THE COMMISSIONER OF INCOME TAX,COCHIN vs. M/S.O.E.N.INDIA LTD.,COCHIN

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ITA/1212/2009HC KeralaKLHC01025973200901 February 2019Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the question framed by the Revenue did not arise as one of law. The Tribunal had correctly found that the tools were small-value items with a short lifespan, not of enduring benefit, and were wrongly capitalized by the assessee. The assessee, upon realizing this, reversed the capitalization and wrote off the entire value in the same year, treating it as revenue expenditure. The Court found that this adjustment, when properly understood, meant the entire amounts should have been allowed as revenue expenditure. The Court relied on the assessee's submission that the write-off was due to the tools becoming useless after use, necessitating frequent purchases, which is allowable as revenue expenditure in the context of the industry. Therefore, the Court found no reason to interfere with the Tribunal's order. The appeal was rejected.

What were the facts?

The Revenue, Commissioner of Income Tax, Cochin, is the appellant, and M/s. O.E.N. India Ltd., Cochin, is the respondent assessee. The appeal concerns the assessment year(s) not explicitly stated but relates to an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, dated 22-02-2007, which confirmed the decision of the first appellate authority. The Assessing Officer (AO) initially allowed 100% depreciation on tools capitalized by the assessee in the same year of purchase. The AO later sought to rectify this under Section 154. The first appellate authority reversed the rectification, and the ITAT upheld this reversal. The ITAT found that the tools were small-value items with a short lifespan, not of enduring benefit, and thus wrongly capitalized. The assessee, however, had reversed the capitalization and written off the entire value in the same year, claiming it as revenue expenditure.

What were the issues?

1. Whether, after capitalizing expenses incurred on the purchase of tools, the assessee can claim 100% depreciation in the same year of purchase? (Question of law/mixed law and fact, concerning depreciation and capitalization). Assessee's Contentions: - The assessee initially capitalized the amounts spent on small-value tools but later reversed this and wrote off the entire value in the same year as they were rendered useless after use in the manufacturing process. - The claim in the return was as revenue expenditure. - Relied on (1990) 182 ITR 493 [Commissioner of Agricultural Income Tax v. Midland Rubber and Produce Co. Ltd.] to contend that loss on revaluation of loose tools is permissible as an accountancy practice and that such factual determinations need not be interfered with by the High Court. - The write-off was due to the tools being rendered useless after use, necessitating frequent purchases, which is allowable as revenue expenditure in the nature of the industry. Revenue's Contentions: - The Revenue's primary contention, as indicated by the appeal, is that the assessee should not have claimed 100% depreciation on capitalized tools in the same year of purchase and that the capitalization itself was incorrect.

Which sections of the Income-tax Act were involved?

Section 154

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON FRIDAY ,THE 01ST DAY OF FEBRUARY 2019 / 12TH MAGHA, 1940 ITA.No. 1212 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 1307/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 22-02-2007 APPELLANT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX,COCHIN COCHIN. BY ADVS. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/S:/RESPONDENT/ASSESSEE: M/S.O.E.N.INDIA LTD., COCHIN. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- ITA No.1212 of 2009 ------------------------------------------- Dated this the 1st day of February, 2019

J U D G M E N T Vinod Chandran, J. The question raised is as to whether after capitalisating the expenses incurred on purchase of tools, can the assessee claim depreciation at 100% in the very same year in which the purchase was made?

2.

The Assessing Officer is said to have allowed it, which was sought to be rectified under Section 154 of the Income Tax Act, 1961. The first appellate authority reversed the rectification, which reversal the Income Tax Appellate Tribunal confirmed. The Tribunal agreed with the first appellate authority, insofar as the finding that the tools were small value tools which have a short life span of less than one year. There is no benefit of enduring nature and the assessee had capitalized it wrongly.

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3.

The Tribunal also found that in fact the assessee should have treated it as revenue expenditure. The learned counsel for the assessee also submits that this was specifically what was done by the assessee. The AO at the first instance wrongly allowed it as a claim of depreciation of 100%. The assessee admits that it had capitalised the amounts spent on small value tools in the very same year. However, noticing the discrepancy, the assessee had reversed it and written off the entire value in the very same year in which they were rendered useless after use in the manufacturing process. The claim in the return was as a revenue expenditure.

4.

The learned counsel also relies on (1990) 182 ITR 493 [Commissioner of Agricultural Income Tax v. Midland Rubber and Produce Co. Ltd.] to contend that loss on revaluation of loose tools -4- is permissible as an accountancy practice and though a question was raised, this Court had found that such a factual determination need not be interfered with in the appeal to the High Court. The revaluation of loose tools done therein, was found to be as a matter of accountancy procedure or practice and not as an actual expenditure incurred. There was also no depreciation claimed for the same. Here too, the write off was on account of the tools being rendered useless after use in the manufacturing process. This necessitates frequent purchase of the said tools for continuous manufacturing process. In the nature of the industry, the same is allowable as a revenue expenditure. We find that the adjustment made by the assessee was wrongly understood by the AO at the first instance. If it had been properly understood, -5- then, the entire amounts would have been allowed as a revenue expenditure. In such circumstances, we do not think that there is any cause for interference with the order of the Tribunal. The question framed does not at all arise as one on law. The Income Tax Appeal is, hence, rejected. No order as to costs. K.VINOD CHANDRAN JUDGE ASHOK MENON JUDGE -6-

Appendix — schedule of exhibits
APPENDIX APPELLANT'S EXHIBITS: ANNEXURE A COPY OF ORDER U/S. 154 DATED 25.8.2003 FOR THE ASST. YEAR 1998-99. ANNEXURE B COPY OF THE ORDER DATED 9.9.2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE C COPY OF THE ORDER DATED 22.2.2007 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.1307/COCH/2004. [True Copy] jg

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