2021 (9) TMI 1026 - AT - Income Tax

Disallowance on account of depreciation on the amount written back from Capital Reserve - Determination of Cost of capital assets u/s 43(6) - assessee submitted that write back of the capital creditor was made in the A.Y. 2006-07 and it had no relation with the year under consideration - Depreciation on the w.d.v. of the block of Machinery at the gross value with or without reducing the waiver of loan therefrom - AR contended that the actual cost of an asset once determined in the year of purchase cannot be altered in a later year and hence even the Explanation 10 cannot be triggered in a later year so as to reduce the actual cost with any amount other than sale proceeds of the assets - HELD THAT - A reading of the proviso to section 36(1)(iii) in juxtaposition to the Explanation 8 to section 43(1) makes it discernible that any interest paid on capital borrowed for acquisition of an asset till the date such asset is first put to use is not allowable as deduction but is to be treated as a part of its actual cost. Suppose an asset is purchased in the month of February and is actually put to use in May with the year ending on 31st March, interest on capital borrowed for the purchase of the asset from the date of purchase in February to the year ending in March and from the beginning of the next financial year in April up to the putting it to use in May is required to be taken as part of actual cost of the asset. Thus, it is graphically clear that the interpretation suggested by the ld. AR for restricting the modification of the actual cost of an asset only to the year of its purchase does not sound well. One cannot reduce the amount of depreciation on a part of the value of the block of asset without correspondingly reducing the w.d.v. of the block of assets as per a manner known to law. Presently, we are confronted with a situation in which the waiver took place in the year ending 31.3.2006. AO did not reduce the amount of waiver from the value of block of asset for that year and allowed the gross value of the block to attain finality. The position continued as such in later years as well when the assessee kept on claiming depreciation on ₹ 40 after giving a similar Note in the Final accounts. In the year ending 31.3.2011 under consideration, no event activating either section 43(6) or the opening part of section 43(1) or the Explanation 10 has happened, which could have disturbed the w.d.v. or the actual cost so as to warrant reduction in the value of block of asset and the consequential depreciation thereon. The logic behind section 2(24)(xviii) is simple and clear that if the assessee has received any subsidy or grant or waiver or concession or reimbursement etc. in respect of an asset, which is otherwise a capital receipt and further that the same cannot be reduced from the actual cost of the asset or the w.d.v., then it should be subjected to tax as an income of such a year. This provision runs on parity with section 41(1) of the Act, which provides for taxation of remission or cessation of a trading liability. One thing which is common to both sections 2(24)(xviii) and 41(1) is that the taxability takes place in the year of receipt of waiver or concession and not any other year. It is further relevant to accentuate that section 2(24)(xviii) has itself been introduced from the A.Y. 2016-17. As such, it can have no application either to the A.Y. 2003-04 when the Machinery was purchased or to the A.Y. 2006-07 when the waiver of loan was received or the year in appeal. The waiver of loan in the earlier year has no impact either on the actual cost u/s 43(1) or the w.d.v. u/s 43(6) for the year under consideration and further section 2(24)(xviii) also does not envelope such waiver within the ambit of income for the extant year. In that view of the matter, depreciation has to be allowed on the w.d.v. of the block of Machinery at the gross value without reducing the waiver of loan therefrom. Ex consequenti, disallowance of depreciation cannot stand and is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on the amount written back from Capital Reserve.
2. Initiation of re-assessment proceedings.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on the Amount Written Back from Capital Reserve:

The primary issue in this appeal concerns the disallowance of ?6,54,950 on account of depreciation on the amount written back from Capital Reserve. The assessee, engaged in manufacturing moulds and plastic moulded components, had its assessment reopened under section 148 of the Income-tax Act, 1961. The Assessing Officer (AO) observed that a sum of ?45,18,582 payable to a group company for the purchase of plant and machinery was waived off and credited to Capital Reserve in the financial year 2005-06 without reducing it from the asset value. The assessee continued to claim depreciation on the gross value of the block of plant and machinery, including the waived amount, which was disallowed by the AO and upheld by the CIT(A).

The Tribunal emphasized that depreciation must be allowed on the written down value (WDV) of the block of assets as defined under section 43(6) of the Act. The definition of WDV does not consider any reduction in the value of existing assets in the block except when sold. The Tribunal noted that the waiver of the loan in the financial year 2005-06 should have reduced the WDV of the block of assets at that time. However, since the AO did not reduce the WDV in that year and allowed depreciation on the gross value, the stage for altering the actual cost/W.D.V. on account of the loan waiver had passed.

The Tribunal concluded that no disallowance of depreciation could be made without first lawfully reducing the WDV of the block. Since the AO did not adjust the WDV in the year of the waiver, the depreciation claimed in the year under consideration could not be disallowed. Consequently, the disallowance of ?6,54,950 was deleted.

2. Initiation of Re-assessment Proceedings:

The assessee also challenged the initiation of re-assessment proceedings. However, the Tribunal did not find it necessary to adjudicate this ground due to the favorable decision on the merits of the disallowance issue.

Conclusion:

The Tribunal allowed the appeal, deleting the disallowance of depreciation of ?6,54,950 and did not address the challenge to the re-assessment proceedings due to the favorable outcome on the primary issue. The order was pronounced in the Open Court on 22nd September 2021.