I-T - Whether depreciation is to be allowed on capitalized expenses for preceding years on re-characterization of revenue expenses - YES: ITAT
By TIOL News Service
MUMBAI, NOV 08, 2016: THE issue is - Whether on re-characterization of ‘revenue expenses' into ‘capital expenses' by revenue authorities, depreciation u/s Sec. 32(1)(ii) Exp 5 can be allowed on capitalized expenses for preceding years also. YES IS THE VERDICT.
Facts of the case:
The assessee is a private limited company engaged in the business of manufacturing pharmaceutical formulations. It filed its return of income declaring a 'loss' of Rs.8,55,11,372/-, which was revised at a 'loss' of Rs. 8,71,24,645/- by way of a revised return of income. The case of the assessee was taken up for scrutiny assessment, pursuant whereto the A.O after deliberating on certain issues, assessed the total loss of the assessee company at Rs.8,20,26,201/-. The A.O during the course of the assessment proceedings carried out certain disallowances/additions in the hands of the assessee. During the course of the assessment proceedings it was observed by the A.O that an amount of Rs.20,76,724/- incurred by the assessee company towards 'Patent expenses' was debited under the head 'Miscellaneous expenses' in the 'P & loss a/c'. The A.O being of the view that as the said expenditure was in the nature of a 'Capital expenditure', therefore called upon the assessee company to justify its claim as regards allowance of the same as a 'Revenue expenditure', in compliance whereto the assessee emphasised on its claim as regards allowability of the said amount as a revenue expenditure, but thereafter came up with an alternative plea that in case of treatment of the same as a 'Capital expenditure', depreciation of Rs.10,64,618/-was to be allowed as regards the capitalized value of the 'Patent expenses' pertaining to the year under consideration, as well as those for the preceding years. The A.O discarding the contention of the assessee and being of the view that as per Exp 3 to Sec 32(1)(ii), the patents were covered in the scope and gamut of the definition of intangible assets, therefore the expenses incurred as regards the same was a 'capital expenditure', disallowed the claim of Rs. 20,76,724/- of the assessee, but on the basis of such recharacterisation of the aforesaid expenditure as a 'capital expenditure', allowed a consequential depreciation of Rs.5,19,181/- on the aforesaid capitalized value of Rs. 20,76,724/- to the assessee.
On appeal, the ITAT held that,
++ this Tribunal is of the considered opinion that now when the lower authorities had discarded the claim of the assessee company and had held that the 'Patent expenses' were not to be allowed as a 'revenue expenditure', and had recharacterised the same as a 'capital expenditure', thereafter pursuant to such recharacterisation, all the more in light of the specific claim raised by the assessee, the A.O remained under a statutory obligation to allow depreciation, i.e both as regards the capitalized value of the 'Patent expenses' pertaining to the year under consideration, as well as on the W.D.V of those as had been capitalised in the preceding years.
++ though we are not oblivious of the settled position of law that an assessee cannot be allowed to improve upon his return of income by raising fresh claims in the course of the assessment proceedings, but as in the case of the present assessee company, where as a result of differential treatment given by the A.O to a claim raised by an assessee in his return of income, a consequential statutory entitlement emerges and gets vested with the latter, then to our opinion the A.O remains under a statutory obligation to give effect to the same without any reservation….. in the background of the settled position of law as stands contemplated in Sec. 32(1)(ii)- Exp 5, provides irrespective of the fact that as to whether an assessee had claimed deduction in respect of depreciation while computing his total income, or not, the same shall mandatorily be considered to have been given effect to;
(See 2016-TIOL-1882-ITAT-MUM)