ITAT decision: Assessee's appeal partly allowed, Revenue's appeal dismissed. Various issues addressed.

The ITAT partly allowed the assessee's appeal, dismissing the Revenue's appeal and confirming the CIT(A)'s decisions on various issues including disallowance of provision for obsolete stores/spares, disallowance under Section 14A, deduction of prior period expenses, depreciation on buildings, loss on sale of stores/spares, depreciation rate for software-ERP system, addition of amount from special reserve, and grant of additional depreciation on new plant and machinery. The order was pronounced on May 31, 2011.

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Issues Involved:
1. Disallowance of provision made for obsolete stores/spares.
2. Disallowance under Section 14A read with Rule 8D.
3. Deduction of prior period expenses.
4. Depreciation on buildings.
5. Deduction for loss on sale of stores/spares.
6. Depreciation rate applicable to software-ERP system.
7. Addition of amount transferred from special reserve.
8. Grant of additional depreciation on new plant and machinery.

Issue-wise Detailed Analysis:

1. Disallowance of provision made for obsolete stores/spares:
The assessee contested the disallowance of Rs. 35,40,882 for stores and spares and the addition of Rs. 16,37,758 provision. The ITAT upheld the CIT(A)'s decision, confirming the disallowance of the provision but allowing the deduction for the actual sale of stores/spares, in line with the precedent set in the assessee's own case for AY 1997-98. The assessee is permitted to claim the deduction in the year the items are sold, subject to verification by the Assessing Officer (AO).

2. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of Rs. 2,35,68,500 under Section 14A. The CIT(A) followed the Tribunal's decision in Daga Capital Management Ltd., applying Rule 8D retrospectively. However, the jurisdictional High Court in Godrej & Boyce Mfg Co Ltd v DCIT held that Rule 8D is prospective from AY 2008-09. The matter was remitted to the AO to rework the disallowance reasonably, considering the assessee's self-disallowed amount of Rs. 1,37,00,382.

3. Deduction of prior period expenses:
The CIT(A) allowed the deduction of prior period expenses, citing consistency and the Bombay High Court's decision in Nagri Mills Co Ltd. The ITAT upheld this decision, referencing its own ruling for AY 1997-98, where the accounting practice of booking expenses upon receipt of bills/vouchers was accepted.

4. Depreciation on buildings:
The AO disallowed depreciation on a flat used for business purposes, arguing the assessee acquired shares, not the building, and was not the owner. The CIT(A) and ITAT, referencing the assessee's case for AY 1997-98, held that the assessee, by holding specific shares, effectively owned the flat and was entitled to depreciation. The ITAT upheld the CIT(A)'s decision, granting depreciation.

5. Deduction for loss on sale of stores/spares:
As decided in the assessee's appeal, the ITAT confirmed that the assessee is entitled to claim deduction for the actual loss on the sale of stores/spares, not for the provision made. The AO is directed to verify the computation of the loss.

6. Depreciation rate applicable to software-ERP system:
The CIT(A) allowed 60% depreciation on ERP software, following the decision in Tata Consultancy Services and the ITAT's ruling in Datacraft India Ltd. The ITAT confirmed this decision, noting that from AY 2003-04, computer software is entitled to 60% depreciation under the IT Rules.

7. Addition of amount transferred from special reserve:
The CIT(A) deleted the addition of Rs. 18.18 lakhs transferred from a special reserve, used to set off book depreciation. The ITAT upheld this decision, referencing its own ruling for AY 2005-06, where it was held that such set-offs do not affect income and the amount received in 1992 cannot be treated as income in the current year.

8. Grant of additional depreciation on new plant and machinery:
The CIT(A) allowed additional depreciation of Rs. 26,96,923 on new plant and machinery, despite the claim not being made in the return of income. The ITAT confirmed that depreciation is mandatory and can be claimed before the CIT(A) if not claimed in the return. The AO is directed to verify compliance and correctness of the computation.

Conclusion:
The ITAT partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on all issues. The order was pronounced on May 31, 2011.

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