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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI G. MANJUNATHA
आदेश /O R D E R Per G. MANJUNATHA, AM: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-3, Chennai, dated 29.09.2017 and pertains to the assessment year 2014-15.
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The assessee has raised the following grounds in its appeal:-
General The order passed by the Commissioner of Income-tax (Appeals) [‘CIT(A)’] —3 under section 250(6) of the Income-tax Act, 1961 (‘the Act) dated 29 September2017 (received on 24 October 2017) is bad in law and facts, and hence ought to be quashed. The Appellant submits that the below grounds are independent and without prejudice to one another.
Disallowance of depreciation relating to assets capitalized during the subject AY 2.1 The learned CIT(A) erred on facts and in law by disallowing depreciation amounting to INR 5,756,005 (including additional depreciation) relating to assets capitalized during the subject AY. The Appellant had capitalized amounts of INR 16,445,731, which were payment made to directors as an incentive for providing consultation / professional services with regard to purchase and installation of fixed assets during the subject AY 2014-15. 2.2 Further, the learned CIT(A) has erred in not appreciating the fact that out of the aforesaid amounts capitalized, an amount of JNR 10,853,698 was claimed as expenditure and debited to profit and loss account of the Company during the AY 2013-14, however the same has been disallowed in AY 2013-14 under section 43B of the Act and the same has not been claimed as a deduction at the time of actual payment during the subject AY. Given the same, the claim of depreciation on the aforesaid amount shall not tantamount to double deduction. 2.3 Notwithstanding the above, the learned CIT(A) erred in not allowing the entire amount paid to the directors as revenue expenditure in the nature of professional fees, for which TDS was also deducted under section 1941 of the Act.
Disallowance of depreciation on assets purchased in AY 2013-14 but put to use in AY 2014-15 ‘3.1. The learned CIT(A) erred in disallowing depreciation on plant and machinery acquired in AY 2013-14, but put to use in AY 2014-15. The
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CIT(A) ought to have appreciated that the depreciation under section 32 of the Act can be availed only when the asset is put to actual use, i.e. when the plant and machinery was set up and operational.
Excess disallowance of depreciation 4.1. The learned CIT(A) ought to have disallowed only 50 per cent of the depreciation relating to the aforesaid assets amounting to 1NR 3,417,965, as only this amount of depreciation was claimed by the Appellant, as the assets were put to use for a period less than 180 days.
Others The learned AO has erred in initiating penalty proceedings under section 271(1 )(c) of the Act without appreciating that there was no failure on the part of the Appellant in complying with notices during the course of assessment proceedings or any attempt to conceal income / furnish inaccurate particulars of income.
Relief 6.1 The Appellant craves leave to add, alter, amend and/Or withdraw the above ground of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.
At the time of hearing, the Authorized Representative for the assessee submitted that there is a delay of 24 days in filing the appeal before the Tribunal for which necessary petition for condonation of delay along with affidavit has been filed. The ld.AR for the assessee further referring to the petition, submitted that the delay in filing the appeal was due to inadvertent mistake of the Counsel who is handling the tax matters, as per which they have held up with ongoing tax audit and income tax filing work due to which the filing of appeal was slipped the mind of the Counsel.
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Therefore, the delay in filing the appeal is neither intentional nor to derive undue benefit and hence in the interest of justice, the delay may be condoned to advance substantial justice.
3.1 The ld.DR on the other hand strongly opposing the condonation petition filed by the assessee, submitted that the reasons given for delay in filing the appeal does not come under reasonable cause and further the assessee failed to prove bonafideness and hence the petition filed by the assessee may be dismissed.
3.2 Having heard both sides and considered material on record, we find that although the reasons given by the assessee is not sufficient enough to condone the delay in filing the appeal, but considering the delay of 24 days in filing the appeal, the delay in filing the appeal is condoned to advance substantial justice and the appeal of the assessee is admitted for hearing.
The brief facts of the case are that the assessee company is engaged in the business of marketing and manufacturing of pharmaceutical finished dosage formulations, filed its return of income for the assessment year 2014-15 on 30.11.2014 declaring
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‘Nil’ total income. The case was selected for scrutiny and during the course of assessment proceedings, the AO noticed that the assessee has capitalized an amount of Rs.60,52,126/- and Rs.1,03,93,605/- as pre-operative expenses relating to acquisition of asset. The AO called upon the assessee to justify the claim of depreciation on expenses capitalized. In response, the assessee submitted that the amounts capitalized under pre-operative expenses represents payments made to the Directors of the company towards rendering services in connection with installation of plant and machinery. The assessee further submitted that out of the total expenses, a sum of Rs.54,26,849/- was disallowed u/s.43B of the Income Tax Act, 1961 (hereinafter ‘the Act’) for the assessment year 2013-14. Since, the said sum was not allowed as revenue expenditure, the assessee has capitalized it and claimed depreciation. The AO was not convinced with the explanation furnished by the assessee and according to him, expenditure incurred towards installation charges paid to Directors is in the nature of revenue expenditure on which depreciation cannot be allowed. Accordingly, disallowed depreciation claim on said expenditure. The AO further noted that the assessee has also capitalized sum of Rs.30,85,500/- towards purchase of plant and machinery, but such plant and machinery, was purchased on 14.12.2012. Since, the asset was acquired in
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earlier financial year, the AO has disallowed depreciation claimed on said amount. Thus, the AO has worked out total disallowance of depreciation at Rs.68,35,930/- and added back to the total income.
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has reiterated its submissions made before the ld.AO in respect of depreciation claim on the amount capitalized towards incentives paid to Directors for rendering services in connection with installment of plant and machinery. The assessee has filed a detailed written submission along with judicial precedents to argue that professional / technical fees paid in connection with acquisition of fixed assets, can be added to the cost of fixed asset. The assessee has also taken an alternative plea in so far as disallowance of 100% depreciation on purchase of plant and machinery of Rs.30,85,500/- on the ground that although the said asset was purchased in the financial year 2013-14, but the same was put to use on 01.01.2014 relevant to assessment year 2014-15 and 50% of actual depreciation was claimed, because the asset was put to use for less than 180 days. However, the AO has disallowed 100% depreciation by taking note of date of acquisition of assets without considering the submissions of the assessee that although the asset
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was purchased during the previous financial year, the same was put to use during the current assessment year.
The CIT(A) after considering relevant facts held that the assessee was not able to prove beyond reasonable doubt that the Directors of the company had requisite qualification to render services in relation to installation of plant and machinery and there is no evidence to prove that they have rendered services for installation of plant and machinery to warrant such huge payments. The ld.CIT(A) further noted that although the assessee has debited incentives paid to Directors in the previous financial years relevant to the assessment year 13-14, but for the reasons best known to them, this part of expenditure has been disallowed and added back to total income u/s.43B of the Act while filing the return of income. During the year, the assessee has paid the amount by deducting TDS and capitalized to plant and machinery and also claimed depreciation, without establishing the fact that how an expenditure was revenue in nature in the previous financial year suddenly becomes capital in nature for the purpose of claiming depreciation. Therefore, he was of the opinion that the claim of the assessee that it has paid incentive for installation of plant and machinery to Directors cannot be accepted and accordingly the claim of
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depreciation on said amount is not in accordance with law. As regards to disallowance on depreciation on Rs.30,85,500/-, the CIT(A) noted that the assessee was not able to demonstrate the nature of asset purchased and justify the time of about one year taken to install such machinery. The assessee also not given any details of the transaction as to how the said asset acquired in December 2012 was dealt in the books of accounts in the earlier financial year. Therefore the CIT(A) opined that there is no error in the findings of the ld.AO to disallow depreciation on said plant and machinery. The ld.CIT(A) also dealt with alternative plea of the assessee and held that since the claim of the assessee that assets were installed only in the second half of the year would not supported by any documentary evidence, there is no mistake in the finding recorded by the AO to disallow 100% depreciation on said plant and machinery. The relevant findings of the ld.CIT(A) are as under:
4.4. I have considered the submissions of the AR, the reasoning in the assessment order and written submissions of the appellant. The admitted fact is that the appellant had capitalized the fees paid to the Directors of Rs.1,03,93,605 and Rs.60,52,126I- being incentive paid to them for providing consultation/professional services. This amount was provided in the accounts of the appellant company in the financial year 2012-13 relevant to the assessment year 2013-14 and the same was partly disallowed according to the appellant u/s 438 of
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the Act while filing the return of income. The amount so provided in the earlier year was actually paid during the year relevant to the assessment year 2014-15 and the entire amount shown as payable and paid during the year was capitalized and depreciation was claimed. The appellant was not able to adduce any evidence to Show that the directors have rendered services in connection with the acquisition arid installation of the machinery at all. It is also not known whether Directors had requisite qualification and experience in installation of machineries to warrant an incentive to be paid to them. it is also not clear as to why the payments to the Directors was disallowed u/s 43B when the said provisions deal only with statutory liabilities not paid and not for fees payable to directors of a company. The fact remains is that the appellant had made a provision for fees to its directors in the assessment year 2013-14 and for the reasons best known to them they have not claimed the same as an expenditure probably as the amounts were not paid by them and the Directors would not have offered the amount as their income in the earlier year. During the year, the appellant have paid the amount by deducting TDS u/s 194J as professional fees and capitalized the payment so made. It is also not clear as to how the incentive was worked out and what was the total cost of the machinery installed on which such capitalization was made. The case laws relied on would only show that the expenses incurred for installation of machineries are to be capitalized. In this case, the appellant was not able to prove beyond reasonable doubt that the directors of the company had requisite qualification and in fact rendered services for installation of the machinery to warrant such huge payments and that too as incentive and not towards consultation charges for erection of the machinery. In view of the above ambiguity in the submissions of the appellant, Its claim that it paid incentive for installation of machinery to its Directors cannot be accepted and consequently no depreciation can be allowed on such fees though capitalized by the appellant in its books. I therefore the grounds of the appeal and hold that the appellant is not entitled to depreciation on the amount of Rs.1,64,45,731/- capitalized.
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Depreciation claimed on assets capitalized amounting to Rs.30,85,500 4.5. As regards the disallowance of depreciation on Rs.30,85,500/-, the ARs submission that though the asset was acquired in the earlier previous year they were installed in the second half of the previous year relevant to the assessment year 2014-15 and therefore it is entitled to depreciation Is not supported by any documentary evidence. The appellant was not able to demonstrate the nature of asset purchased and justify the time of about one year taken to install such machinery purchased etc. The appellant has not also given any details of the transaction as to how the said asset acquired in December, 2012 was dealt in the books of accounts of the appellant and whether it was shown as work in progress or not all taken to account. For want of satisfactory details, the claim of the appellant cannot be entertained and therefore, I dismiss the grounds in this regard. The grounds of appeal are dismissed.
Excess disallowance of depreciation 4.6. The other alternative submission of the AR that any disallowance of depreciation made should be restricted to 50% only as the said capitalization was done in the second half of the year. Here also it is only a verbal statement made without any supporting evidence. The nature of asset installed and the reasons for the delay in putting the asset into use and how the fees paid had gone into the cost of the asset are not indicated by the appellant. In particular, the appellant was not able to give the depreciation statement as per Income-tax rules and claimed by it in the return of income to justify its stand. Since the claim of the appellant that the assets were installed only at the second half of the year was not supported by any documentary evidence, I dismiss the grounds of appeal raised on this issue.
The ld.AR for the assessee submitted that the ld.CIT(A) erred in disallowing depreciation, including additional depreciation relating to asset capitalized during the subject assessment year
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without appreciating the fact that payment made to Directors as an incentive for providing consultation / professional services with regard to purchase and installation of fixed assets is part of the asset as envisaged u/s.43(1) of the Act and hence the assessee has rightly claimed depreciation on such amount. The ld.AR further submitted that the ld.CIT(A) has erred in not appreciating the fact that out of the total amounts capitalized, the amount of Rs.1,08,53,698/- was claimed as expenditure and debited to P&L account for the assessment year 2013-14, but the same has been disallowed u/s.43B of the Act in the statement of total income. Since, the assessee has not claimed deduction towards said expenditure, the same can be added back to the cost of the assets, because it is related to purchase and installation of plant and machinery. The AR further submitted that the ld.CIT(A) has erred in disallowing depreciation on plant and machinery acquired in financial year 2012-13 but put to use in financial year 2013-14 without appreciating the fact that as per Section 32 of the Act, depreciation can be availed only when the asset is put to actual use. Since the assessee has put to use the particular asset in the impugned assessment year, it has rightly claimed depreciation on the said asset. The ld.AR further submitted that without prejudice to the argument that the assessee has entitled for depreciation on
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full amount atleast, the ld.CIT(A) should have appreciated the fact the assessee has claimed only 50% of the depereciation relating to the aforesaid asset because the said asset was put to use for a period less than 180 days.
The ld.DR on the other hand strongly supporting the order of the CIT(A) submitted that the authorities below has brought out clear facts in light of various evidences filed by the assessee and came to the conclusion that the assessee has failed to file necessary evidences to prove genuineness of payments made to Directors in order to claim the benefit of depreciation as part of cost of asset. Therefore, there is no reason to take a different view unless the assessee has demonstrated with evidences that the view taken by the ld.CIT(A) is contrary to the facts brought out by the AO.
We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. The facts with regard to the impugned dispute are that the assessee has incurred certain expenditure in connection with purchase and installation of plant and machinery during the financial year 2012-13 and the same has been debited to pre-operative expenses. The facts borne out from records further indicate that
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out of the total expenditure debited to pre-operative expenses, part of expenditure has been disallowed u/s.43B of the Act while filing return of income. During the current financial year relevant to assessment year 2014-15, the assessee has capitalized said expenditure to the cost of assets and claimed depreciation. Although the assessee has claimed depreciation on said expenditure as part of cost of asset, but failed to explain as to how a particular expenditure was revenue in nature in the previous financial year was suddenly become capital in nature for the current financial year unless there is change in facts and circumstances. The assessee has also failed to explain how an expenditure which is not coming under the provisions of Section 43B of the Act was disallowed in computing total income for the assessment year 2013-14. Be that as it may, it is well settled principle of law that professional / technical fees paid in connection with installation and acquisition of fixed asset shall be added to the cost of the fixed asset. But in order to claim the benefit of depreciation, the assessee shall prove beyond doubt that particular expenditure is incurred in connection with acquisition / installation of said asset. In this case, the facts brought out by the lower authorities which clearly indicate that the assessee has failed to justify the genuineness of expenditure with necessary evidence. Although the assessee claimed that it has deducted tax at source
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u/s.194J of the Act on such expenditure while making payment, but mere making a TDS on said payment does not automatically prove the genuineness of expenditure. Further, the assessee itself has claimed said expenditure as revenue in nature in the previous financial year and debited to pre-operative expenses. But, during the current financial year, it has changed its stand and capitalized to said plant and machinery as part of cost of asset. Therefore, we are of the considered view there is no clarity in the accounting terms given by the assessee in so far as particular expenditure is concerned because it has given differential treatment for different financial years. Hence, we are of the considered view that the issue needs to be re-examined by the AO in the light of the claim of the assessee that said expenditure is part of cost of capital asset which is incurred in connection with acquisition / installation of plant and machinery. In case, it is part of acquisition of asset, then the AO is directed to verify and allow depreciation as per law.
As regards disallowance of depreciation of fixed asset acquired during financial year 2012-13 and put to use during financial year 2013-14, according to AO, the assessee has acquired asset during financial year 2012-13 and claimed depreciation during financial year 2013-14. No doubt, there is no bar under the Act to
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claim depreciation on any asset which was acquired in earlier financial year, but the only point needs to be examined is when the particular asset is installed and put to use in the premises of the assessee. It was the claim of the assessee before the lower authorities that although the asset was acquired in financial year 2012-13 but the same was put to use on 01.01.2014 relevant to assessment year 2014-15. If the claim of the assessee is correct then the assessee is entitled for depreciation on particular asset from the date the said asset is put to use in the business of the assessee. But fact with regard to date of acquisition and date of asset put to use in the business needs verification from the AO. Therefore, we are of the considered view that this issue also needs to be go back to the file of the AO for fresh consideration in the light of the claim of the assessee that it has put to use the asset during assessment year 2014-15. In so far as alternative claim of the assessee that it has claimed 50% actual depreciation, because the said asset was put to use for less than 180 days, we are of the considered view that since the substantive issue of claim of depreciation was remitted back to the AO, this ground becomes infructuous. The AO is directed to examine the claim of the assessee and allow depreciation in accordance with the provisions of Section 32 of the Act. In case, the assessee has put to use the asset
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for less than 180 days, then as claimed by the assessee depreciation should be allowed at the rate of 50% of actual depreciation available on particular asset.
To sum up, the appeal of the assessee is set aside to the file of the AO and direct him to reconsider the issues of depreciation in the light of various claim made by the assessee including judicial precedents in support of its claims.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced on 2nd December, 2020 at Chennai.
Sd/- Sd/- (महावीर �सह ) (जी. मंजुनाथ) (MAHAVIR SINGH) (G. MANJUNATHA) उपा�य� /VICE PRESIDENT लेखा सद�य /ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 2nd December, 2020 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.