Additional depreciation u/s 32(1)(ii) on capital work in progress converted into plant and machinery erected, commissioned during the year allowable – ITAT

Additional depreciation u/s 32(1)(ii) on Capital Work in Progress converted into plant and machinery during the year is allowable – ITAT

ABCAUS Case Law Citation:
976 2016 (07) ITAT
Assessment Year: 2006-07
Date/Month of Judgment/Order: July 2016

Important Judgments Cited:
JCIT vs. Lotus Energy (India) Ltd. [2016] 68 taxmann.com 364 (Mumbai – Trib.).

Question before the Tribunal:
Whether assessee was entitled for additional depreciation u/s 32(1)(ii) on plant and machinery not purchased during the year under assessment, claimed under the head “capital work-in-progress”, transferred from pre-operative expenses?

Brief Facts of the Case:
The appellant assessee company was in the business of manufacturing of fertilizers, chemicals and paints. After completion of assessment under section 143(3) of the Income-tax Act, 1961 it was reopened u/s 148 on the ground that from the scrutiny of assessment record, it was noticed that the assessee had not purchased any plant and machinery during the year under assessment and the additional depreciation was claimed on opening work-in progress consisting of plant and machinery and transferred from pre-operative expenses. Therefore the assessee had wrongly claimed additional depreciation on plant and machinery and thus the income had escaped assessment within the meaning of section 147/148.

AO held that the additional depreciation u/s 32(1)(ii) was allowable on new machinery purchased and installed during the year under consideration only whereas in the case in hand, machinery was purchased before beginning of the financial year and it was only transferred from pre-operative expenses to the schedule of assets and shown as addition in plant and machinery which did not qualify for the claim of additional depreciation and accordingly he disallowed additional depreciation making an addition thereof to the income of the assessee.

The Assessee carried the matter before the CIT (A) who also affirmed the assessment order passed u/s 147/143 (3) .

Contentions of the Assessee:
It was submitted that the assessee company being a manufacturing unit, the erection of plant and machinery in the assessee’s unit got completed during FY 2005-06 and production also started during FY 2005-06 and as such the assessee company was entitled for additional depreciation under provisions contained u/s 32(1)(ii).

Observations made by ITAT:
The Tribunal observed that the Legislation has used words “acquired and installed” and provisions contained u/s 32(1)(ii) are beneficial legislation to extend incentive to the new manufacturing units, which should be constructed liberally.

On completion of erection and installation of the machinery, the assessee company was certainly entitled for claiming additional depreciation shown as transferred from pre-operative expenses. When integrated unit was completed after installation of the plant and machinery during the relevant year and the fact had not been disputed by the revenue, additional depreciation could not be disallowed on the ground that the machinery was purchased before the beginning of the financial year.

The Tribunal further elaborated that expenses under the head “work-inprogress” constitute the amount of expenses for the acquisition of various components and material to convert the same into plant and machinery (complete unit) and when the assessee had not claimed any depreciation (normal or additional) on the expenses incurred under the head “capital work-in-progress” in the earlier assessment years as the installation and erection of machinery was under progress, the assessee was entitled for additional depreciation under the amended provisions . The findings by the lower authorities that no new machinery was purchased and installed during the financial year under consideration were not tenable in the eyes of law.

Held:
The Tribunal set aside the order of CIT(A) holding that the AO had assumed jurisdiction to reopen the assessment u/s 147/148 of the Act by misinterpreting the relevant provisions and disallowing the additional depreciation .