100% Depreciation Allowed on Temporary Structures Under Contract; Bund Maintenance Provision Upheld as Legitimate Liability

The ITAT Delhi dismissed the Revenue's appeals challenging the CIT(A)'s orders for AYs 2004-05 and 2005-06. The tribunal upheld the allowance of 100% depreciation on temporary structures erected by the assessee on land not owned by it, recognizing these as purely temporary erections removable upon contract completion. The assessee's claim was supported by facts that the structures had no earth foundation, were used temporarily for contractual purposes, and the cost was borne by the assessee. Regarding the provision for bund maintenance, the tribunal held the provision was a legitimate business liability estimated on a rational basis following accepted accounting principles and AS-7. Reliance was placed on Supreme Court and HC precedents allowing deductions for accrued liabilities maintainable on mercantile accounting. Consequently, both issues were decided in favour of the assessee, and the Revenue's appeals were dismissed.

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ISSUES:

Whether 100% depreciation is allowable on temporary structures erected on land not owned by the assessee, where such structures are not attached to the land and used for limited contractual purposes.Whether provision for bund maintenance expenses, claimed as a contingent liability, is allowable as a deduction under the Income Tax Act.

RULINGS / HOLDINGS:

On the issue of depreciation, the Court held that the structures were "purely temporary erections" not attached to the land, erected on land not owned by the assessee and used only for limited contractual purposes; therefore, "100% depreciation should be allowed" on such temporary structures.Regarding the provision for bund maintenance, the Court ruled that the provision was a "business liability [that] has definitely arisen in the accounting year" and was estimated on a "rational basis" following accepted accounting principles and AS-7; hence, the provision was "legitimate and genuine" and allowable as a deduction.

RATIONALE:

The Court applied the statutory provisions under section 32 and section 37(1) of the Income Tax Act, along with Appendix-I to the Income Tax Rules regarding depreciation on temporary structures.It relied on precedents including decisions by the Hon'ble Supreme Court and High Courts, such as CIT vs. Industrial Cables I Ltd., Shalivahana Constructions Ltd. vs. DCIT, and CIT vs. Print Systems and Products, which recognized that temporary structures erected without permanent attachment to land and used for limited purposes qualify for 100% depreciation.For the bund maintenance provision, the Court referred to the principle laid down in Bharat Earth Movers v. CIT that a liability accrued in the accounting year is deductible even if to be discharged in the future, subject to accepted accounting standards and mercantile system of accounting.The Court also considered the application of AS-7 (Accounting Standard on Construction Contracts) and the assessee's technical evaluation and experience in estimating warranty liabilities, supported by relevant case law including Metal Box Co. Pvt. Ltd., SBI v. CIT, and Woodward Governor India P. Ltd.No dissenting or differing opinions were recorded; the Court affirmed the appellate authority's order in favor of the assessee on both issues.

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