2009 (7) TMI 65 - HC - Income Tax

Depreciation on Flats and Machines u/s 32 Expenditure on R&D office u/s 35 Held that - the expression used for the purpose of business includes passive user of the assets in the business. - the asset cannot be said to be not used when the same is kept ready for use depreciation allowed regarding expenditure on scientific research - expenditure for scientific research means to become liable to i.e. to incur a debt and at such time the expenditure can be said to have been incurred. It was further held that the expression incurring includes either an actual payment or that the concerned person has become liable for payment but had not actually made payment therefore benefit can not be denied where payment has not been made

Summary

Issues:
1. Depreciation on flat purchased by assessee at Mumbai.
2. Expenditure made by assessee for purchase of two machines.
3. Expenditure incurred by assessee on R&D office at Lalru.

Analysis:

Issue 1 - Depreciation on flat purchased by assessee at Mumbai:
The Revenue raised concerns regarding the ITAT's decision to allow depreciation on the flat purchased by the assessee. The court noted that the flat was obtained, registered, and fitted with amenities for office use within the relevant financial year. The Revenue argued that passive user does not entitle depreciation claim, but the court emphasized that actual user for business purposes suffices. Referring to relevant case law, the court held that the expression "used for the purpose of business" includes passive user and allowed depreciation based on the asset being ready for use. The court dismissed the Revenue's contentions, citing precedents supporting depreciation allowance even in cases of assets being kept ready for use.

Issue 2 - Expenditure made by assessee for purchase of two machines:
The Revenue contested the ITAT's decision to allow expenditure on two machines, highlighting that payment for the second machine was not made within the assessment year. The assessee argued that maintaining accounts on a mercantile basis justifies claiming the expenditure, as invoices were raised and a letter of credit was opened for the second machine. The court agreed with the assessee, stating that under the mercantile method of accounting, incurring expenditure is based on liability to pay, not actual payment. Citing relevant case law, the court upheld the assessee's claim, emphasizing that incurring expenditure includes becoming liable to pay, even if payment is yet to be made.

Issue 3 - Expenditure incurred by assessee on R&D office at Lalru:
The ITAT allowed the expenditure incurred by the assessee on its R&D office at Lalru, amounting to Rs. 1,15,25,117/-. The details of expenditure were provided, and the Assessing Officer's doubts were addressed with supporting evidence, including a survey report. The Assessing Officer's failure to mention the survey report in the assessment order was deemed indifferent. The court found no fault in the explanation provided by the assessee and upheld the decision of the authorities below in allowing the expenditure on the R&D office. Consequently, the court concluded that no substantial question of law arose and dismissed the appeal.

In conclusion, the court addressed all three issues raised by the Revenue, providing detailed analyses and legal reasoning for each, ultimately dismissing the appeal as no substantial question of law was found to arise from the judgment.