Facts of the Case

The assessee company had imported machinery under a duty exemption certificate issued by the Ministry of Finance. Subsequently, the Customs Department disputed the exemption and issued a show cause notice demanding customs duty amounting to Rs. 4,25,34,028.

Without prejudice to its rights and while contesting the demand, the assessee paid the customs duty and capitalized the amount by adding it to the cost of machinery. Consequently, depreciation was claimed on the enhanced cost of the machinery.

The Assessing Officer disallowed the depreciation claim on customs duty, treated expenditure incurred on glow sign boards as capital expenditure, and restricted depreciation on UPS from 60% to 25%.

The Commissioner (Appeals) deleted all three additions, and the Tribunal affirmed the relief granted to the assessee.

Issues Involved

1.      Whether customs duty paid under dispute could be capitalized and depreciation claimed thereon.

2.      Whether expenditure incurred on glow sign boards was revenue expenditure or capital expenditure.

3.      Whether UPS was eligible for depreciation at the rate of 60% or only 25%.

Petitioner’s Arguments

• The customs duty payment was under dispute and therefore could not form part of the actual cost of machinery for claiming depreciation.

• Glow sign boards provided enduring benefit to the assessee and accordingly constituted capital expenditure.

• UPS was an independent electrical equipment and was not entitled to depreciation at the higher rate applicable to computers and computer peripherals.

Respondent’s Arguments

• The customs duty had actually been paid and had gone out of the assessee’s coffers; therefore, it formed part of the machinery cost irrespective of pending litigation.

• Glow sign boards were perishable in nature, required frequent replacement and were incurred wholly for business promotion; therefore, the expenditure was revenue in nature.

• UPS formed an integral part of the computer system and was entitled to depreciation at 60% in accordance with judicial precedents.

Court Findings

Issue No. 1 – Depreciation on Customs Duty

The Court upheld the Tribunal’s finding that once customs duty had been paid, the liability had accrued and the amount became part of the actual cost of plant and machinery. The pendency of litigation regarding the validity of the customs duty demand did not prevent capitalization of the amount.

Accordingly, depreciation on the enhanced cost was allowable.

Issue No. 2 – Glow Sign Board Expenditure

The Court agreed with the Punjab & Haryana High Court's decision in CIT vs Liberty Group Marketing Division (315 ITR 125).

It was held that glow sign boards are not assets of a permanent or enduring nature. They are exposed to weather conditions, have a short life span, and require regular replacement. The expenditure was incurred for facilitating business operations and not for acquiring a capital asset.

Therefore, the expenditure was held to be revenue expenditure allowable under the Income-tax Act.

Issue No. 3 – Depreciation on UPS

The Court followed its earlier judgment in CIT vs BSES Yamuna Powers Ltd. and held that UPS is eligible for depreciation at the rate of 60%.

Final Order

The Delhi High Court held that:

• Customs duty paid on imported machinery could be capitalized and depreciation claimed thereon.

• Expenditure incurred on glow sign boards was revenue expenditure.

• UPS was entitled to depreciation at the rate of 60%.

Accordingly, both appeals filed by the Revenue were dismissed.

Important Clarification

The Court clarified that actual payment of liability is a significant factor for capitalization even where the liability is disputed and litigation is pending.

The judgment further reiterates that expenditure resulting in no enduring benefit and requiring regular replacement ordinarily qualifies as revenue expenditure.

The ruling also strengthens the principle that UPS forms part of the computer system for depreciation purposes and qualifies for higher depreciation.

Sections Involved

• Section 32 of the Income-tax Act, 1961 – Depreciation
• Section 37(1) of the Income-tax Act, 1961 – Business Expenditure
• Provisions relating to Actual Cost of Assets and Capitalization

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:346-DB/AKS20012011ITA652011.pdf

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