Case Law Details
Shapers India Private Limited Vs DCIT (ITAT Pune)
We find that the assessee spent hypothetical figure of Rs.100 on the purchase of the Machinery in the year ending 31.3.2003. This Rs.100 constitutes the actual cost to the assessee in that year in terms of section 43(1) without the aid of the Explanation 10. It was during the year ending 31.3.2006 that the assessee got waiver of loan of Rs. 40. Such waiver of loan is in the nature of `the cost of an asset … met directly or indirectly … by any other person, in the form of … reimbursement (by whatever name called)‘ as per the terminology of the Explanation 10. This amount qualifies to reduce the `actual cost‘ of the Machinery when such waiver vested in the assessee, that is, year ending 31.3.2006. The assessee did not reduce Rs.40 from Rs.100 in that year and appended a Note in this regard, which has been reproduced supra. The AO did not disturb the actual cost/written down value at gross value of Rs.100 for that year and also granted depreciation accordingly. Once the assessment for the A.Y. 2006-07 got concluded with such gross value of the asset, the stage for altering the actual cost/w.d.v. on account of the loan waiver got over. The AO got denuded of the power to reduce the amount of depreciation after so many years in the A.Y. 2011-12. As section 32(1) provides for granting depreciation on the w.d.v. of the block of asset, it is only such value which can be considered for depreciation. 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. The 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 Rs. 40 after giving a similar Note in the Final accounts. In the year ending 31.3.2011 under consideration, no event activating either section 43(6) or the opening part of section 43(1) or the Explanation 10 has happened, which could have disturbed the w.d.v. or the actual cost so as to warrant reduction in the value of block of asset and the consequential depreciation thereon.
The logic behind section 2(24)(xviii) is simple and clear that if the assessee has received any subsidy or grant or waiver or concession or reimbursement etc. in respect of an asset, which is otherwise a capital receipt and further that the same cannot be reduced from the actual cost of the asset or the w.d.v., then it should be subjected to tax as an income of such a year. This provision runs on parity with section 41(1) of the Act, which provides for taxation of remission or cessation of a trading liability. One thing which is common to both – sections 2(24)(xviii) and 41(1) – is that the taxability takes place in the year of receipt of waiver or concession and not any other year. It is further relevant to accentuate that section 2(24)(xviii) has itself been introduced from the A.Y. 2016-17. As such, it can have no application either to the A.Y. 2003-04 when the Machinery was purchased or to the A.Y. 2006-07 when the waiver of loan was received or the year in appeal.
To sum up, the waiver of loan in the earlier year has no impact either on the actual cost u/s 43(1) or the w.d.v. u/s 43(6) for the year under consideration and further section 2(24)(xviii) also does not envelope such waiver within the ambit of `income‘ for the extant year. In that view of the matter, depreciation has to be allowed on the w.d.v. of the block of Machinery at the gross value without reducing the waiver of loan therefrom. Ex consequenti, disallowance of depreciation of Rs.6,54,950 cannot stand and is hereby deleted.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal takes exception to the order dated 02.08.2017 passed by the CIT(A) in relation to the A.Y. 2011-12.
2. A small but an interesting issue has been raised in the appeal. The assessee has assailed the confirmation of disallowance of Rs.6,54,950 on account of depreciation on the amount written back from Capital 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 Rs.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 Rs.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 Rs.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 Rs.6,54,950. The ld. CIT(A) echoed the assessment order on this point, against which the assessee has approached the Tribunal.
4. We have cogitated the rival submissions and scanned the relevant material on record. A little more elaboration of facts is essential for understanding the controversy. The assessee purchased certain Plant & machinery items from SS during the previous year ending 31.03.2003. A sum of Rs.45.18 lakhs was payable to SS which was waived off by the company on 31.12.2005. The assessee wrote off the amount payable to SS and created Capital Reserve in its books of account in that year for equal amount. In other words, the assessee did not reduce the amount of loan waived by SS from the value of block of assets. It continued to claim depreciation on the gross value of the block of Plant & machinery, which included the amount of Rs.45.18 lakhs waived. To exemplify, if the gross value of block of Plant & machinery, before write off, as on 31.3.2006 was say Rs.100, out of which say Rs.40 was waived off, the assessee continued with the value of block of Plant & machinery at Rs.100 and took Rs.40 to the Capital Reserve Account. Depreciation was claimed during all the succeeding years from 31.3.2006 on the gross value of Rs.100 as reduced by the amount of depreciation. For the year under consideration also, the assessee claimed depreciation on the depreciated gross value of Rs.100 and the amount of depreciation pertaining to the amount of loan waived (equivalent of Rs.40) was Rs.6,54,950, which came to be disallowed at the hands of the authorities below. The case of the Revenue is that the assessee should have reduced the amount of Rs.40 from the value of assets at Rs.100 and accordingly claimed depreciation on Rs.60 and as such, depreciation on Rs.40 for the year was rightly disallowed. Per contra, the assessee has set up a case that there is no bar on claiming depreciation on Rs.40 during the year, which was waived by SS on 31.12.2005.
5. The assessee gave a Note in this regard in its Final accounts for the year ending 31.03.2006, reading as under:
―Note No.28. – During the period Sermo Sable (one of the group companies) has been closed and has waived off the amount payable to them by Sermo PM India amounting to Rs.45.18 lakhs (79,263.16 Euros). This is as per the approval received from Sermo Sable. But the Company has not yet received the court order for liquidation.
Accordingly, the Company has written back Creditors amounting to Rs.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 `written down value‘ has been defined u/s 43(6) to mean: `(a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act. Clause (c) of section 43(6) applies in the case of any `block of assets‘ and explains the written down value to mean:
`(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;
(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and …
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by,—
(A) the increase or the reduction referred to in item (i), not being increase on account of acquisition of goodwill of a business or profession;….‘.
7. After this, there are certain Explanations to section 43(6), none of which is relevant for our purpose. On going through the prescription of the provision, it clearly transpires that `written down value‘ on and from the A.Y. 1989-90 means the opening w.d.v of the concerned block of asset as increased by the actual cost of any asset falling within that block purchased and reduced by the sale consideration of the assets sold from the block during the year. It is thus overt that definition of `written down value‘ does not encompass any reduction in the value of existing asset in the block except when it is sold. Going with the definition, there is no scope for making any adjustment in the w.d.v. of the block on 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 under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, 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….‘. When we read the opening part of section 43(1) in conjunction with the Explanation 10, it follows that the opening part, providing for reducing the actual cost of the asset to the assessee by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority, refers to such reduction taking place at the time of purchase of the asset itself. Albeit, it is not so expressly spelt out therein, but the reading of the Explanation 10 providing, inter alia, for reducing the amount of reimbursement by any other person, makes it clear whereas por una parte the opening part of section 43(6) deals with a situation where part of the cost is met by any other person at the time of the purchase of the asset, por otra parte, the Expl. 10 deals with a situation where a part of the cost is met by any person after its purchase. If the opening part of section 43(6) is construed as dealing with the situation at any time – whether at the time of purchase of asset or after its purchase – then the Expl. 10 would be rendered superfluous and redundant.
9. The ld. AR contended that the `actual cost‘ of an asset once determined in the year of purchase cannot be altered in a later year and hence even the Explanation 10 cannot be triggered in a later year so as to reduce the actual cost with any amount other than sale proceeds of the assets. We are not convinced with this line of reasoning. A plain and literal reading of section 43(1) rules out such an interpretation canvassed on behalf of the assessee. At this juncture, it is relevant to note section 36(1)(iii), which provides for deduction of interest paid on capital borrowed. Its proviso states: ` that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction‘. Explanation 8 to section 43(1) provides: `that where any amount is paid or is payable 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. Coming back to our context, we find that the assessee spent hypothetical figure of Rs.100 on the purchase of the Machinery in the year ending 31.3.2003. This Rs.100 constitutes the actual cost to the assessee in that year in terms of section 43(1) without the aid of the Explanation 10. It was during the year ending 31.3.2006 that the assessee got waiver of loan of Rs. 40. Such waiver of loan is in the nature of `the cost of an asset … met directly or indirectly … by any other person, in the form of … reimbursement (by whatever name called)‘ as per the terminology of the Explanation 10. This amount qualifies to reduce the `actual cost‘ of the Machinery when such waiver vested in the assessee, that is, year ending 31.3.2006. The assessee did not reduce Rs.40 from Rs.100 in that year and appended a Note in this regard, which has been reproduced supra. The AO did not disturb the actual cost/written down value at gross value of Rs.100 for that year and also granted depreciation accordingly. Once the assessment for the A.Y. 2006-07 got concluded with such gross value of the asset, the stage for altering the actual cost/w.d.v. on account of the loan waiver got over. The AO got denuded of the power to reduce the amount of depreciation after so many years in the A.Y. 2011-12. As section 32(1) provides for granting depreciation on the w.d.v. of the block of asset, it is only such value which can be considered for depreciation. 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. The 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 Rs. 40 after giving a similar Note in the Final accounts. In the year ending 31.3.2011 under consideration, no event activating either section 43(6) or the opening part of section 43(1) or the Explanation 10 has happened, which could have disturbed the w.d.v. or the actual cost so as to warrant reduction in the value of block of asset and the consequential depreciation thereon.
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 `actual cost‘ or `written down value‘ of the block of asset.
12. The logic behind section 2(24)(xviii) is simple and clear that if the assessee has received any subsidy or grant or waiver or concession or reimbursement etc. in respect of an asset, which is otherwise a capital receipt and further that the same cannot be reduced from the actual cost of the asset or the w.d.v., then it should be subjected to tax as an income of such a year. This provision runs on parity with section 41(1) of the Act, which provides for taxation of remission or cessation of a trading liability. One thing which is common to both – sections 2(24)(xviii) and 41(1) – is that the taxability takes place in the year of receipt of waiver or concession and not any other year. It is further relevant to accentuate that section 2(24)(xviii) has itself been introduced from the A.Y. 2016-17. As such, it can have no application either to the A.Y. 2003-04 when the Machinery was purchased or to the A.Y. 2006-07 when the waiver of loan was received or the year in appeal.
13. To sum up, the waiver of loan in the earlier year has no impact either on the actual cost u/s 43(1) or the w.d.v. u/s 43(6) for the year under consideration and further section 2(24)(xviii) also does not envelope such waiver within the ambit of `income‘ for the extant year. In that view of the matter, depreciation has to be allowed on the w.d.v. of the block of Machinery at the gross value without reducing the waiver of loan therefrom. Ex consequenti, disallowance of depreciation of Rs.6,54,950 cannot stand and is hereby deleted.
14. Though the assessee has challenged initiation of re-assessment proceedings vide ground No.1, but the same, in our considered opinion, does not require any adjudication because of our favorable decision on merits of the issue rendered above.
15. In the result, the appeal is allowed.
Order pronounced in the Open Court on 22nd September, 2021.
