2012 (11) TMI 852 - HC - Income Tax

Capitalization of Depreciation amount and setting off and carry forward against interest income - highway construction - A.O. held that the basic element for claim of depreciation is absent in the case of the assessee. The depreciation on equipment or assets used to construct the highway is itself a capital expenditure till the completion of the same and commencement of the commercial operation. - held that - In Commissioner of Income Tax v. Sakthi Soyas Ltd. 2006 (2) TMI 87 - MADRAS HIGH COURT it was held that - Capitalisation of those expenditure in the books of account alone was not the decisive factor in examining an expenditure for the purpose of income-tax. The name given to an expenditure or a nomenclature given to an expenditure in the books of account of the assessee is not the litmus test to decide the exact nature of expenditure for the purpose of income-tax. The purpose of the Companies Act is different from the purpose of the Income-tax Act. Therefore, the classification of those expenses as capital in nature for the purpose of the Companies Act, does not ipso facto make that expenditure a capital expenditure for the purpose of the Income-tax Act. Application of section 143(3) - held that - sub-section (3) in this case has no manner of application as it is not a case here that the appellant has frequently shifting its accounting process and method. In this case the accounting system is uniform however, while filing returns the depreciation of those assets have been claimed under the provisions of the law in its return. It is not a case that the said assets and properties do not belong to the appellant, therefore depreciation in any assets and properties is a regular phenomenon and deduction on this account is allowable under Section 32 automatically. Tribunal while reading Section 32 of the Act has accepted the legal principle but unfortunately while granting relief as rightly pointed out by Mr. Khaitan has not allowed the setting off of the interest income as regard the aforesaid amount of depreciation. - A.O.is directed to work out again allowing the deduction and setting off of the amount of interest income and to allow carry forward - Decided in favor of assessee.

Summary

Issues:
1. Interpretation of provisions of explanation 5 to Section 32(2) and Section 145 of the Income-tax Act, 1961 regarding capitalization of depreciation and set off against interest income.
2. Allowance of highway construction expenditure including depreciation as a deduction for the assessment year 2003-2004.

Issue 1:
The appeal challenged a judgment regarding the capitalization of depreciation and its set off against interest income. The appellant, engaged in road construction, showed interest income but claimed depreciation on assets, resulting in a loss. Authorities disallowed the depreciation claim, citing the appellant's accounting system capitalizing all highway construction expenditure. The appellant argued for depreciation allowance under Section 32(1) irrespective of accounting policy, citing judicial precedents. The Revenue contended that since the expenditure was capitalized per accounting policy, depreciation should be treated as capital expenditure. The High Court referred to precedents emphasizing the legal right to treat an expense as revenue despite its accounting treatment. The Court held that the appellant's right to claim depreciation should not be estopped by its accounting treatment, directing the AO to allow the deduction and set off interest income.

Issue 2:
The second issue involved the allowance of highway construction expenditure, including depreciation, as a deduction. The appellant's accounting system capitalized all expenditure under "National Highway Development Expenditure," leading to disallowance of depreciation claim. The appellant argued for depreciation allowance under Section 32(1) despite accounting treatment. The Revenue contended that since the expenditure was capitalized, depreciation should be treated as capital expenditure. The High Court emphasized the right to claim a deduction under the Act, regardless of accounting treatment. The Court held that depreciation on assets used for business purposes should be allowed, directing the AO to rework the deduction, set off interest income, and allow carry forward. The appeal was allowed without costs.