TaxTMI 
TaxTMI 
2024 (10) TMI 80
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....epreciation of Rs.1,68,21,472/- due to reclassification of assets of as calculated by the learned Pr. CIT being contrary to law may kindly be deleted. Alternatively: If the Disallowance of Depreciation of Rs.1,68,21,472/- due to rectification of assets is confirmed, then the appellant humbly prays that appellant may kindly be granted deduction of the said depreciation in earlier years in view of depreciation, being mandatory deduction as per section 32 of the Act. (III) Disallowance u/s 40(a)(ia) of Rs. 58,56,612/- on account of short deduction of IDS on rent expenses as calculated by the learned Pr. CIT being contrary to law may kindly be deleted. (IV) Initiation of penalty proceedings may kindly be quashed." 3. Perusal of the order of the ld.Pr.CIT reveals that the assessment order passed in the case of the assessee under section 143(3) of the Act for the impugned assessment year i.e. Asst. Year 2018-19, was found to be erroneous causing prejudice to the Revenue on two counts viz; i) Incorrect allowance of claim of depreciation pertaining to prior period amounting to Rs.1,68,21,472/-; ii) Non-examination of the issue of ren....
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....cts on records. The brief facts as discussed here in above are that assessee company was following accounting policy of capitalising amount paid to Government Authorities towards permission for use of land for laying pipelines, along with cost of pipelines and depreciation was charged on useful life of assets in books of accounts. In current year, assessee company has changed the Method of accounting where by such assets are considered as ROU/ROW as intangible assets in books of accounts, Based upon change in accounting policy, assessee has also made similar changes in Block of Assets of Income Tax wherein assets are reclassified as Intangible Assets from Plant & machinery. Due to such change in books of accounts and similar treatment in Income Tax, Assessee has claimed further depreciation of Rs 1,68,21,472/- under other deduction in ITR filed by it and claimed that assessee has wrongly claimed lower depreciation in earlier years hence it is entitled to such Prior Year Depreciation in current year. 4.1 It is found at assessee has already claimed depreciation on similar assets considering it as part of Block of Assets of Plant & machinery. Simply because assessee has chang....
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....s as well as similar treatment followed by other players in the industries, and accordingly, cost incurred for ROU/ROW was treated as an intangible assets; that as a consequence to this change in accounting policy, the intangible assets of the assessee was increased by Rs.11,20,19,420/- and plant & machinery decreased by the said amounts, and as a consequence of re- classification of the assets from plant & machinery to intangible assets, the rate of depreciation eligible/applicable thereon was 25% as opposed to earlier rate of depreciation applied on plant & machinery at 15%. The assessee reworked the WDV of these re- classified assets as on first of April of the impugned year applying the increased rate of depreciation, and the short depreciation claimed as a consequence in the earlier years was accordingly claimed in the impugned year. The contention of the ld.counsel for the assessee was that higher depreciation of earlier years claimed in the impugned year was based upon the change in accounting policy in the impugned year; that therefore, the expenditure on account of increased depreciation had crystalized in the impugned year, and therefore allowable in terms of section 37(1....
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....at beginning of the year adjusted for addition/ deletion made thereto. That no question therefore arises for allowing any earlier year depreciation as per the said section. The Ld.PCIT also refers to section 37(1) of the Act, allowing only expenditures incurred during the year, for denying this claim of earlier years. 12. The fact of the matter to be kept in mind is that the assessee had during the impugned year changed its accounting policy for accounting of land user rights acquired from the government for laying pipelines, which was earlier accounted for as Plant and Machinery along with cost of pipelines, to Intangible asset of Right of User/ Right of Way. That as a result the WDV of Plant and Machinery as at the beginning of the year was reduced by the value of such reclassified intangible assets contained therein creating thus a new block of asset of intangible assets attracting higher rate of depreciation of 25% as opposed to 15% applied on Plant and Machinery. The assessee also had recalculated the WDV of this new block of asset by applying the higher rate of depreciation applicable from the beginning, i.e since the acquisition of the ROU/ ROW. And the difference between....
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....stroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced- (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b)by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value; (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect....
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....43(6) of the Act. The relevant sections, more particularly section 43(6) of the Act, does not provide for any adjustment to WDV of block of assets on account of any reclassification of assets. The Ld.PCIT has in effect applied the provision of section 32 of the Act for holding prior period claim of depreciation not allowable, to only part of the impact of reclassification of asset effected by the assessee. This is not justified. The Ld.PCIT ought to have considered the reclassification of asset in totality, considering the circumstances in which it was effected and then proceeded to find whether there was any error in the order of the AO causing prejudice to the Revenue in allowing the claim of prior period depreciation to the assessee. The finding of the Ld.PCIT therefore that the claim of prior period depreciation was not tenable in terms of section 32 of the Act, is not completely and palpably convincing. 15. In fact, Ld.Counsel for the assessee has demonstrated before us that considering the reclassification of asset in totality the view taken by the AO that the claim of the assessee of prior period depreciation was allowable is a plausible view. 16. As is evident from th....
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.... to depreciation under section 32 of the Act, and therefore, the accounting standard prescribed by the ICAI would be applicable. According to which, therefore, the claim of the assessee of the prior period depreciation arising on account of change in accounting policy was allowable. 19. We find merit in the contention of the Ld.Counsel for the assessee. As noted above section 32 of the Act allows depreciation on the WDV of the block of assets. It does not cater to the situation of change in WDV on account of change in accounting policy as in the present case. Ld.Counsel for the assessee has demonstrated AS 16 issued by the ICAI to provide for dealing with such situation by claiming all previous year depreciation, accruing on account of change in policy, in the year in which change is effected. Therefore the allowance of claim of prior period depreciation to the assessee arising on account of change in accounting policy appears to be plausible view. 20. On the finding that there is no prejudice caused to the Revenue by allowing claim of prior period depreciation. 21. During the course of hearing before us, ld.counsel for the assessee was specifically asked to demonstrate, w....
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.... 23. We have noted that the assessee had also contended before the AO that depreciation is allowable whether or not claimed by the assessee. Expl 5 to section 32 of the Act states so in very clear terms as under: Explanation-5 For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income. Therefore, the assessee could not have been denied depreciation in preceding years for not having claimed so and if so allowed, there is no loss of Revenue to the Department as noted above by us. There is no prejudice therefore caused to the Revenue and exercise of revisionary jurisdiction, therefore, in the present case is, unwarranted since it fails to satisfy the twin primary conditions of the assessment order being erroneous and causing prejudice to the Revenue, both of which conditions need to be satisfied for a valid exercise of revisionary power u/s 263 of the Act. 24. For the above reasons, therefore, we do not agree with the ld.Pr.CIT of the assessment order being erroneous causing prejudice to the Revenue for ha....