2022 (4) TMI 480 - AT - Income Tax

Depreciation on assets on demerger - actual cost as per section 43(1) of the Income Tax Act, 1961 was nil - demerger in terms of explanation 4 to section 2(19AA) recognised - AO has disallowed depreciation on the ground that the assessee had received assets free of cost from the Government of Uttaranchal - HELD THAT - In this case, the assets have been transferred from Uttar Pradesh Government (UPJVNL) to Uttaranchal Government (UJVNL). There is no claim of the depreciation twice by both the Governments. The demerger led to division of assets in a fixed ratio and the same was duly accounted for both the entities as per the written down value (WDV) as on that date. The depreciation on de-merger cannot be a forgone benefit owing to de-merger, which is the result of state reorganization. Hence, we decline to interfere with the reasoned order of the Ld. CIT (A). Prior Period expenses - disallowance of expenses as it do not relate to the previous year under consideration - HELD THAT - We find in all the years the certain expenses like repair and maintenance, employee cost, administrative cost, administrative expenses which pertain to earlier years having claimed in the current year. It was submitted that due expenses or business expenses and having crystallized during the year. These expenses are overlapping over the years and no double deduction has been claimed. These are the spillover expenses which pertain to more than one previous year and the similar system has been followed continuously in all the years. The Assessing Officers sole reason for disallowance is that they do not relate to the previous year under consideration. However in reality it is found that these expenses belong to the previous year but crystallized in the instant year. In the absence of any change in the tax rate for the successive years the interests of revenue are not jeopardized. Hence, we decline to interfere with the Ld. CIT(A) on this grounds. - Decided against revenue.

Summary

Issues Involved:
1. Depreciation
2. Prior Period Expenses

Issue-wise Detailed Analysis:

Depreciation:

The appeals centered on whether the assessee could claim depreciation on assets transferred from UPJVNL to UJVNL. The original assessment disallowed depreciation under Section 32 of the Income Tax Act, 1961, on the grounds that the assets were taken over without corresponding liabilities, implying they were acquired free of cost. The assessee contested this, arguing that the assets were not free as they were part of a demerger, and the difference between assets and liabilities was shown as a reconstruction reserve.

The Tribunal's previous order (ITA No.5724/Del/2015) had remitted the case for re-adjudication, emphasizing the need for audited accounts to determine the true income. The AO, in fresh proceedings, disallowed ?29,95,08,702/- of depreciation, stating discrepancies in the opening and closing WDV of assets.

The CIT (A) allowed the depreciation claim, noting that the assets were transferred as part of a demerger and not free of cost. The CIT (A) relied on past appellate decisions that consistently allowed such claims. The Tribunal upheld this view, stating that the assets were acquired with corresponding liabilities, and the demerger was recognized under explanation 4 to Section 2(19AA) of the Income Tax Act. The Tribunal referenced a similar case involving BSNL, where the Delhi High Court ruled that reserves should not be considered subsidies or grants affecting asset costs.

The Tribunal concluded that the depreciation disallowance by the AO was not lawful, as the assets were acquired with corresponding liabilities, and the demerger did not negate the depreciation benefits. Thus, the Tribunal upheld the CIT (A)'s decision to allow the depreciation claim.

Prior Period Expenses:

The second issue involved the disallowance of prior period expenses, which included repair and maintenance, employee costs, and administrative expenses claimed in the current year. The AO disallowed these expenses, arguing they did not pertain to the current year.

The assessee argued that these expenses, though related to previous years, crystallized in the current year and were consistently claimed in such a manner. The CIT (A) accepted this explanation, noting that the expenses were business-related and had crystallized during the year, with no double deduction claimed.

The Tribunal agreed with the CIT (A), stating that in the absence of any change in tax rates over the years, the revenue's interests were not compromised. The Tribunal found no reason to interfere with the CIT (A)'s decision to allow these expenses.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT (A)'s decisions on both issues. The depreciation claim was allowed, recognizing the assets were not acquired free of cost but through a demerger with corresponding liabilities. The prior period expenses were also allowed, as they crystallized in the current year and were consistently claimed without jeopardizing revenue interests.

Order Pronounced:

The appeal of the revenue was dismissed, and the order was pronounced in open court on the 24th of November, 2021.