Tribunal allows appeal on depreciation disallowance for incorrect asset value calculations.

The Tribunal allowed the appeal, deleting the disallowance of depreciation of Rs. 6,54,950. The disallowance was based on the failure to reduce the written down value of assets following a loan waiver, resulting in incorrect depreciation calculations. The Tribunal emphasized that depreciation should be based on the written down value of assets. The challenge to the initiation of re-assessment proceedings was not addressed due to the favorable outcome on the primary issue.

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Issues Involved:
1. Disallowance of depreciation on the amount written back from Capital Reserve.
2. Initiation of re-assessment proceedings.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on the Amount Written Back from Capital Reserve:

The primary issue in this appeal concerns the disallowance of Rs. 6,54,950 on account of depreciation on the amount written back from Capital Reserve. The assessee, engaged in manufacturing moulds and plastic moulded components, had its assessment reopened under section 148 of the Income-tax Act, 1961. The Assessing Officer (AO) observed that a sum of Rs. 45,18,582 payable to a group company for the purchase of plant and machinery was waived off and credited to Capital Reserve in the financial year 2005-06 without reducing it from the asset value. The assessee continued to claim depreciation on the gross value of the block of plant and machinery, including the waived amount, which was disallowed by the AO and upheld by the CIT(A).

The Tribunal emphasized that depreciation must be allowed on the written down value (WDV) of the block of assets as defined under section 43(6) of the Act. The definition of WDV does not consider any reduction in the value of existing assets in the block except when sold. The Tribunal noted that the waiver of the loan in the financial year 2005-06 should have reduced the WDV of the block of assets at that time. However, since the AO did not reduce the WDV in that year and allowed depreciation on the gross value, the stage for altering the actual cost/W.D.V. on account of the loan waiver had passed.

The Tribunal concluded that no disallowance of depreciation could be made without first lawfully reducing the WDV of the block. Since the AO did not adjust the WDV in the year of the waiver, the depreciation claimed in the year under consideration could not be disallowed. Consequently, the disallowance of Rs. 6,54,950 was deleted.

2. Initiation of Re-assessment Proceedings:

The assessee also challenged the initiation of re-assessment proceedings. However, the Tribunal did not find it necessary to adjudicate this ground due to the favorable decision on the merits of the disallowance issue.

Conclusion:

The Tribunal allowed the appeal, deleting the disallowance of depreciation of Rs. 6,54,950 and did not address the challenge to the re-assessment proceedings due to the favorable outcome on the primary issue. The order was pronounced in the Open Court on 22nd September 2021.

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