2015 (5) TMI 651 - HC - Income Tax

Depreciation claim denied - cession of work/suspension of work in the factory premises of the petitioner - Held that - Applying the decisions of M/s. Norplex Oak India 2011 (3) TMI 620 - CALCUTTA HIGH COURT to the facts in this case wherein held that as the assessee was ready for doing his business. But for the adverse law and order situation, he could not actually run the factory although all the machineries were ready for use and the valuation of such machinery also depreciated notwithstanding its non-user. Notwithstanding such adverse law and order situation, the assessee did not abandon its business but suffered loss for such a state of affairs prevailing in that State over which he had no control with an expectation of resuming the business. This is not a case where the assessee himself is embroiled in a dispute with his labourers and in the process, has decided to declare a lockout expressing its intention not to run the business. Thus,the Tribunal below rightly granted depreciation in favour of the assessee - the question in the present case too has to be and is answered in the affirmative - Decided against the revenue. Expenditure on filling up the pond, leveling of the low land - revenue v/s capital expenditure - Held that - In this case the expenditure was made for bringing into existence an advantage for the enduring benefit of the business of the assessee, and therefore, the same was capital in nature. In the circumstances the view taken by the learned Appellate Tribunal is certainly a possible view. We, therefore, answer the second question in the negative - Decided against the assessee

Summary

Issues:
1. Claim of depreciation under Section 32 of the Act for machinery not actively used during a period of work suspension.
2. Treatment of expenditure incurred for filling up the pond and leveling the low land as revenue or capital expenditure.

Issue 1: Claim of Depreciation for Inactive Machinery During Work Suspension:

The appellant claimed depreciation under Section 32 of the Act for machinery not actively used during a work suspension period. The appellant relied on precedents where courts allowed depreciation in similar circumstances. The High Court cited cases where depreciation claims were allowed for machinery not actively used due to external factors like lock-outs or adverse situations affecting business operations. The court emphasized that the machinery being ready for use during the suspension period was crucial. The court noted that the suspension of work was not due to any malice, and the plant remained ready for use. Relying on these precedents, the court held in favor of the appellant, allowing the claim of depreciation for the inactive machinery during the work suspension period.

Issue 2: Treatment of Expenditure on Filling Up Pond as Revenue or Capital Expenditure:

The second issue revolved around the treatment of an expenditure of &8377; 15.69 lakhs incurred for filling up a pond and leveling low land. The appellant claimed the expenditure as revenue, arguing that it did not create any new asset but enabled the earning of rental income. The Assessing Officer and CIT(A) treated the expenditure as capital, emphasizing that the improvement added enduring value to the land. The Tribunal upheld this view, stating that filling up the pond changed it into land, enhancing its value, and thus, the expenditure was capital in nature. The appellant cited a Supreme Court case emphasizing that for an expense to be deductible, it must be laid out wholly and exclusively for business purposes. However, the Tribunal held that the filling up of the pond and land leveling constituted an improvement of enduring nature, enhancing the value of the asset. Referring to a previous case, the court agreed with the Tribunal's view that the expenditure was capital in nature as it brought enduring benefits to the business. Consequently, the court answered the second question against the appellant, upholding the treatment of the expenditure as capital.

In conclusion, the High Court partially allowed the appeal, ruling in favor of the appellant regarding the claim of depreciation for inactive machinery during work suspension but against the appellant concerning the treatment of the expenditure on filling up the pond as capital expenditure.