Facts of the Case

The Appellant (Revenue/Income Tax Department) filed an appeal (ITA No. 769/2009) against the order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2003-04. The dispute arose out of two primary additions made by the Assessing Officer (AO):

  • Fixed Assets Written Off: The AO disallowed a deduction of ₹11,05,552/- on account of fixed assets written off. The AO assumed that since the assessee was not an undertaking engaged in the generation or generation and distribution of power, it was entirely disentitled to depreciation under Section 32(1)(i).
  • Deferred Revenue Expenditure: The AO disallowed and added back ₹10,34,703/- claimed by the assessee as deferred revenue expenditure. The assessee had consistently followed a policy of amortizing this deferred revenue expenditure across multiple financial years.

The Commissioner of Income Tax (Appeals) [CIT(A)] and the ITAT both ruled in favor of the Respondent (Assessee), deleting both additions. Aggrieved by this, the Revenue approached the High Court.

Issues Involved

  • Issue 1: Whether on the facts and in the circumstances of the case, the Ld. ITAT erred in law and on merits in allowing ₹11,05,552/- on account of fixed assets written off under Section 32?
  • Issue 2: Whether on the facts and in the circumstances of the case, the Ld. ITAT erred in deleting the addition of ₹10,34,703/- on account of deferred revenue expenditure?

Petitioner’s (Revenue's) Arguments

  • Regarding Depreciation: The Petitioner contended that the assessee did not fall within the scope of Section 32(1)(i), which specifically caters to power generation and distribution undertakings, and thus could not claim the deduction.
  • Regarding Deferred Revenue Expenditure: The learned counsel for the Revenue argued that the CIT(A) and ITAT erred by deleting the addition merely because it was allowed in the previous year. The Petitioner pointed out that in the preceding year, the return was processed under Section 143(1)(a) (intimation/notice of assessment) and not scrutinized under Section 143(3). Therefore, an assessment under Section 143(1)(a) does not constitute a binding order after due consideration and cannot serve as a binding precedent for the relevant assessment year 2003-04.

Respondent’s (Assessee's) Arguments

  • Regarding Depreciation: The Assessee maintained that depreciation is not strictly confined to sub-clause (i) of Section 32(1).
  • Regarding Deferred Revenue Expenditure: The Assessee asserted that they had consistently followed a systematic accounting policy of amortizing the deferred revenue expenditure over different years. Furthermore, the counsel for the respondent placed on record that the Assessing Officer had, in fact, allowed a further part of the same deferred revenue expenditure in subsequent assessment years succeeding the relevant assessment year.

Court Order / Findings

The Division Bench of the Delhi High Court, comprising Hon'ble Mr. Justice A.K. Sikri and Hon'ble Mr. Justice Valmiki J. Mehta, dismissed the Revenue's appeal, holding that no substantial question of law arose:

  • On Depreciation / Section 32: The Court observed that Section 32 relates to entitlement of deduction under various sub-clauses, namely (i), (ii), (iia), and (iii). The deduction with respect to depreciation is not confined exclusively to sub-clause (i) (which pertains only to power undertakings). The deduction in this case was covered under Section 32(1)(iii) concerning buildings, plant, and machinery. Thus, the Assessing Officer fell into an explicit error, which was correctly rectified by the CIT(A) and ITAT.
  • On Deferred Revenue Expenditure: While the Court agreed in isolation with the Revenue's proposition that an assessment under Section 143(1)(a) does not bind subsequent years, it held that the facts of the present case differed. The Assessee consistently followed a policy of amortization over different years.
  • Precedents Applied: The High Court relied heavily on the landmark judgment of the Supreme Court of India in CIT vs. Madras Industrial Investment Corporation [1997 (4) SCC 666], which established that deferred revenue expenditure can be legally amortized over different years. This judicial principle, coupled with the fact that the AO themselves allowed further portions of this expenditure in succeeding assessment years, validated the concurrent findings of the CIT(A) and ITAT.

Important Clarification

  • Scope of Section 32: Section 32 depreciation rules must be read holistically across all its sub-clauses. An asset write-off/depreciation cannot be rejected solely because the assessee is not a power-generating unit under Section 32(1)(i), provided it qualifies under other clauses like Section 32(1)(iii).
  • Amortization Consistency: If an assessee follows a consistent accounting policy of multi-year amortization of deferred revenue expenditure, and it is supported by Supreme Court precedent (Madras Industrial Investment Corp.) as well as subsequent acceptance by the Revenue in later assessment years, the deduction cannot be arbitrarily broken or disallowed in intermediate years.

Section Involved

  • Section 32 of the Income Tax Act, 1961 (specifically sub-clauses 32(1)(i), 32(1)(ii), 32(1)(iia), and 32(1)(iii)) – Depreciation.
  • Section 143(1)(a) of the Income Tax Act, 1961 – Intimation/Processing of Return.
  • Section 143(3) of the Income Tax Act, 1961 – Scrutiny Assessment.

Link to download the order –

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:7258-DB/AKS21082009ITA7692009_161629.pdf

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