ITAT directs AO to consider WDV for depreciation, adjust capital grants, and verify depreciation in line with law.

The ITAT partly allowed the appeals for statistical purposes, directing the A.O. to consider the WDV at the beginning of A.Y. 2003-04 for depreciation purposes, adjust only capital grants specifically for asset creation from the actual cost capitalized during the year, and verify and allow depreciation in accordance with the law. The reopening of the assessment for A.Y. 2003-04 was upheld to determine allowable depreciation, aligning with the decision for A.Y. 2004-05, with a caution that this order should not be considered a precedent for other cases.

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Issues Involved:
1. Reopening of assessment under section 147.
2. Calculation and adjustment of depreciation under section 43(6).
3. Adjustment of capital grants-in-aid received towards the cost of assets.

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment for A.Y. 2003-04. The original assessments for both A.Y. 2003-04 and 2004-05 were completed under section 143(3) accepting the net loss declared by the assessee. However, the A.O. initiated proceedings under section 147 following audit objections. The ITAT upheld the reopening of the assessment for A.Y. 2004-05, and the assessee did not press the issue further. For A.Y. 2003-04, considering the necessity to determine the allowable depreciation, the reopening was upheld. The ITAT emphasized that this decision was specific to the facts of this case and should not be taken as a precedent.

2. Calculation and Adjustment of Depreciation under Section 43(6):
The primary issue revolved around the adjustment of grants-in-aid received towards the cost of assets and the calculation of Written Down Value (WDV) for depreciation purposes. The A.O. and Special Auditor re-determined the WDV from the inception of the assessee, which the ITAT found incorrect. The ITAT highlighted Explanation-6 to section 43(6), which specifies that the WDV as per the books at the beginning of A.Y. 2003-04 should be considered for depreciation purposes. The ITAT directed that the WDV at the beginning of A.Y. 2003-04 should be taken as per the books of accounts, and only the capital grants received specifically for asset creation should be adjusted from the actual cost capitalized during the year.

3. Adjustment of Capital Grants-in-Aid Received Towards the Cost of Assets:
The A.O. and Special Auditor's approach to adjusting capital grants was found to be flawed. The Special Auditor incorrectly considered the entire amount of assets capitalized during the year as capital grants without examining the actual grants received. The ITAT noted that the grants received up to A.Y. 2002-03 should not be considered as the assessee was not taxable during those years. The ITAT rejected the Special Auditor's report and directed the A.O. to verify the capital grants specifically sanctioned for asset creation and adjust them accordingly.

Conclusion:
The appeals were partly allowed for statistical purposes. The ITAT directed the A.O. to:
1. Consider the WDV at the beginning of A.Y. 2003-04 as per the books of accounts for depreciation purposes.
2. Adjust only the capital grants received specifically for asset creation from the actual cost capitalized during the year.
3. Verify and allow the depreciation in accordance with the facts and law, specifically considering Explanation-6 of section 43(6).

The reopening of the assessment for A.Y. 2003-04 was upheld to determine the allowable depreciation, aligning with the decision for A.Y. 2004-05. The ITAT emphasized that this order should not be taken as a precedent for other cases.

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