IN THE ITAT
Asstt.
Commissioner of Income-tax, Circle 9(1)
v.
SRF Ltd.
R.V. Easwar,
Vice President
And Deepak R.
Shah, Accountant Member
IT Appeal No.
2204 (
[Assessment
year 2002-03]
February 22,
2008
I Section 32 of the Income-tax Act,
1961 - Depreciation - Allowance/Rate of - Assessment year 2002-03 - Whether
ownership and user both are criteria for claim of depreciation under section
32(1) - Held, yes - Whether user criteria is to be fulfilled at time when asset
is to form part of block of assets and once assets are part of block of assets,
it looses its individual cost or written down value and thereafter depreciation
is allowable on entire block of assets - Held, yes - Assessee was engaged in
synthetic, fabric and chemical business - For relevant assessment year,
assessee claimed depreciation in respect of assets of its international
division - Assessing Officer disallowed depreciation on ground that there was
no business activity in this division and assets had not been put to use during
year - Whether since entire assets of all divisions formed block of assets and
assets of international division was not a separate block of assets and further
said assets were ready for use though not used actually, Assessing Officer was
wrong in denying depreciation to assessee as claimed - Held, yes
II Section 251
of the Income-tax Act, 1961 -
Commissioner (Appeals) - Powers of - Assessment year 2002-03 - Whether an
alternate claim can be made before Commissioner (Appeals) for first time and in
disposing of appeal under section 251 Commissioner (Appeals) has power to pass
such orders as he thinks fit - Held, yes
Section 37(1) read with section 32 of the Income-tax Act,
1961 - Business expenditure- Allowability of - Assessment year 2002-03 -
Assessee had taken a premises on lease for a period of three years - During
relevant previous year, assessee incurred certain expenditure on this premises
in respect of partition, floor tiles, false ceiling, plaster of paris work,
paint and white-wash, lamination of doors, renovation of toilets, etc. and
claimed depreciation on said assets at rate of 100 per cent claiming said
assets as temporary structure - Assessing Officer having noticed that said
assets were used by assessee for less than 180 days restricted claim of
depreciation to 50 per cent - Assessee contended before Commissioner (Appeals)
that expenditure in question was of revenue nature and allowable as such, but
it had made erroneous claim of depreciation at 100 per cent - Commissioner (Appeals),
accepted said contention and held that impugned expenditure was revenue in
nature and allowable fully in current year - He, therefore, deleted
disallowance made by Assessing Officer - Whether Commissioner (Appeals) was
justified in his action- Held, yes
III Section 37(1) of the Income-tax
Act, 1961 - Business expenditure - Year
in which deductible - Assessment year 2002-03 - Assessee incurred certain
expenditure on recruitment and training of its employees working in various
divisions and at head office and claimed
deduction of same as a revenue
expenditure - Assessing Officer held that since assessee was to derive long
lasting benefit from training imparted to its employees, 50 per cent of
expenses was allowable in year under consideration and balance amount was to be
allowed in subsequent year - Whether since training expenditure was an ongoing
process and did not bring into existence any capital asset to assessee,
expenditure could not be spread over number of years - Held, yes - Whether, therefore,
entire expenditure in question was allowable in current year - Held, yes
IV Section 115JB read with section 2(43) of
the Income-tax Act, 1961 - Special provision for payment of tax by certain
companies - Assessment year 2002-03 - Whether deferred tax liability is neither
tax paid nor payable for year and it would not fall within ambit of clause (a)
of Explanation to second proviso to section 115JB(2) and, therefore, cannot be
added to book profit for purpose of section 115JB - Held, yes
V Section 115JB of the Income-tax Act 1961 - Special provision for payment of tax by certain companies - Assessment year 2002-03 - Whether provision for bad and doubtful debts is not a provision for liability - Held, yes - Whether amount of provision for bad and doubtful debts cannot be considered as amount credited to reserve and, hence, cannot be added under clause (b) of Explanation to second proviso to section 115JB(2) while computing book profit - Held, yes
FACTS - I
The operations
of the assessee-company were organized into three main businesses (a)
Industrial Synthetics Business (b) Industrial Fabric Business (c) Chemical
Business. For the relevant assessment year 2002-03, the assessee claimed
depreciation in respect of assets of its international division. The Assessing
Officer disallowed the depreciation on the ground that there was no business
activity in this division and the assets had not been put to use during the
year.
On appeal, the
Commissioner (Appeals) held that the assets in question had been used in
earlier years and also in subsequent year and they were ready for use in the
current year also but remained idle due to lack of business in the
international division. He also held that after the amendment in section 32 the
depreciation became allowable not in respect of individual asset but in respect
of block of assets. The use of asset would be relevant only in the first year
of claim of depreciation. Once the asset entered the block, depreciation could
not be determined or allowed on a piecemeal basis but was allowable on the
entire block. He, therefore, allowed the assessee’s claim for depreciation.
On revenue’s
appeal:
HELD - I
Under section
32(1) depreciation on certain assets owned and used for the purpose of business
is allowable and the same is allowable at the prescribed percentage on the
written down value of block of assets, which comprises various assets entitled
to same rate of depreciation. Thus the ownership and user both are the criteria
for claim of depreciation. However, the user criteria is to be fulfilled at the
time when the asset is to form part of block of assets. Once the assets are
part of block of assets, it looses its individual cost or written down value.
In a way it looses its identity. Thereafter, the depreciation is allowable on
the entire block of assets. In the instant case, the assets of international
division was not a separate block of assets. The entire assets of all the
divisions formed block of assets. Even these were ready for use though not used
actually. In the decision of Delhi High Court in the case of Capital Bus
Services (P.) Ltd. v. CIT [1980] 123 ITR 404, it was held that even
if the assets were not actually used, if the assets were kept ready for use by
the owner in his business, will entitle the assessee to claim depreciation.
Accordingly, applying the ratio laid down by the Delhi High Court in the case
of Capital Bus Service (P.) Ltd. (supra) the claim, of the assessee was
allowable. [
FACTS - II
The assessee
had taken a premises on lease for a period of three years. During the relevant
previous year, the assessee had incurred certain expenditure on this premises
in respect of partition, floor tiles, false ceiling, plaster of paris work,
paint and white-wash, lamination of doors, renovation of toilets, etc. and
claimed depreciation on the said assets at the rate of 100 per cent claiming
the said assets as temporary structure. The Assessing Officer having noticed
that the said assets were used by the assessee for less than 180 days
restricted the claim of depreciation to 50 per cent.
On appeal, the
assessee contended that the expenditure in question was of revenue nature and
allowable as such, but it had made erroneous claim of depreciation at 100 per
cent. The commissioner (Appeals) held that the impugned expenditure was revenue
in nature and allowable fully in the current year. Therefore, he directed to
delete the disallowance made by the Assessing Officer.
On revenue’s
appeal:
HELD - II
An alternate
claim can be made before the Commissioner (Appeals) for the first time and in
disposing of the appeal under section 251 the Commissioner (Appeals) has power
to pass such orders as he thinks fit. His powers include powers to reduce,
enhance or annual the assessment. Having power to reduce the assessment, the
Commissioner (Appeals) was justified in entertaining claim as to whether the
expenditure could be allowed as revenue expenditure. The expenditure in a
leased premises on partition, false ceiling, painting, white-washing,
renovation of toilets etc. was revenue expenditure and did not bring into
existence any capital asset as such. Accordingly, the claim of the assessee was
rightly allowed by the Commissioner (Appeals).
[
FACTS - III
The assessee
incurred certain expenditure on recruitment and training of its employees
working in various divisions and at head office and claimed deduction of the
same as a revenue expenditure. The Assessing Officer relying upon the decision
of the Supreme Court in the case of
On appeal, the
Commissioner (Appeals) following the decision of the Supreme Court in the case
of Alembic Chemicals Works Co. Ltd. v. CIT [1989] 177 ITR 377/43
Taxman 312 held that the expenditure which facilitated the profit making
process or enhanced the productivity would be revenue in nature and allowable
as such. He, therefore, allowed the total expenditure in question in the
relevant assessment year.
On revenue’s
appeal:
HELD - III
Under the
scheme of Income-tax Act the expenditure can either a capital expenditure or
revenue expenditure. Deferred revenue is not recognized under the Income-tax
Act. Enduring benefit is one of the tests to determine whether the expenditure
is capital or revenue. However, it is not a foolproof test and even in some
occasion such test will fail if the circumstances so demand. This was so
precisely laid in the case of Alembic Chemicals
Works Co. Ltd. (supra). The training expenditure was an ongoing process
and did not bring into existence any capital asset to the assessee. By training
its personnel the business of the assessee was carried on more efficiently and
smoothly. It only facilitated proper functioning keeping in view the new
technology advances. Thus expenditure being incurred wholly and exclusively for
the purpose of business, which could not be categorized as capital expenditure,
could not be spread over number of years. The decision of the Supreme Court in
the case of Madras Industrial Investment Corpn. Ltd. (supra) would not apply as
in the said case benefit of premium payable on redemption of debentures was
available throughout the life of the debentures issued. Same was not the case
in the instant appeal. Therefore, the Commissioner (Appeals) was Justified in
his view. [
FACTS - IV
The assessee
made provision for deferred tax liability. It while determining the book profit
as per provisions of section 115JB did not add back the amount of provision for
deferred tax liability on the plea that the same did not fall in clause (a)
of Explanation to Second Proviso to section 115JB (2) read with section 2(43).
The Assessing Officer held that deferred tax liability was a provision for
income-tax payable in future, and that it would fall within the meaning of
clause (a) of Explanation to second proviso to section 115JB(2).
He accordingly added the sum while computing book profit. On appeal, the
Commissioner (Appeals) held that under clause(a) of Explanation to second
proviso to section 115JB(2) what could be added was ‘the amount of income tax
paid or payable, and the provision therefor.’
The provision of Accounting Standard 22 related to accounting treatment
for taxes on income. Matching of taxes against revenue for a period was a
special requirement. Since there was difference between income as per profit
& loss account and income computed under the provision of Income-tax
Act, due to various facts, like
depreciation etc., the income as per Companies Act and income as per Income-tax
Act would not match. Therefore, in order to equalize the accounting treatment
of tax liability on depreciation and other items, the assessee had followed
AS-22 and treated the tax on such differences as deferred tax responsibility.
Under clause (a) of Explanation to second proviso to section 115JB(2)
only the amount of tax paid or payable and the provision therefor were to be
enhanced by the amount of income tax paid or payable in respect of the current
year and not in respect of future years. When the deferred tax liability was
written back, it would be added to the book profit in the same year. Thus, the
provision for deferred tax liability was not in relation to tax liability of
the book profit of the current year and, hence, not to be added while computing
book profit. He, therefore, deleted the amount of provision for deferred tax
liability from the book profit.
On revenue’s
appeal:
HELD IV
As per section
115JB in the case of the assessee being a company, if the income-tax payable on
the total income computed under the Act is less than 7½ per cent of its book
profit, such book profit shall be deemed to be the total income and the tax
payable by the assessee on such total income shall be the amount of income-tax
at the rate of 7½ per cent. The book profit is to be computed as per
Explanation of second provio to section 115JB(2). Under section 115JB(2) the
profit and loss account for the relevant previous year is to be computed in
accordance with Parts II and III of Schedule VI to the Companies Act, 1956. The
profit and loss account shall confirm to the Accounting Standards adopted for
preparing accounts and cannot be different in respect of accounts presented for
income-tax purposes than that produced before the share holders at the annual
general meeting in accordance with the provisions of section 210 of the
Companies Act. Thus, the assessee was also required to prepare accounts in
accordance with mandatory Accounting Standards prescribed. Accounting
Standard-22 prescribes as to how taxes on income shall be accounted for.
Admittedly, the assessee was following AS-22, as it was mandatory for it.
Article 5 of AS-22 prescribes that tax expense for the period, comprising
current tax and deferred tax, should be included in the determination of the
net profit and loss for the period.
Thus it is mandatory to provide for deferred tax liability in the
accounts. Under section 115JB the book
profit is to be computed for the year. Impliedly if the amount of tax payable
is for the year, the same
needs to be added
while computing the book
profit. However, the deferred tax liability is neither the tax paid nor
payable for the year. It is accounted
only to iron out the difference which arises due to different treatment given
to various items of income and expense in the Companies Act and under the
Income-tax Act e.g. if the amount is provided in the accounts as deferred
revenue expenditure but under the income-tax Act whole of the expenditure is
claimed and allowed, the liability of tax payable for the year will be less,
conversely, even if some deferred revenue expenditure are provided in
subsequent years, the assessee does not get deduction thereof in subsequent
years. In a way even though no expenses
are accounted for in the profit & loss account, due to income-tax laws, the
assessee is required to pay lesser tax on higher income declared. To that extent, tax payable for the year
will be lesser but in fact when it comes to subsequent years, though the
expenses are booked in the profit and loss account, the same are not tax
deductible and the assessee is required to pay higher tax in subsequent
years. To remove such differences
arising due to various differential treatment as explained above, deferred tax
liability/asset springs up and are required to be accounted for. But such liability though accounted for is
neither paid nor payable nor any provision is required therefor. The word ‘tax’ is defined in section 2(43)
of the Act. As per the definition ‘tax’
means income-tax chargeable under the provisions of this Act. The provision for deferred tax is not tax
payable under the Act. The deferred tax
liability is created where the assessee gains tax advantage of temporary nature
which are payable in subsequent years.
When tax liability of subsequent years are determined, the amount is
decreased from deferred tax liability and actual provision is made for the
current tax liability. What can be
added under clause (a) of Explanation to second proviso to
section 115JB(2) is the income paid or payable on the current income computed
under the provisions of the Act and not the liability which is deferred or
becomes payable in subsequent years. Thus the deferred tax liability provided
not being falling in clause (a) of Explanation to second proviso
to section 115JB(2) cannot be added to book profit for purpose of section
115JB. Similar view has been adopted by the ITAT,
FACTS - V
The assessee
made provision for bad and doubtful debts. It while computing the book profit
under section 115JB did not add back the amount of provision for bad and doubtful
debts. The Assessing Officer held that the provision for bad and doubtful debts
made by the assessee was excess amount of provision to be treated as reserve
and not provisions and that under clause (b) of Explanation below
sub-section (2) of section 115JB, the book profit had to be increased by any
amount carried to any reserves, by whatever name called and, hence, to be added
by crediting book profit. He, therefore, added back the amount of provision for
bad and doubtful debts while computing the book profit under section 115JB.
On appeal, the
Commissioner (Appeals) held that the provision was only to the extent of
diminution in the value of assets, and that no excess provision had been made
but had been solely provided to cover diminution in value of assets known to
exist at the date of balance sheet. He, therefore, held that the amount of
provision for bad and doubtful debts could not be added under clause (b)
of Explanation below sub-section (2) of section 115JB while computing
the book profit.
On revenue’s
appeal:
HELD - V
In the books
of account the assessee had made the provision for bad and doubtful debts. The
amount was not carried to any reserve. Creating a provision for diminution in
value of assets namely debtors cannot be considered as amount carried to any
reserve. Under the Companies Act, the amount of provision for any known
liability can be considered as reserve only if the excess of provision is made
which is so opined by the directors. The accounts did not reveal that the
directors had treated the excess provision as reserve. The Supreme Court in the
case of Appollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman
562 held that the Assessing Officer cannot recast the profit and loss account
if the same is prepared in accordance with Parts II & III of Schedule VI of
the Companies Act for the purpose of computing book profit under section 115J.
Accordingly, the amount of provision for bad and doubtful debts cannot be
considered as amount credited to reserve and, hence, can not be added under
clause (b) of Explanation to second proviso to section 115JB(2)
while computing book profit. The amount of provision for bad and doubt full
debt is not a provision for making liability, as by making provision the
assessee merely restated the assets. Thus even under clause (c) of Explanation
to section 115JB(2) the same could not be added while computing book
profit. Therefore, the Commissioner (Appeals) was justified in his view. [
EDITOR’S NOTE
Where the
assessee claimed deduction of loss suffered due to exchange fluctuation on the
amount borrowed in foreign currency for the purpose of working capital. The
loss was allowable in the relevant assessment year and the Assessing Officer,
was not justified in disallowing the assessee’s claim on the ground that the
loss, was a contingent one and did not arise till the loan was repaid.
CASE REVIEW
Capital Bus
Service (P.) Ltd. v. CIT [1980] 123 ITR 404/4 Taxman 309 (