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TMI Blog2014 (5) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... e the original cost, less, NIL - the original cost becomes WDV. Assessee was exempt from Income Tax u/s 10(20) up to A.Y. 2002-03 - Explanation-6 to section 43(6) is applicable to the assessee’s case - the amount of depreciation provided in the books of accounts up to the previous year relevant to the AY shall be considered as depreciation ‘actually allowed’ under the Act - the WDV as per the books at the beginning of the A.Y.2003-04 becomes WDV for the purpose of section 43(6) - since Explanation-6 has overriding effect and is clearly applicable to the assessee’s case, the entire exercise of re-determining the WDV from year of inception till AY 2002-03 cannot be upheld at all - assessee’s contention that WDV at the beginning of A.Y. 2003- 04 in the books of accounts should be considered as WDV for the purpose of Income Tax Act is upheld – the AO is directed to verify and allow the depreciation keeping in mind facts and law, specifically the Explanation-6 of Sec.43(6) - the claim of depreciation is to be remitted back to the AO for adjudication – Decided in favour of Assessee. Validity of re-opening of assessment – Held that:- Assessee raised various issues on reopening of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the special audit under section 142(2A) and consequent to that report which was submitted that with certain reservations, the A.O. concluded the assessment proceedings on the basis of the audit report determining the depreciation at a lesser figure while modifying the receipts and expenditure. 3. Assessee has carried the matter in appeal to the Ld. CIT(A). the Ld. CIT(A) while upholding the reopening of assessment also uphold the working of the depreciation consequent to the audit report vide orders originally passed for A.Y. 2004-05 dated 28.09.2011. This order was subject matter of appeal before the ITAT and the ITAT B Bench, Hyderabad in ITA.No.2047/Hyd/2011 upheld the reopening of the assessment under section 147 whereas for determining the WDV consequent to Explanation (6) to section 43(6) of the I.T. Act, restored the matter to the file of the CIT(A) for considering the assessee s explanation and determining the WDV and eligible depreciation. Consequent to the orders dated 06.08.2012, the Ld. CIT(A), however, reiterated earlier orders of the authorities on the reason that assessee failed to justify various grants received and passed the order for A.Y. 2004-05 on 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A) vide orders dated 01-10-2013. Since the orders of the Hon ble High Court of A.P. could not be implemented as Ld. CIT(A) already passed the order by that time the directions of the Hon ble High Court were issued, the assessee did not press the issue of reopening under section 147 before us in the present proceedings. Therefore, the issue of reopening of the assessment was only agitated in A.Y. 2003-04. This issue will be considered at a later of point of time, after considering the merits of the action of the authorities in re-determining the WDV and restriction of depreciation. Accordingly, the issue on merits is considered first. 4. As briefly stated above, the issue in this appeals is with reference to adjustment of grants-in-aid received towards cost of asset under the provisions of section 43(6). It was the contention of the A.O. that the grants-in-aid received by the assessee from the Government of A.P. towards various projects are to be adjusted in the cost of assets for the purpose of arriving at Written Down Value (WDV). It was the contention of the assessee that grants-in-aid were received sometimes towards the project, sometimes towards capital contribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the orders of the Ld. CIT(A), it was submitted that Ld. CIT(A) also ignored the specific Explanation-(6) brought on the statute retrospectively and confirmed the order of the A.O. on the basis of the provisions of section 43(6) which was interpreted by the Hon ble ITAT in the case of Kandla Port Trust vs. ACIT 296 ITR 88. In that case, it was held that in the case of an entity it was obviously exempt from Income Tax, since there is no liability to tax, there was no occasion to compute the income of such person under the provisions of the Act. Hence, the depreciation provided in the books in the years when the income was exempt cannot be treated as the depreciation actually allowed. Therefore, it was held that the WDV for the purpose of assessment would be the original cost. Since this interpretation is not inconformity with the intention and purpose of the provisions for depreciation, Explanation-6 was inserted specifically overriding the above order of the ITAT. It was the submission of the Ld. Counsel that Ld. CIT(A) again referred provisions to section 43(6) to interpret in a different manner even though Explanation-6 was introduced specifically for the assessees like the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and [(C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;] (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his clause, the expressions moneys payable and sold shall have the same meanings as in the Explanation below subsection (4) of section 41.] [Explanation 5. Where in a previous year, any asset forming part of a block of assets is transferred by a recognised stock exchange in India to a company under a scheme for corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the written down value of the block of assets in the case of such company shall be the written down value of the transferred assets immediately before such transfer.] [Explanation 6. Where an assessee was not required to compute his total income for the purposes of this Act for any previous year or years preceding the previous year relevant to the assessment year under consideration, (a) the actual cost of an asset shall be adjusted by the amount attributable to the revaluation of such asset, if any, in the books of account; (b) the total amount of depreciation on such asset, provided in the books of account of the assessee in respect of such previous year or years preceding the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n value for the purpose of assessment would be the original cost, less, NIL. Therefore, the original cost becomes WDV. As this interpretation of the ITAT is not in accordance with/ conformity with the intention and purpose of the provision of depreciation, Explanation-6 has been inserted in sub-section 6 of Section 43. It was clarified as under : 14.2 Some persons were exempt from tax and! therefore, not required to compute their income under the head Profits and gains of business or profession . Upon withdrawal of exemption, such persons became liable to income-tax and hence were required to compute their income for income-tax purposes. In this context, dispute has arisen regarding the basis for aIlowing depreciation under the Income-tax Act in respect of assets acquired during the years when such persons enjoyed tax exemption. The Income-tax Appellate Tribunal in the case of Kandla Port Trust v. Asst. CIT [2008] 296 ITR (AT) 88, has held that in the case of such a previously exempt entity, since there was no liability to tax, there was no occasion to compute the income of such person under the provisions of the Income-tax Act. Hence, the depreciation provided in the books in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of Income Tax Act is upheld. 12. Now coming to the working of claim of depreciation, the issue which is also agitated and on which, there is a dispute is with reference to capital grants sanctioned by the Government of A.P. towards various projects, which are required to be adjusted when the assets being capitalized or acquired by the assessee as part of various projects in the course of its operations. The major dispute arose in ascertaining the capital grants sanctioned by the Government to the assessee in various years. As per law, whatever is the capital grant received upto and including A.Y. 2002-03 are not to be taken into account as in those years assessee was not taxable. Therefore, as per the accounting principles being followed by the assessee, certain grants were taken towards revenue expenditure and certain grants were taken as capital. Therefore, since those accounts were already finalised and approved by various authorities both under the Company Law as well as under the Rules of Government, the issue of examining the capital grants in earlier years should not arise at all. Infact AO/ Special auditor has no mandate to disturb the entries in earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of Rs.12 crores which may be taken towards cost of new assets. As against this, the special audit report indicates that capital grant was taken at Rs.46.48 crores which is nothing but the entire amount of assets capitalized during the year. Therefore, the basis for working out the amount itself being wrong, we are not in a position to approve the working given by the Special Auditor in this regard. 15. Similarly, for A.Y. 2004-05, it was noticed that assessee was in receipt of Rs.26.15 crores grant out of which, Rs.22.67 crores was reduced from the revenue expenditure in Income Expenditure statement. Thus, after amount being capitalized from gross expenditure of Rs.258.25 crores, expenditure were charged only Rs.206.16 crores,thus, arriving at excess of income at Rs.10.57 crores. Therefore, in this year out of Rs.26.15 crores grant, Rs.22.67 crores was already adjusted as revenue expenditure. Therefore, in our opinion adopting the amount of Rs.104.07 crores as capital grants received and adjusting in WDV calculation was totally erroneous. In view of the above, since the Special Auditor did not base his report not only with the provisions of the Act but also facts arising ..... X X X X Extracts X X X X X X X X Extracts X X X X
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