2015 (8) TMI 665 - HC - Income Tax

Section of AY to capitalize the customs duty levied on import of hospital equipment and claim depreciation - whether the obligation to pay customs duty related back to the actual date of payment of customs duty or the date of import of the equipment and whether the said customs duty paid in the previous year relevant to the AY in question can be capitalized with reference to an earlier year? - Held that - Following the decision in Funskool (India) Limited (2007 (4) TMI 125 - HIGH COURT , MADRAS) wherein held that even though the sales tax was paid in a subsequent year, the liability to pay sales tax arose in the accounting period relevant to the assessment year in which the machinery was purchased. It was held on the facts of that case that the development rebate had to be claimed in the AY in which the machinery was purchased. We are of the view that in the instant case, the AO erred in disallowing the capitalization of the additional customs duty in the manner claimed by the Assessee and adding the entire customs duty paid in the relevant AY to the income of the Assessee. The impugned order of the ITAT affirming the decision of the CIT (A) that the enhanced cost of equipment should be taken into consideration from AY 2005-06 onwards and that the WDV should be reworked for the AY in question does not call for interference. - Decided against revenue.

Summary

Issues:
1. Determination of the Assessment Year for capitalizing customs duty on imported hospital equipment and claiming depreciation.

Analysis:
The primary issue in this case revolves around the Assessment Year (AY) in which the Assessee can capitalize the customs duty levied on the import of hospital equipment and claim depreciation. The Respondent-Assessee, a hospital and diagnostic center, imported hospital equipment without paying customs duty based on a customs duty exemption certificate. Subsequently, the certificate was withdrawn, leading to a demand for customs duty. The Assessee remitted the duty and claimed depreciation on the enhanced cost of the machinery.

The Assessing Officer (AO) rejected the Assessee's explanation, considering the customs duty as penal in nature and disallowing its capitalization. The Commissioner of Income Tax (Appeals) directed the AO to rework the depreciation from AY 2005-06. The Income Tax Appellate Tribunal (ITAT) affirmed this decision, stating that the obligation to pay customs duty arose in AY 2005-06, and the enhanced equipment cost should be considered from that year onwards.

The Court upheld the ITAT's decision, citing the Madras High Court's ruling that depreciation can be claimed on customs duty paid in a previous year relevant to the AY in question. The Court rejected the Revenue's argument that customs duty should be capitalized in AY 2009-10 at a 15% depreciation rate. The Court emphasized that the Assessee's claim for depreciation on customs duty paid from the year of actual import remains open for consideration in a future case.

In conclusion, the Court dismissed the appeal, affirming the decision to allow depreciation on the enhanced equipment cost from AY 2005-06 onwards. The Court's ruling aligns with the principle that the liability to pay customs duty relates back to the date of import, allowing for the capitalization and depreciation of the duty paid on imported equipment.