2015 (3) TMI 932 - AT - Income Tax

Disallowance of depreciation on de-capitalised assets as directed by DRP - Held that - The assessee is engaged in the business of trading of Xerographic Equipments, Printers, Scanners, Faxes, Multi Functional Devices and consumables parts thereof. The assessee leased out the equipments to the customers on an operating lease basis and these equipments are capitalised and depreciation is claimed for tax purposes in accordance with the provisions of the Act. These operating leased assets were returned to the assessee either on the termination of the lease or otherwise after a period of six months, then the assessee is following a practice to convert these assets into stock-in-trade at a nominal value of ₹ 1/- as these used assets are not having any readymade market for further leasing. This nominal value is reduced from the block of assets. In some of the cases, these assets are again leased out then they are recapitalized in the block of assets at the nominal value at which these were decapitalised. However, certain used assets remained in stock-in-trade and whenever these are sold, the profit is offered for taxation. This method of accounting is being followed consistently by the assessee. When the assets are recapitalized at the nominal value at which it is decapitalised then there is no effect on the taxability of the assessee. Similarly, whenever these used assets are converted into stock-in-trade and sold subsequently and the surplus on the sale is offered for taxation then there is no harm to the revenue. Considering all these facts, we allow this ground of assessee s appeal. - Decided in favour of assessee. Disallowance of depreciation on the fixed assets which has been written off in the books of account and where the assets ceased to exist - Held that - This issue is covered in favour of the assessee by the decision of Hon ble Delhi High Court in assessee s own case in assessment year 2008-09 to held that tax authorities were not justified in working out the depreciation on block of assets by reducing the value of assets which have either to be discarded or destroyed or sold or written off. - Decided in favour of assessee. Addition on changing the accounting policy - recognising the sale on completion of installation and acceptance by the customers as against on delivery followed in earlier years - Held that - Assessee has adopted this accounting policy as per Standard 9 of Institute of Chartered Accountants of India. It has been constantly followed thereafter. Revenue is recognised on installation and acceptance of goods at the premises of the customers. In view of this factual matrix, we hold that this issue is covered in favour of the assessee by the decision of Hon ble Supreme Court in CIT vs. M/s. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT wherein held that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party from whom the income becomes due to pay that amount. Hon ble Supreme Court has also held that income accrued when it becomes due but it must also be accompanied by a corresponding liability of other party to pay the amount, only then can it be said that for the purpose of liability that the income is not hypothetical and really accrued to the assessee. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of depreciation on de-capitalized assets.
2. Disallowance of depreciation on fixed assets written off.
3. Addition due to change in accounting policy for recognizing sales.
4. Interest levied under sections 234D and 244A and initiation of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on De-capitalized Assets:
The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to disallow depreciation of Rs. 28,21,208 on de-capitalized assets, arguing that assets converted into stock-in-trade at a nominal value of Rs. 1 were not eligible for depreciation as they were not used for business purposes. The assessee argued that these assets, which included technology products, were either obsolete or defective and thus converted to stock-in-trade at a nominal value. The depreciation should continue on the remaining written-down value (WDV) of the block of assets as per section 43(6)(c) of the Income-tax Act. The Tribunal allowed the appeal, stating that depreciation on the block of assets continues even if individual assets are sold, discarded, or de-capitalized, as long as the block exists.

2. Disallowance of Depreciation on Fixed Assets Written Off:
The DRP sustained a disallowance of Rs. 6,03,122 on fixed assets written off, based on past history and pending High Court orders. The assessee argued that the issue was covered in their favor by the Delhi High Court in a similar case, where it was held that depreciation should continue on the block of assets even if individual assets are written off, provided there is no scrap value. The Tribunal agreed with the assessee, citing the High Court's decision and directed the AO to re-compute the depreciation and allow the necessary relief.

3. Addition Due to Change in Accounting Policy for Recognizing Sales:
The DRP directed the AO to add Rs. 1,39,94,000, arguing that the change in accounting policy from recognizing sales on delivery to recognizing sales on installation and acceptance by customers led to underreporting of income. The assessee contended that the change was in compliance with Accounting Standard 9 issued by the Institute of Chartered Accountants of India and was necessary to reflect the true transfer of risks and rewards. The Tribunal, referencing the Supreme Court's decision in CIT vs. Excel Industries Ltd., held that income must be real and not hypothetical. Since the new policy was consistently followed and aligned with accounting standards, the Tribunal directed the deletion of the addition.

4. Interest Levied under Sections 234D and 244A and Initiation of Penalty under Section 271(1)(c):
The Tribunal held that charging interest under section 234D is mandatory and consequential, thus dismissing the assessee's plea. The withdrawal of interest granted under section 244A was also upheld as per law. The initiation of penalty under section 271(1)(c) was deemed premature, and hence, the issue was dismissed.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the deletion of disallowances related to depreciation on de-capitalized and written-off assets and the addition due to the change in accounting policy, while upholding the interest charges and dismissing the penalty initiation as premature.

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