2012 (10) TMI 465 - AT - Income Tax

Terminal depreciation - revenue expenditure or capital - assessee had acquired land and put up a factory during 1995 - in 2003, the assessee had stopped its business of offset printing and typesetting and it had converted the land and building into stock in trade Held that - For claiming depreciation u/s. 32(1)(iii), it must first comply with the provisions of Sec. 32(1) of the Act that the asset is used for the purpose of business or profession. As the asset being the land and factory building, the assets were used in the business of offset printing and typesetting, which was discontinued business from 2003, the provisions of Sec. 32(1) is no more available in regard to such business as the business itself does not exist - As the business in respect of which the said development cost has been incurred is discontinued, the same cannot be claimed as revenue expenditure in respect of another business being real estate business, just because the land has been converted into stock in trade for the present business - appeals of the Revenue are allowed

Summary

Issues:
1. Allowance of capital expenses on conversion of land from capital assets to stock in trade.
2. Allowance of terminal depreciation on factory building and land as revenue expenditure.

Analysis:
1. The first issue pertains to the allowance of capital expenses on the conversion of land from capital assets to stock in trade. The appellant contested the decision of the Commissioner of Income Tax(A) to permit the capital expenses incurred during the conversion. The appellant argued that as the business of offset printing and typesetting had been discontinued in 2003, the assets related to that business were no longer eligible for depreciation under Sec. 32(1) of the Act. The Tribunal agreed with the appellant, stating that once the business is discontinued and the assets are no longer used for business purposes, the provisions of Sec. 32(1) do not apply. The Tribunal found that the development cost incurred for the land portion where the factory building was constructed during 1995 could not be claimed as revenue expenditure for the new real estate business simply because the land had been converted into stock in trade for the new business. Therefore, the Tribunal reversed the decision of the Commissioner of Income Tax(A) on this issue and upheld the Assessing Officer's order.

2. The second issue revolved around the allowance of terminal depreciation on the factory building and land as a revenue expenditure. The appellant claimed terminal depreciation under Sec. 32(1)(iii) for the Assessment Year 2006-07 and 2007-08 based on the WDV of the factory building. The Tribunal noted that the assets were originally used for the offset printing and typesetting business, which had been discontinued in 2003. As a result, the Tribunal ruled that the provisions of Sec. 32(1) were no longer applicable to the assets related to the discontinued business. The Tribunal further emphasized that the development cost incurred for the land portion, claimed as a revenue expenditure, could not be allowed for the new real estate business. Consequently, the Tribunal allowed the appeals of the Revenue, reversing the decision of the Commissioner of Income Tax(A) on the issues.

In conclusion, the Appellate Tribunal ITAT, Chennai, in its judgment, addressed the issues related to the allowance of capital expenses on land conversion and terminal depreciation on the factory building and land. The Tribunal ruled in favor of the Revenue, overturning the decisions of the Commissioner of Income Tax(A) and upholding the Assessing Officer's orders based on the provisions of Sec. 32(1) of the Income Tax Act.