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Income Tax Appellate Tribunal, DELHI BENCH “G” NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & DR. B.R.R. KUMAR
आदेश /O R D E R PER C.N. PRASAD, J.M.
This appeal is filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-7, New Delhi dated 24.03.2017 for the AY 2011-12. The Revenue has raised the following grounds: -
“The Ld.CIT(A) has erred in law and on facts of the case in deleting the addition of Rs.1,39,22,151/- on account of depreciation claimed at a higher rate as the assessee company is neither a manufacturing concern nor is involved in power generation business and is not any
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specified industry, mentioned in sub item(8) but is involved in the business of providing machinery on lease.
The Ld.CIT(A) has erred in law in allowing relief to the assessee ofRs.1,37,34,665/- on account of disallowance u/s 79 of the Act as the assessee has not more than 51% of voting power and as per the provision of section 79, no carry forward business loss shall be available to be set off and carried forward.
The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.” 2. We have heard the rival submissions, perused the orders of the
authorities below.
The first issue in the appeal of the Revenue is with regard to
deletion of disallowance of depreciation claimed by the assessee on
the plant and machinery which has been used as energy savings
devices. The assessee claimed depreciation at 80% on the exhaust
gas boiler that has been used for the purpose of generation of steam
and saving power treating it as energy saving device as per entry at
Part A-III-(8)(ix) of the depreciation schedule. However, the AO
restricted the depreciation to 15% under the head plant and
machinery as per Appendix 1 to Rule 5 of I.T. Rules. On appeal the
Ld. CIT(Appeals) deleted the disallowance made by the AO following
the decision of the Hon’ble Supreme Court in the case of M/s ICDS
Vs. CIT [350 ITR 527] and also the decision of the Hon’ble Delhi High
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Court in the case of CIT Vs. HLS India Limited [335 ITR 292]
observing as under: -
“4.2. I have carefully considered the assessment order and written submissions filed by the Ld. AR. The AO disallowed an amount of Rs1,39,22,151/- being excess depreciation claimed, contending that the higher rate of depreciation @ 80% on energy saving devices is available only to the concerns which are involved either in manufacturing or power generation or some specified industries as sub-item (8) at Part A-lll of New Appendix I of the Income Tax Rules is for industry specific plant or machineries and hence appellant is eligible for depreciation @ 15% instead of 80% claimed in the return. The appellant company is engaged in the business of providing infrastructure equipment on lease, in the form of gas based power generating sets and related services. The AO has not disputed the depreciation rate of 80% on the plant and machinery but has restricted the claim to 15% on the ground that the machinery is not utilized for its own business but has given it on hire and therefore depreciation is allowable only at rate of 15%. This issue was adjudicated by the Hon'ble Delhi High Court in the case of CIT -vs.- HLS India Ltd (2011) 335 ITR 292 (Del) in which it was held as under: "43. Now the question before us in this regard is as to whether the assessee can be termed as a —mineral oil concern so as to put it in a position from where it can be entitled to claim depreciation @ 100% under the Item III (3) (ix) (b) in Appendix-I to the Income Tax Rules, 1962; and further, even if the assessee is not a mineral oil concern, can it be given benefit of the aforesaid provision on the basis of nature of operation of its high-tech wire-line logging & perforation equipments. 44. At this point, it would be interesting to note that while the appeal against the order of the ITAT dated 10.01.2002, whereby it has upheld the action of the CIT (A) to reverse the fresh assessment order passed
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by the AO in pursuance of the direction of the ITAT dated 10.10.1998 to do so is filed in this court in the year 2002 [listed before us as ITA 208/2002], however, the appeal against the original order of the ITA T dated 10.10.1998 whereby it had reverted the matter back to the table of the AO was filed by the revenue in the year 2005 only [listed before us as ITA 194/2005], It is not hard to understand that filing of the appeal, though at a delayed stage of the case, against the original order of the ITAT is an act of prudence on the part of the Department. The reason being is that had not there been this appeal against the order dated 10.10.98 as passed by the ITAT, it would have been taken by assessee as acceptance of the approach, as adopted by the ITAT, on the part of the revenue that if the public OH giants are able to give a technical certificate to the assessee regarding the similarity of the equipments and the nature of operations then the matter would become a subject of technical interpretation of the real world operations of the equipments in question rather a question which is to be determined by way of giving judicial interpretation to the statutory provisions and in case if the certification thing comes in favour of the assessee then the entire genesis of the arguments as build by the revenue in order to push forward its case, would start crumbling on its feet. 45. This takes us to the order of the ITAT dated 10.10.98 to revert the matter back to the table of the AO to re-examine the matter after verification as required under the said order. The arguments, which Ms. Bansal, the learned senior counsel for revenue has advanced to destroy the case of the assessee have been, more or less, similar through-out the prolong history of the instant dispute. These arguments have been evolving and revolving around the department's position that the depreciation under Item-III(3), (IX) (a) and (b), in the schedule of rates of depreciation in Appendix I to the IT Rules, 1962 is allowable to the mineral oil concerns only as the words 'plant used 'in field operation (below ground)' is required to qualify the term — mineral oil concerns, as found in the 4
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aforesaid provision and therefore the assessee, having not being engaged in drilling or oil production, cannot be given a status of a mineral oil concern. The learned senior counsel Ms. Bansal has vehemently contended before us that the business of the assessee is that of leasing and the equipments so leased by the assessee, only supplies the data to OIL and ONGC which are mineral oil concern. It is also submitted by her that the nature of the assessee's equipments is different from those used by state run mineral oil concerns as the assessee's equipments are mobile in nature while the equipments used by ONGC and OIL are permanently affixed down the hole. Hence, it is not entitled to 100 per cent depreciation. As opposed to this Mr. Vohra, though admitting that assessee is not a mineral oil concern, has submitted that even if it is not producing any oil nor has been engaged in the ITA Nos. 194/2005, 208/2002 & Ors. Connected Matters Page 47 of 52 activity of oil drilling, even then it is lawfully entitled to depreciation allowance in respect of the plant and equipment owned and used by it in carrying out wire-line logging operations below the ground in the oil wells of mineral oil concerns at the rate of 100 per cent of the actual cost/written down value thereof as prescribed in item 111(3)(ix)(b) of the table of rates of depreciation in Appendix-I to the IT Rules, 1962. 46. After hearing learned counsels for the parties at length on this issue, we are of the opinion that the Revenue's stand on this issue lacks substance. Sec. 32(1) of the Act provides for a deduction in the computation of business income, on account of depreciation of buildings, machinery, plant or furniture owned by the assesses and used for the purposes of the business or profession. This provision reads as under: Depreciation. 32. (1)[In respect of depreciation of—
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(i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed--] [(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;] (ii) [in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:] 47. Rule 5 of the IT Rules, 1962 provides that the depreciation allowable under s. 32(1)(ii) of the Act in respect of any block of assets shall be calculated at the percentages specified in the II column of the table of rates of depreciation in Appendix I to the Rules, on the written down value of such block of assets as are used for the purpose of the business or profession of the assessee at any time during the previous year. The concerned entry in the Appendix I is Part 1, III (ix). This entry reads as under- "(ix) Mineral oil concerns: a. Plant used in field operations (above ground) distribution returnable packages. b. Plant used in field operations (below ground), but not including kerbside pumps including under-ground tanks and fittings used in field operations (distribution) by mineral oil concerns." Column 2 corresponding to the above entry provides depreciation @ 100% for the items described in the said entry.
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The table of rates of depreciation in Appendix I to the Rules prescribes a single rate of depreciation for the assets falling within a particular block of assets. It does not prescribe differential rates of depreciation with reference to the ownership of the asset It would be pertinent to note here that the special rate of depreciation for the main item "III- Machinery and Plant" have been prescribed with reference to the nature of the particular asset and the character of its user including the types of business and the environmental conditions in which it is used. When the OIL has certified in this regard, that the wireline logging A perforation equipments/tools which are used by the assessee are similar to those equipments/ tools owned and used by mineral oil concerns and when there is no shadow is casted over the fact that the similar assets would qualify for a depreciation & 100% under the said entry if these are owned by a mineral oil concern like OIL, we do not find any substance in the department's approach to deny the same to the assessee on the ground that the owner of the similar assets, we are concerned with, will not be so entitled. Mentioning of the fact, in the letter of OIL dated 13 Nov 1998 that these equipments/tools are meant only for use in underground oil field operations for wireline logging A perforation leaves no iota of doubt that the nature of assessee’s equipments and its user is similar to those equipments which are owned by the mineral oil concerns and eligible for depreciation under the aforesaid entry. The artificial distinction regarding the mobile nature of the assessee's equipments, which has been created and relied upon by the department, is of no use because even if such a distinction exists it would neither alter the nature of the assessee's equipments nor the character of its user. We, therefore, are of the considered opinion that the assessee's wireline logging and perforation equipments are eligible for a higher depreciation @ 100% under cl. (ii) of s. 32(1) of the Act, r/w item III(3)(ix)(b) of the schedule of rates of depreciation in Appendix I to the Income Tax Rules, 1962.
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Having decided the issue in the aforesaid terms, we may take liberty to look into this issue from a different point of view. Depreciation allowance is a kind of tax benefit which is given to the business concerns for promotion of business activities in any particular field of business. In the instant case depreciation is allowable to mineral oil concerns @ 100% on the equipments used below the earth surface. If the same depreciation is not allowed to other business concerns on the ground that the owner of these equipments is not a mineral oil concern but it is just providing an assistance or leasing these equipments to a mineral oil concern then definitely this=other concern' will charge more for these services and consequently the mineral oil concerns will be commercially forced not to outsource wireline logging activities to other companies but to do it themselves. However, practically this is not a viable option because oil companies are facing immense pressure to increase the output to meet the energy needs of our growing economy and this has resulted in extra work load. 50. From the above discussion, both the legal issues, as formulated by us in para (7) above are found to be in favour of the assessee. Accordingly, all substantial question of law involved in the instant batch of appeals are decided in the favour of the assessee and against the revenue. Consequently, all the appeals are dismissed.” 4.3. In the case of ICDS vs. CIT, 350 ITR 527 (SC), the Hon’ble Apex Court observed that Section 32(1) requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. So long as the asset was utilized for the purpose of business of the assessee, the requirement of Section 32(1) will stand satisfied, notwithstanding, non usage of the asset itself by the assessee. The Hon'ble Court held as under: "Where leasing of machinery is a mode of carrying on business by the assessee, the assessee would be
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entitled to claim depreciation and when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate." 4.4. The AO disputed the claim of the appellant of depreciation at higher rate on the ground that the said machinery was not utilized by the appellant itself in its business but was leased to a third party. In view of the proposition approved in the judgements referred above, the appellant is entitled to higher rate of depreciation on plant & machinery under the head energy saving devices given on lease @ 80%. The disallowance of Rs.1,39,22,151/- as excessive depreciation claimed, is directed to be deleted. This ground of appeal is ruled in favour of the appellant.” 4. On careful perusal of the order of the Ld.CIT(Appeals), we do
not see any valid reason to interfere with the findings of the
Ld.CIT(Appeals) in deleting the disallowance made by the AO
towards depreciation. This ground of Revenue is rejected.
Coming to ground no.2 of grounds of appeal of the Revenue
i.e. in respect of denying set off and carry forward of business loss
invoking the provisions of Section 69 of the Act. We find that the
Ld.CIT(A) held as under: -
“7.1. On this ground, the Ld. AR furnished written submission as under: "3.1 At the outset, reference in this connection is invited towards the provisions of Sec. 79 of the Act, the relevant extract of which has been reproduced herein below: Carry forward and set off of losses in the case of certain companies.
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Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless— (a) on the last day of the previous year the shares of the company carrying not less than fifty- one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred: Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift: Provided further that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company…….. 3.2 From the perusal of above, it is clear that the provisions of Sec. 79 are not applicable to a company in which public are substantially interested. Further, as per Sec. 3(iv)(c) of the Companies Act, a private company which is a subsidiary of a company which is not a private company is a Public Company. The shareholding pattern of the preference share capital of the appellant remained unchanged during the year. Further, the shareholding pattern of the equity share capital of the appellant in the present case has been tabled below:
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3.3 From the perusal of above, it is clear that 99.99% shareholding of the appellant lies with public companies since both QIEL & SIFL are companies in which the public are substantially interested. Thus, as per Sec. 3(iv)(c) of the Companies Act, the appellant, being a subsidiary of the public company during the relevant previous year and even before that, is also a Public company. Further, as per clause (b) of section 2(18) of the Income Tax Act, a company is said to be "a company in which the public are substantially interested" if it is a company which is not a private company as defined in the Companies Act, 1956, and the conditions either in item (A) or in item (B) are satisfied. The relevant extract of Sec 2(18)(b) of the Act has been reproduced below: 3.4 In the present case, the 99.99% shares of the appellant were being held by the public companies (SIFL or QIEL) throughout the FY 2010- 11 and thus the appellant, not being a private company, is a company in which the public are substantially interested. Consequently, the provisions of Sec. 79 are not applicable in the present case. 3.5 Reliance in this connection is placed on the case of Meredith Traders (P) Ltd. vs. ITO (2011) 142 TTJ 182(Mum) wherein on similar facts as in the present case, it was held that in case of a deemed public company, application of Section 79 is automatically ruled out. The relevant extract of the judgement has been reproduced below:
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A bare perusal of s. 79 divulges that if a change in the shareholding of the company takes place in a previous year, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless the conditions specified in cl. (a) are satisfied. The thing which is of utmost importance is that s. 79 is applicable "in the case of a company, not being a company in which the public are substantially interested". It, therefore, transpires that s. 79 has no application in the case of a company in which the public are substantially interested. To put it in simple words, if it is a company in which the public are not substantially interested, then s. 79 would apply and vice1 versa. 3.6 Relying on the aforesaid judicial pronouncement, similar view has been held by Mumbai ITAT in the case of Tata Petrodyne Ltd. - vs. - ACIT (5108/Del/2004). 7.2. The AO disallowed a sum of Rs.1,37,34,665/- on the ground that more than 51% of the voting power has changed during the year and hence in compliance of Sec 79, no carry forward business loss shall be available to be set off and carried forward. The Ld. AR has contended that the provisions of Section 79 are not applicable to a company in which public are substantially interested. As per Section 3(iv)(c) of the Companies Act, a private company which is a subsidiary for company which is not a private company, is a public company. It was contended that the share holding pattern of the equity share capital of the appellant during the year was under:
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7.3. As both QIEL and SIFL are companies in which public are substantially interested and 99% share holding of the appellant was held by these companies. Thus, as per Section 3(iv)(c) of the Companies Act, the appellant being a subsidiary of the public company was during the previous year and even before that a public company. It was further contended that as per clause (b) of Section 2(18) of the Act, a company is said to be “a company in which the public are substantially interested”, if it is a company which is not a private company as defined in the Companies Act, and the conditions either in item (a) or item (b) ofclause B of Section 2(18) of the Act are satisfied. The Ld. AR stated that 99.9% shares of the appellant were being held by the public companies (QIEL or SIFL) throughout the previous year and therefore, the appellant not being a private company, is a company in which public are substantially interested. In consequence thereto, the provisions of Section 79 are not applicable to the appellant. 7.4. I have carefully considered the assessment order and written submissions filed by the Ld. AR. The AO has invoked provisions of Section 79 of the Act in the case of the appellant as more than 51% of the voting power has changed without examining the provisions of Section 2(18) to decide whether the appellant is a private company or a public limited company to attract the mischief of provisions of Section 79 of the Act. Relevant extract of Section 2(18) of the Act is reproduced below: "(18) “company in which the public are substantially interested”—a company is said to be a company in which the public are substantially interested— (a) …………………or (aa) ………………..or (ab) ……………….or (ac) ……………….or (ad) …………………..
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(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely: - (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made there under; (B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by- (a) the Government, or (b) a corporation established by a Central, State or Provincial Act, or (c) any company to which this clause applies or any subsidiary company of such company [if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year]," 7.5. Applying the provisions to the facts of the case, it is noted that the appellant is a subsidiary of public company SIFL with effect from 01.04.2010 pursuant to amalgamation of its previous holding company QIEL with SIFL with effect from 01.04.2010 as per sanction of the Hon'ble Calcutta High Court order. The appellant is, therefore, a public company as defined in Section 3 of the Companies Act. Further, as per item (b) of clause B of Section 2(18) of the Act, 99.9% of the shares of the appellant company were held by SIFL (which is a company in which public are substantially interested as it is a
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public company listed on recognized stock exchange) throughout the previous year under consideration. Since the condition as per provisions of Section 2(18)(b) of the Act are satisfied in the case of the appellant, it is clear that the appellant is not a private company and provisions of Section 79 are not applicable for this assessment year. The appellant has also relied on the judgement of the Hon'ble Bombay High Court in the case of 'Meredith Traders (P) Ltd. vs. ITO, 142 TTJ 182, wherein on similar facts, it was held that in case of a deemed public company, provisions of Section 79 is not applicable. In view thereof, the AO’s action of not granting set off of business loss of Rs.1,37,34,665/- is not in order and the consequent addition made is deleted. This ground of appeal is ruled in favour of the appellant.” 6. On careful perusal of the order of the Ld.CIT(A), we do not
find any infirmity in the order passed by the Ld.CIT(A) in holding
that the assessee is not a Private Limited Company and provisions of
Section 79 are not application for this assessment year. The
Ld.CIT(A) has rightly held that as per item (b) of Clause B of Section
2(18) of the Act, 99.9% of the shares of the assessee company were
held by the SIFL which is a Company in which public are
substantially interested as it is a public company listed on
recognized stock exchange throughout the previous year under
consideration. We also observed that identical issue came up before
the Hon’ble Mumbai Tribunal in the case of Meredith Traders Pvt.
Ltd. Vs. ITO [142 TTJ 182], wherein it has been held that in case of
a deemed public company provisions of section 79 are not
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applicable. Similar view has been taken by the Mumbai Tribunal in
the case of M/s Tata Petrodyne Ltd. Vs. ACIT in ITA
No.5108/Del/2004 dated 29.06.2012 and the appeal of the Revenue
has also been dismissed by the Hon’ble Bombay High Court in the
case of CIT Vs. Tata Petrodyne Ltd. [60 taxmann.com 81]. Thus, we
see no valid reason to interfere with the findings of the Ld.CIT(A)
and the same is sustained. Ground no.2 of grounds of appeal of the
Revenue is rejected.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 23/04/2024
Sd/- Sd/- (DR. BRR KUMAR) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 23/04/2024 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order
Assistant Registrar, ITAT: Delhi Benches-Delhi