Case Law Details
PCIT Vs India Medtronic Pvt. Ltd. (Bombay High Court)
The Bombay High Court considered an appeal filed by the Revenue against the order dated 17 January 2018 passed by the Income Tax Appellate Tribunal, Mumbai Bench, for Assessment Year 2010-11. The Revenue proposed three substantial questions of law relating to (i) whether Advertisement, Marketing and Promotion (AMP) expenditure constituted an international transaction under Sections 92B and 92B(1) of the Income-tax Act, (ii) whether the Tribunal was justified in deleting the disallowance of depreciation on plant, machinery and building despite the absence of manufacturing activity, and (iii) whether the Tribunal was justified in deleting the disallowance of payments made to doctors under Section 37(1) on the ground that such payments violated Clause 6.8 of the IMC Regulations.
On Question (A), the High Court noted that the Tribunal had relied upon its earlier decision in Thomas Cook (India) Ltd. dated 31 May 2016 to hold that the disputed AMP expenditure was not an international transaction under Sections 92B or 92B(1). The Court observed that an appeal against the Tribunal’s decision in Thomas Cook (India) Ltd. had already been admitted by the High Court on 26 August 2019 in connected appeals. Since the same issue was already pending before the Court, the present appeal was admitted on Question (A).
With regard to Question (C), concerning the deletion of the disallowance of payments made to doctors, the High Court held that the issue required consideration in light of the Supreme Court’s decision in Apex Laboratories (P) Ltd. v. Deputy Commissioner of Income-tax. Accordingly, the Court admitted the appeal on Question (C) as well.
The Court then examined Question (B), which related to the deletion of the disallowance of depreciation on plant, machinery and building. It referred to the Tribunal’s findings, which recorded that the issue had already been decided in the assessee’s favour in earlier assessment years, including Assessment Years 2002-03, 2003-04, 2007-08 and 2009-10. The Tribunal had observed that although the assessee had discontinued manufacturing operations with effect from 25 January 2002, depreciation continued to be allowable because, after the introduction of the concept of the “block of assets” from Assessment Year 1989-90, depreciation is computed on the aggregate written down value of the block of assets rather than on individual assets.
The Tribunal also noted that the Commissioner (Appeals) had relied upon earlier judicial decisions while allowing the depreciation claim and that the Department had either accepted those appellate orders or had not challenged the depreciation issue before the Tribunal in earlier years. It further observed that Section 38(2) relates to assets used for non-business purposes and does not refer to assets partly used during the year for business purposes. On that basis, the Tribunal deleted the disallowance of depreciation.
The High Court agreed with the Tribunal’s reasoning. It observed that in earlier years the Assessing Officer’s disallowance of depreciation had been reversed by the appellate authorities and those decisions had been accepted by the Department. The Court found that the Revenue had chosen to challenge the depreciation issue only for the relevant assessment year despite there being no change in the factual circumstances. Consequently, it held that Question (B) did not give rise to any substantial question of law requiring consideration by the Court.
In view of these findings, the High Court admitted the Revenue’s appeal only on Questions (A) and (C), relating respectively to AMP expenditure and payments made to doctors. Question (B), concerning depreciation on plant, machinery and building, was not admitted. The Court directed the Registry to communicate a copy of the order to the Tribunal so that the relevant records would remain available when required and ordered that the appeal be heard together with the connected income-tax appeals arising from the Thomas Cook (India) Ltd. matter.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. The above Appeal is filed by the Appellant-Revenue challenging the order dated 17th January 2018 passed by the Income Tax Appellate Tribunal, Bench Mumbai. The Assessment Year in question is A. Y. 2010-11. According to the Revenue, the impugned order gives rise to the following three questions of law:-
“(A). Whether on the facts and circumstances of the case and in law, Hon’ble ITAT erred in relying upon the decision of Thomas Cook India Ltd. (ITAs/1261 & 1238/Mum/2015 dated 31.05.2016) and apply the principle laid down therein, wherein it is held that the transactions in dispute (AMP expenses) is not covered by the provisions of section 92B or 92B(1) of the Act and hence it is not an International transaction?.
(B) Whether on the facts and circumstances and in law the Hon’ble ITAT is justified in deleting the disallowance of depreciation on plant and machinery and Building in AY 2010-11, ignoring the fact that the assessee itself during the assessment proceedings has put forth the disallowable amount of depreciation relatable to the assets treated and attributed towards manufacturing activity by the assessee, where in fact there was no manufacturing activity?”
(C) Whether on the facts and circumstances and in law the Hon’ble ITAT is justified in deleting the disallowance of payment made to doctors, ignoring the fact that the expenditure occurred by assessee is violation of clause 6.8 of IMC Regulations and unlawful which is not allowable u/s 37(1) of the IT Act, 1961.?”
2. As far as Question (A) is concerned, the Tribunal relied upon its decision in Thomas Cook (India) Ltd dated 31st May 2016. It has been brought to our attention that an Appeal from the decision of the Tribunal in Thomas Cook (India) Ltd has been admitted by this Court on 26th August 2019 in Income Tax Appeal No.712 of 2017 with Income Tax Appeal No.713 of 2017. We, accordingly, admit the above Appeal on Question (A).
3. As far as Question (C) is concerned, we find that the same also is a substantial question that requires consideration in light of the decision of the Hon’ble Supreme Court in Apex Laboratories (P) Ltd v/s Deputy Commissioner of Income-tax [2022] 135 com 286 (SC). Accordingly, the above Appeal is also admitted on Question (C).
4. As far as Question (B) is concerned, we find that the same does not give rise to any substantial question of law. The reason we say this is because of the findings given by the Tribunal in paragraph 4 of the impugned order. For the sake of convenience, paragraph 4 of the impugned order is reproduced hereunder:-
“GOA-17 is about disallowance of depreciation on plant and machinery and building amounting to Rs.3.41 lakhs.It was brought to out notice,by the representatives of both the sides, that the issue stands covered by the earlier orders of the Tribunal(ITA/812/Ahd./2008(04-05)&1245/Ahd./2008(03-04);ITA/836/Ahd/2008 (04-05)&1181/Ahd/2008(03-04),dated- 25/5/2017). We are reproducing the relevant portion of the order and it reads as follow:
11. We have gone through the order of the Tribunal in assessee’s own case as well as the order of the lower authorities for the year under consideration. In the A.Y. 2003-04, the CIT(A) has confirmed the addition on account of depreciation on plant and machinery, building, furniture and fixtures by holding the same to be related to the discontinuity of manufacturing operation of the assessee and also holding that the same have not been used during the year We found that exactly the similar issue was considered by the Tribunal in assessee’s own case for the A.Y. 2002- 03 vide order dated 23/11/2007 also in the A.Y2007-08 vide order dated 30/03/2012 and for A.Y. 2009-10 vide order dated 31/12/2015.
12. Learned DR fairly conceded that issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case. We also found that assessee was engaged in the business of manufacturing and trading. However, the manufacturing processes were discontinued with effect from 25 January 2002. During the year under consideration, the assessee had claimed depreciation on plant and machinery, building, furniture and fixtures and office equipment. Once the concept of block of assets was brought into effect from AY 1989-90 onwards, then depreciation is allowable on the aggregate of WDV of all the assets in the block at beginning of the Financial year alongwith the additions made to the assets in the subject AX The individual asset losses its identity for depreciation. From the record, we also found that in AY 2007-08, the Hon’ble CIT(A) has allowed the assessee’s ground by placing reliance on the decisions in case of CIT v Oswal Agro Mills (197 Taxman 25) (HC), Swati Synthetics Ltd vITA (38 SOT 208) (Mumbai ITAT) and Allied Photographics (8 SOT 318) (Mumbai ITAT). The Department has filed an appeal before the Hon’ble ITAT for AY 2007-08. However, the aforementioned issue was not taken in appeal by the Department before ITAT. We also found that Department accepted CIT(A) order for AY 2002-03. The CIT(A) has accepted the principle that with the introduction of concept of WDV of block of assets, the depreciation is allowable not on individual items but depending upon date of acquisition and put to use of the asset. Further, CIT(A) was in agreement with assesse’s view that section 38(2) deals with usage of assets for non-business purposes and does not refer to assets partly used during the year for business purposes. Accordingly, CIT(A) has allowed the depreciation claimed on plant and machinery during AY 200203. The department has filed an appeal before the Hon’ble ITAT for AY 2007-08. However, the aforementioned issue was not taken in appeal by the Department before ITAT. In view of the above, based on a combined reading of all of the above, it is abundantly clear that depreciation is 1,22,84,477 and the disallowance made by the AO was not justified. Thus, there is no merit for disallowance so made. Respectfully, following the order of the Tribunal in assessee’s own case, we delete the disallowance of depreciation so made by the AO.
Respectfully, following the above order, we allow ground no. 17″.
5. As can be seen from this reproduction, on the issue of depreciation, for earlier years, the Assessing Officer had denied the depreciation to the Assessee and which was overturned by the Appellate Authorities. That was never challenged and accepted by the Department. It is only in this year that the Department has decided to challenge the denial of depreciation before this Court without any change in circumstances. We, accordingly, find that Question (B) does not give rise to any substantial question of law requiring an answer by this Court.
6. In view of the foregoing discussion, this Appeal is admitted only on Questions (A) and (C) reproduced above. Respondent waives service.
7. The Registry is directed to communicate a copy of this order to the Tribunal. This would enable the Tribunal to keep papers and proceedings relating to the present Appeal available, to be produced when sought for by the Court.
8. The present Appeal is to be heard along with Income Tax Appeal No.712 of 2017 and Income Tax Appeal No.713 of 2017.
9. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
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