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Income Tax Appellate Tribunal, “F” Bench, Mumbai
The appeal filed by the revenue and the cross objection filed by the assessee are directed against the order passed by Ld CIT(A)-2, Nashik and they relate to the assessment year 2004-05.
The revenue has filed revised grounds of appeal and the same reads as under:-
2 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged)
“1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in allowing the claim of depreciation based on additional evidences submitted by the assessee during the appellate proceedings without granting any opportunity to the AO make his comments, in clear violation of the provisions of Rule 46A of the IT Rules
2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) was not correct in law in allowing the claim of depreciation of Rs 43 42 crores, claimed by the assessee by fling the revised return of income for AY2004-05 based on the order passed by the Arbitration Tribunal on 18 06 2004, which pertains to AY2005-06
3. On the facts and in the circumstances of the case and in law, the LU CIT(A) was not correct in allowing the claim of depreciation of Rs 43.42 crores (claimed @100%) as the amount of arbitration award is Rs 186.04 crores, which is more than the WDV of the assets for which depreciation was claimed.
4. On the facts and in the circumstances of the case and in law, the Ld CIT(A) was not correct in law in allowing the claim of depreciation of Rs. 43.42 crores (claimed @ 100%) as the assets were not put to use/admittedly not installed during the assessment year under consideration.
5. For these and other grounds that may be urged at the time of hearing, the decision of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”
In the cross objection, the assessee has raised an alternative plea that the depreciation of Rs.43.42 crores, which is being contested by the revenue, should alternatively be allowed as business loss.
The facts relating to the issue are stated in brief. The assessee was earlier known as “Datar Switch Gear Ltd” and it has since merged with M/s L & T Ltd. The assessment for the year under consideration was completed u/s 143(3) of the Act by the AO on 28-12-2006, wherein the AO disallowed the claim of depreciation of Rs.43,42,25,604/- made by the assessee in the revised return of income filed by it.
The facts relating to the above said depreciation claim needs to be elaborated further. The assessee entered into a contract with Maharashtra State Electricity Board (MSEB) for supply, testing, erection, commissioning and maintenance of “Low Tension Load Management Systems” (LTLMS) on 3 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged)
“leasing basis”, vide the contract entered on 27-03-1997. The LTLMS are energy saving capacitors. According to the contract, the assessee has to install 47,987 LTLMS. The assessee installed 17,294 LTLMS units at the specified locations stated by MSEB. Thereafter, there were disputes with MSEB and the MSEB did not provide the list of places where the remaining units are to be installed. The MSEB also terminated the contract on 19-02-1999. Hence the matter was referred to arbitration. In the meantime, the assessee had manufactured 14,206 LTLMS units and they could not be installed anywhere in the absence of any instructions from MSEB. According to the assessee, it has also purchased raw materials for the remaining 16,487 units also.
Before AO, the assessee submitted that it had incurred Rs.163.08 crores on this project and the same was capitalized and shown under Fixed Assets in the books of account as “L.T Load Management System”. After termination of the contract on 19-02-1999, the dispute was referred to arbitration and the Arbitrator passed an award of Rs.186.00 crores plus interest in favour of the assessee on 18-06-2004. The MSEB had earlier stated that the assessee could remove and take back the capacitors as they have become junk. However, after the award, the MSEB has changed its stand and vide its letter dated 30.08.2004, refused to allow the assessee to repossess the capacitors. The assessee further submitted that these capacitors, being energy saving devices, are eligible for depreciation @ 100%. Accordingly, it was submitted that the assessee has decided to claim depreciation @ 100% on the entire remaining amount.
The AO sought for directions from Joint Commissioner of Income tax u/s 144A of the Act. The discussions made by AO in this regard in the assessment order are extracted below:-
“Assessee company has claimed write off of depreciation amounting to Rs. 43,42,25,604/- on LTLMS assets which are 100% depreciable as per IT Act, 1961.
4 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged)
The claim of depreciation results in loss of Rs.45,67,50,311/- as per assessee’s revised return against loss of Rs.2,25,24,705/- as per assessee’s original return.
The Joint Commissioner vide his letter dated 27.12.2006 gave directions u/s 144A to the office of the ACIT, Circls-2, Nashik. The operative part of the order giving directions to the ACIT, Circle-2, Nashik is reproduced below:-
“Keeping in view the fact that many opportunities since 06-07-2006 has been given and the assessee has not furnished the details called for I am constrained to hold, in the absence of details required for claiming depreciation not having been filed by the assessee, the assessee cannot claim depreciation as claimed in the revised return and A.O is directed to disallow the said claim of depreciation claimed in revised return in view of the discussion above.”
Accordingly, the AO disallowed claim of depreciation of Rs.43,42,25,604/-.
The assessee challenged the above said disallowance by filing appeal before Learned CIT(A). We noticed earlier that the assessee had submitted before the AO that it had incurred a sum of Rs.163.08 crores on this project. In the very same letter furnished to the AO, the assessee has given workings with regard to the claim of Rs.43.42 crores as depreciation. The said workings have been extracted by Learned CIT(A) as under:-
PARTICULARS AMOUNT Expenses/Cost incurred in FY 1997-98 48,17,91,403 Expenses/Cost incurred in FY 1998-99 51,42,81,330 Total cost incurred 99,60,76,733 Depreciation claimed in AY 1998-99 (41,18,50,169) Depreciation claimed in AY 1999-2000 (15,00,00,000) Balance amount claimed as depreciation in AY 2004-05 43,42,25,604 (* There are arithmetical errors in the computation furnished by the assessee) We notice that there is no discussion on the difference in the amount of ‘cost incurred, i.e., difference between Rs.163.08 crores and Rs.99.60 crores.
The Learned CIT(A) noticed that the arbitrator has granted award to the assessee on the following basis:-
5 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged)
Damages payable on 17,294 installed units - 108.02 crores Damages payable on 14206 uninstalled units - 71.43 crores Cost of imported raw materials - 6.52 crores ---------- 185.97 crores ========= The Learned CIT(A) proceeded to decide the issue on the basis of information given in the table extracted above. The Ld CIT(A) noticed that the assessee has incurred a sum of Rs.99,60,75,733/- in respect of the assets and further it has claimed aggregate amount of deduction of Rs.56,18,50,169/- in FY 1997-98 and 1998-99.(It is pertinent to note that the assessee has not explained the nature of deduction claimed by it, i.e., whether it was depreciation claim or any other claim) Accordingly, the Ld CIT(A) held that the proportionate cost of 17,294 units, which have already been installed by the assessee, should be taken as Rs.54,67,66,523/-. Accordingly, the Learned CIT(A) held that the amount of Rs.43,42,25,604/- now claimed as depreciation in the current year pertains to 14,206 units, which remained with the assessee. We notice that the revenue has not questioned above said workings given by Learned CIT(A). Hence, the question that boils down now is whether the assessee is entitled to claim depreciation of Rs.43,42,25,604/- in the current year in respect of 14,206 units, which remained with it.
The Ld CIT(A) held that the assessee is entitled to claim depreciation of Rs.43.42 crores during the current year, since the 14,206 units were ready for giving on lease to MSEB. In this regard, the Ld CIT(A) placed his reliance on the decision rendered by Hon’ble Supreme Court in the case of ICDS vs. CIT (350 ITR 527). The Learned CIT(A) also noticed that, as per the Explanation 5 inserted in Sec. 32(1) with effect from AY 2002-03, the depreciation is to be allowed from AY 2002-03 onwards compulsorily. In that case, the unabsorbed depreciation has to be carried forward to AY 2003-04 and 2004-05 u/s 32(2). Hence, in any case, the assessee is entitled to depreciation claim of Rs.43,42,25,604/-. The assessee had also raised an alternative contention that the above said amount should be allowed as business loss. Since the Learned
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CIT(A) had held that the assessee is entitled to claim depreciation, he did not adjudicate this alternative ground.
Before the Tribunal, the revenue is challenging the decision rendered by Learned CIT(A) in allowing the claim of depreciation. The assessee has filed cross objection seeking to allow the same as business loss.
The first ground urged by the revenue is that the Learned CIT(A) has allowed relief to the assessee on the basis of additional evidences submitted before him and those additional evidences were not confronted with the AO. The Ld A.R submitted that the assessee has not furnished any additional evidence as alleged by the revenue. He submitted that the Learned CIT(A) has made reference to arbitration award only in his order, but the copy of arbitration award was furnished to the AO during the course of assessment proceedings. We have gone through the assessment order and the order passed by Learned CIT(A). We notice that the copy of arbitration award was furnished to the AO also, which fact is finding place in the assessment order. In any case, the arbitration award is not relevant to the depreciation claim made by the assessee. Apart from it, we notice that the assessee has furnished break-up details of expenses incurred by it on the LTLMS capacitors. We also noted earlier that the Learned CIT(A) had worked out proportionate cost of installed 17,294 units at Rs.54,67,66,523/-. Accordingly, he has held that the cost of uninstalled 14,206 units is Rs.43,42,25,604/-. (Here also, there are arithmetical errors.). We earlier noticed that the revenue has accepted the computation so made by Ld CIT(A) and hence the question that requires adjudication is whether the assessee is entitled to claim depreciation @ 100% on the cost of 14,206 units amounting to Rs.43,42,25,604/-. Hence we are of the view that the Learned CIT(A) has not considered any additional evidence as alleged by the revenue.
The second ground urged by the revenue is that the assessee has claimed depreciation of Rs.43.42 crores in AY 2004-05 on the basis of award
7 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged) given by Arbitration Tribunal on 18-06-2004, which pertains to AY 2005-06. The issue before us relates to the eligibility of the assessee to claim depreciation on the cost of 14,206 units. As submitted by Ld A.R, the eligibility to claim depreciation is not dependent upon the factum of award given by arbitration tribunal. We notice that the arbitration award given on 18-06-2004 has resolved the dispute on that date (even though the MSEB has challenged the award by filing appeal) and it has enabled the assessee to take decision to claim depreciation on uninstalled units in AY 2004-05. Hence, the date of giving of arbitration award is not relevant to the issue under consideration.
In ground no.3, the revenue is contending that the arbitration award of Rs.186.04 crores given to the assessee is more than the amount of depreciation of Rs.43.42 crores claimed by the assessee and hence the Learned CIT(A) was not correct in allowing depreciation claim. We do not find any merit in this ground. The award given to the assessee is “income” item and the depreciation claim is an “expenditure” item. The quantum of income is not relevant for allowing claim of depreciation.
The last ground of the revenue is that the Learned CIT(A) should not have allowed the claim of depreciation, since the assets were not put to use. This is the only effective ground that requires to be adjudicated.
The Ld D.R. submitted that the 14,206 units have not been put to use by the assessee, as the MSEB has refused to accept them. He further submitted that the assessee has not furnished the details of assets also. Accordingly, the Ld D.R submitted that the assessee is not entitled to claim depreciation on the cost of 14,206 units. In support of these contentions, the Ld D.R placed his reliance on the following case laws:-
(a) DCIT vs. Sheth & Sura Engg (P) Ltd (2008)(110 ITD 39)(Pune)(TM) (b) DCIT vs. Yellamma Dasappa Hospital (2007)(290 ITR 353)(Kar)
8 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged)
(c) ACIT vs. DHL Operations BV (2007)(13 SOT 581)(SB).
The Ld D.R further submitted that the assets should be actually used for the purposes of business in order to claim depreciation. Mere fact that the asset is ready for use is not sufficient. In support of this proposition, the Ld D.R placed his reliance on the decision rendered by Hon’ble Bombay High Court, Nagpur bench in the case of Dineshkumar Gulabchand Agarwal vs. CIT (2004)(267 ITR 768).
The Ld A.R, on the contrary, submitted that the assessee was engaged in the business of leasing LTLMS capacitors to MSEB and it has actually leased out 17,294 units. He submitted that the assessee has claimed deductions in the earlier years and it has been allowed. Due to disputes between the assessee and MSEB, the remaining 14,206 units could not be given to MSEB on lease, even though they were ready for use. Since there was breach of contract by MSEB, the assessee referred the matter to arbitration and the arbitration tribunal has allowed compensation to the assessee, vide its order dated 18.06.2004. Hence the assessee has decided to claim depreciation @ 100% in AY 2004-05. He submitted that these 14,206 units were ready to use, these assets should be considered as having been “used” in its business of leasing out them to MSEB. Hence, the assessee should be allowed depreciation thereon. In support of these contentions, the ld A.R placed his reliance on the following case laws:- (a) CIT vs. Kotak Mahindra Finance Ltd (2009)(317 ITR 236)(Bom) (b) Multican Builders Ltd vs. CIT (2005)(278 ITR 142)(Cal) (c) Capital Bus Service (P) Ltd vs. CIT (123 ITR 404)(Delhi) (d) PCIT vs. Larsen and Toubro Ltd (2018)(403 ITR 248)(Bom)
Referring to the Cross objection, the Ld A.R submitted that the above said amount of Rs.43.42 crores should be allowed as “business loss”.
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We have heard rival contentions and perused the record. As per the agreement entered with MSEB, the assessee has agreed to lease out LTLMS capacitors to MSEB. Hence the business of the assessee in respect of LTLMS units is the business of leasing out them. The assessee had leased out and installed 17,204 units at the places identified by MSEB. It is the submission of the assessee that it had produced 14,206 units of LTLMS capacitors and has kept it ready for installation, but the MSEB has committed breach of contract. Now the question that arises is whether the assessee would be entitled to claim depreciation on the cost of 14,206 units. Before us, the Ld A.R placed reliance on the above said case laws, which we are discussing below:-
(a) CIT vs. Kotak Mahindra Finance Ltd (2009)(317 ITR 236)(Bom)
In this case, it was held that the fact whether the lessee had put to use the leased equipment would be irrelevant as long as the machinery in fact had been given on lease before the end of financial year, as then it could be said that the assessee for the purpose of business had “used” the leased equipment. In this case, the Hon’ble Bombay High Court also considered its decision rendered in the case of Dineshkuar Gulabchand Agrawal (supra).
(b) Multican Builders Ltd vs. CIT (2005)(278 ITR 142)(Cal)
In this case, a vehicle was given on lease. The registration of vehicles happened before the closure of the year, but lease rent become payable from next year onwards. It was held that the assessee would be entitled to claim depreciation on vehicles, since the vehicle has been used by the assessee for business purposes in accounting year
(c) Capital Bus Service (P) Ltd vs. CIT (123 ITR 404)(Delhi).
In this case, the assessee was in transport business and buses were kept ready for running on contract basis. It could not run business on account of lack of demand. The High Court held that the expression “used for 10 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged) the purpose of business” must be given wider meaning and hence depreciation is allowable.
(d) PCIT vs. Larsen and Toubro Ltd (2018)(403 ITR 248)(Bom)
In this case, the machinery was used for trial runs. It was held that the depreciation is allowable.
The ratio of above said decisions, in our understanding, is that the expression “used for the purpose of business” must be given wider meaning. If the assets are ready to use, then the depreciation should be allowed thereon. In the case of business of leasing, the actual user by the lessee is not relevant. If the assets were handed over to the lessee, then the said asset is considered to have been used for the business of leasing. It is the contention of the assessee that, since it is in the business of leasing out LTLMS capacitors, they should be considered as having used for the purpose of business of leasing, when these assets were ready to use. However, there is a fine distinction between the facts available in the above said cases and the facts prevailing in the present case. In the above cited cases, the assets were actually put to use in the succeeding years after they were found to be “ready to use”, i.e., the decisions have been rendered in the context of subsisting lease contracts. Under those set of facts, it was held by Hon’ble Courts that the factum of “ready to use” would be considered as “used” within the meaning of sec. 32 of the Act. On the contrary, we noticed that the MSEB had terminated the contract way back in the February, 1999. Hence, even though 14,206 units of LTLMS capacitors are claimed to be “ready to use”, in the facts of the present case, there was no subsisting contract of lease. Hence there was no scope for using it actually in the subsequent periods, since the contract has been terminated by MSEB way back in February, 1999. Hence, in the facts of the present case, the assessee could not have put these 14206 units in use in the business of leasing at all. Hence, in our considered view, the concept of “ready to use” may not come to the help of the assessee in the facts of the present
11 M/s. L&T Ltd. (Datar Switch Gear Ltd. merged) case. Accordingly, we are of the view that the assessee would not be entitled to claim depreciation on the cost of 14,206 units. Accordingly, we set aside the order passed by the Learned CIT(A) on this issue.
Now, the next question that arises is whether the amount of Rs.43.25 crores is allowable as business loss or not. The assessee has raised this issue in the cross objection. We noticed earlier that there was contradiction with regard to the quantum of expenditure incurred by the assessee. We also notice that the assessee, in its letter dated 16.12.2004 while explaining the reasons for filing revised return for AY 2004-05 has stated as under:-
“The company had incurred Capital expenses of Rs.163.08 crores on this project. This amount is capitalized and appearing under the Fixed Assets schedule as L.T Load Management System. So far the company has not charged the depreciation on these assets under Income tax Act, though it could have been claimed.” In the very same letter, it has been stated that the assessee had incurred expenses of Rs.99,60,75,733/- and it has claimed a sum of Rs.41,18,50,169/- and Rs.15,00,00,000/- in AY 1998-99 and 1999-2000. Hence there is no clarity with regard to the nature of claim of above said two amounts, viz., Rs.41.18 crores and Rs.15.00 crores. Hence it is not clear as to whether these two amounts claimed by the assessee are in the nature of “depreciation” or they are of any other nature. From the arbitration award, we notice that the assessee has incurred expenses on raw materials also. It is not clear as to whether the raw materials cost has been included in the above said amount of Rs.99.60 crores or not. Thus, there is lack of clarity in the submissions made with regard to facts also and further there is no clarity with regard to the quantum of expenditure, the nature of deduction claimed in the earlier years etc.
There should not be any dispute that the quantum of “business loss” is required to be computed by considering various aspects like,
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(a) Whether the LTLMS units could be used by the assessee in any other manner, (b) If not, what was the salvage value of those capacitors? (c) Whether the raw materials could be used by the assessee in any other manner? (d) If not, what was the salvage value of raw materials (e) The effect of arbitration award on determination of business loss.
We may make it clear that these are given as illustrations only and it is possible that some more aspects may also require to be taken into account to determine the quantum of business loss.
Since the assessee has incurred loss in the course of its business of leasing out LTLMS capacitors, we agree with the contentions of the assessee that the same is allowable as business loss. However, in view of the foregoing discussions, we are of the view that the matter of quantification of business loss requires to be examined at the end of AO. We noticed earlier that the Learned CIT(A) did not examine this alternative claim of the assessee, since he has allowed depreciation claim. We have, however, held that the depreciation is not allowable and accordingly we have reversed the decision rendered by Learned CIT(A). Even though we have accepted the alternative claim of the assessee, we have expressed the view that the quantification of business loss requires examination. Since it involves factual aspects, we are of the view that this issue requires examination at the end of AO. Accordingly, we restore this issue to the file of AO for examining it in accordance with law, after affording adequate opportunity of being heard.
In the result, the appeal filed by the revenue is allowed and the cross objection filed by the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on 03.08.2022.