By TIOL News Service

MUMBAI, NOV 19, 2015: THE issue is - Whether the "electric fittings" should considered as "plant & machinery" and depreciation should be allowed @ 15% to the same. YES is the answer.

Facts of the case

The assessee is a company. This ground relates to the disallowance of depreciation of certain assets and the rate of depreciation is the subject matter of dispute. While the assessee claimed rate of depreciation @15% on the assets mentioned in the above grounds, the AO restricted the same to 10%. On similar facts, the Tribunal held in favour of the assessee and granted 25% as claimed by the assessee in the earlier AYs mentioned above.

The assessee purchased land at Athal, Silvassa along with the boundary wall constructed thereon. In this regard, concerned Government Authorities not permitted the assessee for manufacturing of Polyester Polymer at Athal, Silvassa and therefore, the assessee-company decided to shift the said project to Sarigam, Gujarat. The land at Athal, Silvassa was sold in AY 2007-2008. During the year under consideration, assessee company incurred Rs. 17,98,46,190/- as "interest" expenditure. Out of the said amount, Rs. 7,78,34,944/- was capitalized to fixed assets for new industrial undertaking at Sarigam. In the assessment, AO disallowed the interest of Rs. 69,76,659/- on the ground that the said interest relate to the capital expenditure. Aggrieved, assessee carried the matter in appeal before the first appellate authority. After considering the submissions of the assessee, CIT (A) confirmed the decision of the AO. 011-26017444.

Assessee made purchases POY to the tune of Rs. 3,54,44,578/- and plastic adapter to the tune of Rs. 67,53,401/- from Arya Industries in which the chairman of the company is the partner. In the assessment, AO observed that similar purchases were made from other parties and compared the rates. AO accepted the rates for purchase of paper tubes. However, he was of the view that purchase of plastic adapter, there were some variations with other parties. Accordingly, AO made addition of Rs 4,77,918/- u/s 40A(2)(b). On appeal, CIT (A) confirmed the said addition made by the AO. Aggrieved, assessee is in appeal before the Tribunal. During the proceedings before us, at the outset, counsel for the assessee brought our attention to the said decision of the Tribunal dated 17.12.2014 and mentioned that vide para 35 the Tribunal directed the AO to compute the disallowance @ 6% of the aggregate purchase value of the purchases made from M/s. Arya Industries, and therefore, considering the commonality of the issue, the present ground should also be decided in the same lines.

Next ground relates to the disallowance of alternate claim of depreciation of Rs. 45,87,122/-, when the rentals were not allowed. In this regard, Counsel for the assessee brought our attention to the said Tribunal"s order dated 17.12.2014 and mentioned the on identical facts, Tribunal decided the similar issue vide para 10 of its order.

Having heard the matter, the Tribunal held that,

++ the Tribunal held that by following the decision of the Ahmedabad Bench of the Tribunal referred above, we hold that the electrical fittings in the instant case should be considered as plant and machinery and hence the depreciation should be allowed at the rate of 25% to plant and machinery. Considering the above Tribunal"s decision on the identical issue as well as in the absence of any contrary decision before us from the side of the Revenue, we, respectfully following above decision of the Tribunal, hold that the "electric fittings" should considered as "plant & machinery" and hence the depreciation should be allowed @ 15% to the said plant & machinery as claimed by the assessee. Accordingly, Ground no.1 with its sub-grounds raised by the assessee is allowed;

++ we find the Tribunal held that at the time of hearing the AR submitted that the assessee had used the internal cash accruals for funding the above said projects and the availability of its own funds could be proved to the AO by showing the balance sheet of the assessee. Accordingly, he requested that this matter may be set aside to the file of the AO so that the assessee would be able to demonstrate about the availablility of its own funds, to which the DR also did not object. Accordingly, we set aside the order of the CIT (A) and restore this issue to the file of AO with a direction to examine this issue afresh by considering the information and explanation that may be furnished by the assessee and take appropriate decision in accordance with law. Considering the commonality of the issue involved in the instant ground with that of the one decided by the Tribunal vide above extracted para 31 of its order and respectfully following the same, we remand this issue to the file of the AO with identical directions. Accordingly, ground no.2 with its sub-grounds raised by the assessee is allowed for statistical purposes;

++ we find that Tribunal direct the AO to recomputed the disallowance at the rate of 6% of the aggregate purchase value of purchases made from M/s. Arya Industries. The order of the CIT (A) on this issue stands modified accordingly. Considering the commonality of the issue involved in the instant ground with that of the one decided by the Tribunal vide above extracted para 35 of its order and respectfully following the same, we direct the AO to compute the disallowance @ 6% of the aggregate purchase value of the purchases made from Arya Industries. Accordingly, this ground 3 with its sub-grounds is partly allowed.

++ the Tribunal held that AO has denied the benefit of depreciation also on the ground that the assessee is not the owner of the asset as per the lease agreement. There is a fallacy in the said decision. Once the AO has held that this was a case of finance transaction by ignoring the lease agreement, in our view, he should not refer to the very same lease agreement to decide about the ownership. Accordingly, we are of the view that the assessee should be allowed depreciation benefit. Considering the commonality of the issue involved in the instant ground with that of the one decided by the Tribunal vide above extracted para 35 of its order and respectfully following the same, we are of the considered opinion that the assessee should be allowed depreciation benefit. Accordingly, ground no.5 with its sub-grounds raised by the assessee is allowed. In the result, appeal of the assessee is partly allowed for statistical purposes.

(See 2015-TIOL-1883-ITAT-MUM)