2015 (2) TMI 318 - AT - Income Tax

Tribunal rectifies depreciation error, dismisses 14A challenge, remits for factual determination.

Metro Exporters Pvt. Ltd. Versus Asst. CIT, Circle 6(3), Mumbai

The tribunal rectified its order disallowing depreciation on a leased building, acknowledging the error in applying the relevant provision. The tribunal ... Rectification of mistake - non-application of the provision of section 32(1)(iii) in the instant case - Held that:- The order by the tribunal suffers from a mistake apparent from record; the assessee being admittedly a company in the manufacturing of garments and bicycles and not engaged in the production and distribution of power. The discovery of the said mistake, noticed suo motu, would necessitate amending the order with a view to rectifying the said mistake apparent from the record. No objection thereto was raised by either party during hearing, even as it was clarified that the hearing had called only to allow them to state their objections, if any, thereto. We, accordingly, confirm the disallowance of the assessee’s alternate claim of depreciation for the entire amount of WDV of the relevant asset. Disallowance u/s.14A - assessee challenged disallowance on the ground that no satisfaction had been recorded by the Assessing Officer (A.O.) prior to effecting the disallowance u/s.14A, which is mandatory - Held that:- no specific ground raised by the assessee before the tribunal or, for that matter before the first appellate authority, in the matter. Further, no pleading in its respect was also made during the course of the hearing. The decision in the case of Maxopp Investment Ltd. (2011 (11) TMI 267 - Delhi High Court ) was neither cited before us nor is a copy thereof on record. In any case, even as observed at the time of hearing, the matter has been set aside back to the file of the first appellate authority to adjudicate the assessee’s case afresh, i.e., qua the said disallowance, allowing the assessee opportunity to present its case on both the factual and legal aspects. We are, thus, unable to see as to how any prejudice stands caused by the said decision by the tribunal. - Decided against assessee. Disallowance of depreciation - asset under reference is not a building, but repair and renovation expenditure in respect of a leased building, which stands capitalized under the block of assets ‘Furniture, fixture and electrical fittings’ - Held that:- Statement of the depreciation allowable under the Act was made by the AR during hearing, specifically adverting to the opening WDV of the block of assets ‘Furniture, fixture and electrical fittings’, which is stated at ₹ 53,09,065/-. The tribunal has moved on the basis that the asset under reference is a building covered under Explanation 1 to section 32(1)(ii). The decision thus stands rendered on an incorrect factual premise or, in any case, one inconsistent with the contentions by the assessee in its respect, without meeting the same. The order by the tribunal, accordingly, contains a mistake apparent from record, i.e., qua this aspect, and is accordingly recalled for being considered afresh. - Decided in favour of assessee. Disallowance of depreciation - relevant asset being no longer in existence, or of the assessee being no longer its’ owner - Held that:- On principle, i.e., assuming the amount, as claimed, forms part of the block of assets ‘Furniture and Fittings’, and stands carried over from an earlier year, we find the assessee’s claim as valid. Section 43(6)(c), defining WDV of a block of assets, clearly stipulates a reduction from the opening WDV for the ‘moneys payable’ in respect of any asset falling within a block of assets, which is sold or destroyed or demolished or discarded during the relevant previous year. Assets which are subject to any of the conditions provided in section 43(6)(c)(i)(B) are no longer in the assessee’s domain, while the value realized in their respect stands to be adjusted, so that the question or issue boils down to one of value adjustment. It also needs to be noted that the changed method of allowance of depreciation, i.e., after introduction of the concept of ‘block of assets’, does away with the allowance of terminal depreciation, which is since applicable only to the assets falling u/s. 32(1)(i), i.e., where depreciation is charged on individual assets (also refer section 32(1)(iii) r/w s.41(2)). - Decided in favour of assessee. Issues Involved:1. Rectification of the tribunal's order regarding the disallowance of depreciation on a leased building.2. Assessee's challenge to disallowance under section 14A for lack of satisfaction recorded by the Assessing Officer.3. Classification of repair and renovation expenditure on a leased building and its inclusion in the block of assets.Issue-wise Detailed Analysis:1. Rectification of the Tribunal's Order:The tribunal noted that the assessee claimed depreciation on a leased building, which had been vacated. The initial disallowance was confirmed based on previous court decisions. However, it was later realized that section 32(1)(iii) only applies to assets of an undertaking engaged in power generation and distribution, which was not the case here. The tribunal acknowledged the mistake and decided to rectify the order. The tribunal directed the Registry to assign a number to the rectification proposed suo motu. The tribunal confirmed the disallowance of the assessee's alternate claim for depreciation on the entire amount of WDV of the relevant asset, expunging the incorrect reasoning from the original order.2. Assessee's Challenge to Disallowance under Section 14A:The assessee contended that the disallowance under section 14A was invalid as the Assessing Officer did not record satisfaction before making the disallowance. The tribunal observed that no specific ground or pleading was made regarding this issue before the tribunal or the first appellate authority. The tribunal noted that the matter had been set aside to the first appellate authority to adjudicate afresh, allowing the assessee to present its case on both factual and legal aspects. Therefore, the tribunal dismissed the relevant grounds, finding no prejudice caused by the earlier decision.3. Classification of Repair and Renovation Expenditure:The assessee argued that the expenditure was not on a building but on repair and renovation of a leased building, capitalized under 'Furniture, fixture and electrical fittings.' The tribunal found that the statement of depreciation was made during the hearing, but the tribunal had incorrectly treated the asset as a building. The tribunal acknowledged the mistake and recalled the order for reconsideration. The tribunal restored the matter to the first appellate authority to determine the facts, noting that the assessee's claim was valid if the expenditure formed part of the block of assets 'Furniture and Fittings' and was carried over from an earlier year. The tribunal clarified that the condition of ownership is not a pre-condition for depreciation under section 43(6)(c)(i)(B) and that depreciation is allowed on the value of all assets in a block of assets. The tribunal also distinguished the case from previous decisions, stating that the condition of user does not apply to assets sold, destroyed, demolished, or discarded.Result:The tribunal disposed of MA No. 414/2014 on the stated terms, partly allowing it. The tribunal restored the matter to the first appellate authority for factual determination regarding the repair and renovation expenditure. The assessee's appeal was partly allowed, with the tribunal recognizing the validity of the depreciation claim on the block of assets 'Furniture and Fittings.' The order was pronounced in the open court on January 30, 2015.