DR. REDDY`S BIOSCIENCES LIMITED,HYDERABAD vs. ACIT, CIRCLE-17(1), HYDERABAD

Two issues are involved in this matter. First one is in respect of the claim of the assessee for depreciation under section 32 of the Income Tax Act, 1961 (for short “the Act”) on boundary wall and other structures whereas the second one is in respect of the cost of acquisition of the property in respect of which long term capital gains were claimed. Assessee challenged the findings of the learned CIT(A) on the aspect of depreciation on two counts. Firstly vide ground No. 2, it is stated that the impugned order on this aspect is a non-speaking order; whereas merits of such findings are challenged vide ground No.

3. Ground No. 4 relates to the issue of the quantum of cost of acquisition to compute the capital gains. Grounds No. 1 and 5 are general in nature and do not require any adjudication.

As stated above, the first issue relates to the claim for depreciation in respect of the boundary wall. On this aspect, learned Assessing Officer recorded that there was an addition of Rs. 19.09 crores in buildings in respect of which the assessee claimed depreciation at Rs. 1.96 crores. Assessee submitted that they have completed the construction of compound wall during that year and, therefore, added the same to the block of assets and claimed depreciation. Learned Assessing Officer recorded that the boundary wall was not put to use for business purpose and on that score, denied the depreciation.

Learned CIT(A) dealt with this aspect, noted the submissions made by the assessee before the learned Assessing Officer, and the opinion of the learned Assessing Officer in detail, also referred to the opinion of the learned Assessing Officer and finally considered the submissions made by the assessee before him. Having done so, learned CIT(A) recorded his findings, which according to us, are necessary to be extracted here under,- “5.4 I have perused the assessment order and the submission of the appellant as above carefully. I find that the AO in the assessment order made a detailed discussion as to why and how the depreciation claimed by the appellant on. the expenditure incurred on the development of the boundary wall should not be allowed u/s. 32 of the Act. The every aspect of AO's observation and findings in this regard categorically established the fact that the appellant was not eligible to claim depreciation on the expenditure on boundary wall, as in the relevant assessment year the said boundary wall was not put to the business of the assessee. The AO, after discussing the nature and business activities of the appellant Company for which it was created and further referring to the provisions of section 32(1) of the Act vis-a-vis distinguishing the decisions cited by the appellant before him had proved beyond doubt as far as the undersigned is concerned that the appellant had not rightly claimed depreciation and for the detailed facts stated in the assessment order by the AO and reasoning/given on which completely agree, he had justifiably denied the appellant's claim of depreciation of Rs. 1,96,15,744/-. From the submission of the appellant made before-the AO, which the AO had discussed treadbare in the assessment order, it cannot be said that the appellant could prove that the boundary wall constructed on which expenditure had been incurred during the year or earlier was put to use for the purpose of appellant's business during the year under consideration. Similarly, from the submission made during appellate proceedings as quoted above, I do not find that any additional facts or nature or explanation had been adduced by the appellant so that the claim of the appellant could be considered in its favour, taking a view otherwise than as taken by the Ld. Assessing Officer. I therefore hold that the Assessing Officer had correctly disallowed the appellant's claim of depreciation of Rs. 1,96,15,744/- in the assessment order for the detailed reasons and explanation given by therein and therefore no interference in the observation and findings of the Assessing Officer in this regard is warranted. The addition made of Rs.1,96,15,744/- on account of disallowance of depreciation is therefore confirmed. Ground No.1 raised by the appellant is accordingly dismissed.”

We have extracted the observations and findings of the learned CIT(A) because it is the contention of the assessee that the learned CIT(A) did not pass any speaking order on this aspect. As stated above, before recording the observations and findings vide paragraph No. 5.4 of his order, learned CIT(A) elaborately referred to the submissions made by the assessee before the learned Assessing Officer and also himself and also the reasoning and the conclusions of the learned Assessing Officer on this aspect. Paragraph No. 5.4 of the impugned order is the culmination of the consideration of the learned CIT(A) of all the above. Learned CIT(A) specifically recorded that he was in agreement with the threadbare reasoning given by the learned Assessing Officer. Then it is not necessary for the learned CIT(A) to refer to line by line in the order of the learned Assessing Officer or the submissions of the assessee to say that he does not agree with the assessee and he is convinced by the reasoning of the learned Assessing Officer. Learned CIT(A) further recorded that he did not find any additional fact or explanation that missed the attention of the learned Assessing Officer. In such situation, it cannot be said that the impugned order on this aspect is not a speaking order. Ground No. 2 of the appeal does not hold any merit and the same is accordingly, dismissed. 6. insofar as the Ground No. 3 is concerned, Learned AR submitted that for claiming depreciation, it is enough if the asset is ready for its use and insofar as the boundary wall is concerned, actual usage is equivalent to the construction thereof and its serving its purpose. He referred to the financials of the company and submitted that till the financial year 2014- 15, the construction cost of the compound wall was Rs. 19.01 crores whereas during the financial year 2015-16 after incurring and expenditure of Rs. 69.32 lakhs the construction was complete.

per contra, it is the submissions on behalf of the Revenue that the wall was in fact constructed in the financial year 2014-15 but only to avoid the payment of tax on account of long term capital gains, the depreciation in respect of the compound wall is brought into picture, by showing the nominal expenditure of Rs. 69.32 lakhs. According to the learned DR, since there was no business activity during the year, the assessee cannot claim any depreciation.

Coming to the merits of these contentions, firstly we observe that the purpose of the boundary wall is to provide protection and security to the building and other assets of the company, which are undoubtedly business assets. Further, the moment the boundary wall is complete, it started serving its purpose and, therefore, it would be, but natural to include the same in the block of assets, land, buildings etc. From the notes to financial statements in respect of the fixed assets at paper No. 12 of the paper book, we notice that there was an addition to the tune of Rs. 19.10 crores in respect of which the depreciation at Rs. 1.97 crores was claimed. Further it is shown in the notes on financials, as one of the significant accounting policies, that the tangible fixed assets are carried at the cost of acquisition or construction less accumulated depreciation, and the cost of tangible fixed assets includes the acquisition and installation of respective assets. 9. It is not the case of Revenue that on the ground of non-carrying out of any business activity, the depreciation on the fixed assets was denied. Since the purpose of boundary wall is to protect the business assets like building and other fixed assets and the moment it is complete it starts serving its purpose, it cannot therefore, be said that such an asset cannot be added to the block of assets when once the installation/construction of such asset is complete. 10. In these circumstances, we are of the considered opinion that if the construction of boundary wall is complete during the current year, the same is eligible to be added to the block of assets and subject to the requirement of law, it is qualified for claiming depreciation. We, therefore, hold that the disallowance of depreciation cannot be sustained. Accordingly, we direct the deletion of the same. 11. Coming to the second addition on account of the cost of acquisition, learned Assessing Officer found that during the year, the assessee sold only 40% of the land while claiming the cost of acquisition in respect of the balance land also. Assessment order reads that the assessee submitted before the learned Assessing Officer that in all the assessee acquired Ac. 184.39 at the cost of Rs. 18.40 crores, but when the assessee intended to sell about 4 acres, thereof, there arose a dispute and the actual extent of land was found to be Ac. 3.33 guntas and under a compromise agreement, 40% thereof fell to the share of the assessee, which the assessee sold. Learned Assessing Officer allowed the cost of acquisition only to such an extent of 40% of land that was sold and disallowed the rest of the same.

Learned CIT(A) considered this issue in detail and held that the assessee is not entitled to claim the indexed cost of acquisition in respect of which the assessee had no right, title or interest. Learned CIT(A) accordingly, upheld the findings of the learned Assessing Officer.

It is contended before us by the learned AR that whatever the price that was paid by the assessee for acquisition of land, that was claimed for indexing and, therefore, it shall be construed that for the price paid by the assessee, only that much of land was acquired as was sold and, therefore, while selling such land, the entire cost incurred for acquisition of that much land has to be allowed.

Learned DR vehemently opposes this proposition. According to him, the indexed cost of acquisition shall be taken only in respect of such land as was sold but not in respect of the land which the assessee parted to others under any compromise. According to him, at best it is a business loss, but does not go to benefit the assessee to claim the same as indexed cost of acquisition.

It is therefore, clear that even according to the assessee, on survey, in respect of 4 acres of land which they intended to sell, it was found that there exists only Ac. 3.33 guntas and under a compromise, the assessee got only Ac. 1.332 which the assessee sold. While computing the capital gains on the sale of this Ac. 1.332, the assessee claimed the indexed cost of acquisition in respect of all the 4 acres. According to Section 48 of the Act, while computing the capital gains on the transfer of any capital asset, the cost of acquisition of the asset and the cost of any improvement thereof shall be deducted from the full value of consideration received on such transfer of capital asset. Here, in the case on hand, such capital asset transferred is not entire 4 acres, but only Ac. 1.332. Whatever that was not sold by the assessee cannot be considered to be the asset that was transferred for consideration and, therefore, for computing the capital gains the asset in respect of which sale consideration received alone has to be considered.

With this view of the matter, we do not find any infirmity in the findings of the authorities below on this aspect and accordingly, we uphold the same. Ground No. 4 is accordingly, dismissed.

In the result, appeal of assessee is allowed in part.