Depreciation is allowed even before the date of Inauguration if the Asset is ready to use : ITAT

P. Murali Mohan Rao for the Appellant. Smt. Amisha S. Gupt for the Respondent.

ORDER

Saktijit Dey, Judicial Member – These cross-appeals by the Revenue and Assessee are against the order of the Ld. CIT(A)-III, Hyderabad dated 02.04.2015 for the A.Y. 2008-2009. First we will deal with the Revenue’s appeal being ITA.No.338/Hyd/2015. The only effective ground raised by the department reads as under :

“2. The Ld. CIT(A) ought to have upheld the disallowance made u/s.40(a)(ia) as the TDS remittance made before the due date of filing of return of income was not in conformity with the provisions of section 40(a)(ia).”

2. Briefly the facts relating to this issue are, the assessee a company is engaged in the business of publishing of news papers. For the A.Y. under dispute, assessee filed its return of income on 30.09.2008 declaring loss of Rs.2,88,64,295. Assessment in the case of assessee was originally completed under section 143(3) by order dated 06.12.2010 determining loss at Rs.1,47,12,817. Subsequently, the A.O. reopened the assessment under section 147 of the Act vide notice issued under section 148 dated 29.08.2011. During the assessment proceedings, A.O. noticed that assessee has made the following payments without deducting tax at source.

3. Since the assessee had failed to deduct tax while making the aforesaid payments, the A.O. disallowed the expenditure claimed by applying the provisions of section 40(a)(ia) and added back the amount of Rs.1,07,14,603 to assessee’s income for the impugned assessment year. Being aggrieved of such disallowance, assessee preferred appeal before the Ld. CIT(A). Before the first appellate authority, it was submitted by the assessee that A.O. has not passed any order under section 201 treating the assessee as assessee-in-default and as such, no disallowance under section 40(a)(ia) could be made. Further, it was submitted by the assessee that the entire expenditure having been actually paid to the concerned parties before the end of the relevant previous year, disallowance under section 40(a)(ia) cannot be made in view of the decision of ITAT, Vizag Special Bench in the case of Merlyn Shipping and Transport v. Addl. CIT [2012] 136 ITD 23 and the decision of Hon’ble A.P. High Court in case of CIT v. Janapriya Engineers Syndicate [2015] 371 ITR 439  The learned CIT(A) finding merit in the submissions of the assessee and following the decision of ITAT Special Bench in the case of Merlyn Shipping and Transport (supra), deleted the addition made by the Assessing Officer.

4. We have considered the submissions of the parties and also perused the materials on record. The department has not disputed the fact that the expenditure claimed by the assessee which is the subject matter of disallowance under section 40(a)(ia) was entirely paid during the relevant previous year and nothing remained payable on the last day of the previous year. Therefore, in view of the principles laid down by the ITAT, Vizag Special Bench in the case of Merlyn Shipping and Transport (supra), the disallowance under section 40(a)(ia) is not sustainable. The Ld. CIT(A) having deleted the addition by following the decision of the ITAT, Vizag Special Bench as aforesaid, we do not find any infirmity in the order of the Ld. CIT(A), which is accordingly upheld. Ground No.2 raised by the Revenue is dismissed.

5. In the result, appeal of the Revenue is dismissed.

ITA.No.351/Hyd/2015 – A.Y. 2008-09 :

6. In this appeal, assessee has raised in total 9 grounds. Ground Nos. 1 and 9 being general in nature do not require any specific adjudication. Ground No.8 is challenging the initiation of penalty proceedings under section 271(1)(c) of the Act. This ground raised being premature at this stage of the proceedings, is not required to be adjudicated. Hence, ground No.8 is dismissed. As far as Ground Nos. 2, 3, 4 and 5 are concerned, they are on the legality/validity of the proceeding initiated under section 147 of the Act, whereas, ground Nos. 6 and 7 are on the merits of disallowance of depreciation claimed by the assessee amounting to Rs.38,43,674.

7. At the outset, we propose to deal with the grounds raised by the assessee on merits. Briefly the facts relating to the issue in dispute are, assessee, as stated earlier, is engaged in the business of newspaper publication. Assessment in the case of the assessee was completed under section 143(3) of the Act by virtue of the order passed under section 143(3) of the Act on 06.12.2010 determining the loss at Rs.1,47,12,817. Subsequently, as observed by the A.O. in the reasons recorded, during the audit scrutiny it was found that as per the Director’s report the company has commenced its business on 27.10.2007. Whereas, the assessee has claimed depreciation for an amount of Rs.3,45,43,794 which includes depreciation at the rate of 15% amounting to Rs.76,87,348 on opening WDV of plant and machinery valued at Rs.5,12,48,988 and depreciation @ 15% amounting to Rs.1,51,015 on opening WDV on electrical equipment of Rs.10,06,768. It was further observed that on all other assets, the assessee has claimed depreciation @ 50% of normal rate of depreciation as it is used for less than 180 days. From the aforesaid facts, the A.O. was of the opinion that the assessee having commenced its business only on 22.10.2007, it could not have used its assets before that date. Hence, assessee’s claim of depreciation @ 15% on opening WDV of plant and machinery and electrical equipment is not correct. Since assessee’s claim of full depreciation @ 15% was allowed in the original assessment resulting in escapement of income, the A.O. reopened the assessment under section 147 by issuing notice under section 148 of the Act on 29.08.2011 which was served on the assessee on 20.09.2011. As observed by the A.O., in response to the notice issued under section 148, there was no compliance from the assessee. It is also observed by the A.O. that show cause letter dated 14.08.2012 proposing to complete the assessment exparte under section 147 as well as another letter dated 14.09.2012 directing the assessee to file its objections on or before 26.06.2012 also failed to evoke any response from the assessee. Therefore, the A.O. finding no other option, proceeded to complete the assessment exparte under section 144 of the Act. The A.O. noticed that the depreciation claimed by the assessee at Rs.3,45,43,794 comprises of depreciation claimed at 15% amounting to Rs.76,87,348 on opening WDV of plant and machinery worth Rs.5,12,48,988 and depreciation @ 15% amounting to Rs.1,51,015 on opening WDV of electrical equipment worth Rs.10,06,768. However, as per the Director’s Report, newspaper publication was inaugurated by the Government of A.P. and Chief Minister on 22.10.2007. Taking a clue from this fact, the A.O. opined that as assessee’s business operation started only on 22.10.2007, it cannot be said that the assessee had used the assets for the purpose of business before that date. Accordingly, he held that assessee is not eligible for depreciation @ 15% on opening WDV of plant and machinery, electrical equipment, but is eligible for 50% of the depreciation. Therefore, he restricted the depreciation at 7.5%. Accordingly, he disallowed the excess depreciation of Rs.38,43,674 and the loss determined was reduced by that amount. Being aggrieved of disallowance of depreciation, assessee preferred appeal before the first appellate authority.

8. In the course of hearing of appeal before the Ld. CIT(A), it was submitted by assessee that the date of inauguration of newspaper on 22.10.2007 has no relation with the actual date of commencement of assessee’s business. It was submitted that the business of the assessee had actually commenced during the previous year relevant to the A.Y. 2007-2008 and the assets on which the depreciation has been claimed, form part of the opening balance of assets and therefore, disallowance of depreciation on the opening WDV was not correct. The learned A.R. submitted, though, assessee has not claimed any depreciation in the initial year of purchase, but it cannot prevent the assessee from claiming depreciation at the appropriate rate in the subsequent assessment year. It was also submitted that without disturbing the WDV of the assets of the earlier years, it will not be possible to change the WDV of its assets for the subsequent assessment year. In support of such contention, assessee relied upon the decision of Hon’ble Bombay High Court in the case of CIT-LTU v. Silvasa Industries Ltd. [IT Appeal No. 2583 of 2011 and others, Bombay High Court].

9. The Ld. CIT(A) after considering the submissions of the assessee however did not find merit in the same. She observed that when the formal inauguration of newspaper took place on 22.10.2007, the logical conclusion would be that assessee’s business commenced with the formal inauguration. The Ld. CIT(A) also observed that assessee has not brought any evidence on record to establish its claim that the business actually commenced in the previous assessment year. As far as assessee’s submission that opening WDV cannot be disturbed, Ld. CIT(A) stated that since the WDV for the current year was the same as the actual cost of the asset and since assessee has not claimed any depreciation till 01.04.2007, the assessee’s contention cannot be accepted. Being aggrieved, assessee is in appeal before us.

10. The Ld. Counsel for the assessee more or less reiterating the submissions made before the departmental authorities submitted that only because in the Director’s Report, it has been mentioned that the inauguration of the newspaper took place on 22.10.2007, it will not be reasonable to conclude that assessee’s business had not commenced till that date. Learned A.R. referring to the balance sheet for the A.Y. 2007-08 submitted that the assets on which depreciation was claimed at 15%, were purchased/acquired during the previous year relevant to the A.Y. 2007-2008 and has been brought as opening WDV as on 01.04.2007. Moreover, there being no material before the department that assessee has not put to use the assets for the purpose of its business, disallowance of depreciation only relying upon the fact that inauguration of newspaper took place on 22.10.2007 is without basis.

11. Learned D.R. on the other hand, referring to letters of the assessee submitted before the A.O., which forms part of the assessment record, submitted that assessee in the said letters have categorically stated that business of the assessee has not commenced prior to the date of inauguration. Therefore, since the plant and machinery as well as other assets, on which depreciation was claimed at the full rate, could not have been put to use prior to the commencement of business and restriction of depreciation to 50% of the amount claimed is justified.

12. We have considered the submissions of the parties and perused the materials on record as well as the orders of the revenue authorities on this issue. As could be seen from the reasons recorded as well as the discussions made in the assessment order, only on the basis of the fact that the newspaper publication was inaugurated by the Governor and Chief Minister of A.P. on 22.10.2007, the A.O. has formed an opinion that the business of the assessee has commenced from that date. Hence, depreciation @ 15% will not be allowed as the assets on which depreciation has been claimed is put to use for less than 180 days. Ld. CIT(A) has also confirmed the view expressed by the Assessing Officer. At this stage, it will be appropriate to look into the relevant statutory provisions. As per section 32(1) of the Act, depreciation is allowable in respect of the capital asset owned wholly or partly by the assessee and used for the purpose of his business or profession. However, the second proviso to section 32(1) prescribes that if an asset is acquired by the assessee during the previous year and is put to use for the purpose of business or profession for a period of less than 180 days in that previous year, deduction under section 32(1) in respect of such asset shall be restricted to 50% of the amount calculated at the percentage prescribed for an asset. Thus, to qualify for full amount of depreciation, two conditions have to be satisfied as per second proviso to section 32(1). Firstly, the asset on which depreciation is claimed, must have been acquired by the assessee during the previous year and secondly, it must have been put to use for the purpose of business or profession for a period of more than 180 days. If we apply the aforesaid statutory provisions to the facts of the present case, it is to be seen that the assets on which the assessee has claimed depreciation at the full rate i.e., 15% were acquired during the previous year relevant to the A.Y. 2007-2008 and have been shown as opening WDV as on 01.04.2007. There is no dispute to the aforesaid factual position as the department also has accepted the opening WDV shown by the assessee. Therefore, the other condition which remains to be satisfied by the assessee for claiming full depreciation is, whether the assessee has put to use such assets for the purpose of his business or profession for more than 180 days in the relevant previous year. Only relying upon the Director’s Report wherein it is mentioned that inauguration of newspaper happened on 22.10.2007, the A.O. has held that business of assessee had commenced on 22.10.2007. The assessee on the other hand, has pleaded that the date 22.10.2007 has no relevance as far as the commencement of business by the assessee is concerned. On a perusal of the assessment order as well as the order of the first appellate authority, it is patent and obvious that apart from relying upon the fact that inauguration of the newspaper published by the assessee took place on 22.10.2007, there is no other material brought on record by the A.O. to conclusively prove the fact that the plant and machinery as well as electrical equipments were not put to use for the purpose of assessee’s business prior to 22.10.2007. In this regard, it is necessary to observe that the word used in section 32(1) are used for the purpose of business or put to use for the purpose of business. The provision does not use the expression ‘commencement of business’.

13. The expression used ‘for the purpose of business’ or ‘put to use for the purpose of business’ as employed in section 32(1) of the Act has come up for interpretation time and again before different High Courts in a number of decisions. The Hon’ble Gauhati High Court in the case of CIT v. India Tea and Timber Trading Co. [1996] 221 ITR 857  has held that the expression ‘used’ should have a wider meaning so as to include not only actual but also passive user. Therefore, if the machinery was kept ready by the owner for its use in the business then it will be eligible for depreciation even if it is not actually used in the business during the relevant assessment year. The Hon’ble Kerala High Court in the case of CIT v. Geo Tech Construction Corpn. [2000] 244 ITR 452 held that if the asset on which depreciation is claimed is ready for use, then depreciation is allowable. While coming to such conclusion, the Hon’ble High Court observed that the word ‘used’ in section 32(1) is to be given a wider meaning. The Hon’ble Madhya Pradesh High Court in the case of CIT v.Premier Industries (India) Ltd. [2010] 323 ITR 672  held that even if a machine is kept idle but is in a ready to use condition, then depreciation is allowable. The Hon’ble Madras High Court in the case of CIT v. Chennai Petroleum Corpn. Ltd. [2013] 358 ITR 314  held that if the machinery is ready for use but has not been actually used, still then assessee would be eligible for depreciation. Similar view has also been expressed in the following decisions i.e., (1) CIT v. Oswal Agro Mills Ltd. [2012] 341 ITR 467  (Delhi)CIT v. Oswal Woollen Mills Ltd. [2007] 289 ITR 261 (Punj. & Har.). Therefore, the principle of law which emerges from the aforesaid judicial precedents is to the effect that the term ‘used’ as employed in section 32(1) has to be given a wider meaning and will also include passive user of the asset. It has been held that if the machinery or plant is ready for use but it is not actually used, still then assessee will be eligible for depreciation. If we apply the aforecited principle to the facts of the present case, it is to be seen that the plant and machinery and electrical installation on which assessee has claimed full depreciation were acquired in the preceding assessment year. Therefore, it can be safely concluded that the plant and machinery as well as electrical installation were ready for use in the impugned assessment year. Only because the inauguration took place in October, 2007 that cannot be a sole criteria to deny assessee’s claim of depreciation at the full value when there is no material brought on record by the department to show that the plant and machinery and electrical installations were not ready for use prior to 22.10.2007. Therefore, considering the totality of the facts and circumstances of the case, we hold that disallowance of 50% out of the total depreciation claimed by the assessee on the opening WDV is without any reasonable basis. Hence, we delete the addition made on that account.

14. In view of our decision on merit as in the foregoing paragraphs, the legal issue as raised in ground Nos. 2, 3, 4 and 5 being of mere academic interest do not require to be adjudicated upon. Accordingly, ground Nos. 2, 3, 4 and 5 are dismissed.

15. In the result, appeal of the assessee is partly allowed.

16. To sum-up, ITA.No.338/Hyd/2015 of the Revenue is dismissed and ITA.No.351/Hyd/2015 of the Assessee is partly allowed.