TMI Blog2021 (9) TMI 1026X X X X Extracts X X X X X X X X Extracts X X X X ..... lly put to use in May with the year ending on 31st March, interest on capital borrowed for the purchase of the asset from the date of purchase in February to the year ending in March and from the beginning of the next financial year in April up to the putting it to use in May is required to be taken as part of `actual cost of the asset. Thus, it is graphically clear that the interpretation suggested by the ld. AR for restricting the modification of the `actual cost of an asset only to the year of its purchase does not sound well. One cannot reduce the amount of depreciation on a part of the value of the block of asset without correspondingly reducing the w.d.v. of the block of assets as per a manner known to law. Presently, we are confronted with a situation in which the waiver took place in the year ending 31.3.2006. AO did not reduce the amount of waiver from the value of block of asset for that year and allowed the gross value of the block to attain finality. The position continued as such in later years as well when the assessee kept on claiming depreciation on ₹ 40 after giving a similar Note in the Final accounts. In the year ending 31.3.2011 under consideration, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Reserve. 3. Succinctly, the factual panorama of the case is that the assessee is engaged in manufacturing Moulds and Plastic moulded components. A return was filed and the assessment was finalized determining the total income at ₹ 2.29 crores. The case was reopened by means of a notice u/s 148 of the Income-tax Act, 1961 (hereinafter referred to as the Act ). While finalizing the assessment u/s 147 of the Act, the AO observed from para 27 of Notes to accounts that a sum of ₹ 45,18,582 payable to a group company Sermo Sable (SS), on account of purchase of Plant and machinery, ceased to be payable and was straightway credited to Capital reserve in the Financial year 2005-06 without reducing it from the asset value. The assessee had claimed depreciation of ₹ 6,54,950 in the previous year relevant to the A.Y. 2011-12 under consideration on such amount which was transferred to Capital reserve account. On being show caused, the assessee submitted that write back of the capital creditor was made in the A.Y. 2006-07 and it had no relation with the year under consideration. Not convinced, the AO disallowed depreciation claim of ₹ 6,54,950. The ld. CIT(A) ech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Sermo Sable. But the Company has not yet received the court order for liquidation. Accordingly, the Company has written back Creditors amounting to ₹ 45.18 lakhs. Since, this liability was pertaining to purchase of Plant and Machinery (which is in use for production) the amount written back has been accounted as Capital Reserve. RBI approval is required for the writing back of the creditors as the amount involves foreign currency. But the Company has not taken any approval from RBI for the same since the Company has not yet received the Court order for liquidation of Sermo Sable. A similar Note was given by the assessee in its Final accounts for all the succeeding years including the year in question. 6. Section 32 is a provision governing the grant of depreciation. Sub-section (1) mandates that depreciation: `shall be allowed in the case of any block of assets, (at) such percentage on the written down value thereof as may be prescribed . It is the `written down value of the block that constitutes the bedrock for allowing depreciation and hence it is out of point to claim or allow depreciation on any value other than the w.d.v. of the block. The term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of waiver of loan in respect of an asset which was purchased in an earlier year. Once depreciation is to be granted u/s 32 on the w.d.v. of the block of asset, it is vivid that no disallowance of depreciation can be made without first lawfully reducing the w.d.v. of the block. 8. Clause (a) of section 43(6) and sub-clause (A) of section 43(6)(c)(i) read with section 43(6)(c)(ii) unequivocally provide for recognizing the `actual cost of any asset falling within that block which is acquired during the year. Thus the definition of `actual cost as given in section 43(1) assumes significance on the question of granting depreciation. This provision opens by providing actual cost to mean: `the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority . It is followed by two provisos and some Explanations, which are not relevant for our purpose except the Explanation 10, which 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 or any authority established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset. A reading of the proviso to section 36(1)(iii) in juxtaposition to the Explanation 8 to section 43(1) makes it discernible that any interest paid on capital borrowed for acquisition of an asset till the date such asset is first put to use is not allowable as deduction but is to be treated as a part of its actual cost. Suppose an asset is purchased in the month of February and is actually put to use in May with the year ending on 31st March, interest on capital borrowed for the purchase of the asset from the date of purchase in February to the year ending in March and from the beginning of the next financial year in April up to the putting it to use in May is required to be taken as part of `actual cost of the asset. Thus, it is graphically clear that the interpretation suggested by the ld. AR for restricting the modification of the `actual cost of an asset only to the year of its purchase does not sound well. 10. Comi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. At this juncture, it is worthwhile to take note of clause (xviii) to section 2(24) inserted by the Finance Act, 2015, w.e.f. 1.4.2016. It provides that: `assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than,- (a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or . shall constitute income. Section 2(24)(xviii) is activated in the year when the `waiver or concession takes place. It assumes the character of income in the year of its receipt. The point worth noting is that whereas the subsidy or grant or reimbursement received in terms of Explanation 10 to section 43(1) adjusts the actual cost of asset, any amount of such incentive or reimbursement or waiver etc. which does not fall within the realm of the Explanation 10 assumes the character of income directly in the year of its receipt without disturbing the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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