TMI Blog2013 (1) TMI 311X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted by the Revenue. The assessee has claimed depreciation of those machineries from the A.Y. 1997-98. This fact came to the knowledge of the AO in the course of assessment proceedings for the AY 2004-05 & action was initiated u/s. 148 to reduce the WDV of the relevant block of assets and withdraw the depreciation already granted to the assessee in the past. Such action was initiated only from A.Y. 2001-02 to 2006-07. 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. The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT's Circular dated 23.09.1988 is that once the various assets are clubbed together and become 'block asset' within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset in so f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing off the unabsorbed depreciation against the total income without giving effect to the brought forward business loss reported in the return of income of earlier years - Held that:- CIT(A) has directed the AO to verify the records and allow the claim of the assessee directing to carry forward business loss should be first set off and thereafter the unabsorbed depreciation has to be set off. Section 72 gives priority in the matter of setting off of carry forward business loss and depreciation, and it lays down that carry forward business loss has to be set off against business income for that assessment year. Section 32(2) provides for set off of unabsorbed depreciation. Those provisions are subject to provisions of section 72(2) which provides that set off has to be first given for carry forward business loss. It is thus clear that the claim of the assessee that priority of set off should be brought forward business loss and thereafter unabsorbed depreciation is found to be correct. The AO is accordingly directed to verify and give effect, keeping in mind the observations referred to above. - IT Appeal Nos. 751 to 755, 771 to 773, 1131 & 1164 (Bang.) of 2010 And 349 (Bang.) of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 manufacturing facilities at Hoskote plant, Bangalore, wanted to import machineries. The assessee made an application to RBI for opening foreign currency account outside India. RBI imposed a condition that the assessee should obtain bank guarantee from various suppliers for 1/3rd advance payment for the purchase of machinery. This was not feasible for the assessee. The assessee had appointed another group entity viz., Courtaulds Engineering Ltd. UK ("CEL, UK") as engineering contractors to design, engineer and carry out the project management of building the factory for the assessee. Since getting enough bank guarantees from the suppliers was not possible, the assessee sought assistance from CEL, UK. CEL, UK funded the first instalment of advance payments and the equipments were imported and installed at Hoskote plant. This happened in April, 1996. 4. In the F.Y. 1997-98, the Akzo Nobel group acquired Courtau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aiver 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 depreciation allowable on plant machinery by reducing the WDV on which depreciation had to be allowed for AY 01-02. Similarly in A.Y. 2002-03, and 03-04, depreciation was reworked by making adjustments to the WDV in proceedings u/s. 148 of the Act. In A.Y. 2004-05 to 2007-08, in the assessment proceedings u/s. 143(3) of the Act, the AO reduced the depreciation consequent to adjustment of the opening WDV which was made in A.Y. 2001-02. 8. On appeal by the assessee, the ld. CIT(Appeals) was of the view that the entire waiver of the loan cannot be reduced from the WDV of the block of assets. He held that depreciation allowance already allowed from the date of purchase of plant machinery till A.Y. 2000-01 should alone be reduced from the opening WDV as on 01.04.2001. The relevant findings of the CIT(A) in this regard were as follows:- "4.5 I have considered the appellant's submission put forth above. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance 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 appellant's submissions put forth above. The fact remains that the original cost of assets purchased during the FY 1994-95 to 1996-97 was reduced from the WDV of assets for the AY 2001-02. Further, it is contended that it is not open to the AO to make adjust of cost of assets of earlier years in a subsequent year. The provisions of section 43(6) do not envisage reduction of cost of assets in the guise of depreciation and disallowance of depreciation already claimed. The depreciation claimed on imported machinery at Rs. 13,48,08,881/- is worked out as under: Asst. Year Depreciation (Rs.) Cost of acquisition 13,48,0881 1997-98 2,60,81,052 1998-99 2,52,96,992 1999-2000 2,03,20,420 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 asset met directly or indirectly by any authority in the form of "subsidy or grant or reimbursement". 12. The ld. DR reiterated the stand of the revenue as reflected in the orders of the lower authorities. His submission was that the ld. CIT(A) erred in giving partial relief to the assessee and that the order of the AO in this regard should be restored. 13. The parties also made submissions with regard to validity of initiation of reassessment proceedings. On this issue which arises for consideration only in AYs 2001-02 to 2003-04, the CIT(A) had given his decision as follows:- "3.6 I have carefully considered the appellant's submissions and perused the assessment orders. In this context, it would he relevant to mention Explanation 2 to section 147 of the Act, which read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caped 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 ascertained the fact by legal evidence or conclusion. The function of the Assessing officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not the established fact or escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef 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 income. During the course of the assessment proceedings for the AY 2004- 05, the AO noticed that the appellant imported certain machinery from Akzo Nobel International, the sister concern of the appellant, during the FY 1994-95 to 1996-97 worth Rs. 13,48,09,000/-. The payment to the sister concern could not be made as the RBI did not grant permission for the same as it involved release of foreign exchange. Consequently, the foreign company i.e. the seller, waived the liability of Rs. 13,48,09,000/-during the FY 2000-01. The waived amount of Rs. 13,48,09,000/-was credited to the Capital Reserve Account, which reduced the sundry creditors in the appellants books. No adjustment has been made to the WDV of the concerned assets on account of waiver either prior to or in the financial year 2000-01. Observing thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 relevant block of assets and withdraw the depreciation already granted to the assessee in the past. Such action was initiated only from A.Y. 2001-02 to 2006-07. A notice u/s. 148 for AY 2001-02 was issued by the AO on 01.02.2007. This is probably because the AO could not reopen the earlier assessment years as they could not be reopened in view of the limitation of time laid down in section 149 of the Act. The question now to be decided by the Tribunal is as to whether the action of the revenue could be justified. The relevant provisions of law in this regard have to be seen. The concept of "block of assets" was introduced with effect from 01.04.1988. Section 32 (1) of the Income Tax Act, 1961 (the Act) reads as follows: "32. (1) In respect of depreciation of - (i) building, machinery, plant or furniture, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard 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 block of assets instead of the present system of depreciation on individual assets at paragraph 6.3, the Board stated as follows: "As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregate has to be the record keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act, necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee: Provided that were such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee." 21. The aforesaid Explanation was explained by the Board in Circular No.772 dated 23.12.1998 [reported in (1999) 235 ITR (St.)35]. The relevant part of the Circular is reproduced below: "22.2 Explanation 10 provides that where a portion of the cost of an asset acquired by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee. Even this can be done only when after the waiver of the loan which was used to acquire machinery. By that time if the assessments for that AY gets barred by time, the revenue is without any remedy. Even the provisions of Sec. 155 do not provide for any remedy to the revenue in this regard. 23. The AO has made a reference to the provisions of section 43(6)(b) of the Act. In our opinion, these provisions were not applicable to the present case. The applicable provisions to the present case are section 43(6)(c) of the Act. It is also noticed that the Hon'ble Supreme Court in the case of Tata Iron Steel Co. Ltd. (supra) has taken a view that repayment of loan borrowed by an assessee for the purpose of acquiring asset has no relevance to the cost of assets on which depreciation has to be allowed. Similar view was also expressed by the Hon'ble Kerala High Court in the case of Cochin Co. (P.) Ltd.'s case (supra), as already stated, as follows:- "WDV as at the beginning o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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