2016 (8) TMI 111 - HC - Income Tax

Depreciation computation - whether the depreciation should be allowed on the original value of assets even though certain assets were old and obsolete and the respondent had claimed depreciation in its books of accounts for the same? - Held that - The depreciation provided in the books in the years when the income was exempt cannot be treated as the depreciation actually allowed . Accordingly, it was held that as the assessee was not required to compute profits and gains of business or profession under the Income-tax Act, mere passing of accounting entry made for depreciation in the books of accounts was not the depreciation actually allowed as there was no liability to tax and hence, no income-tax assessment for this period. It has further held that the written down value (WDV) for the purpose of assessment would be the original cost less nil, i.e., the original cost. This interpretation is not in conformity with the intent and purpose of the provisions of depreciation. Accordingly, Explanation 6 has been inserted in sub-section (6) of section 43 to clarify that in such a case - (a) the actual cost of the asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account of the assessee; (b) the total amount of depreciation on such provided in the books of account of the assessee in respect of such previous year or years preceding the previous year relevant to the assessment year under consideration shall be deemed to be the depreciation actually allowed under the Income-tax Act for the purposes of sub-section (6) of section 43; (c) the depreciation actually allowed as above shall be adjusted by the amount of depreciation attributable to such revaluation.- Decided against assessee Roads and boundaries, railway sidings, jetty pire, bouys, mooring and navigation structure can be considered as plant and machinery for the purpose of granting of depreciation under Sec. 32. See Commissioner of Income-Tax v. SLM Maneklal Industries Limited 1993 (6) TMI 51 - GUJARAT High Court - Decided in favour of assessee.

Summary

Issues Involved:
1. Challenge to the judgment of the Income Tax Appellate Tribunal for Assessment Year 2003-2004.
2. Interpretation of depreciation allowance on original value of assets and block of assets.
3. Classification of certain assets as plant and machinery or building for depreciation under Sec. 32 of the Income Tax Act, 1961.

Issue 1: Challenge to Tribunal Judgment
The appellant challenged the judgment of the Income Tax Appellate Tribunal for Assessment Year 2003-2004, where the Tribunal allowed the appeal by the respondent and overturned the CIT (Appeals) findings.

Issue 2: Interpretation of Depreciation Allowance
The substantial questions of law framed by the Court for consideration revolved around the depreciation allowance on the original value of assets. The appellant argued that depreciation should not be allowed on assets that were old or obsolete, even if the respondent had claimed depreciation in their books of accounts. Additionally, the appellant contested the allowance of depreciation in a block of assets on the original value, even when certain assets had nil value or were written off in the books of accounts.

The appellant referred to Circular No.1/2009, emphasizing the interpretation of the written down value (WDV) of assets and the treatment of depreciation for previously exempt entities. The Circular clarified that the depreciation actually allowed under the Income-tax Act should be adjusted based on the original cost of the asset, including any revaluation amounts in the books of account.

Issue 3: Classification of Assets for Depreciation
Regarding the classification of certain assets like roads, boundaries, railway sidings, and other structures as plant and machinery or building for depreciation under Sec. 32 of the Income Tax Act, the respondent relied on previous decisions to argue that these assets should be considered part of the plant and machinery. Citing relevant case laws, the Court held that the assets in question indeed formed part of the plant and machinery, ruling in favor of the respondent and against the Department.

In conclusion, the High Court upheld the respondent's arguments on all three issues, emphasizing the interpretation of depreciation rules and the classification of assets for depreciation purposes under the Income Tax Act.