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2013 (1) TMI 311 - AT - Income TaxReopening of assessment - excessive allowance on account of depreciation - reduction of WDV of the Block of assets and consequent disallowance of depreciation claim - Held that - The assessee acquired plant & machinery for its Hoskote plant in April, 1996 making no payments for the purchase ultimately the CEL, UK, one of the group company made payments of the machinery to the suppliers. The assessee recognized this liability for payment for purchase of machinery as payable to CEL, UK. Later on, CEL, UK was taken over by Akzo International BV who waived repayment of monies due on purchase of machinery. As in April, 1996 when the machinery was purchased, the actual cost was recorded in the books of account including the monies payable to the supplier of machineries. Even today the Assessee has not made any adjustment in its books of accounts recognizing the write of amounts. The benefit as a result of waiver of the loan was shown in the books of accounts of the Assessee in the balance sheet as a capital receipt not chargeable to tax, claim been accepted by the Revenue. The assessee has claimed depreciation of those machineries from the A.Y. 1997-98. This fact came to the knowledge of the AO in the course of assessment proceedings for the AY 2004-05 & action was initiated u/s. 148 to reduce the WDV of the relevant block of assets and withdraw the depreciation already granted to the assessee in the past. Such action was initiated only from A.Y. 2001-02 to 2006-07. Prior to the introduction of new concept of block of assets with effect from 01.04.1988, depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT s Circular dated 23.09.1988 is that once the various assets are clubbed together and become block asset within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset in so far as calculation of depreciation is concerned. The merger of various assets into the block asset can be altered only when the eventuality contained in clause (c) of s. 43(6) takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). It is thus clear that the only way by which the written down value on which depreciation is to be allowed as per the provisions of Sec.32(1) (ii) can be altered is as per the situation referred to in Sec.43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus the recourse by the revenue to those provisions on the facts and circumstances of the present case cannot be sustained. Provisions of section 43(6)(b) were not applicable to the present case but are section 43(6)(c). As decided in Tata Iron & Steel Co. Ltd. (1997 (12) TMI 5 - SUPREME COURT) that repayment of loan borrowed by an assessee for the purpose of acquiring asset has no relevance to the cost of assets on which depreciation has to be allowed. Similar view was also expressed in the case of Cochin Co. (P.) Ltd. s case (1989 (10) TMI 20 - KERALA HIGH COURT) that WDV as at the beginning of the preceding year as well as the depreciation actually allowed in that year have reached finality and cannot be changed in the assessment year under appeal. They could have been changed only if the assessment of that or earlier years could be re-opened. Such an action was barred by limitation.Further, as per section 43(6)(c)(ii) & (i), the only adjustments permitted in the WDV of the block with reference to the year in which depreciation is to be allowed are addition actual cost of asset acquired during the year and reduction of monies receivable on sale, discarding, demolition or destruction of the assets and its scrap value. Thus the disallowance of depreciation cannot be sustained. The CIT(A) ought to have deleted the disallowance of depreciation in full. Validity of initiation of reassessment proceedings - That there were no assessments u/s. 143(3) and only an intimation had been issued. In the circumstances CIT(Appeals) was right in coming to the conclusion that the reopening of assessment u/s. 148 was valid. AO s action of setting off the unabsorbed depreciation against the total income without giving effect to the brought forward business loss reported in the return of income of earlier years - Held that - CIT(A) has directed the AO to verify the records and allow the claim of the assessee directing to carry forward business loss should be first set off and thereafter the unabsorbed depreciation has to be set off. Section 72 gives priority in the matter of setting off of carry forward business loss and depreciation, and it lays down that carry forward business loss has to be set off against business income for that assessment year. Section 32(2) provides for set off of unabsorbed depreciation. Those provisions are subject to provisions of section 72(2) which provides that set off has to be first given for carry forward business loss. It is thus clear that the claim of the assessee that priority of set off should be brought forward business loss and thereafter unabsorbed depreciation is found to be correct. The AO is accordingly directed to verify and give effect, keeping in mind the observations referred to above.
Issues Involved:
1. Validity of the order passed by the CIT(A) to the extent against the assessee. 2. Validity of reassessment proceedings. 3. Validity of proceedings under section 155(4). 4. Reduction of waiver of loan amount from WDV, depreciation allowance, and carryforward of unabsorbed depreciation. 5. Setting off brought forward business loss against total income and setting off of unabsorbed depreciation first. Detailed Analysis: 1. Validity of the Order Passed by the CIT(A) to the Extent Against the Assessee: The assessee and revenue filed multiple appeals against the CIT(A)'s orders for different assessment years. The CIT(A) provided partial relief to the assessee by holding that only the depreciation allowance already allowed from the date of purchase of plant & machinery till A.Y. 2000-01 should be reduced from the opening WDV as on 01.04.2001. However, the CIT(A) did not accept the assessee's contention in full, leading to appeals from both sides. 2. Validity of Reassessment Proceedings: The CIT(A) upheld the reassessment proceedings initiated by the AO under section 147/148 for A.Y.s 2001-02 to 2003-04. The CIT(A) cited Explanation 2 to section 147, which deems cases where income has escaped assessment due to excessive claims of loss, deduction, allowance, or relief as valid grounds for reassessment. The CIT(A) referred to the Supreme Court's decision in ACIT v. Rajesh Jhavery Stock Brokers P. Ltd., which clarified that the AO only needs a reasonable belief for reassessment, not conclusive evidence of income escapement at the notice stage. 3. Validity of Proceedings Under Section 155(4): The proceedings under section 155(4) were relevant for A.Y. 2004-05, where the CIT(A) had to decide on the adjustments to the WDV of the assets due to the waiver of the loan by the parent company. The CIT(A) concluded that the waiver of the loan could not be construed as the waiver of a loan but as a cessation of liability on account of the cost of assets. 4. Reduction of Waiver of Loan Amount from WDV, Depreciation Allowance, and Carryforward of Unabsorbed Depreciation: The CIT(A) partially accepted the assessee's argument that the entire waiver of the loan could not be reduced from the WDV of the block of assets. The CIT(A) directed that only the depreciation already allowed till A.Y. 2000-01 should be adjusted. The Tribunal, however, found that the AO's action of reducing the amount of loan waived by the supplier of machinery did not fall within the expressions "sold, discarded, demolished, or destroyed" as per section 43(6)(c). The Tribunal held that the depreciation disallowance could not be sustained and that the CIT(A) should have deleted the disallowance in full. 5. Setting Off Brought Forward Business Loss Against Total Income and Setting Off of Unabsorbed Depreciation First: For A.Y. 2007-08, the CIT(A) directed the AO to verify the records and allow the claim of the assessee that the carry forward business loss should be set off first before the unabsorbed depreciation. Section 72 of the Act gives priority to setting off carry forward business loss against business income, and section 32(2) provides for the set off of unabsorbed depreciation, subject to section 72(2). Conclusion: The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed. The Tribunal upheld the validity of the reassessment proceedings but found that the disallowance of depreciation could not be sustained. The Tribunal directed the AO to recalculate depreciation and allow the claim of the assessee regarding the setting off of brought forward business loss and unabsorbed depreciation.
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