2014 (6) TMI 560 - AT - Income Tax

Disallowance of additional deprecation on installation of embroidery machines Held that -Following DCIT vs. Cosmo Films Ltd. 2012 (9) TMI 281 - ITAT DELHI - the additional depreciation cannot be restricted to 50 % and it has to be allowed in succeeding years if it is not allowed full in the relevant year the assessee had earned the benefit as soon as he had purchased the new plant and machinery in full but it is restricted to 50% in that particular year on account of period of usages - Such restrictions cannot divest the statutory right - Law does not prohibit that balance 50% will not be allowed in succeeding year - The extra depreciation allowable u/s 32(1)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage - The so earned incentive must be made available in the subsequent year - overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of plant machinery thus, the order of the CIT(A) in respect of deletion of disallowance on account of additional depreciation is upheld Decided against Revenue.

Summary

Issues:
1. Allowability of additional depreciation claimed on embroidery machine as manufacturing activity.
2. Disallowance of balance additional depreciation claimed on machinery installed in the previous year.

Issue 1:
The case involved a dispute regarding the allowability of additional depreciation claimed on an embroidery machine as a manufacturing activity. The assessee, engaged in embroidery work on clothes, claimed additional depreciation under section 32(1)(iia) of the Income Tax Act. The Assessing Officer disallowed the claim, arguing that the assessee's activities were essentially job work and not manufacturing or production. However, the CIT(A) granted relief to the assessee based on previous ITAT decisions in favor of the assessee. The ITAT, Ahmedabad, upheld the CIT(A)'s decision, emphasizing that embroidery work on machines could be considered a manufacturing activity, allowing the additional depreciation claimed by the assessee.

Issue 2:
The second issue revolved around the disallowance of balance additional depreciation claimed on machinery installed in the previous year. The Assessing Officer disallowed the balance depreciation carried forward by the assessee, contending that it was inadmissible under section 32(1)(iia). The CIT(A), following the decision in the case of DCIT vs. Cosmo Films Ltd, allowed the additional depreciation, reasoning that the incentive for fresh investment in the industrial sector was aimed at encouraging new investments and expanding industrial units. The ITAT upheld the CIT(A)'s decision, emphasizing that the one-time benefit of additional depreciation should be extended to the assessee in subsequent years if not fully allowed in the relevant year. The ITAT concluded that the provisions related to additional depreciation should be construed reasonably and liberally to fulfill the intention of encouraging industrialization.

In summary, the ITAT, Ahmedabad, dismissed the revenue's appeal, upholding the decisions of the CIT(A) in both issues regarding the allowability of additional depreciation on the embroidery machine as a manufacturing activity and the disallowance of balance additional depreciation claimed on machinery installed in the previous year.