Mapex Infrastructure (P) Ltd. vs Commissioner of Income Tax

Kalyan Jyoti Sengupta, Actg. C.J.

The above appeal is directed against the judgment and order dt. 9th March, 2007 passed by the Tribunal, ''E'' Bench, Kolkata in ITA No. 2087/Kol/2006 for the asst. yr. 2003-04. It was admitted by an order dt. 23rd Aug., 2007 on the following substantial questions of law.

Whether on a true and proper interpretation of the provisions of Expln. 5 to s. 32(2) and s. 145 of the IT Act, 1961 the Tribunal was justified in law in directing capitalization of the depreciation amount of Rs. 5,30,93,896 and in holding that the same could not be set off against the interest income of Rs. 29,29,037?

Whether and in any event the entire highway construction expenditure including depreciation was allowable as a deduction in the asst. yr. 2003-04 notwithstanding the accounting policy followed by the appellant and the same was required to be carried forward to the subsequent years after set off against the interest income ?

The short fact which is also admitted leading to preferring the appeal is as follows:

The assessee-company had been carrying on business during the relevant time, amongst other for construction and development of roads. As such the appellant was engaged for construction and development of a portion of the National Highway-2 under the Prime Minister Quadrilateral Project in West Bengal stretching from Panagarh to Palsit. During the previous year relevant to the assessment year under the appeal, the assessee in its return had shown interest income from other sources, of Rs. 29,29,027 but the same was claimed for setting off with the depreciation on assets. Thus in the return the assessee reflected a total loss of Rs. 5,01,64,869 after claim of depreciation of Rs. 5,30,93,896 on the assets acquired by it. No tax report under s. 44AB was filed as the assessee-company was not claiming any revenue receipt on account of business activity. The AO not being satisfied with the explanation offered as above disallowed the said claim for depreciation. While doing so the AO held that the basic element for claim of depreciation is absent in the case of the assessee. The depreciation on equipment or assets used to construct the highway is itself a capital expenditure till the completion of the same and commencement of the commercial operation. On appeal being preferred CIT(A) did not interfere with the disallowance of depreciation. The learned Tribunal then was approached unsuccessfully as the desired relief was not granted. It appears from the recordings of all authorities below that basis of disallowance of the above depreciation was that the assessee itself in its own account has capitalized all the expenditure under the head ''National Highway Development Expenditure'' and it has mentioned in the audited balance sheet that National highway development expenditure amortized over the concession period from the date of commercial operation. In the audited P& L a/c, no expenditure or depreciation has been claimed by the assessee. On the other hand, only interest on fixed deposit has been shown. In the computation of income the assessee has claimed deduction for depreciation against interest income, being income from other sources. The user of the assets was not for earning interest income. The assets were used for construction of National Highway. All the expenditure in respect of construction of National Highway has been capitalized by the assessee itself as per the accounting policy followed by it. Thus it is clear that because of the assessee''s own accounting system the depreciation otherwise allowable has not been allowed. In essence the principle of estoppel has been made applicable in this case.

Mr. Khaitan, learned senior counsel for the appellant submits that there is no dispute as regard findings of the learned Tribunal on the following aspects:

(a) The assessee had commenced its business of construction of National Highway and the entire expenditure of Rs. 88.97 crores incurred by it was revenue expenditure.

(b) The assessee is entitled to depreciation of Rs. 5,30,93,896 in respect of assets owned by it and used for the purposes of its said business.

He complains that in spite of the aforesaid findings because of the view it took, the provisions of s. 145(1) of the IT Act, 1961 (hereinafter referred to as the said Act'') the learned Tribunal'' directed that the depreciation amount was to be capitalized along with other revenue expenditure and the same cannot be set off against the interest income. He submits sub-s. (1) of s. 145 requires computation of business income in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The accounting policy followed by the assessee that is to amortize the highway construction expenditure over the concession period is not the method or system of accounting adverted to in s. 145(1). According to him irrespective of nature of maintenance of accounts under the provision of the said Act the depreciation under s. 32 thereof has to be allowed. Depreciation under s. 32(1) has to be allowed, whether it is claimed or not and this legal position would be clear if Expln. 5 of s. 32(1) which was introduced later the assessee had the option to claim or not to claim depreciation, and if depreciation was not claimed the AO cannot thrust it upon the assessee. In other words he says that Expln. 5 to s. 32(1) has to be given effect irrespective of the fact that the assessee has not claimed any other expenditure. This position has been settled by judicial pronouncement of this Court in case of Commissioner of Income Tax Vs. Berger Paints (India) Ltd. (No. 2), and the decision of Madras High Court in case of Commissioner of Income Tax Vs. Sakthi Soyas Ltd.,

He further submits that depreciation under s. 32 is an item of allowance in computing business income. After business income is computed, the provisions of s. 71(1) of the Act come into play which permit set off of loss under any head of income (other than capital gains). Therefore, the said disallowance of depreciation further setting off of interest income should have been allowed after treating the same as income from other sources. He further contends that once income under different heads is computed, the provisions of the Act relating to the set off and carry forward have to be necessarily given. There is no provision in the Act permitting capitalization of income computed under any head.

Learned counsel for the Revenue submits without disputing the fact as follows:

As the assessee during the accounting year for the relevant assessment year under consideration was not entitled to any annuity, it capitalized the expenditure incurred by it on the construction of National Highway under the head "National Highway Development Account" as per accounting policy followed by it regularly and the said expenditure was to be amortized over the concession period from the date of commercial operation.

He submits that during the year under consideration the assessee-company incurred huge expenditure on purchase of material, direct and indirect expenses on the development of National Highway and since the entire expenditure is revenue expenditure and it is capitalized by the assessee as per method of accounting followed by it, it cannot be allowed to turn around to claim depreciation should be treated to be revenue expenditure. The assets are owned by the assessee and used for the purpose of business, the depreciation to which the assessee is entitled under s. 32(1) and Expln. 5 thereunder has to be worked out on such assets and the same should be capitalized along with other expenditure under the head "National Highway Development Expenditure Account". Hence the judgment and order of the learned Tribunal does not require any scrutiny and should not be interfered with.

After hearing the learned counsel for the parties and reading the judgment of all the authorities below we feel that the AO as well as the CIT(A) disallowed the claim of depreciation because in its own accounting system (mercantile, of course) and also in the P & L a/c the assessee itself has shown the aforesaid depreciation was capitalized and this was shown under the heading "National Highway Development Account". In other words, the authority concerned by necessary implication held that assessee after having shown in its own account is estopped from claiming depreciation in the IT returns consequently, disallowed carry forward of the balance loss. Therefore, cardinal question to be answered in this appeal is whether in view of the aforesaid capitalization in its account debar the appellant from claiming allowance of depreciation in the return before officer concerned. On fact it is not disputed that the plant and machinery equipments are assets and it was utilized for the business. The above question we have summarized has been answered by the Division Bench of the Madras High Court in case of CIT vs. Sakthi Soyas Ltd. (supra). In that judgment it was held on the principle of law as follows:

Capitalisation of those expenditure in the books of account alone was not the decisive factor in examining an expenditure for the purpose of income tax. The name given to an expenditure or a nomenclature given to an expenditure in the books of account of the assessee is not the litmus test to decide the exact nature of expenditure for the purpose of income tax. The purpose of the Companies Act is different from the purpose of the IT Act. Therefore, the classification of those expenses as capital in nature for the purpose of the Companies Act, does not ipso facto make that expenditure a capital expenditure for the purpose of the IT Act.

In the case before Madras High Court, the aforesaid decision was rendered on the factual aspect that assessee therein filed a return of income admitting a total loss of Rs. 8,58,41,145. The AO disallowed the claim of expenditure to the extent of Rs. 20,36,157 towards crop development expenses on the ground that the same was not considered as a revenue expenditure by the assessee in its accounts. However, the assessee claimed it as revenue in the statement of computation of total income. The AO however disallowed the expenses incurred amounting to Rs. 16,41,125 towards advertisement in respect of the Soya products and sales promotional expenses. On fact in those cases authorities below took note of what was stated in the audited account and not what was claimed in the returns.

Our High Court in case of CIT vs. Berger Paints (India.) Ltd. (supra) while taking note of the old decision of the Supreme Court in cases of The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, and Commissioner of Income Tax, West Bengal I Vs. India Discount Co. Ltd., held that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not self-estopped by the treatment given by the assessee to it in its own books of account.

It appears that the authorities below have heavily relied on the account in view of s. 145 of the Act. In view of sub-s. (3) of the same, the said sub-section has given ample discretion to the assessee with regard to correctness and completeness of any account of the assessee in case where the method of accounting provided in sub-s. (1) or Accounting Standards as notified under sub-s. (2) have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in s. 144. We think that the aforesaid sub-s. (3) in this case has no manner of application as it is not a case here that the appellant has frequently been shifting its accounting process and method. In this case the accounting system is uniform however, while filing returns the depreciation of those assets has been claimed under the provisions of the law in its return.

The aforesaid two pronouncements have clearly answered this question. We feel in this case while making assessment of any returns if any deduction is sought for, it is the duty of the Revenue official to examine not only the account but also substantive right of claiming deduction under the Act on the facts and circumstances of this case. It is not a case that the said assets and properties do not belong to the appellant, therefore depreciation in any assets and properties is a regular phenomenon and deduction on this account is allowable under s. 32 automatically. It appears that learned Tribunal while reading s. 32 of the Act has accepted the legal principle but unfortunately while granting relief as rightly pointed out by Mr. Khaitan has not allowed the setting off of the interest income as regards the aforesaid amount of depreciation. We therefore allow this appeal and set aside the judgment and order of the authorities below. We direct the AO to work out again allowing the deduction and setting off of the amount of interest income and to allow carry forward. Thus, the appeal is allowed without any order as to costs.

Asim Kumar Mondal, J.

I agree.