2016 (12) TMI 42 - AT - Income Tax

Tribunal allows depreciation claim on computers for new business

The Tribunal reversed the Principal CIT's decision and allowed the depreciation claim on computers, finding that the business was set up during the year ... Allowability of depreciation - date of setting-up of the business - previous year for a newly set-up business - put to use - pre operative or pre commencement expenditureAllowability of depreciation - date of setting-up of the business - put to use - Whether depreciation on computers purchased and installed by the assessee is allowable for the year under consideration. - HELD THAT: - The Tribunal applied the statutory concept that for a newly set up business the previous year begins from the date of setting-up, and expenses incurred after setting-up (even if actual commercial sales commence later) are allowable as business deductions. On the facts the assessee had entered into an agreement to be sole selling agent, paid requisite deposits and bank guarantees, appointed staff and retail distributors, purchased and installed computers and software, and conducted trial runs. The AO had examined and accepted documentary evidence (including installation certificate showing software installed on 25.03.2010-31.03.2010) and assessed income under the head 'income from business'; the CIT did not bring any contrary material and relied on unsupported suspicion. Given that the infrastructure was in place and the computers were handed over to retail distributors with software and trial runs completed, the Tribunal held that the computers were 'put to use' in the assessee's business for the purposes of claiming depreciation. The Tribunal accepted analogous authorities holding that assets handed over for business use may be treated as put to use by the supplier/owner and noted that, even if a dispute existed about the precise date of actual sales, any disallowance would only defer deduction to the subsequent year and would not deprive revenue ultimately. For these reasons the AO's allowance of depreciation was upheld and the CIT's direction to disallow was reversed. [Paras 4]Depreciation on the computers is allowable in the year under consideration and the AO's allowance is restored.Final Conclusion: The Tribunal allowed the assessee's claim for depreciation on computers for A.Y. 2010-11, reversed the CIT's direction to disallow that depreciation and consequently partly allowed the appeal; the Tribunal did not decide the jurisdictional validity of the section 263 order as that issue became academic. Issues Involved:1. Whether the Principal CIT erred in setting aside the assessment order passed by the AO on the grounds of erroneous and prejudicial to the interest of the revenue.2. Whether the Principal CIT was correct in directing the AO to disallow the claim of depreciation on computers.3. Jurisdictional validity of the order passed under section 263.Issue-wise Detailed Analysis:1. Setting Aside the Assessment Order:The Principal CIT set aside the assessment order passed by the AO, holding it to be erroneous and prejudicial to the interest of the revenue. The CIT argued that the AO allowed depreciation on computers without proper verification of their installation, usage, and the commencement of the business. The CIT contended that the AO did not make specific inquiries or discuss the pre-requisite factors such as the actual use of computers for business during the financial year, details of trial runs, and the commencement of business itself.2. Disallowance of Depreciation on Computers:The Principal CIT directed the AO to disallow the claim of depreciation on computers amounting to Rs. 59,55,717/-. The CIT reasoned that since the business did not commence nor operate in F.Y. 2009-10, the entire expenditure incurred in setting up the business should be treated as pre-operative or pre-commencement expenditure and capitalized. The CIT further stated that although computers were installed with software, the system was not ready for use as no evidence was submitted for necessary training and online trial runs.Assessee's Arguments:The assessee argued that complete details and documentary evidence were submitted to the AO, which were duly verified. The AO allowed the depreciation after due application of mind and verification of the facts relating to the setting up of the business and the installation and usage of computers. The assessee contended that the business was set up during the year, evident from the AO's action of computing income under the head 'income from business' and making certain disallowances. The assessee relied on the judgment of the Delhi High Court in CIT vs. Hughes Escorts Communications Ltd. 311 ITR 253 (Delhi), which held that expenses are allowable immediately after setting up the business, even if the business is not yet actually commenced.Revenue's Arguments:The Revenue argued that the assessee was permitted to make the first sale of lottery tickets on 01.04.2010, and hence, the business could not have commenced during the year under consideration. The CIT-DR contended that the assessee failed to provide conclusive evidence of the actual installation and usage of the computers. The Revenue maintained that the AO did not properly examine the evidence, and therefore, the CIT rightly disallowed the depreciation claimed on computers.Tribunal's Findings:The Tribunal examined the submissions and evidence. It noted that the business of the assessee was set up during the year, as the entire infrastructure was put in place to commence the business. The Tribunal referred to section 2(34) and section 3 of the Act, which define the 'previous year' and the date of setting up of the business. The Tribunal cited the Bombay High Court's judgment in Western Indian Vegetables Products Limited v CIT 26 ITR 151, which distinguished between the setting up and commencement of business. It held that expenses incurred after setting up the business but before the actual commencement are permissible deductions.The Tribunal found that the assessee entered into an agreement with the Punjab Government on 15.01.2010, made requisite arrangements, hired staff, appointed retailers, and installed computers with the necessary software. The AO examined the evidence and allowed the depreciation on computers after due verification. The Tribunal concluded that the assessee's business was set up during the year, and the computers were ready for use. Therefore, the claim of depreciation was valid.3. Jurisdictional Validity of the Order under Section 263:Since the Tribunal allowed the claim of depreciation on merits, the issue of the jurisdictional validity of the order passed under section 263 became academic and was not addressed.Conclusion:The Tribunal reversed the CIT's action, allowing the depreciation claim on computers. The appeal filed by the Assessee was partly allowed with the Tribunal's directions. The order was pronounced in the open court on 21st September 2016.