2025 (7) TMI 1491 - AT - Income Tax

PCIT's Revision Under Section 263 Set Aside for Improper Disallowance of Additional Depreciation Claims

The ITAT Ahmedabad held that the PCIT's revision under section 263 was unsustainable. The PCIT failed to conclusively establish that the additional ... Revision u/s 263 - erroneous claims of depreciation and disallowance of expenses u/s 14A - HELD THAT:- We find from the bare reading of the order passed by the PCIT in the present case that she herself has either not arrived at a conclusive finding of the impugned claims being wrongly allowed to the assessee or her finding in this regard is found to be incorrect. Claim of additional depreciation on camera and Air Conditioner CIT having asked the AO to verify the claim of the assessee that the assets were deployed in the factory and allow the claim to additional depreciation if facts found similar to cases cited by the assessee, it is patently clear that on the issue of allowance of claim of additional depreciation on camera and Air Conditioners, there was no categorical finding by the Ld. PCIT of the said claim of additional depreciation to having been wrongly allowed to the assessee. The matter having been referred back to the AO for verification, the Ld. PCIT could not have directed the AO to disallow the said claim in her order passed u/s. 263 of the Act. Depreciation on factory building - We find, that her finding of the said claim being wrongly allowed to the assessee is flawed. Clearly the finding of error by the Ld. PCIT with regards to the issue of claim of depreciation of residential building of staff @10% is itself flawed and incorrect, based on the decision of the ITAT, while the assessee had pointed out the decision of the Hon’ble High Court of Madras ruling in its favour [2019 (8) TMI 735 - MADRAS HIGH COURT] which the Ld. PCIT had not cared to distinguish at all. The finding of error by the Ld. PCIT in the order of the AO in this regard being flawed her direction to the AO to disallow the excess claim of depreciation on the residential building is, therefore, not sustainable in law. Disallowance of expenses u/s. 14A - PCIT noted the assessee to have earned exempt income from the LLP and finding the AO to have made no disallowance of expenses u/s. 14A of the Act pertaining to the expenses incurred for the purposes of earning exempt income, she held the assessment order passed in the present case to be erroneous causing prejudice to the Revenue - Onus of the AO to record dis-satisfaction with the explanation of the assessee has been assumed by the Ld. PCIT. It is the PCIT who has rejected the explanation of the assessee as not being sufficient for explaining its claim that no expenses were attributable to the earning of exempt income. This clearly is not as per law interpreted by the Hon’ble Apex Court in Maxopp Investments Ltd. [2018 (3) TMI 805 - SUPREME COURT] It was for the AO to record dis-satisfaction and the Ld. PCIT could not usurp this power and further after usurping this power and recording dis-satisfaction with the explanation of the assessee, she could not have directed the AO to make disallowance by invoking the Rule 8D of the IT Rules. The Ld. PCIT, at best, ought to have directed the AO to consider the explanation of the assessee and record his dis-satisfaction or not with the said explanation and thereafter proceed in accordance with law. PCIT in the present case having assumed power which she was not entitled to in terms of the provisions of Section 14A of the Act and which power lay only with the AO, her direction, therefore, to the AO to disallow expenses by invoking the Rule 8D of the IT Rules, 1962, goes against the provisions of law and, therefore, are not sustainable. Excess depreciation claimed on the written down the value of the assets before reducing the portion of additional depreciation to which it was entitled to in the impugned year - As pointed out by the assessee to the Ld. PCIT, the provisions of law clearly state and required depreciation to be allowed on the WDV of assets and there is no provision in law to the effect that additional depreciation brought forward from the preceding year needs to be reduced from the WDV of the present year or succeeding year before allowing depreciation on the same. PCIT has not pointed out any provision of law requiring WDV to be reduced with additional depreciation carried forward from preceding year for set off, before allowing depreciation on the same for the year. The primary Rule of interpretation of statute is that law is to be read as it is and nothing can be added or subtracted or altered or modified unless it is plainly necessary in order to prevent a provision from being unintelligible, or absurd, or unreasonable or unworkable or totally irreconcilable with the rest of the statute. The Hon’ble apex court in the case of Sarala Birla [1989 (1) TMI 1 - SUPREME COURT] has held that the plain language of a statute must override any supposed intendment of the legislature and cannot be amended or stretched by any court. PCIT has tried to give a purposive interpretation to the provision of law, which is against the basic rule of interpretation of statutes and her contention therefore for finding assesses claim of depreciation on WDV of assets to be excessive is, we hold, against the provisions of law in this regard. The issue, at hand, pertaining to claim of depreciation, which is merely allowance of cost of an asset which is spread over the useful life of an asset, the said claim if disallowed in the impugned year is liable to be allowed in succeeding years. The exercise of revisionary power over an admittedly trivial/ immaterial claim which otherwise is allowable in succeeding years to the assessee, is nothing but a gross misuse of the power granted u/s 263 of the Act. We hold that the order passed by the Ld. PCIT directing the AO to make disallowance of the excess depreciation so claimed, is not sustainable in law. Appeal filed by the assessee is allowed. ISSUES: Whether the assessment order passed under Section 143(3) of the Income Tax Act, 1961 was erroneous and prejudicial to the revenue for allowing excess depreciation claims on plant & machinery, residential building, and other assets.Whether the claim of additional depreciation on cameras and air conditioners installed at factory premises qualifies for allowance under the Income Tax Act.Whether disallowance of expenses under Section 14A read with Rule 8D of the Income Tax Rules, 1962 should have been made in respect of exempt income earned by the assessee.Whether the Assessing Officer erred in the computation of depreciation by not reducing the balance 50% additional depreciation carried forward from the preceding year before allowing general depreciation on the written down value (WDV) of assets.Whether the Principal Commissioner of Income Tax (PCIT) validly exercised revisionary powers under Section 263 of the Income Tax Act to set aside the assessment order. RULINGS / HOLDINGS: The order passed under Section 263 setting aside the assessment order for excess depreciation claims on plant & machinery and residential building is not sustainable in law; the PCIT's finding on excess depreciation on residential building is flawed as it relies on an ITAT decision without distinguishing a binding High Court ruling in favor of the assessee.The claim of additional depreciation on cameras and air conditioners installed at factory premises is not conclusively disallowed by the PCIT; rather, the AO was directed to verify the facts, and thus, the PCIT could not direct disallowance under Section 263 without a conclusive finding.The PCIT assumed the power to record dissatisfaction under Section 14A and direct disallowance under Rule 8D, which is impermissible; only the Assessing Officer has the jurisdiction to record such dissatisfaction and proceed accordingly.The contention that the WDV must be reduced by the unallowed 50% additional depreciation from the preceding year before allowing general depreciation in the impugned year is contrary to the plain language of Section 32; there is no statutory provision requiring such reduction, and the PCIT's interpretation is against the statutory scheme and principles of statutory interpretation.The exercise of revisionary power under Section 263 in this case is not justified, especially given the trivial nature of the alleged excess depreciation amounting to approximately 0.2% of the declared income; such power must be exercised with caution and not for reopening settled issues without substantial material. RATIONALE: The Court applied the statutory provisions of the Income Tax Act, 1961, specifically Sections 14A, 32, 143(3), and 263, along with Rule 8D of the Income Tax Rules, 1962.Regarding additional depreciation, the Court emphasized the plain language of Section 32(1) that depreciation is to be allowed on the written down value of assets without any statutory mandate to reduce WDV by the balance additional depreciation carried forward; it rejected purposive interpretation that contradicts clear legislative text, citing the principle that 'the plain language of a statute must override any supposed intendment of the legislature.'In respect of Section 14A disallowance, the Court relied on the precedent that only the Assessing Officer can record dissatisfaction with the assessee's explanation before invoking disallowance; the PCIT's assumption of this power was held to be beyond jurisdiction.On the issue of additional depreciation on cameras and air conditioners, the Court noted that the PCIT did not make a conclusive adverse finding but rather remanded the matter to the AO for verification, which precludes the PCIT from directing disallowance under Section 263.The Court recognized the settled judicial hierarchy and binding precedents, noting the PCIT's failure to distinguish binding High Court decisions favorable to the assessee while relying on lower tribunal decisions.The Court underscored the principle that the power under Section 263 is to be exercised sparingly and with caution, especially when the issue is minor or trivial relative to the total income declared.