MAN INDUSTRIES (INDIA) LIMITED,MUMBAI vs. DCIT ,CENTRAL RANGE -7 (2), MUMBAI

The solitary issue urged in these appeals relates to disallowance of claim of depreciation on the withholding tax (TDS liability) borne by the assessee, which has been capitalised.

The facts relating to the issue are stated in brief. The assessee company is engaged in the business of manufacture and sale of large diameter carbon steel line pipes required for high pressure transmission application for gas, crude oil, petrochemical products and portable water.

Before the Assessing Officer, the assessee relied on the decision rendered by Hon'ble Madras High Court in the case of CIT Vs. Standard Polygraph Machines (P) Ltd. (2002) (124 taxman 669), wherein it was held that the withholding tax payable on the consideration given to foreign collaborator and borne by the assessee will form part of actual cost of the plant and machinery, on which depreciation should be allowed. The assessee also relied on the decision of Mumbai bench of the Tribunal in the case of BOB Card Ltd. (ITA No. 7660/Mum/2011), wherein it was held that the assessee would be entitled to claim deduction of tax liability paid since the payment made in terms of contractual agreement in discharge of its trade liability.

The assessee also submitted that an identical disallowance of depreciation made by the Assessing Officer in A.Y. 2013-14 on identical reasoning has since been deleted by the learned CIT(A). However, the Assessing Officer expressed the view that the Revenue has filed the appeal before the ITAT challenging the decision so rendered by the learned CIT(A) and accordingly did not follow the decision rendered by the learned CIT(A) in A.Y. 2013-14. Accordingly the Assessing Officer disallowed the depreciation claimed in three years under consideration as detailed below :-

The learned AR submitted that the Assessing Officer has made an identical disallowance of depreciation on withholding tax borne by the assessee in A.Y. 2013-14. He submitted that the Tribunal, vide its order dated 25.11.2021 passed in ITA No. 7530/Mum/2019, has deleted the disallowance by following the decision of Hon'ble Madras High Court in case

On merits, the learned AR placed reliance on the decision rendered by the Tribunal in assessee’s own case in the first year i.e. A.Y. 2013-14 (referred supra) and also decision rendered by Hon'ble Madras High Court in the case of Standard Polygraph Machines (P) Ltd. (supra).

On the contrary, the learned DR submitted that that the assessee also stood as representative-assessee of the payee of the premium on FCCB. The assessee, after having borne TDS liability on the premium amount, could claim it as refund from the income tax department. Accordingly, the learned DR submitted that if the assessee claims back TDS amount back as refund, the same would be offset payment already made. Under this scenario, the

We heard the rival contentions and perused the record. The facts relevant to the issue are that the assessee has borne the TDS payable on the FCCB premium paid by the assessee. The withholding tax liability so borne by the assessee was Rs.12.40 crores. In the normal course, the TDS amount would be reduced from the amount payable to the payee and the net amount alone will be paid to him. The TDS amount will be remitted to the credit of the payee, who can adjust the same against his tax liability. In the instant case, since the assessee has borne the TDS deductible on the amount of premium payable on FCCD, the same would become additional cost to the assessee. Hence it will go to increase the premium payable on FCCB. The assessee has capitalized a portion of premium amount, which included the above said amount of Rs.12.40 crores. The amount was capitalized by the assessee in the year relevant to AY 2013-14 and it also claimed depreciation thereon, which was disallowed by the assessing officer in AY 2013-14. The Ld CIT(A), however, deleted the disallowance and hence the revenue filed appeal before the Tribunal in that year. As stated by Ld A.R, the ITAT has confirmed the order passed by Ld CIT(A), vide its order dated 25.11.2021 passed in ITA No.7530/Mum/2019, with the following observations:-

Under these facts, it is contention of the assessee that the AO could not have disallowed in the subsequent years, since the depreciation has been allowed in the first year. We notice that the above said proposition of the assessee finds support from the decision rendered by Ahmedabad bench of ITAT in the case of Bodal Chemicals Ltd (supra), wherein it was held that the

In our view, the issue before us can be looked at from another angle also. There should not be any dispute that the identity and character of the asset, which has entered into the block of asset, would be lost. It was so held by Hon’ble Delhi High Court in the case of Bharat Aluminium Co Ltd (ITA No.532 and others of 2006 dated 15-10-2009) as under:- “(i) The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT’s Circular dated 23.09.1988 is that once the various assets are clubbed together and become ‘block asset’ within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned;

On merits, we notice that the co-ordinate bench has already taken the view that the TDS liability (withholding tax) on the premium payable on FCCB and borne by the assessee, would go to increase the cost of asset and accordingly depreciation is allowable thereon. In this regard, the co-ordinate bench has followed the decision rendered by Hon’ble Madras High Court in the case of Standard Polygraph Machines (P) Ltd (supra). In the above said decision, the Hon’ble Madras High Court held that the TDS liability borne by the assessee shall form part of the consideration. The decision rendered by Hon’ble Madras High Court is extracted below:- “2. The assessment year is 1981-82. The assessee claimed that the amount of income-tax paid by the assessee in respect of the consideration paid by the assessee to the foreign collaborator should also form part of the actual cost of the plant and machinery on which depreciation and investment allowance should be allowed. That claim was accepted by the ITO, but negatived by the Commissioner in suo motu revision under section 263 of the Income-tax Act, 1961. The Tribunal has held that the amount of tax paid by the assessee should be regarded as liability of the foreign collaborator which the assessee had undertaken to pay as per the agreement entered into with the collaborator. The Tribunal, therefore, held that it should be treated as part of the value of plant and machinery of the assessee.

We notice that the tax authorities have taken the view that, as per the agreement entered by the assessee with the FCCB holders, it is liable to bear the TDS liability in excess of 10%. In the instant case, the TDS liability was only 10% and hence there was no contractual obligation for the assessee to bear the withholding tax (TDS liability). Accordingly, the tax authorities have taken the view that the capitalized value of withholding tax borne by the assessee is not eligible for depreciation.

We are unable to agree with the rationale given by the tax authorities. It may be true that the assessee, as per the written agreement, was liable to bear the withholding tax liability, if it exceeds 10% of the premium amount. However, as submitted by Ld A.R, the fact would remain that the assessee has ultimately borne the liability of withholding tax of 10% also. Here, the question before us is not on the correctness or otherwise of the action of the assessee in bearing the TDS liability on its own account. We notice that the AO has not enquired on the developments subsequent to the entering of agreement, which compelled the assessee to bear the TDS liability, which in the normal course would be deducted from the amount payable to the payee. Be that as it may, once the assessee has borne the liability of withholding tax, as per the ratio laid down by the Hon’ble Madras High Court, the same

Before us, the Ld D.R contended that the assessee would have got back the withholding tax amount (TDS amount) as refund, since the assessee herein is the representative assessee for the payees, i.e., it is the say of Ld D.R that the assessee would get refund of withholding tax and effectively, there will not be any TDS liability upon the assessee. In that case, the assessee would not be eligible to get depreciation on the TDS liability so capitalized. Accordingly, he submitted that the AO has rightly disallowed the depreciation claim made on the amount of withholding tax.

We are of the view that the Ld D.R is advancing his arguments on probabilities and not on facts. First of all, it is not shown to us that the assessee has got refund of withholding tax. According to Ld D.R, the assessee is acting as representative of the payees. In case of an representative assessee, there is no personal benefit/consequences, i.e., the consequences/benefits arising from the transactions would belong to the principal and not to the representative. It is not shown to us that the refund, if any, that will be obtained out of the impugned withholding tax would be given back to the assessee by the payees to offset the TDS liability already borne by the assessee. If the above said scenario happens, it would happen in future and in that year of receipt, the AO is always be free to examine the tax liability, if any/ tax treatment to be given thereon. Hence, a future contingency, which may or may not happen, cannot be a ground to deny the

In view of the foregoing discussions, we are of the view that the depreciation claim by the assessee cannot be disallowed in all the three years under consideration. Accordingly, we set aside the orders passed by Ld CIT(A) on all the three years and direct the AO to allow the depreciation claimed by the assessee.

In the result, all the three appeals filed by the assessee are allowed. Order pronounced in the open court on 28.10.2022.