TaxTMI 
TaxTMI 
2013 (1) TMI 311
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....oceedings u/s. 155(4) - - - 2 - - - Reduction of:- Waiver of loan amount from WDV, Depreciation allowance, Carryforward of unabsorbed depreciation 3(a,b&c) 3(a,b,c &d) 3(a,b,c &d) 3(a,b&c) 2(a,b&c) 1(a,b,c &d) 2 to 8 Not setting off brought forward business loss first against total income and setting off of unabsorbed depreciation first. - - - - - - 9 Revenue's Appeal No. &AY 771/10 2001-02 772/10 2002-03 773/10 2003-04 2004-05 2005-06 1164/10 2006-07 Proceedings under section 147/148 147/148 147/148 155(4) 143(3) 143(3) Issues Ground No. Ground No. Ground No. Appeal not filed by the Deptt. Ground No. Reduction of:- Waiver of loan amount from WDV, Depreciation allowance, Carryforward of unabsorbed depreciation 1,2,3,4,5 1,2,3,4,5 1,2,3,4,5 1,2,3,4,5 Reliance on case laws placed by the AO 6,7 6,7 6,7 - 3. The material facts necessary for adjudication of these appeals are as follows: The assessee is a manufacturer and trader of polymer based industrial paints and sealant products. It was incorporated on 13.05.1994 as a 100% subsidiary of Courtaulds Holding BV, Netherlands. The assessee, for the purpose of establishing....
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.... was purchased by the assessee for which the assessee did not make payments and the amount outstanding for such purchases were made by the parent company and ultimately waived by the parent company, the assessee claimed depreciation right from the A.Y. 1997-98 upto A.Y. 2000-01. It is important to mention that the Assessee considered the actual cost of the machinery at that point of time i.e., in AY 97-98 as the monies payable to the supplier of machineries viz., Rs.13,48,09,000. The assessee was allowed depreciation in the assessment proceedings. In the A.Y. 2001-02, the original return was processed u/s. 143(1) of the Act. This assessment was however reopened by the AO by issuing notice u/s. 148 of the Act. The facts with regard to the waiver of the loan payable for acquiring the machineries came to the knowledge of the AO in the course of assessment proceedings for AY 04-05. According to the AO, on the waiver of loan by the parent company, the Written Down Value ("WDV") of the plant & machinery had to be reworked by reducing from the opening WDV the amount of loan which had been waived by the parent company viz., a sum of Rs. 13,48,09,000. The AO accordingly worked out the depre....
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.... The appellant has also made the following submissions: 2.7.7 Without prejudice to our aforesaid submissions, the Appellant further objects to the method of determination of written down value of assets. In these calculations, entire cost of the imported asset has been reduced and not the value arrived net of depreciation. As the Hon'ble CIT (A) may notice, what opening written down value represents are the written down value of the assets and not the original cost of the asset. Hence, if at all anything is to be reduced, then it shall be written down value of underlying assets and not the original cost of the asset itself. If original cost of asset purchased during FY 1994-95 to FY 1996-97 is reduced from the written down value of assets for the assessment year 2001-02, that would amount to incorrect value of assets for the purpose of depreciation and the depreciation so calculated will not be in accordance with the provisions of section 32 of the Act. 2.7.8. Hence, without prejudice to our other submissions, the Appellant submits that, if at all any value is to be reduced it has to be only with reference to value which is arrived net of depreciation." 4.7 There is force in the....
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....inery cannot be said to be falling within the expression "sold, discarded, demolished, or destroyed". It was his submission that consequently the WDV cannot be disturbed by the AO. Further reference was also made by the ld. counsel for the assessee to the decision of the Hon'ble Supreme Court in the case of CIT v. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285, wherein the Hon'ble Supreme Court held that the manner of repayment of loan availed by an assessee for the purchase of an asset on which depreciation is claimed, cannot have any impact on allowing depreciation on such assets. Reference was also made to the decision of the Hon'ble Kerala High Court in the case of CIT v. Cochin Co. (P.) Ltd. [1990] 184 ITR 230 for identical proposition. 11. Further submissions were made on the concept of block of assets and as to how once an asset enters the block of assets, it becomes part of block of assets and becomes part of the WDV and that the WDV can change only on instances set out in section 43(6)(c) of the Act. It was also submitted that Explanation 10 to section 43(1) will not apply to the present case because the amount waived by the parent company cannot be said to be cost of the ....
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.... assessment, then it could be said that the AO had reason to believe that the income chargeable to tax has escaped assessment. The apex court further held that the expression 'reason to believe' in section 147 of the Act cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The apex court further held that, at the stage of issue of notice u/s 148 of the Act, the only question to be considered is, whether there was relevant material on which a reasonable person could have formed a requisite belief and not whether the materials would conclusively prove escapement of income. '16. Section 147 authorises and permits the Assessing officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the Assessing officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing officer should have finally ascertain....
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.... to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the provision to section 147. The case at hand is covered by the main provision and not the proviso. 18. So long the ingredients of section are fulfilled, the Assessing officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued." (i) Applying the ratio laid down by the apex court in the aforesaid case, it has to be seen in the present case whether the AO had any cause or justification to form a reasonable belief that income chargeable to tax has escaped assessment. 3.8 It is observed that the appellant furnished its returns of income as indicated at page 2 supra. The returns were processed u/s 143(1) and subsequently no orders u/s 143(3) were passed. As such, the AO had no occasion to scrutinise the correctness of the loss, deduction, allowance or relief claimed in the returns of ....
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....e assessee thereafter recognized this liability for payment for purchase of machinery as payable to CEL, UK. Later on, CEL, UK was taken over by Akzo International BV. Akzo International BV waived repayment of monies due on purchase of machinery. It is not in dispute that in April, 1996 when the machinery was purchased, the actual cost was recorded in the books of account including the monies payable to the supplier of machineries. Even today the Assessee has not made any adjustment in its books of accounts recognizing the write of amounts payable for purchase of machineries. The benefit as a result of waiver of the loan was shown in the books of accounts of the Assessee in the balance sheet as a capital receipt not chargeable to tax. The above claim of the Assessee has also been accepted by the Revenue. The assessee has claimed depreciation of those machineries from the A.Y. 1997-98. In April, 2000, Akzo International BV, the parent company waived the amounts payable by the assessee for purchase of machineries. This fact came to the knowledge of the AO in the course of assessment proceedings for the AY 2004-05. Thereafter action was initiated u/s. 148 to reduce the WDV of the rele....
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.... written down value as so increased; and 17. The term "block of assets" is defined in Section 2(11) of the Act as under: - "2(11) "block of assets" means a group of assets falling within a class of assets comprising - (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed;" 18. Prior to the introduction of new concept of block of assets with effect from 01.04.1988, depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block assets and allowability of depreciation on such a block. The rationale behind such a provision is contained in Circular No.469 dated 23.09.1986 issued by the Central Board of Direct Taxes (CBDT). After referring to the Budget Speech of the Finance Minister wherein reference was made to the proposal to introduce a system of allowing depreciation in respect of blo....
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....rovisions that the only way by which the written down value on which depreciation is to be allowed as per the provisions of Sec.32(1) (ii) can be altered is as per the situation referred to in Sec.43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus the recourse by the revenue to those provisions on the facts and circumstances of the present case, in our view, cannot be sustained. 20. We shall examine the issue from the provisions of Sec.43(1) of the Act and Explanation 10 thereto also. Section 43(1) of the Act is reproduced hereunder: - "(1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:" By the Finance (2) Act, 1998, Explanation 10 to Section 43(1) was inserted with effect from 1.4.1999. It reads as under: "Explanation 10 - Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly the Central Government or a State Government or any authority ....
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....n the scope of any of the aforesaid expressions used in Expln.10. Even otherwise Sec 43(1) is applicable only in the year of purchase of machinery and in the present case the purchase of the machinery in question was not in AY 01-02. Therefore the actual cost which has already been recognised in the books in the AY prior to AY 01-02 cannot be disturbed in AY 01-02. In this regard there is a lacuna in the law and it is for the legislature to provide appropriate safeguards in this regard. It is true that the Assessee on the one hand gets the waiver of monies payable on purchase of machinery and claims such receipt as not taxable because it is capital receipt. On the other hand the Assessee claims depreciation on the value of the machinery for which it did not incur any cost. Thus the Assessees stand to benefit both ways. As per the law as it prevails as on date, we are of the view that the revenue is without any remedy. The only way that the revenue can remedy the situation is that it has to reopen the assessment for the year in which the asset was acquired and fall back on the provisions of Sec. 43(1) of the Act which says that actual cost means the actual cost of the assets to the ....