2025 (6) TMI 1331 - HC - Income Tax

Disallowance of depreciation on the assets of beverages division - as per AO commercial production had not commenced subsequent to the trial run - ITAT allowed claim - HELD THAT - The commercial production could not be commenced due to some public agitation. Assessee had even done a trial run which was not disputed by the lower authorities and it was established that during the trial run of the beverages division that the assessee undertook raw material was consumed and production during the trial run was sent for analysis and found suitable for marketing purposes. We agree with the ITAT that it was clearly beyond doubt that the beverages division was ready for commencement for commercial production but due to unavoidable circumstances which were beyond the control of assessee commercial production did not commence. The reason as noted earlier was due to certain public agitation. When assessee had completed all the required formalities for start of commercial production then merely because the commercial production could not commence due to the circumstances for which assessee is not responsible the claim of depreciation as rightly held by the ITAT cannot be denied solely on that basis. ITAT has rightly held that in order to get depreciation u/s 32 of the Act it is not necessary that the machinery in question should have been actually used in the relevant previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year though not actually used due to circumstances beyond assessee s control. Assessee had not started or commenced new business but had only established a new division in its on-going business. Indisputably the beverages division had become part of block assets and was so treated by assessee in its books of accounts. Therefore once depreciation is allowable on entire block of assets even if some of the assets of the block have not been used existence of an individual asset in the block of assets itself amounts to use for the purpose of business. Therefore the assessee would be entitled for depreciation on beverages division. Decided in favour of assessee. Disallowing of expenditure due to cane price fixed - lower authorities denied the claim of assessee on the ground that the said expenditure crystallized on 27.07.2004 and 29.10.2004 and accordingly pertained to AY 2005-06 and not to AY 2006-07 - HELD THAT - The fact that the orders under Clause 5A of the Order were received by assessee during May and June 2005 has been factually found to be correct. We also find no reason as to why assessee should charge the expenditure in the subsequent year if the orders were received in the earlier year when the expenditure is allowable without any dispute. We find that the lower authorities denied the claim of assessee on the ground that the orders cannot be received in the month of May and June 2005 when they were issued in July and October 2004. The denial is only on the basis of conjecture and surmises and without any material or evidence to substantiate the disallowance of claim of the assessee. It is not the case of the revenue that assessee received the orders immediately after it was notified as the Assessing Officer has not given any finding that the orders dated 27.07.2004 and 29.10.2004 were dispatched by the Government immediately after the date of notification. We see no reason to disbelieve the assessee that these orders were received by assessee on 06.05.2005 and 15.06.2005. Therefore as the expenditure is allowable in either AYs 2005- 06 or 2006-07 there is no reason as to why assessee will claim the expenditure in a different year than the year in which it actually crystallized. Therefore we agree with the finding in the facts and circumstances of the case that the expenditure as a result of order passed under Clause 5A of the Order has been crystallized only when the assessee received the Government orders. Decided in favour of assessee. Disallowance of deduction claimed on an intangible asset (goodwill) - HELD THAT - We find that the assessee has been consistently maintaining this method of accounting and treating the extra price paid as advance to farmers during the period of orders under Clause 5A were awaited. It is clear therefore that the payment on this account was made by assessee for procurement and uninterrupted supply of sugarcane and therefore the expenditure was closely related to the business of assessee. When the payment is not disputed and the purpose of payment is also not in dispute we see no justification in denying the claim of the said expenditure as business expenditure only on the ground that the assessee treated the said payment as advance to the farmers under the nomenclature of goodwill . Since the excess amount was crystallized only after the sugarcane price was fixed under Clause 5A of the Order then when the additional expenditure is allowable as per the order under Clause 5A the excess payment made by assessee which cannot be recovered in the facts and circumstances nature of transaction and practice in the business of assessee is also allowable as business expenditure.Decided in favour of assessee. Computation of book profit u/s 115JB - As in view of our answers given to the first three issues we decide this issue also in favour of assessee and against the revenue when the amount once added into the net profit has to be excluded again from net profit while computing the book profit u/s 115JB.

Summary

The core legal questions considered by the Court were:

1. Whether depreciation on the assets of the beverages division is allowable when commercial production had not commenced but the assets were ready for use during the relevant assessment year.

2. Whether the assessee can claim expenditure relating to additional cane price fixed by government orders issued in an earlier year but received by the assessee in the subsequent year, consistent with the mercantile system of accounting.

3. Whether the assessee can claim deduction of an amount treated as an intangible asset (goodwill) representing payments made over and above statutory cane prices in earlier years, when the payments were recorded as advances and not claimed as expenditure in those years.

4. Whether the assessee is entitled to deduct Rs. 25 crores of Cane Equalization Fund from net profit while computing book profit under Section 115JB of the Income Tax Act.

Issue 1: Depreciation on Beverages Division Assets

The legal framework involves Section 32 of the Income Tax Act, which permits depreciation on assets used for business purposes. The Court examined whether actual use in the relevant year is necessary or whether readiness for use suffices.

The Court noted that the assessee had established a beverages division pursuant to a valid agreement and obtained all necessary statutory permissions. A trial run was conducted, raw materials were consumed, and production was analyzed and found suitable for marketing. The only impediment to commercial production was public agitation beyond the assessee's control.

The Court agreed with the Tribunal's reasoning that actual use of machinery in the relevant year is not mandatory for claiming depreciation. It is sufficient if the asset is ready and available for use. Since the beverages division was integrated into the existing business and formed part of the block of assets, depreciation on the entire block, including the beverages division assets, was allowable. The Court emphasized that "existence of an individual asset in the block of assets itself amounts to use for the purpose of business."

Competing arguments that commercial production had not commenced and hence depreciation should be disallowed were rejected as the delay was due to circumstances beyond the assessee's control.

Conclusion: Depreciation on the beverages division assets was allowable despite the absence of commercial production in the relevant year.

Issue 2: Timing of Deduction for Additional Cane Price under Clause 5A of Sugarcane (Control) Order

The relevant legal principle is the mercantile system of accounting, where expenses are recognized when the liability crystallizes. The government issued orders under Clause 5A fixing additional cane prices on 27.07.2004 and 29.10.2004, which pertained to AY 2005-06. However, the assessee received these orders only in May and June 2005, i.e., during AY 2006-07.

The Assessing Officer disallowed the claim on the ground that the liability crystallized in AY 2005-06. The Court found no evidence that the orders were dispatched promptly after notification or that the assessee had received them earlier. The Tribunal's finding that the liability crystallized only upon receipt of the orders was accepted.

The Court held that since the expenditure was allowable in either AY 2005-06 or AY 2006-07, the assessee's choice to claim it in AY 2006-07 when the orders were actually received was valid. The Revenue's denial was based on conjecture without material evidence.

Conclusion: The expenditure due to additional cane price fixed under Clause 5A was allowable in AY 2006-07 when the orders were received, consistent with mercantile accounting principles.

Issue 3: Deduction of Intangible Asset (Goodwill) Representing Payments Over Statutory Cane Prices

The facts revealed that sugar factories make payments to cane growers over and above statutory minimum prices and Clause 5A prices to ensure uninterrupted supply. The assessee paid Rs. 76.38 crores as agreed price over statutory amounts, recorded as advances to farmers in earlier years, and treated as intangible asset (goodwill) in the books. The assessee claimed deduction of this amount as revenue expenditure in AY 2006-07.

The Revenue disputed the claim on the ground that the expenditure pertained to earlier years and that treatment as goodwill was impermissible.

The Court noted that the payment was not disputed and was revenue in nature. The additional liability crystallized only after the government orders under Clause 5A were received. The assessee's accounting practice was consistent and reflected the commercial reality of payment for cane procurement.

The Court rejected the Revenue's argument that the nomenclature of 'goodwill' invalidated the claim. Since the payment was closely related to business and not recoverable, it was allowable as business expenditure. The Court observed surprise that the assessee did not claim the entire amount as cane procurement expenditure initially but did not find this fatal to the claim.

Conclusion: The deduction claimed on the intangible asset representing additional payments to cane growers was allowable as revenue expenditure in AY 2006-07.

Issue 4: Deduction of Cane Equalization Fund from Net Profit under Section 115JB

The assessee claimed deduction of Rs. 25 crores of Cane Equalization Fund from net profit while computing book profit under Section 115JB. The Assessing Officer disallowed the claim as the amount was debited in the Profit and Loss Appropriation account and not credited to Profit and Loss Account as reserve.

The Court, relying on the favorable findings on the earlier issues, held that the amount once added to net profit should be excluded again while computing book profit under Section 115JB. No separate detailed legal framework was discussed, but the decision followed from the treatment of the amounts in the earlier issues.

Conclusion: The assessee was entitled to deduct Rs. 25 crores of Cane Equalization Fund while computing book profit under Section 115JB.

Significant Holdings:

On depreciation, the Court stated: "in order to get depreciation under Section 32 of the Act, it is not necessary that the machinery in question should have been actually used in the relevant previous year for the purpose of business and it is sufficient if the same is kept ready for use during the relevant previous year, though not actually used due to circumstances beyond assessee's control."

On timing of expenditure recognition, the Court emphasized that "the expenditure as a result of order passed under Clause 5A of the Order has been crystallized only when the assessee received the Government orders," rejecting the Revenue's denial based on assumptions.

On the intangible asset issue, the Court held: "When the payment is not disputed and the purpose of payment is also not in dispute, we see no justification in denying the claim of the said expenditure as business expenditure only on the ground that the assessee treated the said payment as advance to the farmers under the nomenclature of 'goodwill'."

On the Cane Equalization Fund, the Court concluded that the amount "once added into the net profit has to be excluded again from net profit while computing the book profit under Section 115JB."