TaxTMI 
TaxTMI 
2016 (9) TMI 399
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.... 2. Disallowance the depreciation of Rs. 21,60,26,673/- on non existing assets. 3. Disallowance of depreciation of Rs. 11,63,37,224/- U/s 43(1) explanation 10 of Income Tax Act. 4. That further under the given circumstances the provisions of MAT (sec. 115JB of Income Tax Act, 1961) are also not applicable. Further alternatively the quantum of depreciating considered for disallowance should also be considered as per books as claimed and not as per Income Tax returns/rates. 5. That further in view of decision of M/s Kwality Biscuits Ltd. Vs. CIT (284 ITR 434 (SC) charging of interest U/s 234B on MAT tax is also bad in law." Grounds of revenue's appeal (ITA No. 385/JP/2009 A.Y. 2002-03):- "In view of the facts and circumstances of the case, the Ld. CIT(A), Ajmer has erred in : 1. Restricting the disallowance of Rs. 11,63,37,224/- on non existing assets as against disallowance of Rs. 18,99,41,047/- made by the A.O. U/s 43(1) of the I.T. Act which is to be taken for calculation of book profit U/s 115JB." Grounds of assessee's appeal (ITA No. 284/JP/2009 A.Y. 2003-04):- "Under the facts and the circumstances of the case the....
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....3,227/- on non existing assets as against disallowance of Rs. 37,77,40,749/- made by the A.O. U/s 43(1) of the I.T. Act which is to be taken for calculation of book profit U/s 115JB." 2. All the appeals are being heard together, therefore, for the sake of convenience, a common order is being passed. 3. Ground No. 1 of all the assessee's appeals for the A.Y. 2002-03 and 2003-04 is not pressed, therefore, we dismiss the ground No. 1 of the assessee's appeal as not pressed. 4. We shall first decide the appeal for the assessment year 2003-04 as in the said appeal vide order dated 17/10/2008, this Tribunal has decided issues and thereafter remanded the matter back to the file of the Assessing Officer with certain observations and directions. We deem it appropriate to reproduce the same, which is as under:- "We have heard the ld. DR and perused the written submissions by the assessee placed on record. The objection of the A.O. is that no physical existence of the fixed assets worth Rs. 115.21 crore is available and amount of Rs. 6.95 crore has been capitalized in the current year. The explanation of the assessee is that the assessee took the assets through Financial Restructu....
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....O. Thus, the assessee has not followed the direction of the Hon'ble ITAT. The assessee has not submitted any supporting evidence against the audit observation made by the auditor for the F.Y. 2002-03 (A.Y. 2003-04) of the company, Page 29 (10)(B) of the Statutory Audit Report filed alongwith the return, wherein it is reported that "the fixed assets of Rs. 115.21 Crore transfer through FRP was physically not available at the Head Office Location" From the above discussion, it is clear that the assessee has submitted a certificate before the A.O. stating that the company has physically verified all its assets, however, not produced list of fixed assets prepared on physical verification as directed by the Hon'ble ITAT therefore depreciation claimed against non existing assets is not allowable. During assessment proceedings in the A.Y. 2005-06 the ld AR has submitted depreciation chart in respect of assets of Rs. 115.21 Crores as under: A.Y. Rate of Depreciation Amount (Rs.) 2001-02 25% 288035564 2002-03 25% 216026673 2003-04 25% 162020005 2004-05 25% 121515004 2005-06 25% 91136253 2006-07 15% 41011314 2007-08 15% ....
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....ling of RSEB. As the preparation of fixed assets register thorough the consultant appointed for the purpose is in progress a committee of company officials has also been looking after the work. These amounts represent the capitalization of expenses (viz Employee Cost, Admn. & Gen Exp.) which is as per Nigam's accounting policy. Hence no physical existence possible in respect of these amounts. " 3.5 In such a situation, it is not clear as to on what basis the Chief Accounts Officer has filed a certificate to the effect that all the fixed assets have been verified and no loss of assets is found during such verification. Since the appellant failed to furnish the fixed assets register before the AO, it was not possible for the AO to verify whether the claim of the appellant is correct or not. I, therefore, hold that the AO has rightly made the disallowance of Rs. 16,20,20,005/- and the same is confirmed. Ground No.1 is thus dismissed." 7. Now the assessee is in appeal before us. The ld AR of the assessee has submitted that the assessee company was incorporated on 19.04.2000 as per Rajasthan State Extra Ordinary Gazette Dated 18.01.2002 whereby for Rajasthan Power Sector ....
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....not found ready in the impugned year, then necessary entries, if required for loss of fixed assets, if any be passed in the year I which it is ready and allow depreciation accordingly. In such situation the AO cannot disturb depreciation in the impugned year. The matter is restored to the file of the AO for fresh adjudication but after providing the adequate opportunities of being heard to the assessee." Thus the directions of Hon'ble ITAT on the issue for A.Y. 2003-04 were very specific that the disallowance of depreciation can be made only on those fixed assets for which loss has been claimed in value in the books otherwise the depreciation is not disallowable. The A.O. without considering the fact that the direction of ITAT was to verify from books regarding the loss claimed for fixed assets and then consider the disallowance of depreciation prorata however the A.O. only insisted to submit list of assets as claimed physically verified and for this reason disallowed the depreciation. Thus the A.O. has wrongly interpreted the directions of ITAT wherein even the ITAT has accepted the block of fixed assets however they have directed to disallow the depreciation only on those ....
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..... On 29/6/2016, the ld AR alongwith representatives of the assessee were present in the court. Ld AR submitted that the Board have filed the return of income for the assessment year 2001-02 and have also provided the chart for depreciation in respect of fixed assets of the assessee. 9.1 Even otherwise Section 80 of the Electricity Supply Act, 1948 provides as under:- "80. Provision relating to Income Tax and Super Tax.- (1) For the purposes of the Indian Income-tax Act, 1922 (XI of 1922), 4 the Board shall be deemed to be a company within the meaning of that Act and shall be liable to income tax and super tax accordingly on its income, profits and gains. (2) The State Government shall not be entitled to any refund of any such taxes paid by the Board. In view of the specific provisions under the Electricity Supply Act, 1948, a Board constituted under the said Act and the Board is liable to pay tax under the provisions of Income Tax Act, 1961 and therefore, the Board was required to file income tax return and the judgment passed by the Hon'ble Rajasthan High Court in the case of Rajasthan State Electricity Board Vs. DCIT (1993) 200 ITR 434 clearly deals that the Rajast....
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....ave to be written down value of the transferor company meaning thereby the block of assets, which was transferred by the Rajasthan Electricity Board with the original cost of acquisition, shall be determined the written down value for the assessee company. The Hon'ble Delhi High Court in the case of Dalmia Ceramic Industries Ltd. Vs. CIT (2005) 277 ITR 219 has held that "what would be the actual cost of the transferee company on the date of transfer is indicated in Section 43(1), explanation-6, thus the actual cost of transferee company will be written down value of the holding company." 9.4 Since the original cost of acquisition of the transferor company, is determined, similarly, the written down value of the transferor company is also available with the Assessing Officer, therefore, the ld Assessing Officer was only required to allow the application depreciation on the written down value of the assets acquired by the assessee from the transferor company (RACB). The relevant portion of the judgment is reproduced hereinbelow: "8. The only issue before this court is whether the written down value of the holding company is to be taken as actual cost of the assessee or the amou....
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....ess." 11. There is no dispute that the case falls under clause (iv) of section 47. Therefore, it is clear that the actual cost would be the written down value of the transferor-company. This aspect is required to be borne in mind while considering the question. We will now have to turn to Explanation 6 to section 43(1) which reads as under : " Explanation 6.-When any capital asset is transferred by a hold ing company to its subsidiary company, or by a subsidiary company to its holding company, then, if the conditions of clause (iv) or, as the case may be, of clause (v) of section 47 are satisfied, the actual cost of the transferred capital asset to the transferee-company shall be taken to be the same as it would have been if the transferor-company had continued to hold the capital asset for the purposes of its business." 12. It is clear that what would be the actual cost to the transferee company on the date of transfer is indicated in section 43(1), Explanation 6. Thus, the actual cost to the transferee-company will be the WDV of the holding company (transferor-company). 13. The assessee based its submission relying on Maharana Mills P. Ltd. v. ITO [1959] 36 ITR ....
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....inal figure itself requires a modification." 9.5 In view thereof, this ground of the assessee's appeal is allowed. 9.6 However, we would like to add that the maintenance of fixed assets register is necessary for the smooth functioning of the electricity distribution business and other activities of the assessee. We fail to appreciate that despite the issuance of direction by the Tribunal way back on 20/6/2008 till date the fixed assets register have not been maintained and physical verification of the assets have not been done. Though we have held that the assessee is entitled for deprecation on the written down value of the transferred assets but nonetheless it is the duty of the assessee to maintain and keep the fixed assets register. We will appreciate if the assessee completes this exercise of maintaining the fixed assets register by actual verification of the assets within a period of one year from today. If the physical verification of the assets are not done by the assessee, then the assessee shall be living in fools paradise with lot of assets on papers but nothing on ground. We deem it appropriate that the said state of affairs of not maintaining up to date fixed ass....
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....on on Rs. 120/-. If the assessee had chosen the first method then as per the companies Act and accounting standards, assessee has either to charge depreciation on 'actual cost' i.e. Rs. 60/- as per example in P & L account and excess depreciation on account of these reserves as deferred income over the useful period of life in systematic and rational basis, or of an amount equal to additional depreciation (excess) due to creation of these reserves has to be credited to P & L account from these reserves; if the appellant had chosen the second method, it was required to change depreciation on actual cost only in all three cases, the effect of depreciation on gross amount would have been only that ii will transfer these reserves to general reserves, while leaving the profit untouched. In the instant case the assessee has charged depreciation on fictitious cost directly to P&L, neither considering these reserves as deferred income over the useful period of life in systematic and rational basis, nor crediting an equal amount of excess depreciation from these reserves to P&L account, and in this way has reduced in profit to that extent, or alternatively has actually credited the gene....
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.... assets and losses arising from the retirement or gains or losses arising from disposal of the fixed assets, which is carried at cost should be recognized in the Profit & Loss Account. However this is not being done. Also scrap is accounted for at nil value and net realizable value while as per the provisions of AS- 10 clause-24 material items from active use and held for disposal should be stated at the lower of their net books value and net book value and shown separately in the financial statements. The same has not been done thus leading to the violation of AS-10. (3) In the absence of Contribution, Grants, Subsidies towards the cost of capital assets being deducted from the gross value of asset as also in case of replacement of asset, WDV of the asset, WDV of the asset discarded is not reduced from the Gross value of the asset, depreciation is charged on the full gross value of the asset. This is against the provisions of AS-6. Thus, depreciation is overstated and net loss, which is shown as subsidy receivable from Govt. is overstated by the amount the quantification of which is not possible in the absence of full details of discarded assets and the allocation of Contributi....
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....ly that it will transfer these reserves to general reserves, while leaving the profit untouched. In the instant case the assessee has charged depreciation on fictitious cost directly to P & L, neither considering these reserves as deferred income over the useful period of life in systematic and rational bases, nor crediting an equal amount of excess depreciation from these reserves to P & L account, and in this way has reduces in profit to that extent, or alternatively has actually credited the general reserves to the extent of excess depreciation. Thus based on these notes to accounts and the findings in case of Jd.VVNL, Jodhpur the A.O. has alleged to disallow the claim of depreciation on fixed assets being service connections and lines considering that the reserves created out of subsidies, grants and contribution by consumer are not refundable and thus being the Capital Receipt should be deducted from the cost of fixed assets for which received and only on the remaining block of asset the depreciation should be allowed. The A.O. has alleged to disallow portion of depreciation u/sec. 32(l)(iii) read with section 43(1) Explanation 10 without considering the following facts:....
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.....O. has erred to reduce the same from the cost and disallow portion depreciation. The Company cannot act beyond the Accounting Norms approved for them and is also Governed by Accounting for Electricity Companies and accordingly the treatment has been made in books and the A.O. has made disallowance without considering the Accounting applicable to Electricity Companies. e. Alternatively the A.O. while making the deduction from Fixed Assets Block for Reserves & Surplus has not followed consistent method i.e. in A.Y. 2001-02 and 2002-03 has not deducted amounts for material cost variance under the head Reserves & Surplus but in the later years for deduction of Reserves & Surplus from Fixed Assets the amount of Material Cost Variance has also been deducted which is not in relevance with the Fixed Assets Cost and is rather related to Material Cost and thus the Block of Assets has reduced for depreciation by this amount and the eligible depreciation has also reduced. Further the addition to Fixed Assets as per books has been taken by A.O. at other arbitrary figures which have also been corrected in chart. Thus as per the chart on the theory of A.O. the depreciation disallowable come t....
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....ment is so received, shall not be included in the actual cost of the asset to the assessee.] A bare reading of the Explanation 10 of Section 43 of the Act, which clearly provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government in the form of a subsidy or grant or reimbursement, then, so much of the subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Admittedly, the amount has been received by the assessee in the form of grant/reimbursement/subsidy from the state Government therefore, in our view, the order passed by the ld CIT(A) is required to be upheld and the value of the assets shall be taken by the ld Assessing Officer after adjusting the subsidy/grant/reimbursement from the State Govt. or the other government departments. Accordingly, this issue is decided against the assessee and in favour of the revenue. 15. The ground No. 4 and 5 of the assessee's appeal for the A.Y. 2003-04 are interlinked and are against application of Section 115JB of the Act and also charging of interest U/s 234B on MAT Tax. In th....
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....llant furnished complete chart regarding calculation of depreciation for the period A.Y. 2001-02 to A.Y. 2006-07. The A.O. was also asked to verify these figures from records. As a result of this verification, it was found that depreciation disallowed U/s 43(i) for block of assets should be Rs. 17,75,49,581/- instead of Rs. 31,61,86,877/-. The A.O. is directed to take this figure for the purpose of calculation of book profits U/s 115JB. There will be no change in the other figure of Rs. 16,20,20,005/- on account of depreciation on non-existent assets. Ground No. 3 is thus partly allowed." 17. Now the assessee is in appeal before us. The ld AR of the assessee has submitted as under:- The A.O. has alleged to consider all the disallowances as made above for adjustments to book profit considering that the Annual Accounts as prepared are not proper as per the Companies Act and excessive depreciation claimed in books the Book Profit can be recomputed by A.O which have been confirmed by Ld CIT (A) considering that the books are itself considered not proper as per Companies Act as pointed by Statutory Auditors and hence the adjustment made to Book Profit by AO are valid. Whereas t....
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.... the relevant previous year in accordance with the provisions of the Act governing such company:] Provided that while preparing the annual accounts including profit and loss account,- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956): Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- (i) The accounting policies; (ii) The accounting standards adopted for preparing such accounts including profit and loss account; (iii) The method and rates adopted for calculating the depreciation, Shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for prepa....
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....d to P & L A/c to the extent it does not exceed the amount of depreciation on account of revaluation of assets [applicable from the assessment year 2007-08]. e. the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books of account ["loss" for this purpose does not include deprecation and, therefore in a case where an assessee has shown profit in a year, but after adjustment of depreciation, it results in loss, no adjustments in book profit is allowed]; or f. the amount or profit eligible for deduction under section 80HHC; or g. the amount or profit eligible for deduction under section 80HHE; or h. the amount or profit eligible for deduction under section 80HHf; or i. the amount or profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 and ending with the assessment year during which the entire net worth [i.e., paid-up capital plus free reserves) of such company becomes equal to or....
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..... 1956 are in consistent with the said Electricity Supply Act. (Pg. 77 of Paper Book or Pg 20 of Annual Accounts for the F.Y. 2002-03). Thus when the applicant has been maintaining its accounts as per the provisions of Electricity Supply Act read with Electricity (Supply) Annual Accounts Rules 1985 and the provisions of the Companies Act to the extent not inconsistent with the Rules under Electricity Act. [Electricity Supply Act since has been repealed by the Electricity Supply Act, 2003 still old rules as per section 185(2)(d) of the Act of 2003, all ruled made under sub section (1) of earlier Act of 1948 shall continue until modified). (3) Further the Adjustments regarding calculation of depreciation to change book profit by A.O. is only limited to the method and rates adopted for calculating the depreciation and the same is not applicable on the value of fixed assets as per books. The A.O. has relied on certain remarks of Statutory Auditors regarding Accounting Standards and physical verification of fixed assets by him for changing the Book Profit for calculation of MAT whereas the Auditor has no commented or disallowed any of these assets he has just ....
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....s. 9,32,66,120/- on account of prior period expenses. On this ground, the ld CIT(A) had allowed the appeal of the assessee by observing as under:- "3.3 From the perusal of assessment order, it is found that the issue regarding prior period expenses has been decided in favour of the appellant by Hon'ble ITAT Jaipur Bench for A.Y 2002-03 and 2003-04. In its order dated 17.10.2008 in case of appellant, in ITA No. 1019/JP/2007 Hon'ble ITAT made the following observation:- "The Id CIT(A) while deciding the issue has followed the decision of Jaipur Bench of the Tribunal on the issue in the case of DCIT v/s Chambal Fertilizers and Chemicals Ltd., 34 TW 59 (Jpr.) holding that the deduction of an expenditure will be admissible only in the year in which it crystallized and accounted for on the basis of system of accounting regularly followed by the assessee. An identical issue in the case of assessee for the A. Y 2002- 03 has also been decided by Jaipur Bench of the Tribunal in favour of the assessee vide its order dated 31.10.2007 in ITA No. 272/JP/2006. Under these circumstances, we are of the view that the Id CIT(A) was justified in accepting the case of the assessee on the is....