PRASIDH FINCAP LTD. ,NEW DELHI vs. DCIT CIRCLE-20(1), NEW DELHI

The ld AO completely ignored these facts and observed that the assessee had not claimed depreciation in earlier years; that bills for procurement of these assets were not produced by the assessee; that depreciation is claimed for the first time in AY 2012-13 because there are taxable profits; the depreciation claimed is only an accounting entry and the same is not genuine. The assessee submitted that these fixed assets were purchased way back in AY 2013-14 and thereafter there has been no addition thereon. The assessee is supposed to maintain books of account for 8 years. Hence, the assessee is not bound as per law to maintain the books of account, bills and vouchers for a period pertaining to AY 2003-04. The action of the ld AO was upheld by the ld CIT(A).

It is not in dispute that there has been no addition to gross value of fixed assets from 31.03.2003 to 31.03.2012. It is not in dispute that the assessee had not claimed any depreciation on the gross value of fixed assets stated supra up to AY 2011-12. Hence, no depreciation has been ‘actually allowed’ to the assessee on the said fixed assets up to AY 2011- 12. The ld AO had relied on Explanation 5 of Section 32 that depreciation is to be mandatorily allowed by the ld AO irrespective of the claim made by the assessee actually supports the case of the assessee. In any case, it is a fact that no depreciation has been allowed to the assessee up to AY 2011-12. If the case of the revenue by applying the Explanation 5 is to be accepted, then the ld AO should allow depreciation from AY 2003-04 & 7966/Del/2018 Prasidh Fincap Ltd onwards to the assessee and allow that depreciation loss to be carried forward to subsequent years and such accumulated depreciation loss would be eligible to be treated as current year depreciation u/s 32(2) of the Act eligible for set off against taxable income of the year under consideration. Hence, in either way, there would be no difference in the computation of total income by allowance of the depreciation even if the stand of the revenue is to be accepted on application of Explanation 5 to section 32 of the Act. The value of fixed assets has been retained in the business of the assessee, being used for the purpose of the business of the assessee and duly reflected in the balance sheet of the assessee year on year commencing from 31st March 2003 onwards. Hence, the genuinity of the existence of those assets being used for the purpose of the business is proved beyond reasonable doubt. Accordingly, depreciation would be eligible to the assessee.

The assessee in a non-banking financial company and had disclosed the interest income as its income from business. The ld AO had sought to shift the said interest as income from other sources which is manifestly illegal. The assessee being a non banking financial company could obviously earn only interest income as its business income. Such income cannot be shifted from business income to other sources. We find that as per Section 43(6) of the Act, the value of Written Down Value (WDV) of the assets shall be calculated based on the original cost of the assets as reduced by the depreciation which was ‘actually allowed’. In the instant case, no depreciation was ‘actually allowed’ to the assessee up to AY 2011-12. Hence, the assessee would be entitled to claim depreciation on the opening WDV as on 01.04.2011 as per the provisions of the Act. The issue in dispute is no longer res integra in view of the decision of the & 7966/Del/2018 Prasidh Fincap Ltd Hon'ble Supreme Court in the case of CIT Vs. Doom Dooma India Ltd reported in 310 ITR 392 (SC) wherein, the Apex court held as under:-

In the case of CITNandlal Bhandari Mills Ltd. [1966] 60 ITR 173 (SC), which judgment was in the context of composite income, the question inter alia arose whether depreciation "actually allowed" would & 7966/Del/2018 Prasidh Fincap Ltd mean depreciation deducted in arriving at the taxable income or the depreciation deducted in arriving at the world income (composite income). In that case the assessee was a company incorporated in Indore. It owned and ran a textile mill. Until 1-4-1950, when Income- tax Act, 1922 was extended to Part B States including Madhya Bharat of which Indore became a part, the assessee was assessed at Bombay under the Income-tax Act, 1922 as a non-resident and for some years as resident. The assessee was also assessed in Indore under the Indore Industrial Tax Rules, 1927. For those years in which it was assessed as a non-resident under Income- tax Act, 1922, only that part of its profits attributable to the sale proceeds of goods received in British India were brought to tax. For the assessment years in question, in ascertaining the "written down value" of the building, machinery and plant, under paragraph 2 of the Taxation Laws Order, 1950, only the greater of the two depreciations "actually allowed" in British India and in Indore could be taken into account. The ITO took into account the depreciation allowances for the years up to 1944 as computed under Income-tax Act, 1922 for the purposes of ascertaining the world income of the assessee, and for the years 1945 to 1948, he took into account the income as computed under Indore Industrial Tax Rules 1927; and on that basis the ITO arrived at the "written down value" as on 1-1-1949. The assessee contended, inter alia, that in regard to the years up to 1944 only the proportionate depreciation attributable to the taxable income came within the meaning of the words "actually allowed" in the old section corresponding to section 43(6)(b) of the 1961 Act. This contention of the assessee was accepted by the majority judgment which held that in fixing the depreciation allowances for the years in which the assessee was assessed as a non-resident under the Income-tax Act, 1922, the ITO had "actually allowed" only a portion of the amount towards depreciation allowable in assessing its world income. It was further held that the mere fact that in the matter of calculation, the total amount of depreciation was first deducted from the world income (composite income) and thereafter a proportion was struck did not amount to an actual allowance of the entire depreciation in ascertaining the taxable income that accrued in British India. Therefore, it was held, that, the depreciation deducted in arriving at the taxable income alone could be taken into account and not the depreciation taken into account for arriving at the world income (composite income).

In our view the above judgment of the Supreme Court squarely applies to the present case. Assessee is engaged in the business of growing and manufacturing of tea. As per the provisions of section 10(1) of the 1961 Act read with rule 8, 40 per cent of the business income derived from the sale of tea grown and manufactured in India by the assessee was liable to tax. In the above judgment of the Supreme Court, the Court was concerned with the world income, in this case we are concerned with the composite income. Therefore, in our view the judgment of the Supreme Court, above referred to, is & 7966/Del/2018 Prasidh Fincap Ltd squarely applicable to the present case. Therefore, we do not see any infirmity in the impugned judgment of the High Court.

Be that as it may, we can give the following illustration(s) which will give an example of how the "written down value" needs to be computed:- Illustration A Rs. Income from sale of tea 100 Less: Expenses- Depreciation Others 100 Business Profit 300 Income subject to charge under the Income-tax Act by 600 application of rule 8 (40% of 600) 240 Illustration 'B' Income from sale of tea (40% of 1000) 400 Less: Expenses- Depreciation 40 Others (40% of 300) 120 Business Profit subject to charge of income-tax (40% of 240 600)

Analysing the above two charts, we find that at the end of computation the income chargeable to tas by applying rule 8 comes to Rs. 240. Under Illustration 'A', the normal depreciation is Rs. 100 which is deductible from Rs. 1,000 being the income from sale of tea. On the other hand, under Illustration 'B, we have taken 40 per cent of each of the items, namely, income from sale of tea, depreciation and other expenses. Accordingly, on comparison it may be noted that whereas income from sale of tea is Rs. 1,000 under Illustration A. proportionately it comes to Rs. 400 under Illustration B'. Similarly, depreciation under Illustration 'A' which is normal depreciation is Rs 100 whereas in Illustration 'B' at 40 per cent the pro rata depreciation is 40. What is important to be noted is that at the end of computation under both the Illustrations. the Income taxable by applying rule 8 comes to Rs. 240 in both the cases. The only difference is that in Illustration B' we have gone by pro rata basis.

The important thing to be noted is that according to the Department, in the succeeding year, the opening "written down value of the assets would be Rs. 900 (Rs 1,000 for the cost of the assets less Rs. 100) as indicated in Illustration 'A' whereas, if one goes by Illustration 'B' the "written down value" comes to Rs. 960 (Rs. 1,000 for the cost of the asset(s) minus 40), being the depreciation in Illustration 'B' 15. Recording to the assessee, in view of the law laid down by the judgment of this Court in the case of Madeva Upendra Sinai (supra), & 7966/Del/2018 Prasidh Fincap Ltd the "written down value" should be computed at Rs. 960 and not at Rs. 900 as claimed by the Department.

In our view, in cases where rule 8 applies, the income which is brought to tax as "business income" is only 40 per cent of the composite income and consequently proportionate depreciation is required to be taken into account because that is the depreciation "actually allowed". Hence we find no merit in the civil appeals filed by the Department.

Before concluding, we may state that the judgment of this Court in CIT v Willamson Financial Services [2008] 297 ITR 17, has no application to the present cases. Willamson Financial Services' case (supra) was rendered in the context of deduction under section 80HHC of the 1961 Act Section 80HHC comes under Chapter VI-A. Chapter VI-A refers to special deductions. It is a separate Code by itself. There is a distinction between "deductions/allowances in section 30 to section 43D" and "deductions admissible under Chapter VI- A" Deductions/allowances provided in sections 30 to 43D are allowed in determining Gross Total Income and are not chargeable to tax because the same constitute charge on profit, whereas, deductions under Chapter VI-A are allowed from Gross Total Income chargeable to tax. Therefore, the judgments rendered in the context of section 80HHC of the 1961 Act, both by this Court and by the Kerala High Court, stand on different footing.

For the aforestated reasons, we find no merit in the Department's civil appeals which are accordingly dismissed with no order as to costs.”

Similar was the view taken by the Hon’ble Jurisdictional High Court in the case of CIT Vs. Hybrid Rice International Pvt. Ltd reported in 320 ITR 63 (Del) wherein, the Hon’ble High Court held as under:-

We, therefore, answer the question of law framed in that we hold that ITAT was correct in law in allowing depreciation to the assessee & 7966/Del/2018 Prasidh Fincap Ltd on the actual cost of the germplasm seeds and the actual cost incurred by the assessee much before becoming an assessee can still be treated as an actual cost to the assessee when depreciation has to be claimed. With these observations, the appeals are dismissed.”

In view of the above observations and respectfully following the judicial precedents relied upon herein above, we have no hesitation to hold that the assessee would be duly entitled for depreciation on the fixed asset in AY 2012-13 being the first year of claim. Accordingly, the grounds raised by the assessee are allowed for AY 2012-13.

The grounds raised for AY 2013-14 are exactly identical to those raised in AY 2012-13 and hence, the decision rendered by us in AY 2012- 12 shall apply mutatis mutandis for AY 2013-14 also, except with variance in figures.

Ground Nos. 1 and 4 raised by the assessee are general in nature and does not require any specific adjudication.

Ground No. 2 raised by the assessee is identical to grounds raised for AY 2012-13. Hence, the decision rendered by us in AY 2012-13 hereinabove, shall apply mutatis mutandis for Ground No. 2 of AY 2014-15 also, except with variance in figures.

Ground No. 3 raised is challenging the disallowance u/s 14A of the Act.

We have heard the rival submissions and perused the material available on record. It is not in dispute that there was no exempt income & 7966/Del/2018 Prasidh Fincap Ltd received by the assessee during the year under consideration. Hence, there cannot be any applicability of provisions of Section 14A of the Act warranting any disallowance thereon. Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs Era Infrastructure (India) Ltd reported in 141 taxmann.com 289 (Del HC). Respectfully, following the same the ground No. 3 raised by the assessee is allowed.

In the result, all the appeals of the assessee are allowed.