Case Law Details
DCIT Vs Echjay Industries Pvt. Ltd. (ITAT Mumbai)
ITAT Mumbai held that amount of compensation for defective product being capital in nature cannot be adjusted from WDV of the assets.
Facts- Assessee Company is engaged into the business of manufacturing engineering products & exports. Case of the assessee originally assessed u/s. 143(3) of the Act, determining total income at Rs. 14,77,02,280/- against the returned income of Rs. 12,74,92,260/-.
Against this order assessee preferred an appeal before the Ld. CIT (A) and in its first-round; matter has already travelled up to ITAT. Coordinate Bench Restored the matter back to the AO on the appeal of department pertaining to the issue of Depreciation. In compliance to the order of coordinate bench, AO again assessed the case u/s. 143(3) r.w.s. 254 of the Act by restricting the claim of depreciation to Rs. 1,23,86,490/- against the claim of Rs. 2,92,09,742/-.
Assessee being aggrieved with this order of AO passed u/s. 143(3) r.w.s. 254 in second round of assessment proceedings preferred an appeal before the Ld. CIT (A), who in turn reversed the order of AO and allowed the appeal of the assessee in his order u/s. 250 of the Act. Now, revenue being aggrieved with this order preferred this appeal before us.
Conclusion- Held that stand of the assessee is correct and action of AO is liable to be reversed. As assessee has incurred full cost of acquisition out of its own pocket and no part of cost has been borne by anybody else. In the given circumstances, amount of compensation received cannot be equated with “Cost bear by third party”. Hence WDV of the assets cannot be adjusted by this amount of compensation received by the assessee. In the result ground raised by the revenue is dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by revenue is directed against the order of Ld. CIT (A)-50, Mumbai dated 17.01.2023 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2002-03. The revenue has raised the following grounds of appeal:-
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing to allow the depreciation on plant and machinery without reducing the amount of compensation received by the assessee in AY 1999-2000 of Rs. 16,05,29,977/- (being initial year), whereas the compensation received by the assessee was in the nature of capital receipts and liable to be deducted from the WDV of plant & machinery for charging depreciation as per Income Tax Act/ Rule and the issue for AY 1999- 2000 yet to be decided by the ITAT.”
2. The brief Facts of the case are that Assessee Company is engaged into the business of manufacturing of engineering products & exports. Case of the assessee originally assessed u/s. 143(3) of the Act, determining total income at Rs. 14,77,02,280/- against the returned income of Rs. 12,74,92,260/-. Against this order assessee preferred an appeal before the Ld. CIT (A) and in its first-round; matter has already travelled up to ITAT. Coordinate Bench Restored the matter back to the AO on the appeal of department pertaining to the issue of Depreciation. In compliance to the order of coordinate bench, AO again assessed the case u/s. 143(3) r.w.s. 254 of the Act by restricting the claim of depreciation to Rs. 1,23,86,490/- against the claim of Rs. 2,92,09,742/-.
3. Assessee being aggrieved with this order of AO passed u/s. 143(3) r.w.s. 254 in second round of assessment proceedings preferred an appeal before the Ld. CIT (A), who in turn reversed the order of AO and allowed the appeal of the assessee in his order u/s. 250 of the Act. Now, revenue being aggrieved with this order preferred this appeal before us. We have gone through the order of AO, Order of Ld. CIT (A) and arguments of the assessee. It is observed that assessee is involved in the business of manufacturing steel forged products using MS steel and its alloys. Production is tailor made meaning thereby that it manufactures products to the specification and drawings given by the customers. On the issue of facts elaborately noted by the Ld. CIT (A) (both assessee and AO) as under:-
4. Assessee received a compensation of Rs. 16,05,27,977/- (DM-7) from German Supplier M/s THYSSEN Industries AG in the assessment year 1999-2000. In that year, AO reduced this amount from the cost of plant, accordingly WDV was revised resulting into reducing the claim of depreciation. This money of compensation received is on account of defect in the machine supplied. The production unit of the appellant has state of the art plants. In or about 199-93-94, the appellant imported a plant known as ACDR (Axial Cold Die Rolling plant) from Germany. The same was found to be defective by the appellant to the effect that it did not turn out, to its optimum capacity production guaranteed by the manufacturer. The appellant raised a dispute on this issue and after taking up the dispute before Queen’s Council in England and Conciliation Tribunal in Paris, the German Manufacturer supplier offered that their Engineers should be allowed to work on the plant in India for an agreed period and if they shall be satisfied with the claim of the appellant, it would pay a compensation. On trial by their Engineers, the appellant was proved right in its claim made and the manufacturer granted a compensation of DM 7 Million which amounted to Rs. 16,05,29,977 in the financial year 1998-99 relevant to the assessment year 1999-00.
5. We have gone through the order of Ld. CIT (A). He decided the matter in favour of the assessee relying on the order of his predecessor for AY 1999-2000. Although, appeal for the same year, is still pending before the Coordinate Bench. We have gone through the facts of the case and the findings of the authorities below, we find the order of Ld. CIT (A) to be correct in facts and in law. To arrive at a conclusion, we relied upon the following judicial pronouncements of Hon’ble Supreme Court and Hon’ble High Court of Calcutta as under:-
[2010] 192 Taxman 300 (SC) CIT, Gujarat v. Saurashtra Cement Ltd.
“It was clear from the agreement that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment of which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It was evident that the damages to the assessee were directly and intimately linked with the procurement of a capital asset, i.e., the cement plant, which would obviously lead to delay in coming into existence of the profit-making apparatus, rather than a receipt in the course of profit-earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement. The amount received by the assessee towards compensation for sterilization of the profit-earning source and not in the ordinary course of its business, was a capital receipt in the hands of the assessee. [Para 13]”
[2022] 143 taxmann.com 58 (Cal.) PCIT v. XPRO India Ltd.
“The next issue is with regard to the compensation received from M/s. Batenfeld, UK. The Assessing Officer was of the view that the entire amount of compensation had reduced the cost of the machinery and therefore, denied relief to the assessee. The correctness of the said finding was considered by the CIT (A) and after noting that the entire amount of compensation would not reduce the actual cost of machinery and there is no dispute to the fact that the assessee had capitalised the full invoice value of machinery in its books of accounts and accordingly, claimed depreciations and noting the decision of the Hon’ble Supreme Court in Sourashtra Cement Ltd. (supra) directed the Assessing Officer to restrict the disallowance of depreciation pertaining to 10% of the compensation received by the assessee which will go to reduce the cost of machinery, and for the remaining amount the assessee’s case was accepted. With regard to the 10% of the amount which was directed to be restricted, the assessee was not an appeal before the Tribunal. The Tribunal after considering the findings recorded by the CIT (A) examined the settlement which was executed between the assessee and the UK Company which show that the compensation was given on account of non-achievement of performance parameters. After noting the relevant clauses in the settlement agreement, the Tribunal held that the condition specified in section 143 (1) of the Act for directing the actual cost from value of the machines were applicable to the compensation amount paid to the assessee. We find there is no error in the approach of the Tribunal or that of the CIT (A) for us to interfere. Accordingly, substantial questions of law No. 7 and 8 are answered against the revenue.”
6. In view of above facts and decision of Hon’ble Supreme Court on similar facts in the case of Saurashtra Cement Ltd. (supra), we hold that stand of the assessee is correct and action of AO is liable to be reversed. As assessee has incurred full cost of acquisition out of its own pocket and no part of cost has been borne by anybody else. In the given circumstances, amount of compensation received cannot be equated with “Cost bear by third party”. Hence WDV of the assets cannot be adjusted by this amount of compensation received by the assessee. In the result ground raised by the revenue is dismissed.
7. In the result, appeal of the revenue is dismissed.
Order pronounced in the open court on 25th day of August, 2023.
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