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TMI Blog2011 (11) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... der - Decided against the Revenue. Depreciation on discarded assets - A.O. following block of assets method reduced value of discarded assets from block of assets thus adding back proportionate depreciation to total income - Held that:- It is well settled that depreciation can be claimed only in respect of machinery that are used in the manufacture of the product and when certain machinery out of the block assets have been discarded, the question of claiming depreciation for the machinery would not arise. Therefore, depreciation claimed has to be proportionately reduced in respect of the machineries discarded - in favour of Revenue. - IT APPEAL NO. 1297 OF 2006 - - - Dated:- 30-11-2011 - V.G. SABHAHIT AND S.N. SATYANARAYANA, JJ. K.V. Arvind and M.V. Seshachala for the Appellant. S. Parthasarathi for the Respondent. JUDGMENT V.G. Sabhahit, J. This appeal is filed by the revenue being aggrieved by the order passed by the Income Tax Appellate Tribunal Bangalore Bench 'A' (hereinafter called the ITAT) in ITA No. 1301 (Bang/2002 dated 22-5-2006 for the assessment year 1997-98 wherein the appeal filed by the Revenue was dismissed and cross objection filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessment. Being aggrieved by the said assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals)-I, Bangalore in ITA No. 228/R-1l/CIT(A)1/99-2000. The appellate authority, by order dated 5-7-2002 reversed the finding of the assessing officer that an expenditure of Rs. 28,07,950/- paid as licence fee to M/s. Luwa Switzerland is a capital expenditure and cannot be called as a revenue expenditure and held that the expenditure of Rs. 28,07,950/- paid as licence fee is a revenue expenditure. Further, in respect of disallowance of the travelling expenses of the President accompanied by his wife, the appellate authority confirmed the disallowance of 50% of the expenses claimed as for non-business purposes. In respect of the disallowance of depreciation, the appellate authority confirmed the finding of the assessing officer and accordingly, allowed the appeal in part. Being aggrieved by the said order, the Revenue has filed an appeal before the ITAT in ITA No. 1301(Bang)/2002 and the assessee filed cross objections No. 4 (Bang)/2003. The ITAT, after considering the contentions of learned counsel appearing for the parties, by order dated 22-5-2006 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is necessary in the manufacture of the product and therefore, the order of the ITAT is erroneous. In support of his contention, he has relied upon the decision of the Hon'ble Supreme Court in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 wherein the Hon'ble Supreme Court has considered the points to be kept in mind while considering as to whether the expenditure is a revenue or capital, at para 6, has observed as follows: "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem, no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), where the learned Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week and cannot be carried forward to the next week. It is therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the revenue. He has also relied upon the decision of Hon'ble Supreme Court in Eimco K.C.P. Ltd. v. CIT [2000] 242 ITR 659/109 Taxman 151, wherein the Hon'ble Supreme Court, having regard to the facts of the said case, held that allotment of shares in consideration of technical know-how cannot be termed as expenditure much less revenue expenditure. He has also relied upon a decision of the Hon'ble Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 wherein the assessee in the business of manufacture of pencillin, subsequently, to increase the yield of pencillin with the better technology, entered into an agreement with a foreign company and payment of technical know-how fees in one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted as per the agreement subject to payment of royalty to make use of know-how and technology. The royalty payable is depending upon the sales made and export. The said finding is on the question of fact and cannot at all be said to be perverse or arbitrary. As the facts in this case is identical to the facts of the case in Ciba of India Ltd. case cited above and also the decision in I.A.E.C. (Pumps) Ltd. ( supra ) cited above. There is no merit in the contention of learned counsel appearing for the appellant that since know-how and technology granted by the licence and the patents is of enduring nature, the same would constitute capital expenditure as the payment made is on the basis of sales and export made by the assessee. The mere fact that the said know-how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and payment of royally as referred to above and therefore, finding of the ITAT that the expenditure made towards royalty in a sum of Rs. 28,07,950/- is revenue expenditure is justified and we answer the first substantial question of law against the revenue and in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue and in favour of the assessee. Re: Substantial question of law No. (3) 10. This question relates to depreciation claimed by the assessee. The assessee has been claiming depreciation on block assets and since it was found that some of the assets had been discarded and depreciation had been claimed, explanation was sought for from the assessee and it was submitted by the assessee that once block assessment has been accepted, mere deletion of some of the machineries could not affect the depreciation to be claimed towards block assessment. The assessing officer rejected the explanation of the assessee and held that depreciation claimed is liable to be reduced proportionate to the depreciation claimed in respect of two machineries which have been discarded, and which have not been used in the manufacture of the product by the assessee, no depreciation can be claimed and accordingly, proportionally disallowed the amount of Rs. 22,442/- which has been confirmed by the appellate authority and reversed by the ITAT. The learned counsel appearing for the revenue submitted that two of the assets have been discarded and the same have not been used in the manufacture, no depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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