2015 (11) TMI 1298 - AT - Income Tax

Reopening of assessment - excess deduction allowed u/s 36(1)(viii) and excess depreciation claimed - Held that - As per the provisions of section of 36(1)(viii) of Income Tax Act, 1961, the assessee can claim deduction up to 40% of its income by way of creation of reserve. Therefore, a limit was placed by the second proviso on the amount which can be transferred to the reserve. This limit is there in the section since the beginning. Otherwise the assessee will keep on depositing the amount in the reserve and withdrawing it simultaneously and can claim deduction up to 40 % of total income as envisage in the section 36( 1) (viii) of Income Tax Act,1961. In the instant case, it is not clear as to whether the assessee has excluded the amount withdrawn from the reserve as mentioned above in the aggregate of amounts carried to the reserve, there was excess deduction claimed by the assessee in AY 2004-05 and AY 2005-06 to the tune of ₹ 20.47 cr in AY 2004-05 and ₹ 71.65 er in AY 2005-06.However, as per the amended provision, assessee s eligibility for enhanced deduction is available only, if it is found that amount withdrawn out of the reserve had been offered for taxation u/s.41(4A). However, it is not clear from the record as to whether the amount so withdrawn by the assessee has been offered for tax. Therefore, we restore the matter back to the file of the AO for finding out the factual position and for deciding afresh. - Decided in favour of assessee for statistical purposes. Disallowance of depreciation on the plea assessee had wrongly classified these assets are falling under the head furniture and fixtures, in the plant and machinery - assessee had classified Air conditioners, ECR, Printers, Typewriters, Mobile Phones, Refrigerators, Water Coolers, Photocopiers, EPBX, Fax as machinery and plant and claimed depreciation @ 15% as against @ 10% made by AO - Held that - Assessee s claim of depreciation in respect of these items is in accordance with the New Appendix to the I.T. Rules. These are not furniture and fixtures. Accordingly, there is no merit in AO s action for treating same as furniture and fixture so as to reduce to rate of depreciation from 15% to 10%. The AO is directed to allow depreciation @15% on these items. - Decided in favour of assessee

Summary

Issues Involved:
1. Reopening of assessment under Section 147.
2. Disallowance of deduction under Section 36(1)(viii).
3. Disallowance of depreciation on certain assets.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee contested the reopening of assessments for the years 2004-05 and 2005-06, arguing that all material facts were fully disclosed during the original assessment under Section 143(3). The assessee claimed that the reopening was based on a mere change of opinion without any tangible material. The Tribunal found that the notice under Section 148 was issued within four years, and there was a prima facie case of income escapement due to excess claims of deductions under Section 36(1)(viii) and depreciation. The Tribunal upheld the reopening, referencing the deeming provisions of clause (c) of Explanation 2 to Section 147 and relevant case law, including IPGA Laboratories vs DGIT.

2. Disallowance of Deduction under Section 36(1)(viii):
The assessee argued that the deduction claimed under Section 36(1)(viii) was in accordance with the law, and the amendment to the section was prospective. The Tribunal analyzed the proviso to Section 36(1)(viii), which restricts the deduction to twice the amount of the paid-up share capital and general reserves. It was found that the assessee had claimed an excess deduction of Rs. 20,47,92,181/- for the year 2004-05. The Tribunal noted that the amount carried to the reserve must be considered for deduction, and the proviso's conditions were not met. However, the Tribunal remanded the matter back to the AO to verify if the amount withdrawn from the reserve was offered for taxation under Section 41(4A).

3. Disallowance of Depreciation on Certain Assets:
The AO reclassified certain assets (Air Conditioners, ECR, Printers, Typewriters, Mobile Phones, Refrigerators, Water Coolers, Photocopiers, EPBX, Fax) from 'Plant and Machinery' to 'Furniture & Fittings', reducing the depreciation rate from 15% to 10%. The Tribunal found that the assessee's classification was in accordance with the New Appendix to the IT Rules, which specifies the depreciation rates. The Tribunal held that these items should be classified under 'Plant and Machinery' and allowed the depreciation at 15%.

Conclusion:
The appeals were partially allowed. The Tribunal upheld the reopening of assessments and the disallowance of excess deduction under Section 36(1)(viii) but directed the AO to verify the taxation of the withdrawn reserve amount. The Tribunal allowed the assessee's claim for higher depreciation on the reclassified assets. The order was pronounced on 09/10/2015.