2016 (10) TMI 587 - AT - Income Tax

Revision u/s 263 - as per CIT(A) AO has not examined the issue in depth so as to verify whether the written down value of the block of assets is net of grant amount and the amount of accumulated depreciation pertaining to the fixed assets disposed during the year was credited to the depreciation account and this aspect was not verified by the AO at the time of assessment - Held that - The assessee received the grant from NDDB in the earlier years in relation to capital assets which was shown on the liability side of the balance sheet under the head reserve and surplus in the books of accounts. On the other hand, assessee recognized the capital assets at gross purchase value. As per the policy of the assessee the depreciation pertaining to the grant was written off against the grant value shown in the balance sheet and the balance depreciation pertaining to the net value of the fixed assets was charged in the profit & loss account. The assessee for the year under consideration has calculated the depreciation in the books of accounts for ₹ 3,42,10,774/- out of which proportionate depreciation of ₹ 73,34,650/- was adjusted against the grant value shown in the balance sheet and the balance depreciation of ₹ 2,68,76,124/- proportionate to the net value of fixed assets was debited in the profit & loss account. The assessee accordingly has added the depreciation of ₹ 2,68,76,124/- in the statement of income and reduced the depreciation by the amount as worked out as per written down value of the assets under the income tax Act for an amount of ₹ 1,84,61,661/-. We also find that the depreciation under the income tax act was calculated at the WDV which was brought forward from the earlier years. The WDV was duly accepted by the lower authorities. In the year under consideration no grant was received by the assessee in relation to any capital assets. The ld. DR failed to bring anything contrary to the arguments made by the ld. AR at the time of hearing. In view of above, we opined that the depreciation claimed by the assessee under the Companies Act and Income Tax Act is representing the correct figure. Similarly for the amount credited to the depreciation account during the year for the assets disposed, the ld CIT in his impugned order u/s 263 of the Act at the outset failed to bring any error from the financial statement of the assessee and has just directed the AO for examination and verification of the aforesaid amount. From the submission of the ld. AR, we find that this amount was adjusted with the figures of the depreciation account in the books of accounts. The aforesaid amount has not impacted the depreciation amount charged by the assessee in the computation of income. The aforesaid amount was the accumulated depreciation which was adjusted with the original cost of assets as a consequence of sale of the said assets during the year. The ld. DR failed to bring anything contrary to the arguments made by the ld. AR at the time of hearing. Accordingly we find no error in the order of AO having prejudice to the interest of Revenue. - Decided in favour of assessee.

Issues Involved:
1. Legality and validity of the order passed by the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961.
2. Examination of whether the assessment order under Section 143(3) was erroneous and prejudicial to the interest of the Revenue.
3. Justification for setting aside the assessment order based on the calculation of depreciation.
4. Adjustment of grants received in previous years and their impact on the written down value (WDV) of assets.
5. Jurisdiction of the CIT under Section 263 concerning adjustments relating to previous assessment years.
6. Direction to re-examine the issue of credit of ?29,83,023/-.

Detailed Analysis:

1. Legality and Validity of the Order under Section 263:
The assessee challenged the legality of the CIT's order under Section 263 of the Income Tax Act, 1961, arguing that it was illegal, invalid, and unsustainable in law. The Tribunal examined whether the CIT's order met the requirements of Section 263, which allows the Commissioner to revise any order if it is erroneous and prejudicial to the interests of the Revenue.

2. Examination of Erroneous and Prejudicial Assessment:
The CIT considered the assessment order under Section 143(3) to be erroneous and prejudicial to the Revenue's interest on two counts:
- The assessee showed deferred income of ?73,34,650/- from grants received from NDDB on capital assets without adjusting the depreciation claimed in the income tax return.
- The assessee credited ?29,83,023/- to the depreciation account for assets disposed of during the year, which was not adjusted in the profit & loss account.

3. Justification for Setting Aside the Assessment Order:
The CIT argued that the Assessing Officer (AO) did not examine whether the WDV of the block of assets was adjusted with the grant amount. Additionally, the AO did not verify the adjustment of accumulated depreciation for disposed assets. The Tribunal found that the AO had accepted the WDV brought forward from earlier years and that no new grants were received in the current year. The depreciation claimed by the assessee was found to be correct under both the Companies Act and the Income Tax Act.

4. Adjustment of Grants and Impact on WDV:
The assessee received grants from NDDB in earlier years, which were adjusted against the capital assets' value. The depreciation was calculated on the net value of the assets, and the proportionate depreciation was adjusted against the grant value. The Tribunal noted that the WDV was duly accepted by the lower authorities and that the depreciation claimed was accurate.

5. Jurisdiction of CIT under Section 263:
The assessee argued that the CIT was not justified in assuming jurisdiction under Section 263 for adjustments relating to the assessment year 2002-03. The Tribunal found that the CIT failed to bring any error from the financial statements and merely directed the AO to re-examine and verify the amounts.

6. Re-examination of Credit of ?29,83,023/-:
The CIT directed the AO to re-examine the issue of crediting ?29,83,023/- to the depreciation account for disposed assets. The Tribunal found that this amount was adjusted in the financial accounts and did not impact the depreciation claimed under the Income Tax Act. The amount was the accumulated depreciation adjusted with the original cost of assets due to their sale.

Conclusion:
The Tribunal concluded that the order passed by the AO was neither erroneous nor prejudicial to the Revenue's interest. Therefore, the revision order under Section 263 was unsustainable in law and was canceled. Both appeals of the assessee were allowed. The Tribunal pronounced the order in open court on 09/09/2016.

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