2025 (3) TMI 217 - AT - Income Tax

Revision u/s 263 - computation of depreciation and the treatment of additional depreciation carried forward from the preceding year - as per CIT AO has failed to examine the claim of depreciation made by the assessee as a consequence of claiming brought forward additional depreciation from earlier assessment year 2017-18 which has resulted in the assessee availing excess depreciation - PCIT held that brought forward additional depreciation from AY 2017-18 should have first been reduced from the opening WDV and thereafter current year s normal and additional depreciation should have been computed for AY 2018-19. HELD THAT - Method of computation provided by the Pr. CIT is not correct as Section 32(1)(ii) provides that depreciation has to be charged on the written down value of any block of assets as per the rates prescribed. Section 43(6)(c) of the Act provides that the written down value of a block of asset shall be computed by taking the WDV as on the opening date which shall be increased by the actual cost of the assets acquired during the year and be reduced by the moneys payable in respect of assets sold during the year and no further adjustment is allowed to be made to the WDV computed as per the provisions of the said section. It is on such WDV so computed that the depreciation has to be computed. The format of income tax return utility notified by the CBDT the amount of depreciation chargeable on plant and machinery is auto computed in Schedule DPM. An assessee is meant to submit the figure of opening WDV of the block details of additions made during the year classified by the period for which such asset is put to use (more than or less than 180 days) and the details of assets sold during the year. Basis the aforesaid details submitted the utility as conceived by the Income-tax Department calculates the amount of normal and additional depreciation allowable on the block of asset. No mechanism for the assessee to first compute and reduce the additional depreciation for the preceding year from the opening WDV and then compute the normal depreciation for the relevant year as directed by the Ld. PCIT. The said computation of depreciation as provided in the income tax return utility has also been found to be in consonance with the Clause 18 of the Tax Audit Report. If the method suggested by the Ld. PCIT in the impugned order were to be followed in that case the total depreciation allowable to the assessee would be higher in subsequent years since the closing WDV would be higher. Being so the assessee would be allowed higher depreciation is subsequent years. There is no error in the depreciation claimed by the assessee hence no case of order being erroneous inasmuch as it is prejudicial to the interest of revenue could be made out. Appeal of the assessee is allowed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the Principal Commissioner of Income Tax (PCIT) had jurisdiction to exercise revisionary powers under Section 263 of the Income Tax Act, 1961, in setting aside the assessment order passed under Section 143(3) r.w.s. 144C and 144B of the Act.

2. Whether the assessment order was erroneous and prejudicial to the interest of the Revenue, specifically concerning the computation of depreciation claimed by the assessee.

3. Whether the PCIT correctly interpreted the provisions of Sections 32 and 43(6) of the Income Tax Act in relation to the computation of depreciation and the treatment of additional depreciation carried forward from the preceding year.

4. Whether the method of computation of depreciation followed by the assessee, as accepted by the assessing officer, was correct and consistent with the provisions of the Act and the prescribed return filing utility.

ISSUE-WISE DETAILED ANALYSIS

1. Jurisdiction of the PCIT under Section 263

The relevant legal framework involves Section 263 of the Income Tax Act, which empowers the PCIT to revise any order if it is deemed erroneous and prejudicial to the interests of the Revenue. The Court examined whether the twin conditions of the order being erroneous and prejudicial were satisfied.

The Court found that the PCIT's exercise of revisionary powers was not justified as the assessment order was neither erroneous nor prejudicial to the Revenue. The Court emphasized that the assessment was made after due inquiry and application of mind by the assessing officer, particularly concerning the claim of depreciation.

2. Computation of Depreciation and Additional Depreciation

The legal framework includes Sections 32 and 43(6) of the Income Tax Act, which govern the computation of depreciation. The Court interpreted these provisions to determine the correct method for calculating depreciation, particularly in relation to additional depreciation carried forward from a previous year.

The PCIT argued that the assessee should have reduced the additional depreciation from the opening Written Down Value (WDV) before computing normal depreciation. However, the Court found this interpretation incorrect. The Court reasoned that Section 32(1)(ii) mandates depreciation on the WDV of a block of assets, and Section 43(6)(c) specifies how WDV should be computed without additional adjustments as suggested by the PCIT.

The Court noted that the method used by the assessee was consistent with the income tax return utility prescribed by the Central Board of Direct Taxes (CBDT), which auto-computes depreciation based on the details provided by the assessee.

3. Treatment of Competing Arguments

The Court evaluated the arguments presented by both parties. The assessee contended that the method of depreciation computation was consistent with the Act and had been accepted in previous assessments. The PCIT's argument was that the method led to excess depreciation, which was not in line with statutory provisions.

The Court concluded that the PCIT's method would result in a higher closing WDV, allowing for greater depreciation in subsequent years, thus not prejudicial to the Revenue. Therefore, the Court found no error in the depreciation claimed by the assessee.

SIGNIFICANT HOLDINGS

The Court established the following core principles:

"Depreciation has to be charged on the written down value of any block of assets as per the rates prescribed under Section 32(1)(ii) of the Act."

"The written down value of a block of asset shall be computed by taking the WDV as on the opening date, which shall be increased by the actual cost of the assets acquired during the year and be reduced by the moneys payable in respect of assets sold during the year, as per Section 43(6)(c) of the Act."

The Court's final determination was that the PCIT's order was without jurisdiction and that the original assessment order was neither erroneous nor prejudicial to the interest of the Revenue. Consequently, the appeal of the assessee was allowed.

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