2022 (12) TMI 695 - AT - Income Tax

Tribunal upholds Assessee's depreciation claim; dismisses revision order

Diamines & Chemicals Ltd. Versus The PCIT-1, Baroda & DCIT, Circle-1 (1), Baroda

Diamines & Chemicals Ltd. Versus The PCIT-1, Baroda & DCIT, Circle-1 (1), Baroda - TMI Issues Involved:1. Legality of the order passed under section 263 of the Income Tax Act, 1961.2. Eligibility of depreciation and additional depreciation on additions made to plant and machinery.3. Classification of capital work-in-progress and pre-operative expenses for depreciation under section 32(1) and additional depreciation under section 32(1)(iia).4. Allowability of expenses as revenue expenditure under section 37(1) if not treated as capital in nature.Detailed Analysis:1. Legality of the Order Passed Under Section 263:The Assessee challenged the order dated 27.03.2015 passed by the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961. The Assessee argued that the original assessment order under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The Assessee relied on the Supreme Court judgment in Malabar Industrial Company Ltd. vs. CIT, which held that when two views are possible and the Assessing Officer (AO) has adopted one, the same cannot be considered erroneous or prejudicial to the interest of the revenue. The Tribunal observed that the AO had conducted detailed inquiries and applied his mind before passing the assessment order, making it a plausible view. Consequently, the Tribunal quashed the revision order dated 27.03.2015, stating that the PCIT had not demonstrated how the assessment order was erroneous or prejudicial to the interest of the revenue.2. Eligibility of Depreciation and Additional Depreciation:The Assessee claimed depreciation and additional depreciation under section 32(1)(iia) on additions made to plant and machinery, which included work-in-progress and pre-operative expenses. The PCIT argued that these items were not eligible for depreciation as they did not involve acquisition. The Assessee contended that the plant and machinery were part of a new Ethylene Dichloride (EDC) Plant commissioned during the financial year, making them eligible for additional depreciation. The Tribunal found that the AO had verified the details and allowed the claim after satisfying himself with the explanations provided by the Assessee. Thus, the Tribunal held that the AO's view was plausible and could not be considered erroneous or prejudicial to the revenue.3. Classification of Capital Work-in-Progress and Pre-Operative Expenses:The Assessee argued that capital work-in-progress and pre-operative expenses related to the new EDC project were capitalized upon commissioning and became part of the block of assets. The PCIT disagreed, stating that these items did not qualify for depreciation or additional depreciation. The Tribunal referred to the Supreme Court decision in Chellapalli Sugar Ltd., which held that pre-operative expenses and capital work-in-progress should be capitalized to form part of the actual cost. The Tribunal concluded that the AO had conducted necessary inquiries and the view taken was plausible, thus the revision order under section 263 was not justified.4. Allowability of Expenses as Revenue Expenditure Under Section 37(1):The Assessee argued that if capital work-in-progress and pre-operative expenses were not treated as capital in nature, they should be allowed as revenue expenditure under section 37(1). However, since the Tribunal found that these expenses were correctly capitalized and eligible for depreciation, this issue became moot.Conclusion:The Tribunal quashed the revision order dated 27.03.2015 passed under section 263, stating that the AO had conducted proper inquiries and the view taken was plausible. Consequently, the subsequent order passed by the AO giving effect to the revision order was also rendered infructuous. The appeal filed by the Assessee in ITA No. 1472/Ahd/2015 was allowed, and the appeal in ITA No. 219/Ahd/2017 was dismissed as infructuous.