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TMI Blog2009 (10) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... thing to do with the export activities. (v) Recoveries from house rent: cannot be excluded from business profits. (vi) Recoveries from employees furniture, Liquidated damages and other recoveries, Participation fees for training programme, Reimbursement from PII and others for deputation of employees: - matter restored to the file of AO. Interest received from Customers - Business income or income from other sources - Held that: - Interest from customers has to be assessed only as business income - ITA No. 1967/Mad/2006 ITA No. 1643/Mad/2007 - - - Dated:- 23-10-2009 - Member(s) : R. V. EASWAR., U. B. S. BEDI. ORDER-T.R. SOOD, A.M.: May, 2008 These appeals by the Revenue as well as by the assessee are directed against different orders of the CIT(A) for the above assessment years. ITA Nos. 1976/Mad/2006 1643/Mad/2007: 2. These appeals are filed by the Revenue against the assessee who is a Government of India undertaking. The Revenue was required to obtain the approval of COD for prosecuting the matter before the Tribunal as per the directions of the Hon'ble Supreme Court in the case of Oil Natural Gas Commission vs. CCE (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. (2008) 21 SOT 122 (Del) (copy of the decision filed on record). It was held in that case that though the ownership and user criteria is fundamental to the grant of depreciation, once the asset forms part of the block of assets then user criteria would lose its value because depreciation has to be allowed on the block of assets. He submitted that this can be explained by way of an example, in the sense that even if an asset is purchased and used for very little time but when it enters into the block of assets, depreciation would be allowed on the basis of block and such depreciation would be allowed even if such asset is sold or discarded because depreciation as per the block of assets, formula has to be calculated on the basis of WDV of the block of assets. He submitted that the Hon'ble Allahabad High Court in the case of CIT vs. Swamp Vegetable Products India Ltd. (2005) 198 CTR (All) 595 : (2005) 277 ITR 60 (All) has taken the same view and held that once the asset was ready for use, but not actually used during the relevant accounting year even then the same was entitled for depreciation. Similarly, the Hon'ble Punjab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means that it should be assumed that the High Court has considered all the issues and, therefore, the decision of the Delhi Bench of the Tribunal cannot be applied to the present case. He pointed out that in fact, the High Power Committee has not given permission to the assessee company in the next year and other future years to appeal for the claim of depreciation. This shows that even the High Power Committee was of the view that the assessee would never use these assets and, therefore, the claim of depreciation was not appropriate. 9. In the rejoinder, the learned counsel for the assessee submitted that after all depreciation is given on the basic presumption that certain assets suffer wear and tear and, therefore, they need to be replaced and that is why the claim of depreciation is allowed. He referred to the decision in the case of Heera Financial Services Ltd. and submitted that no doubt in that case films were leased out but depreciation was not held to be allowed merely because the assessee had leased out the films, but depreciation was held to be allowed on the basis of earlier decision of High Court in the case of CIT vs. Vayithri Plantations Ltd. (1980) 18 CTR (Mad) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same will not suffer any wear and tear. Therefore, while deciding the issue before us, we have to keep the concept of wear and tear in mind. 12. As mentioned above, admittedly gas sweetening plant was installed in the asst. yr. 1997-98 but the same could not be put to use in this year because raw material was not available. But once the plant was installed, it will keep on suffering some wear and tear and in our opinion, it should be entitled to the depreciation. No doubt, now s. 32 has been amended and now the word "used" is used in the section and the Hon'ble Bombay High Court in the case of Dineshkumar Gulabchand Agrawal has held that because of the expression 'used', depreciation cannot be granted unless and until the plant is really put to use. However, according to the assessee, this decision cannot be applied in all the situations. The Hon'ble Madras High Court in the case of Heera Financial Services Ltd. has clearly held, following its earlier decision in the case of Vayithri Plantations Ltd. that once the plant was ready, the same is entitled for depreciation. 13. We are unable to agree with the submission of the learned Departmental Representative that in this ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on clearly shows that depreciation in the case of block of assets has to be allowed on WDV at the prescribed rates. "Block of assets" is defined in s. 2(11) of the Act as under: "(11) 'block of assets' means a group of assets falling within a class of assets comprising- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed." The above provision clearly shows that basically block of assets means assets of similar nature for which same Tate of depreciation is allowed. 15. Now, we have to see another term which is "WDV". The same is defined in s. 43(6)(c) of the Act as under: "Written down value" means- (e) in the case of any block of assets,- (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the WDVs of all the assets falling within that block of assets at the beginning of the previous year and adjusted,- (A) by the increase by the actual cost of any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------- Now, in terms of s. 32(1)(ii), depreciation has to be allowed on the above WDV, i.e., Rs. 130. When depreciation is being allowed at Rs. 130 it cannot be said which asset has been used and which asset has not been used and; therefore, in our view after the interpretation (sic-introduction) of the concept of block of assets, depreciation has to be granted on the WDV of the block. This is particularly so, say, the gas sweetening plant has been totally discarded and very nominal value was realised. In that case, such nominal value would have been reduced from the WDV of the block of assets and depreciation would have been allowed on the balance figure, which means that the depreciation has to be allowed on the block. 16. Similar view was taken by the Delhi Bench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. wherein it was held that: "Under s. 32(1) depreciation on certain assets owned and used for the purpose of business is allowable and the same is allowable at the prescribed percentage on the WDV of block of assets, which comprises of various assets entitled to same rate of depreciation. Thus, the ownership and user both are tile criteria for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permission was granted in the future years will have no bearing on deciding the issue before us. 18. In view of the above detailed discussion and considering the fact of wear and tear since gas sweetening plant was kept ready for use and must have suffered some wear and tear, the decision of the Hon'ble jurisdictional High Court in the case of Heera Financial Services Ltd. as well as the concept of block of assets, we are of the view that the assessee is entitled to depreciation on the gas sweetening plant. In these circumstances, we set aside the order of the CIT(A) and direct the AO to allow depreciation on the gas sweetening plant. 19. As far as the issue regarding reopening of the assessment is concerned, detailed arguments were made by both the parties. In fact, doubt was also expressed by the learned Departmental Representative whether permission has been given to contest this issue because he read item No. 16 of the minutes of COD meeting held on 23rd Nov., 2006 and while referring to various columns he pointed out that no permission was given for contesting the reopening issue. Since we have decided the issue on merits without going into the controversy whether permissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export profits, cl. (baa) stood inserted to say that although incentive profits and 'independent incomes' constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the IT Act and every income may not be attributable to exports. This was the reason for this Court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula [CIT vs. Lakshmi Machine Works (2007) 210 CTR (SC) 1 : (2007) 6 Scale 168]." Thus, on the basis of the above decision it was held that, receipts which have nothing to do with the exports cannot be included in the business profits under cl. (baa) for calculating deduction under s. 80HHC of the Act. 24. Now, we shall examine individual items in the light of the above decision: 1. Sale of power: Though it was argued that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damages and other recoveries: Since details are not before us, this item also needs to be re-examined at the level of AO in the light of our observation in respect of unclaimed/unspent liability vis-a-vis revenue items only can be allowed and capital items are to be ignored. 8. Participation fees for training programme: Before us it was claimed that this is only reimbursement of expenditure incurred on training programme of employees and, therefore, this should be set off against training expenditure. However, on a perusal of the records, we do not find any details. Therefore, we set aside this issue also and remit the matter to the file of the AO for re-examination. If it is found on verification that this expenditure was rightly incurred on reimbursement of training expenses, then it should be set off against the training expenditure. 9. Reimbursement from PII and others for deputation of employees: Here again, no details are available before us for reimbursement from PH and others. Hence, we set aside this issue to the file of the AO for re-examination on the basis of our observation on unclaimed/unspent liabilities. 25. These grounds are partly allowed as indicated above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion as drawn by the learned AM. 29. As such, I write my own order on the point of confirmation of disallowance of depreciation as well as reopening of the assessment in ITA No. l822/Mad/2006 as under: 29.1 Facts indicate that with regard to issue relating to reopening of assessment, admittedly, COD has not granted permission for the same as contended by the learned Departmental Representative and referring to various columns of minutes of COD meeting held on 23rd Nov., 2006, as per item No. 16, no permission is stated to have been granted for contesting the reopening issue and on verification, the same is found to be correct, so in my considered view, assessee being public sector undertaking could not prosecute the matter without such permission as per the directions of the Hon'ble Supreme Court in the case of Oil Natural Gas Commission vs. CCE and such decision is being followed in number of cases including ITA Nos. 1967/Mad/2006 and 1643/Mad/2007 as contained in earlier part of the order agreed by both the Members. So, in the absence of permission of COD to prosecute the appeal on reopening of assessment issue, I dismiss the ground of appeal of the assessee on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Delhi Bench of the Tribunal cannot be applied to the present case. He pointed out that in fact, the High Powered Committee has not given permission to the assessee-company in the next year and other future years to appeal for the claim of depreciation as is clear from the record and the order for subsequent years. This shows that even the High Powered Committee was of the view that the assessee would never use these assets and, therefore, the claim of depreciation was not appropriate. 30.1 In his rejoinder to the argument of the learned Departmental Representative, the learned counsel of the assessee submitted that no doubt in that case films are leased out, but depreciation was held to be allowable on the basis of earlier decision of the Hon'ble Madras High Court in the case of CIT vs. Vayithri Plantations Ltd., wherein it was held that assets ready for use were eligible for depreciation. The Hon'ble Karnataka High Court decision is stated to be distinguishable as it never dealt with the issue regarding block of assets. So far as non-grant of permission by High Powered Committee for future years is concerned it has no bearing on the issue being agitated in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned with the interpretation of the expression 'use' or 'used', whereas we are concerned with the interpretation of the word 'used'. It appears that after the above judgment, there was an amendment to s. 32 of the IT Act. The word 'used' denotes actually used and not merely ready for use. The expression 'used' means actually used for the purposes of the business. The view is taken by the Tribunal. In this view of the matter, no substantial question of law is involved. The appeal is dismissed in limine with no order as to costs." The Hon'ble Supreme Court has also dismissed the SLP filed by the assessee against this decision as reported in (2004) 266 ITR (St) 106. (ii) The Hon'ble jurisdictional High Court in the case of CIT vs. Maps Tours Travels (2004) 191 CTR (Mad) 177 : (2003) 260 ITR 655 (Mad) while referring to a decision of Hon'ble Supreme Court has discussed the facts at pp. 655 and 656 to decide the issue in favour of the Revenue as per last but one para of its order and last but two paras of the said orders are reproduced below: "The assessee's claim for depreciation of these vehicles was negativated by the AO. That order was affirmed by the appellate authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of business of the assessee, the depreciation allowance is not to be granted. This view is fortified by a decision of the Gujarat High Court in the case of CIT vs. Suhrid Geigy Ltd. (1981) 25 CTR (Guj) 280 : (1982) 133 ITR 884 (Guj). Inviting our attention to the following words of cl. (vi): 'in respect of the previous year in which the ship or aircraft is acquired or the machinery or plant is installed, of it the ship, aircraft, machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year,' Shri Thakar, learned counsel for the assessee, submitted that it was the choice of the assessee to claim depreciation either in respect of the year of installation or in respect of the year of first putting it to use for the business, and, hence the assessee was entitled to claim depreciation allowance even in respect of the year of first putting it to use for the business, and, hence the assessee was entitled to claim depreciation allowance even in respect of the year of installation of machinery. It is difficult to accept this line of approach. The scheme seems to be that the assessee is entitled to claim deduction in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was entitled to depreciation. On appeal to the High Court: Held, that the assessee was not entitled to depreciation." (v) In a latest decision of the Hon'ble Supreme Court in the case of Dy. CIT vs. N.K. Industries Ltd. (2008) 216 CTR (SC) 114 : (2008) 6 DTR (SC) 131 : (2008) 305 ITR 274 (SC) upheld the action of the Tribunal as under: "We are concerned with the block period 1st April, 1988 to 24th Feb., 1999. The main contention advanced on behalf of the Department is that for allowance of deduction for depreciation, the asset must not only be owned by the assessee but it must also be used for the purposes of business or profession of the assessee. It is the case of the Department that the word 'used' in s. 32 of the IT Act, 1961, refers to actual use of the asset. It is the case of the Department that having regard to the scheme of the IT Act, 1961, and particularly, after the introduction of the concept of 'block of assets', actual use is the only requirement apart from ownership for allowance of depreciation under s. 32. It is the case of the Department that an important question of law arose for determination before the High Court. That the High Court has failed to exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative also supports the above view. 30.6 Keeping in view the facts of the case, the language used in s. 32, legal position as explained in the decisions of various Courts including jurisdictional High Court in the case of CIT vs. Maps Tours Travels as discussed above, it is held that since the asset on which depreciation was claimed, has admittedly not been used for business purpose during the year under consideration, therefore, the assessee is not entitled to depreciation as claimed. This view gets further fortified by the Chennai 'B' Bench decision in the case of Asstt. CIT vs. Kurien E. Kalathil in ITA No. 1854/Mad/2006 for the asst. yr. 2002-03 order dt. 31st July, 2008. As such, while upholding the concurrent finding of both the authorities below in this regard, the appeal of the assessee is dismissed. REFERENCE UNDERS. 255(4) OF THE IT ACT, 1961 11th Dec., 2008 As there is difference of opinion between the Members constituting the Bench, the following questions are formulated and referred for nominating Third Member: "(i) Whether in view of the facts and circumstances of the case, the depreciation on gas sweetening plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he individual assets forming the block were actually used in the relevant previous year for the purpose of the business and that depreciation would be allowed on the WDV of the block of the assets as computed in accordance with the s. 43(6)(c) of the Act. In support of this conclusion, he relied on the order of the Delhi Bench of the Tribunal in the case of Asstt. CIT vs. SRF Ltd. (2008) 21 SOT 122 (Del) in which the Tribunal applied the judgment of the Delhi High Court in Capital Bus Service (P) Ltd. vs. CIT (1980) 17 CTR (Del) 155 : (1980) 123 ITR 404 (Del) where it was ruled that depreciation was allowable if the assets were kept ready for use though not actually used. In this view of the matter, the assessee's claim was upheld by the learned AM. 4. The learned JM in his dissenting opinion has referred to the judgment of the Hon'ble Madras High Court in CIT vs. Maps Tours Travels (2004) 191 CTR (Mad) 177 : (2003) 260 ITR 655 (Mad) to hold that if the asset is not actually put to use in the relevant previous year, no depreciation can be allowed. In addition he has also referred to the order of the Chennai Bench in the case of Asstt. CIT vs. Kurien E. Kalathil in ITA No. 1854/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the second point of difference is concerned, I was taken through the relevant papers and I find that in item No. 16 of the minutes of the COD meeting it has been recorded that the Committee has decided not to accord permission to the assessee for pursuing this point before the Tribunal. There seems to be some confusion in the matter due to the language used. However, it seems sufficiently clear to me that the assessee was not permitted to challenge the validity of the reopening of the assessment for the asst. yr. 1998-99. I therefore hold that the learned JM was right in holding that the assessee's appeal challenging the validity of the reopening of the assessment has to be dismissed. The learned AM, in my humble opinion and with due respect, ought to have dismissed the assessee's appeal on this point instead of holding that since the matter was being decided on merits this point became academic. I thus, answer to second point of difference by saying that this ground of the assessee should be dismissed. 6. Coming to the first point of difference it seems to me that even after the introduction of block of assets concept, there is no change in the legal position to the effect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as active user and after referring to the later judgment of the Bombay High Court in Whittle Anderson Ltd. vs. CIT (1971) 79 ITR 613 (Bom), it was noticed by the Hon'ble Madras High Court that the view taken by the Bombay High Court is the more appropriate view to take on the construction of the provision, as against a contrary view expressed by the Madhya Pradesh High Court in CIT vs. Jiwaji Rao Sugar Co. Ltd. (1969) 71 ITR 319 (MP). Thus, the decision of the Hon'ble Madras High Court in CIT vs. Vayithri Plantations Ltd. is a binding precedent so far as the Tribunal is concerned in favour of the view that in order to claim depreciation under s. 32 of the Act it is not necessary that the machinery in question should have been actually used in the relevant previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year, though not actually used due to circumstances beyond the assessee's control. 7. Sec. 32 of the Act has received several amendments but our attention was not drawn to any amendment which has clarified that depreciation would be allowed only if the asset in question was actually used during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rthy that the Hon'ble Madras High Court did not decide the question on the ground that it is the business of the assessee to lease out film rolls and therefore, once the film rolls were leased out they must be taken to have been used for the purpose of the business, applying the ruling of the Supreme Court in the case of CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC). The Tribunal had allowed the assessee's claim only on the ground that the film rolls were kept ready for use by the lessee though they could not be actually used due to strike. Accordingly, it was held by the Tribunal that the assessee has to be given depreciation allowance on the ground of a passive user. The High Court affirmed the decision of the Tribunal by a reasoned judgment and dismissed the appeal, finding that no substantial question of law arose for consideration. I am unable to accept the argument put forward by the Department before me that this judgment cannot be taken as an affirmation of the Tribunal's order on merits. The last para of the judgment clearly shows that the appeal of the Department was dismissed. Further the dismissal is by an elaborate judgment considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been opined that the proviso to cl. (b) of s. 32(1) contains the words "put to use" which shows that even after the introduction of the concept of block of assets, the requirement of user of the asset still continues and this user must be actual user. Now the connotation of the words "put to use" has been considered by the Hon'ble Madras High Court in Vayithri Plantations Ltd. because s. 33 which provided for development rebate required that the depreciation (sic) should be claimed in the year in which the plant was installed or in the next year in which it was "first put to use". The Hon'ble Madras High Court equated the quoted words appearing in s. 33 with the words "used for the purposes of the business" appearing in s. 32(1) and proceeded to lay down the law that passive user would be sufficient to entitle an assessee to claim depreciation. In the light of this judgment of the Hon'ble Madras High Court I am unable to give effect to the order of the Mumbai Bench of the Tribunal in Nathani Steels Ltd. which takes the view that the words "put to use" connote actual user and not passive user. 12. I will now refer to the two judgments of the Supreme Court which were cited before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Department. Therefore this judgment cannot advance the Department's case further. 13. The judgment of the Hon'ble Madras High Court in CIT vs. Maps Tours Travels cited by the Department turned on its peculiar facts. There the assessee purchased 10 motorcars on the last day of the accounting year relevant to the asst. yr. 1989-90 and no proof was adduced for having used them in the business before the end of the previous year. The Tribunal surmised that the assessee as a businessman would have definitely used the cars though they were purchased on the last day. The High Court held that the cars were not registered for being brought on roads and there was no evidence that they were used before the end of the accounting year. As the facts show, they were peculiar and there was no claim by the assessee that the cars were kept ready for use in the business but could not be used due to circumstances beyond its control. In other words, the question whether the cars can be said to have been passively used could not have, and did not, arise for decision. Therefore, this judgment does not help the Revenue in its contention. 13.1 For the above reasons, I am inclined to agree w ..... 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