Depreciation on non-used division assets and leasehold fit-outs: "ready for use" and revenue deductions upheld, additions deleted.

Depreciation on assets of an international division was disputed on the ground of non-use. The Tribunal held that depreciation is allowable where the assets form part of the common block of assets and were ready for use, applying the "ready for use" test; the disallowance was rejected. Expenditure on leasehold premises treated as temporary structures was held to be revenue in nature since it did not create a capital asset; the deduction allowed by CIT(A) was upheld. Recruitment and training costs were held to be revenue expenditure as they facilitate business operations without creating an enduring capital asset; disallowance was rejected. Foreign exchange fluctuation loss on a working-capital loan was held to accrue year-end as an ascertained liability; deduction upheld. Deferred tax and provision for doubtful debts were held not addable to book profit under s.115JB; additions deleted and appeal dismissed.

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Issues: (i) Whether depreciation under section 32 is allowable on assets of the international division not used during the year where such assets form part of a block of assets; (ii) Whether expenditure on leased premises (partition, flooring, false ceiling, painting, renovation) is revenue expenditure or capital expenditure entitled to 100% depreciation as temporary structures; (iii) Whether recruitment and training expenses are revenue expenditure deductible in the year incurred; (iv) Whether loss due to foreign exchange fluctuation on foreign currency working capital loan is allowable in the year though loan not repaid; (v) Whether provision for deferred tax liability is to be added back to book profit under Explanation to section 115JB(2); (vi) Whether provision for bad and doubtful debts is an amount carried to reserve and hence to be added to book profit under Explanation to section 115JB(2).

Issue (i): Whether depreciation under section 32 is allowable on assets of the international division not used during the year where such assets form part of a block of assets.

Analysis: The Court applied the statutory block-of-assets regime under section 32 and the principle that once assets constitute part of a block of assets they lose individual identity for depreciation purposes; the user requirement is relevant at the time an asset enters the block and passive or ready-for-use status qualifies under the applied precedent.

Conclusion: Depreciation is allowable; decision in favour of the assessee.

Issue (ii): Whether expenditure on leased premises (partition, flooring, false ceiling, painting, renovation) is revenue expenditure or capital expenditure entitled to 100% depreciation as temporary structures.

Analysis: The Court considered the nature of the works done on leased premises and the power of the appellate authority to entertain alternate pleas; it found the expenditures were incurred to make leased premises fit for business and did not result in creation of enduring capital asset.

Conclusion: Expenditure is revenue in nature and allowable; decision in favour of the assessee.

Issue (iii): Whether recruitment and training expenses are revenue expenditure deductible in the year incurred.

Analysis: The Court applied tests distinguishing capital from revenue expenditure, noting training does not create a capital asset and the benefit is not of an enduring, separable nature warranting capitalization or deferral; deferred revenue expenditure is not recognized under the Act.

Conclusion: Training and recruitment expenses are revenue expenditure and deductible in the year; decision in favour of the assessee.

Issue (iv): Whether loss due to foreign exchange fluctuation on foreign currency working capital loan is allowable in the year though the loan is not repaid.

Analysis: Both parties agreed the controlling precedent establishes that where foreign currency loan is for revenue account the exchange loss accrues at year end and is an ascertained liability even if repayment is deferred.

Conclusion: Exchange loss is allowable in the year; decision in favour of the assessee.

Issue (v): Whether provision for deferred tax liability is to be added back to book profit under Explanation to section 115JB(2).

Analysis: The Court examined Explanation clause (a) to section 115JB(2), the definition of 'tax' in section 2(43), and Accounting Standard-22 on timing differences; it held deferred tax liability represents provision for timing differences and is neither tax paid nor tax payable for the current year, and thus does not fall within the amount of income-tax paid or payable and the provision therefor in clause (a) nor within clauses (b) or (c) of the Explanation.

Conclusion: Provision for deferred tax liability is not required to be added back to book profit under Explanation to section 115JB(2); decision in favour of the assessee.

Issue (vi): Whether provision for bad and doubtful debts is an amount carried to reserve and hence to be added to book profit under Explanation to section 115JB(2).

Analysis: The Court reviewed the nature of provisions in the accounts and applicable authorities, finding that a provision to reflect diminution in value of assets (debtors) is not an amount carried to reserve unless directors expressly treat any excess as reserve; here no such treatment appeared.

Conclusion: Provision for bad and doubtful debts is not an amount carried to reserve and is not to be added to book profit; decision in favour of the assessee.

Final Conclusion: The revenue's appeal is dismissed in entirety; the impugned additions and disallowances challenged by the revenue are not sustained and the appellate authority's deletions or adjustments are upheld.

Ratio Decidendi: For the purposes of computing book profit under section 115JB(2), provisions for deferred tax liability arising from timing differences under AS-22 are not 'income-tax paid or payable and the provision therefor' and therefore are not to be added back to book profit; similarly, properly created provisions for diminution in asset value are not amounts carried to reserve under the Explanation.

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