Assessee wins section 80IAB deduction on disallowed depreciation for water-use rights despite revenue's capital asset challenge

ITAT Delhi allowed the assessee's appeal regarding deduction under section 80IAB on disallowed depreciation for water-use rights. The revenue disallowed depreciation claiming water-use rights are not capital assets as the right neither diminishes nor enhances. However, ITAT held that disallowance leading to profit enhancement makes such enhanced profits eligible for section 80IAB deduction, supported by CBDT Circular 37/2016. The tribunal directed the Assessing Officer to allow the deduction and provide consequential relief.

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Issues:
The judgment involves the rejection of a claim for depreciation on Water-use Rights (Intangibles Asset) for A.Y. 2017-18 under Section 143 (3) r.w.s. 144 C r.w.s. 144B of the Income Tax Act, 1961.

Facts and Decision:
During the previous year, the assessee capitalized assets as intangibles by making a payment to Gujarat Industrial Development Corporation (GDC) for water supply and drainage connection. The assessee claimed depreciation on the capitalized amount, which was disallowed by the Assessing Officer (AO) on the basis that the right to use water does not diminish or enhance and cannot be considered an acquisition of a capital asset. The AO held that no depreciation could be allowed on the payment made. The Coordinate Bench in a previous case of the assessee had granted relief in a similar matter, where the payment for water supply connection and drainage connection was capitalized under intangible assets. The Coordinate Bench observed that the payment was not on account of acquisition of a capital asset, and therefore, no depreciation was allowable.

Legal Arguments and Ruling:
The counsel for the assessee argued that if the disallowance of depreciation is allowed, the assessee is eligible for deduction under Section 80IAB, leading to an enhancement of profit. The CBDT circular dated 02.11.2016 was cited to support this argument. The Tribunal agreed with the counsel, stating that the enhancement of profit by disallowance of depreciation would be eligible for deduction under Section 80IAB. Consequently, the Tribunal directed the Assessing Officer to allow the deduction under Section 80IAB on the disallowed depreciation, providing relief to the assessee. As a result, the issue of depreciation on intangible assets became academic, and no separate adjudication was required. The appeal of the assessee was allowed based on the above considerations.

Conclusion:
The Tribunal granted relief to the assessee by allowing deduction under Section 80IAB on the disallowed depreciation of intangible assets. The decision was based on the previous ruling in the assessee's own case and the CBDT circular. As a result, the appeal of the assessee was allowed, and no separate order was deemed necessary.

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