not qualify.

Final determinations on each issue: The court dismissed the appeal, affirming the Tribunal's decision that no substantial question of law arose from the impugned order. The court concluded that the depreciation claim was not justified, and the Rs. 20 crores could not be treated as part of the pipeline's cost.

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