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Scrap value of the assets which have been written off during the year is to be
reduced from the WDV of the block of assets for the purpose of allowing
depreciation and not of the individual assets. Refer, Xerox India Ltd. (2010) 127
TTJ 84 (Del).
Defective machineries found during trial run Whether depreciation is allowable
on machineries which were brought for business purpose and found to be
defective after the trial installation. Held, Yes. The defective machineries cannot
be said that they were not for business purposes. Hence, the claim is allowable.
Sri Chamundeshwari Sugar Ltd. 223 CTR 423.
In the case of G R Shipping 309 ITR 125 it was decided that The assessee,
engaged in shipping business, owned a barge which was included in the block of
assets. The barge met with an accident and sank on 6.3.2000 (AY 2000-01). As
efforts to retrieve the barge were uneconomical, the barge was sold on as-iswhere-is in May 2001 (AY 2002-03). As the barge was non-operational and not
used for business at all in AY 2001-02, the AO denied depreciation. On appeal by
the assessee, the Tribunal took the view that after the insertion of the concept of
block of assets by the T.L. (A) Act, 1988 w.e.f. 1.4.1988 individual assets had
lost their identity and only the block of assets had to be considered. It was held
that the test of user had to be applied upon the block of assets as a whole and
not on individual assets. On appeal by the Revenue, the High Court dismissed
the appeal holding that the issue was squarely covered in favour of the assessee
by its earlier judgments in Whittle Anderson 79 ITR 613 and G. N. Agrawal 217
ITR 250.
As per s. 32(1) the asset is to be owned and used for the purpose of business
or profession, the expression used for the purpose of business when applied to
block asset would mean use of block asset and not any specific items in the said
block as individual assets have lost their identity after becoming inseparable part
of the block asset. Refer, Bharat Aluminium.
The Supreme Court held that in case of manufacturer of tea, by virtue of rule 8D,
only 40% of the income is taxed and consequently in deciding liability only
proportionate depreciation is required to be taken in to account as that is the
depreciation actually allowed. Refer, Doom Dooma India Ltd. 310 ITR 392 (SC).
Assessee having sold the machinery and then acquired the same on lease and
lease rental was also paid, it could not be said that transaction was sham or a
device, and therefore depreciation was allowable. Refer, Punjab State Electricity
Board. 30 DTR 153.
The expenses incurred by Assessee towards training fees of its personnel before
setting up of plant were to be capitalized as part of plant and machinery and
depreciation was to be allowed in respect of the same. Refer, Gujarat Guardian
Ltd.
In case of block of assets, in order to allow assessees claim under section 32(1),
use of individual asset for purpose of its business can be examined only in first
year when asset is purchased and subsequent years use of block of assets is to
be examined. Existence of an individual asset in block of assets itself amounts to
use for purpose of business and therefore, depreciation is allowable on it, even
though saidasset is not actually used in course of business during relevant
assessment year. Refer, Swati Synthetics Ltd. vs. ITO 38 SOT 208 (Mum.).
Assessee company having not acquired any special rights of business or
commercial nature in the course of amalgamation of three group companies with
it, the goodwill appearing in its books of account as a balancing figure for the
assets acquired and the price paid is goodwill simpliciter and therefore, it is not
eligible for depreciation. Refer, Borker Packaging (P) Ltd. vs. ACIT 40 DTR 29
(Panaji) (Trib.).
Finance company cannot claim depreciation as they are not the owner. Refer, CIT
v Manappuram General Finance & Leasing Ltd. 5 Taxmam.com 74 Ker.
Assessee is not entitled to depreciation on a plant which is not operation since its
capitilsation. Refer, Sponge Oron India Ltd V DCIT 5 taxmann.co, 58 Hyd ITAT.
However, in the case of CIT v Premier Industries Limited 323 ITR 672 MP. It was
held that even idle machine is entitled for depreciation.
Assessee would be entitled to depreciation and investment allowance on
increased cost of Plant & Machinery resulting from increase in liability to repay
forign currency loand taken for purchase of such plant & Machinery. Refer,
Century Enka Limited V ACIT 188 Taxmann 382 Cal. Again in the case of DDIT V
Staubil A.G. India Taxmann.com 49 Mum -ITAI -2010 it was held that Depreciation
on assets acquired out of foreign currenncy loans: Depreciation on account of
enhanced cost due to fluctuation in forighn rate is an allowable claim.
Original cost of Machine include AMC cost for 10 Years Allow to be capitilsed.
Refer, CIT V D.D. Industries Limited 323 ITR 596.
Assessee not claiming depreciation change of law w.e.f 1.4-2002 deduction in
respect of depreciation will be granted automatically Dr. Mrs. Sudha S. Trivedi Vs
ITO 318 ITR 356.
Unabsorbed Depreciation:
The High Court of Himachal Pradesh in the case of CIT v Kriti Resorts Pvt Ltd
decided that Unabsorbed depreciation for and up to AY 19961997 could be
carried forward and set-off against income chargeable under any head of income
in any subsequent year
Assessee being entitled to deduction under section 10B upto A.Y. 2005-06,
provisions of section 10B (6) are not applicable in the relevant A.Y. ie 2004-05
and therefore unabsorbed depreciation brought forward from assessment years
prior to A.Y. 2000-01 can be set off against business income or against any other
head of income including income from other sources.(Asst year 2004-05). Refer,
Dy CIT v Akay Falvours & Aromatics (P) Ltd 55 DTR 1.
Unabsorbed depreciation of earlier year in which no deduction was claimed u/s
10B is available for set off against other taxable income of subsequent A/Y. Refer,
Patspin India Limited v DCIT 9 Taxmann.com 140.
In case of Acquisation of Fixed Assets, Actual cost of same to be considered for
purpose of section 32 should be actual cost paid by Assessee. Refer, DCIT v
Lafarge India Limited 9 Taxmann.com 40
Assessee company was entitled depreciation in respect of gas sweetening plant
which was kept ready for use but could not be actually used due to lack of
availability of raw material during relevant assessment years. Refer, ACIT v
Chennai Petroleum Corporation (2010) 125 ITD 396 (Chennai).
Once it is found that assets are used for business, it is not necessary that all the
items falling within the block of assets have to be simultaneously used for being
entitled to depreciation. Refer, CIT v. Sonal Gum Industries (2010) 42 DTR (Guj)
159.
Unabsorbed depreciation relating to assessment year 1997-98 to 1999-2000,
cannot be set off in 2003-04 and 2004-05 against income from other sources.
Refer, Dy. CIT vs. Times Guaranty Ltd 4 ITR 210 (Mum.) (Trib.) (SB).
Unabsorbed depreciation could be set off against income from house property till
the provision was amended w.e.f. 1st April, 2002. Refer, CIT vs. SPIC Ltd 37 DTR
177.
The unabsorbed depreciation brought forward as on April 1, 1997 could be set off
against the taxable business profit or income under any other head for the Asst.
Year 1997-98 and even subsequent years. Short term capital gains for the Asst.
Year 1999-2000 can be set off against unabsorbed depreciation brought forward
as on April 1, 1997. CIT vs. Rpil Signalling Systems Ltd (2010) 328 ITR 283
(Mad.).
Unabsorbed depreciation of amalgamated company cannot be deducted while
taking written down value of asset taken over of amalgamated company. Refer,
CIT v Silical Metallurgic LTd 324 ITR 29.
Additional Depreciation :
The ITAT Ahemdabad decided that Whether when Directors report admits that
there is no change in installed capacity of company, a contrary CA report cannot
contradict same to claim additional depreciation. Hence, Assessees appeal
dismissed
In the case of Anurena Tristar v ITO 330 ITR 168 it was decided that No addl
depreciation in case machine was not new.
parties involved in the transaction are classified as lessor and lessee whilst the
periodic payment to be made by lessee is termed as lease rental. From an
accounting standpoint, simplistically, lease can be classified in three forms
finance lease, operating lease and hire purchase. A lease is classified as a
finance lease if it is for the entire economic life of the asset and under the lease
arrangement all risks and rewards incidental to the ownership of the asset is
transferred to the lessee.
The International Accounting Standards Committee defines finance lease as an
arrangement where all the risks and rewards incident to ownership of an asset
are with the lessee. Any lease other than a finance lease is operating lease. On
the other hand, if under the lease agreement, the lessee/hirer has an option to
acquire the asset at the end of the identified lease period, such arrangement
shall classify as hire purchase.
Interestingly, the last part of definition is in conformity with the 1943 Board
guideline, thereby suggesting the wisdom of the Indian
administration.Admittedly, the line of distinction between a finance lease and a
hire purchase is blurred and leaves a lot to interpretation. Interestingly, the
interpretation of various forms of lease has been ratified and applied by different
courts from time to time; the determination of whether a lease is a finance lease
or operating lease or is in the nature of a hire purchase arrangement depends on
the facts and substance of the transaction rather than the form of such
arrangement. Indian Accounting Standard 19 on Leases provide that in case of
an operating lease, the lessor shall be eligible to claim depreciation in respect of
leased asset; whereas in an finance lease the lessee becomes the economic
owner of the asset and, therefore, should be entitled to claim depreciation on the
leased asset.Under the Income tax Act, 1961, a tax payer is eligible to claim
depreciation on an asset provided the asset is owned by such person and is
being used for the purpose of his business. There is plethora of precedents where
the claim of depreciation has been denied by tax authorities in case either or
both of these tests are not met.The twin tests of ownership and use for
claiming depreciation become even more critical in lease transactions, wherein
the owner of the assets foregoes the possession and use of the asset; whilst the
assets is used by lessee for his business.
The principles governing eligibility of lessor to claim tax depreciation under the
lease arrangement is enunciated by administrative guidance issued by the CBDT
in circulars 9/1943 and 2/2001. These circulars do not distinguish between the
two kinds of lease arrangements and provides that in a lease, other than a hire
purchase, the lessor is eligible to claim depreciation, provided the tests of
ownership and use of the asset are satisfied. The circulars indirectly shows the
thumbs down to accounting treatment of lease by providing that classification of
asset in accordance with Accounting Standard 19 will not have implications on
the allowance of depreciation to the lessor under the income tax laws. After the
issuance of administrative guidance on depreciation in leasing transcations,
there is no ambiguity insofar as depreciation in an operating lease situation is
concerned. On the contrary, in case of finance lease there has been prolonged
divergent courses with any increase in the actual repayment due to devaluation
of the rupee meanwhile vis--vis the dollar, swelling the actual cost of the fixed
asset in the tax records even while leaving the accounting records undisturbed
as it was On the contrary, any appreciation in the rupee vis--visthe dollar would
have the opposite effect in the tax records while leaving the accounting records
undisturbed once again. These then in brief are the respective mandates of
Section 43A of the Income-tax Act, 1961 and Accounting Standard 11 (AS 11). AS
11 does not tinker with non-monetary items which fixed assets are. Instead, any
notional increase or decrease in the rupee liability on the balance sheet date on
the touchstone of the exchange rate prevailing on that date is required to be
recognised with a corresponding debit or credit to the profit and loss
account.Sagacious shift
Prior to the amendment made by the Finance Act, 2002 to Section 43A, a chronic
tinkering was contemplated any increase or decrease in rupee liability in
respect of fixed assets acquired on deferred payment terms or with borrowed
funds on account of fluctuation in the exchange rate between the currency in
which the payment is required to be made vis--vis the rupee, was required to be
added or, as the case may be, subtracted from the actual cost of the fixed asset
each time there was a change in the exchange rate, thus giving rise to the
nightmarish possibility of repeated tinkering with the asset account given the
day-to-day fluctuations witnessed in the currency market, especially if the
currency in which the payment is required to be made happens to be a floating
currency. Mercifully, the amendment made a sagacious shift in favour of
recognising the increase or decrease in such liability only at the time of actual
payment, thus dispensing with the need to chronically tinker with the asset
account for every notional increase or decrease in the rupee liability. To be sure,
the objectives of a fiscal law and accounting standards cannot always be the
same. AS 11 is right on notional increase or decrease in rupee liability being
recognised at the balance-sheet date given the fact that otherwise the balance
sheet would be guilty of under- or over-valuation of a liability. It is also right in
not tinkering with the cost of the fixed asset given the fact that no increase or
decrease in the fair value of the asset accrues merely on the strength of the
gyrations in the currency market.
Cost of asset
One can understand a fiscal law providing for a heightened tax incentive such as
depreciation on fixed asset and pro tanto there would be a divergence between
the written-down value (WDV) of an asset in the tax records vis--vis its
accounting records. While this may be unavoidable, the gulf between the two
sets of records can be bridged by agreeing not to disagree at least on the issue
of the cost of the asset. The I-T Act should allow any increase in the rupee
payment on account of acquisition of a fixed asset as expenditure in one shot
instead of condescending to amortise the same by way of depreciation. And
when there is a reduction in rupee payments, the same should be treated as
income straightaway. AS 11 is not payment fixated like Section 43A. Instead, it
mandates revaluation of all monetary items on the balance sheet date. In other
In the case of - CIT v. Mahendra Mills and ors. [2000] 243 ITR 56 (SC). Supreme
court has held that the provision for claim of depreciation is for the benefit of the
assessee. If he does not wish to avail of that benefit for some reason, the benefit
cannot be forced upon him. It is for the assessee to see if the claim of
depreciation is to his advantage. Income under the head Profits and gains of
business or profession is chargeable to income-tax under section 28 and income
under section 29 is to be computed in accordance with the provisions contained
in sections 30 to 43A. The argument that since section 32 provides for
depreciation it has to be allowed in computing the income of the assessee
cannot in all circumstances be accepted in view of the bar contained in section
34. If section 34 is not satisfied and the particulars are not furnished by the
assessee his claim for depreciation under section 32 cannot be allowed. Section
29 is thus to be read with reference to other provisions of Act. It is not in itself a
complete code.
If the revised return is a valid return and the assessee has withdrawn the claim of
depreciation it cannot be granted relying on the original return when the
assessment is based on the revised return. Allowance of depreciation is
calculated on the written down value of the assets, which written down value
would be the actual cost of acquisition less the aggregate of all deductions
actually allowed to the assessee for the past years. Actually allowed does not
mean notionally allowed. If the assessee has not claimed deduction of
depreciation in any past year it cannot be said that it was notionally allowed to
him. A thing is allowed when it is claimed. A subtle distinction is there when we
examine the language used in section 16 and sections 34 and 37 of the Act. It is
rightly said a privilege cannot be a disadvantage and an option cannot become
an obligation. The Assessing Officer cannot grant depreciation allowance when
the same is not claimed by the assessee.
NON-CLAIMING OF DEPRECIATION :
Non-claiming of depreciation may at times be more beneficial rather than
claiming it. Accordingly one may plan not to claim depreciation in a particular
year and to claim the same in a subsequent year, in which depreciation can be
claimed at a higher written down value due to non-claiming of depreciation in the
earlier year. In this process the benefit of depreciation is not lost but it is
deferred only.
In the following situations it is advisable not to claim the depreciationi) In case where certain deductions and allowances like brought forward
investment allowance may lapse for insufficiency of profits, in a particular year, if
the depreciation is claimed.
ii) In case of non-corporate assessees expecting higher profit in the subsequent
year or years, if their present income is falling in lower tax bracket, as claim of
depreciation in the subsequent years will help them reducing the taxable profits
and thereby saving tax, which would have been payable at a higher rate
considering the slab rates.
CIT v. Industrial Solvents and Chemicals (P) Ltd. 119 ITR 608 (Bom.)- Even if the
finished product obtained by the assessee could be termed as sub-standard, it
cannot be contended that because the end product then obtained was not of
proper standard, the business of the assessee cannot be said to have been set
up though the plant was being worked.
Grasim Industries Ltd. v. CIT 32 TTJ 329 (Bom-Trib.)- A company need not have
actually commenced production to claim depreciation. It was enough if it was
merely ready to produce. The bench ruled that the plant was ready for
business in fiscal 1992-93, and hence eligible for claiming depreciation.
TREATMENT OF REPAIRS- WHETHER ON REVENUE OR CAPITAL ACCOUNT :
It is more or less an age old tradition to treat only small repairs to an asset as
revenue expenditure. However, there are occasions when heavy repairs are
undertaken and/or one whole item of Plant & Machinery may require
replacement. The taxing authority tends to immediately jump to the conclusion
that the same is on capital account. The assessee also succumbs to the assertion
of the authorities under ignorance of law. The result, no appeal thereby inviting
heavy taxation.
Some situations when repairs/replacement may be treated as Revenue
expenditure and Capital expenditure are given below 1. A factory has got 2 or
3 electric motors. If one of them is worn out and replaced by a new motor of
similar capacity involving a heavy cost, in such case, the expenses would be
treated as revenue expenditure. The entirety of Plant & Machinery in a factory is
to be treated as one unit capable of carrying on the business. If any one part of
that unit, say an electric motor in this instance, is replaced by another motor of
similar capacity, it is a repair to the whole gamut of Plant & Machinery and
therefore allowable as revenue expenditure.
2.If the same factory is reconstructed by replacing the old Plant & Machinery by
new ones of bigger capacity then it will be a clear case of reconstruction and the
cost of new Plant & Machinery will be treated as capital expenditure.
3.If a wall is constructed as covered by the obligation of a tenant as per
conditions of a leasehold property, such cost incurred for reconstruction of the
wall will be treated as revenue expenditure. It is a case similar to the
replacement of a few units of worn out railway track by a company out of its
entire long track, which was held as revenue expenditure by the courts.
4.Cost of replacement of petrol engine of a bus by a diesel engine to continue to
run it will also be treated as revenue expenditure.
5.A fleet owner purchases a second hand car with a view to use its parts to
repair his own other cars. It is a simple case of revenue expenditure as the car
was purchased for using its parts to repair the other cars and not to run it as a
car.
15.If an assessee has taken three buildings on a short term lease and effected
improvement to those by construction of partition walls, wall panelling, show
windows etc. the expenses so incurred will be treated on revenue account in
view of the facts that the assessee was not the owner of the premises and there
was no longer term lease in favour of the assessee.
FACTORS RELEVANT TO DETERMINE THE NATURE OF EXPENSES ON REPAIRS :
1.If the repair is not resulting into a new asset or any additional asset, it will be
revenue expenses otherwise it will be capital expenditure.
2.If the expenses are incurred on ground of commercial expediency, the same
may be considered as revenue expenditure.
3.If any expenses are essentially incurred for reconstruction or modification as
per direction of any statutory authority, it may be treated as revenue
expenditure.
4.In determining the nature of expenditure, the nature of assessees business
and overall circumstances have to be considered. No uniform test can be applied
to all situations.
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