2005 (6) TMI 18 - HC - Income Tax

(i) Whether Tribunal was right in directing AO to disallow the entire claim of depreciation if the facts are found that the scaffolding materials at the time of termination of lease is not recovered? (ii) Whether the Tribunal was right in law in exercising jurisdiction which results in enhancement of the assessment on the appellant when the Tribunal has no jurisdiction? (iii) Whether the Tribunal was right in holding that the depreciation on scaffolding material is not to be allowed at the rate of 100 %.? - Tribunal went off on a tangent by observing that the facts need to be verified by the Assessing Officer as to whether the scaffolding materials have been really leased out or have been sold. In fact, it was nobody s case before any of the authorities that there was any disguised sale of scaffolding materials. A perusal of the entire record shows that the only dispute before the authorities related to the rate of depreciation i.e., as to whether it was 33 1/3 per cent, or 100 per cent. The Tribunal had not even put the assessee on notice about the above observation at the time of hearing, and no opportunity was given to the assessee about the point raised suo motu by the Tribunal. In, view of the above, we set aside the impugned order of the Tribunal and hold that the scaffolding materials are entitled to 100 per cent, depreciation treating the transaction as a lease. The appeal is allowed

Summary

Issues:
1. Disallowance of depreciation on scaffolding material.
2. Jurisdiction of the Tribunal to enhance assessment.
3. Allowance of depreciation on scaffolding material at the rate of 100%.

Issue 1: Disallowance of Depreciation on Scaffolding Material:
The case involved a public limited company claiming depreciation on scaffolding material leased out to another company. The Assessing Officer restricted the depreciation claim to 33 1/3 per cent, arguing that the scaffolding material was an integrated unit and could not be bifurcated into smaller parts for depreciation purposes. The Commissioner of Income-tax (Appeals) upheld this decision, citing a precedent where expenditure on integrated systems was treated as a whole. The Tribunal then disposed of the appeal without considering the claim for 100 per cent, depreciation. The Tribunal later observed that the recovery of scaffolding material upon lease termination would determine if it was a sale or lease, raising concerns about the transaction's nature. However, it was noted that neither party disputed the lease agreement, focusing solely on the depreciation rate. The High Court held that each scaffolding material constituted "plant" eligible for 100 per cent, depreciation, emphasizing the inclusive definition of "plant" under the Income-tax Act.

Issue 2: Jurisdiction of the Tribunal to Enhance Assessment:
The Tribunal's observation regarding the potential sale of scaffolding materials and the need for verification by the Assessing Officer was deemed beyond the scope of the case. The High Court emphasized that the dispute revolved around the depreciation rate, not the nature of the transaction. The Tribunal's consideration of extraneous factors without notifying the assessee and providing an opportunity for clarification was criticized. The High Court concluded that the Tribunal's focus should have been limited to the depreciation claim rather than introducing new aspects not raised by either party.

Issue 3: Allowance of Depreciation on Scaffolding Material at 100% Rate:
Relying on precedents and the broad definition of "plant" under the Income-tax Act, the High Court determined that each scaffolding material constituted "plant" and was eligible for 100 per cent, depreciation. The court clarified that the term "plant" encompassed various apparatus used in business operations, including movable objects like scaffolding materials. The High Court set aside the Tribunal's order and allowed the appeal, granting the assessee 100 per cent, depreciation on the scaffolding materials. No costs were awarded in the judgment.

This detailed analysis of the judgment addresses the issues of disallowance of depreciation, jurisdiction of the Tribunal, and the allowance of depreciation on scaffolding material at a 100 per cent rate, providing a comprehensive overview of the legal reasoning and outcomes of the case.