Section 32 of the Income-tax Act, 1961

IN THE ITAT DELHI BENCH ‘A’ Asstt. Commissioner of Income-tax, Circle 9(1) v. SRF Limited R.V. Easwar, Vice President And Deepak R. Shah, Accountant Member IT Appeal No. 2204 (Del) of 2006 [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 asset - Held, yes - Assessee was engaged in manufacture of various products - For relevant assessment year, assessee also claimed depreciation in respect of assets of its international division which was one of divisions of assessee - Assessing Officer disallowed depreciation on ground that since there was no business activity in this division during the year the assets had not been put to use during the year - Whether since assets of international division was not a separate block of assets and further since block of assets of entire assets of all divisions formed block of assets and further since even these were ready for use though not used actually, so 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 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 - Held, yes Iia Section 37(1) read with section 251 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) held that impugned expenditure was revenue in nature and allowable fully incurrent 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 the assessee was to derive long lasting benefit from training imported to its employees, 50 per cent of the expenses was allowable in the year under consideration and balance amount was to be allowed in the subsequent year - Whether since training expenditure was an ongoing process and did not bring into existence any capital asset to assessee, 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 - 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 - Minimum alternate tax - Assessment year 2002-03 - Whether since under section 115JB book profit is to be computed for year and further since deferred tax liability is neither the tax paid nor payable for the year and further since what can be added under clause(A) of Explanation to second proviso to section 115JB(2) is 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 - Held, yes V Section 115JB of the Income-tax Act 1961 - Minimum alternate tax - Assessment year 2002-03 - Assessee made provision for bad and doubtful debts and while computing book profit under section 115JB did not add back amount of provisions 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 provision, 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 amount of provision for bad and doubtful debts while computing book profit under section 115JB - Whether since in books of account assessee had made a provision for bad and doubtful debts and amount was not carried to any reserve, the amount of provision for bad and doubtful debts could not be considered as amount credited to reserve and hence could not be added under clause(b)of Explanation to second proviso to section 115JB(2) while computing book profit - Held, yes FACTS I The assessee was engaged in the manufacture of various products. For the relevant assessment year 2002-03, the assessee also claimed depreciation in respect of assets of its international division, which was one of the divisions of the assessee. The Assessing Officer disallowed the depreciation on the ground that since there was no business activity in this division during the year 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 to the Tribunal: 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 block of assets of the entire assets of all the divisions formed block of assets. Even these were ready for use though not used actually. Therefore, the Commissioner (Appeals) was justified in allowing depreciation to the assessee as claimed. [Para 7] 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 certain 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 to the Tribunal: 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 learned Commissioner (Appeals). [Para 12] 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 Madras Industrial Corporation v. CIT 225 ITR 802. He, therefore, allowed the total expenditure in question in the relevant assessment year. On appeal, the Commissioner (Appeals) following the decision of the Supreme Court in the case of Alembic Chemicals Ltd. 177 ITR 377 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 to the Tribunal: 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. 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. Therefore, the Commissioner (Appeals) was Justified in his view. [Para 10] 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 to the Tribunal: 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 71/2 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 @ 71/2 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 arise 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 oh 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. Therefore, the Commissioner (Appeals) was justified in his view. [Para 24] 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 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 to the Tribunal: HELD V In the books of accounts 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, 255 ITR 273 held that the Assessing Officer cannot recast the profit and loss account if the same is prepared in accordance with Part 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 could not be considered as amount credited to reserve and hence could not be added under clause (b) of Explanation to second proviso to section 115JB(2) while computing book profit. The amount was 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(I) the same could not be added while computing book profit. Therefore, the Commissioner (Appeals) was justified in his view. [Para 29] EDITOR’S NOTE While the assessee claimed deduction of loss suffered due to exchange fluctuation on the amount borrowed on foreign currency for the purpose of working capital and the Assessing Officer disallowed the assessee’s claim on the ground that the loss did not arise till the loan was repaid, since it is well settled that if the foreign currency loan is obtained on revenue account, the loss due to fluctuation accrues at the end of the financial year even if such loan is not repaid during the year and the liability is an ascertained liability and not a contingent liability, the loss was allowable in the relevant assessment year. CASE REVIEW - Capital Bus Services v. CIT [ ] 123 ITR 404 (Del.); Alembic Chemicals Ltd. [ ] 177 ITR 377 - Followed. - Modern Industrial Corporation v. CIT [ ] 225 ITR 802 (SC) - Distinguished. - ACIT v. Balrampur Chini Mills Ltd., 109 ITD 146; Maharaja Shree Umaid Mills Ltd. v. CIT 17 SOT 72 - Followed.