Reduction of loan waived from fixed assets actual cost-wdv u/s 43(6)(c) not required for calculating depreciation allowable under Income tax Act – ITAT
ABCAUS Case Law Citation:
ABCAUS 1190 (2017) (03) ITAT
The appellant assessee company was aggrieved by the order passed by the CIT(A) confirming the penalty imposed by the Assessing Officer u/s 271(1)(c) of the Income-tax Act, 1961 ( ‘the Act’) for furnishing inaccurate particulars of income/concealment of income.
Assessment Year : 2005-06
Date/Month of Pronouncement: March, 2017
Important Case Laws Cited/relied upon:
CIT Vs. Reliance Petro Products Pvt. Ltd.
Akzo Nobel Coatings India Pvt. Ltd. vs. DCIT
CIT vs. Cochin Company (P) Ltd.
Brief Facts of the Case:
The assessee company had purchased certain assets in an earlier year by taking loan from its parent company. During the year under consideration, the assessee’s parent company waived the said loan which was reduced by the assessee from gross block of fixed assets in the Schedule of the Fixed Assets under Companies Act. Consequential adjustment to depreciation as per books of account was also made. The facts of loan waiver and reduction in depreciation under the Companies Act were also recorded in Notes to the Annual accounts.
However, such waiver of loan was not reduced from the value of block of assets in the Schedule of fixed assets for the purposes of calculating depreciation under the Act.
The Assessing Officer (‘AO’) opined that the assessee ought to have reduced the amount of loan waived by its parent company from block of fixed assets for the purposes of calculation of depreciation under the Act as well. Accordingly, the AO disallowed the depreciation on the proportionate amount of loan waived by the parent company and thereafter also imposed penalty u/s 271(1)(c) which came to be sustained by the CIT(A).
Observations made by the Tribunal:
The ITAT observed that undisputed facts were that the parent company of the assessee waived loan which the assessee meticulously reduced from the gross value of assets from the Schedule of Fixed Assets under the Companies Act. This fact was disclosed in Schedule to the Annual Accounts viz., Significant Accounting Policy and Notes to the Accounts as per which the disclosure was made about all the necessary facts concerning the waiver of loan and reduction of this amount from gross block of fixed assets.
The Tribunal observed that the assessee did not reduce the amount of the loan waived for the purposes of calculating depreciation under the Act primarily on the basis of the judgment of Kerala High Court which provided that the actual cost of machinery was not to be reduced by the amount of liability remitted or waived.
It was also observed by the Tribunal that similar view had been taken by the Bangalore Bench of the Tribunal which deleted the disallowance of depreciation made by the authorities on the amount of loan waived by holding that the concept of ‘actual cost’ is defined u/s 43(1) which is relevant only for the year of purchase of assets; and the waiver of loan in a later year cannot be covered u/s 43(6)(c) for reduction from written down value (WDV). The Tribunal opined that the facts of the instant case are identical with those considered and decided by the Bangalore Bench of the Tribunal.
The Tribunal observed that the assessee company on the strength of above decisions, formed an opinion that the amount of loan waived was not to be reduced for the purposes of calculating depreciation under the Act. This was a possible view taken by the assessee as supported by the judgments relied upon by the assessee.
The Tribunal further stated that debatable issues are outside the ken of penalty provision. Where an issue is debatable and the assessee adopts a legally possible view which is eventually upset by the authorities, no penalty can be imposed with reference to such disallowance.
The Tribunal referred to the judgment of the Hon’ble Supreme Court which in the case of Reliance Petro Products Pvt. Ltd. held that simply for the reason that the Assessing Officer did not find the claim of the assessee to be sustainable in law up to a certain extent, cannot be a case for penalty u/s.271(1)(c).
The ITAT deleted the penalty holding the CIT(A) was not justified in sustaining the penalty u/s 271(1)(c) in respect of the disallowance of depreciation.