THE issues before the Bench are - Whether depreciation u/s 32
is an allowance for natural wear and tear of the assets; Whether when the banks
have seized the assets of the assessee and auctioned the same to the highest
bidders, the assessee can still claim notional depreciation and Whether when due
to one-time settlement, assessee considered the amount of interest outstanding
as paid first, no disallowance can be made u/s 43B particularly when for the
principal amount which remained unpaid is already offered by the assessee. And
the verdict partly goes against the assessee.
Assessee is engaged in manufacturing and trading of refined edible oil. Assessment was made u/s 143(3) with additions on account of capital gain on sale of factory building, borewell and plant and machinery after providing for notional depreciation for unused assets and interest u/s 43B as a result of one time settlement scheme. CIT (A) confirmed the order of AO.
A) Brief facts were that assessee sold land, factory building, borewell and plant and machinery and declared capital gain on it. While computing capital gains, assessee had adopted WDV of the asset as on 31.03.2003 since the property in question were attached/seized for default in payment of loan borrowed from Banks as depreciation was not claimed in respect of the said assets as it were not used by assessee in business and conditions of section 32 were not fulfilled. AO by virtue of Explanation 5 to section 32 granted notional depreciation from 2003 onwards and the WDV of the property as on 31.03.2006 was calculated and thus capital gain was recomputed.
CIT (A) dismissed the appeal of assessee observing that to claim depreciation u/s 32 of I.T. Act, two conditions must be fulfilled. The first one is that the assessee must by the owner of the asset and secondly such asset must have been used for the purpose of business. Explanation only clarifies the basic provisions of a substantive section and cannot act as substitute. Thus, the assessee was justified to consider the cost of the sold assets as the WDV as on 01.04.2003. But the computation of STCG on sale of such capital assets is not dependent on the reduction of depreciation. Even standing unused machineries get rusted and its value depreciates. Therefore, assessee was not entitled for depreciation on plant and machinery, bore well and factory building by application of commonsense.
B) Assessee claimed deduction u/s 43B of the Act for the alleged payment of interest. AO took a view that the assessee had not paid any interest during the year and therefore added the interest claimed as deduction. CIT (A) rejected the plea of assessee on the premise that assessee had not paid the interest liability because the same was waived by the bank and, hence, the interest has to be disallowed. Further as per Form No.3CD no interest has been paid during the year. Hence, the said interest’s claim was correctly disallowed.
Assessee contended that as a result of one time settlement, assessee paid liability inclusive of interest. Assessee submitted that the bank having recovered the said interest by way of sale of assets of the assessee, the said liability in effect had been discharged and therefore, the deduction in respect of the interest paid needed to be allowed u/s 43B.
After hearing both the parties, the ITAT held that,
A) ++ the assessee was not in possession and control of the assets due to the seizure by the bank so as to use them for the conduct of the business. There was neither active nor passive use of the said assets as they remain seized by the Banks. The assets were auctioned by the banks to the best bidder and the assets were directly handed over by the bank to the buyer. It is evident that in order to claim depreciation u/s 32 of the Act, the assessee must be owning the assets and the same should be used for the purpose of the business. The other condition, in order to claim depreciation, is that the asset must have been used for the purposes of the assessee’s business. It is not an allowance for natural wear and tear by reason of the aging process. In section 32 the emphasis is on the user of the asset in the business of the assessee. For the purpose of ‘passive use’, even the aspect of where the assets are ‘kept ready for use’, the same would be considered as usage. The assessee not being in possession of the assets, it cannot be said the seized assets were kept in a state of readiness;
++ section 50 nowhere provides that certain deemed depreciation needs to be allowed. Section 50 merely states “where depreciation has been actually allowed under this Act”. The same, therefore, implies that where the depreciation has been allowed as per the provisions of the Act after the fulfilling conditions prescribed u/s 32 of the Act and then the special provisions of section 50 would follow. Thus, the order of the CIT (A) confirming the assessment order in respect of computation of capital gain is not correct. Grant of notional depreciation from the year 2003 for calculation of WDV as on 01.04.2006 is not warranted;
B) ++ assessee understood the OTS of Rs.378.72 lakhs as being first attributed towards interest and balance towards principal leaving a portion of principal unpaid and waived. On this basis, the assessee claimed interest deduction u/s 43B and offered, though, wrongly the waived principal to tax. Even if one would understand the OTS of Rs.378.72 as being first attributed towards principal and balance towards interest, it means that unpaid interest of Rs.193.97 lakhs is to be disallowed u/s 43B. However, this would also mean that there is no waiver of principal amount. This will render the offer of waived principal sum of Rs.257.09 lakhs made by the assessee erroneous. The erroneous offer of tax of Rs.257.09 lakhs towards waiver of principal sum is more than the erroneous claim of interest u/s 43B of Rs.193.97 lakhs. As both erroneous offer of waived principal sum to tax and erroneous claim of interest u/s 43B emanated from a single transaction/event i.e. OTS, both should be understood to have cancelled each other. In other words, whichever way the appropriation of OTS is understood, the assessee cannot be put into double jeopardy (tax on waived principal sum as well as disallowance of interest u/s 43B). These two effects are mutually exclusive and cannot co-exist. Thus, the disallowance of Rs.193.97 lakhs u/s 43B is to be subsumed into the offer of Rs.257.09 lakhs on waiver of principal.
Facts of the
case
Assessee is engaged in manufacturing and trading of refined edible oil. Assessment was made u/s 143(3) with additions on account of capital gain on sale of factory building, borewell and plant and machinery after providing for notional depreciation for unused assets and interest u/s 43B as a result of one time settlement scheme. CIT (A) confirmed the order of AO.
A) Brief facts were that assessee sold land, factory building, borewell and plant and machinery and declared capital gain on it. While computing capital gains, assessee had adopted WDV of the asset as on 31.03.2003 since the property in question were attached/seized for default in payment of loan borrowed from Banks as depreciation was not claimed in respect of the said assets as it were not used by assessee in business and conditions of section 32 were not fulfilled. AO by virtue of Explanation 5 to section 32 granted notional depreciation from 2003 onwards and the WDV of the property as on 31.03.2006 was calculated and thus capital gain was recomputed.
CIT (A) dismissed the appeal of assessee observing that to claim depreciation u/s 32 of I.T. Act, two conditions must be fulfilled. The first one is that the assessee must by the owner of the asset and secondly such asset must have been used for the purpose of business. Explanation only clarifies the basic provisions of a substantive section and cannot act as substitute. Thus, the assessee was justified to consider the cost of the sold assets as the WDV as on 01.04.2003. But the computation of STCG on sale of such capital assets is not dependent on the reduction of depreciation. Even standing unused machineries get rusted and its value depreciates. Therefore, assessee was not entitled for depreciation on plant and machinery, bore well and factory building by application of commonsense.
B) Assessee claimed deduction u/s 43B of the Act for the alleged payment of interest. AO took a view that the assessee had not paid any interest during the year and therefore added the interest claimed as deduction. CIT (A) rejected the plea of assessee on the premise that assessee had not paid the interest liability because the same was waived by the bank and, hence, the interest has to be disallowed. Further as per Form No.3CD no interest has been paid during the year. Hence, the said interest’s claim was correctly disallowed.
Assessee contended that as a result of one time settlement, assessee paid liability inclusive of interest. Assessee submitted that the bank having recovered the said interest by way of sale of assets of the assessee, the said liability in effect had been discharged and therefore, the deduction in respect of the interest paid needed to be allowed u/s 43B.
After hearing both the parties, the ITAT held that,
A) ++ the assessee was not in possession and control of the assets due to the seizure by the bank so as to use them for the conduct of the business. There was neither active nor passive use of the said assets as they remain seized by the Banks. The assets were auctioned by the banks to the best bidder and the assets were directly handed over by the bank to the buyer. It is evident that in order to claim depreciation u/s 32 of the Act, the assessee must be owning the assets and the same should be used for the purpose of the business. The other condition, in order to claim depreciation, is that the asset must have been used for the purposes of the assessee’s business. It is not an allowance for natural wear and tear by reason of the aging process. In section 32 the emphasis is on the user of the asset in the business of the assessee. For the purpose of ‘passive use’, even the aspect of where the assets are ‘kept ready for use’, the same would be considered as usage. The assessee not being in possession of the assets, it cannot be said the seized assets were kept in a state of readiness;
++ section 50 nowhere provides that certain deemed depreciation needs to be allowed. Section 50 merely states “where depreciation has been actually allowed under this Act”. The same, therefore, implies that where the depreciation has been allowed as per the provisions of the Act after the fulfilling conditions prescribed u/s 32 of the Act and then the special provisions of section 50 would follow. Thus, the order of the CIT (A) confirming the assessment order in respect of computation of capital gain is not correct. Grant of notional depreciation from the year 2003 for calculation of WDV as on 01.04.2006 is not warranted;
B) ++ assessee understood the OTS of Rs.378.72 lakhs as being first attributed towards interest and balance towards principal leaving a portion of principal unpaid and waived. On this basis, the assessee claimed interest deduction u/s 43B and offered, though, wrongly the waived principal to tax. Even if one would understand the OTS of Rs.378.72 as being first attributed towards principal and balance towards interest, it means that unpaid interest of Rs.193.97 lakhs is to be disallowed u/s 43B. However, this would also mean that there is no waiver of principal amount. This will render the offer of waived principal sum of Rs.257.09 lakhs made by the assessee erroneous. The erroneous offer of tax of Rs.257.09 lakhs towards waiver of principal sum is more than the erroneous claim of interest u/s 43B of Rs.193.97 lakhs. As both erroneous offer of waived principal sum to tax and erroneous claim of interest u/s 43B emanated from a single transaction/event i.e. OTS, both should be understood to have cancelled each other. In other words, whichever way the appropriation of OTS is understood, the assessee cannot be put into double jeopardy (tax on waived principal sum as well as disallowance of interest u/s 43B). These two effects are mutually exclusive and cannot co-exist. Thus, the disallowance of Rs.193.97 lakhs u/s 43B is to be subsumed into the offer of Rs.257.09 lakhs on waiver of principal.
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