Depreciation on Mollasses Tanks in sugar mills – some interesting issues, which can be applicable in many cases where depreciation is allowable.

[DEV KUMAR KOTHARI]

Recent judgment of ITAT:

 Recent Judgment, which is under study in this article:

2022 (7) TMI 622 - ITAT KOLKATA - SASA MUSA SUGAR WORKS PVT. LTD. VERSUS DCIT, CIR – 10 (2) , KOLKATA

Unreported old judgment of ITAT in case of Vishnu Sugar Mills Ltd in which depreciation was allowed by ITAT, Kolkata dated 21.08.2001 in ITA no. 873 (Cal) of 1996 For AY 1992-93.

Provisions : Sections 28, 32 and 43 of Income tax Act, 1961.

Depreciation on molasses tanks:

In the case of Sasa Musa Sugar Works Ltd  (supra.) assessee earlier used to claim depreciation on molasses tanks and it was allowed by the AO.

 However, when assesse had to make a statutory contribution to “Molasses Tank Reserves “ as per applicable provisions  of Molasses Control Act / Sheera  Niyantran Adhiniyam and such contribution to reserve was claimed and allowed, so  the AO denied depreciation on molasses tanks taking view that it will amount to double deduction.

Assessee also stopped to claim depreciation from assessment year 1989-90 on molasses tank, as per stand taken by the AO to avoid litigation.

However, after understanding  from the author,  and clarity of related issues through several judgments about Mollasses Reserve, real aspects that contribution to ‘molasses tank reserve’ is distinct obligation and it has nothing to do with molasses tanks acquired by assessee and used for business purposes.  Contribution to Molasses Reserve is diverted by over riding title and is not income, etc. the decision to claim depreciation was made by assessee.

It was found that any part of costs has not been met out of Mollasses Reserves and entire costs have been incurred by assessee capitalized as fixed assets in nature of Mollasses Tanks.

Molasses tank  is specially designed and fabricated with special quality of materials and is  necessary apparatus to store molasses during  production season  and during period before it is  sold over long period of time. Furthermore, such tanks are also necessary to prevent pollution , which molasses will make if kept in open space.

Therefore, in AY 2012-13 on advice of the author, assesse  preferred claim for depreciation. Claim  was made by way of note below computation of income filed before the AO for his consideration. This was not included in depreciation claimed  in ITR, with a view to ‘play safe’ policy adopted by assessee and also because there was no taxable income.

 The AO  did not consider  the claim. In first appeal, CIT(A) restored the issue to the AO but his directions were not clear and hence not acted upon by the AO. Therefore, in second appeal claim was made before the Tribunal for clear directions to the AO.  Assessee also took a ground for lower authorities not having  followed binding precedence relied on by assesee. This was considered as general ground but it is an important ground in relation to all other grounds taken by assessee.

The relevant ground before Tribunal is taken under heading -

From order of ITAT with highlights added for analysis, catch points:

B. Grounds to seek further relief:

1) For that Ld. CIT(A) has passed order denying relief claimed, without full and proper consideration of facts and circumstances, details, written submissions and binding precedence relied on by the assessee further Ld. CIT(A) did not apply rule to apply view in favour of assessee. (original ground B.1)

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6) For that Ld. CIT(A) has restored to the Ld. A0, issue relating to depreciation allowance vide ground no. 7 & 8, before him, but there is lack of clarity, Ld. A.O has not considered restored issues while giving effect to the order of Ld. CIT(A). Therefore, Ld. A.O may be directed to allow relief by way of depreciation allowable, correctly on (A) new assets and (b) on correct WDV of molasses tanks, as claimed before lower authorities.

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 14. In respect of ground no. B.6 relating to claim of depreciation on molasses tanks for which the ld. CIT(a) had directed the AO to allow the depreciation after verification that the new plant & machinery were indeed put to use by the assessee. Assessee has come before the Tribunal seeking clarity on the direction given by the ld. CIT(A) to the AO. Ld. Counsel of the assessee submitted that the claim for depreciation on molasses tanks was made before the ld. AO which was not considered in proper perspective. He pointed out that detailed explanation was again submitted before the ld. CIT(A) on the claim of depreciation on molasses tanks which is reproduced as under: "Depreciation on Molasses Tanks:

Storage Reserve is under separate law, and it has nothing to do with cost of Molasses Tank. However, in view of past assessments we have reduced depreciation on Molasses Tanks from our depreciation claim. Please allow depreciation on correct WDV after considering only the amount of depreciation actually allowed in earlier years, if any. There has not been any release from molasses storage tank fund by the concerned authorities. As depreciation has not been claimed / allowed the actual cost may be carried forwarded as W.D.V. for allowing depreciation in future. Molasses storage tank reserve amount is diverted at source by way of overriding title as held by the Supreme Court. Therefore, depreciation on molasses tanks is allowable because entire cost has been met by us. We claimed and AO allowed depreciation till assessment year 1988-89 and thereafter depreciation was not claimed and allowed, although, details were furnished in depreciation chart every year and amount allowable on molasses tank disallowed by reducing total depreciation allowable. Therefore, written down value c/f from assessment year 1988-89 and cost of additions for molasses tanks added thereafter is WDV eligible for depreciation allowance. The information is as follows:

(Note: The table can be seen in judgment of Sasa Musa reported in this website.)

14.1 Ld. Counsel placed reliance on the decision of Co-ordinate Bench of ITAT, Kolkata in the case of Vishnu Sugar Mills Ltd. (supra)  wherein depreciation on molasses tanks was allowed to the assessee. In the light of these submissions and claim of the assessee, we further direct the AO to allow the claim of the assessee on depreciation on molasses tanks by making the correct computation in respect of new assets and the correct written down value (WDV) of the molasses tanks, considering the submissions placed on record. The assessee is already directed to furnish all the details and documentary evidences in support of its claim for due verification by the ld. AO to assist him in arriving at the correct amount of depreciation allowable on the molasses tanks. Accordingly, this ground of the assessee is allowed for statistical purposes. Thus cross-objection of the assessee is partly allowed.

Conclusions and learning:

In the above order we find the following interesting legal issues:

         A.  WDV is to be determined by deduction from actual cost depreciation actually allowed in past in assessment orders.

        B. Even if depreciation was not claimed  due to mistake or misunderstanding of assessee and it was not allowed by AO  or if it was claimed by assessee but was not allowed by the AO. Depreciation, if allowable can be claimed in later years on correct WDV as per provisions of I.T.Act.

         C. If depreciation has not been actually allowed in assessment, it cannot be deemed to have been actually allowed. Depreciation, which was not actually allowed though allowable, means unabsorbed depreciation can alternatively be added in current depreciation.

          D. Depreciation claim is a vital issue in computation of income under heads like Business and profession and other sources. Care should be taken for proper claims. In case due to mistake, misunderstanding or lack of clarity depreciation has not been claimed in past, then also depreciation can be claimed on proper reasoning and explanation. Rule of consistency ( mistaken no claim) will not apply.

E. These issues may be applicable in other cases also where some statutory reserves are to be created  for general public purposes. Unless any fund is released to assesse from such funds, contribution or any part of it cannot be reduced from actual cost of assets.