Income Tax Appellate Tribunal - Delhi
Xerox India Ltd., Gurgaon vs Assessee on 12 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'H' : NEW DELHI)
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.5389/Del./2011
(Assessment Year : 2007-08)
M/s. Xerox India Limited, vs. DCIT, Central Circle 20,
5th & 6th Floor, New Delhi.
Vatika Business Park, Sector - 49,
Sohna Road,
Gurgaon - 122 018.
(PAN : AABCM8634R)
(Appellant) (Respondent)
Assessee by : Shri Ajay Wadhwa, Advocate
Revenue by : Shri N.K. Chand, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the assessee emanates from the order of the Assessing Officer made u/s 143 (3) read with section 144C of the Income-tax Act, 1961.
2. The assessee company is continued to be engaged in the business of trading of Xerographic Equipments, Printers, Scanners, Faxes Multi Functional Devices, High-end printing Equipments and also engaged in trading in paper, fax rolls, transparencies spares and parts of these equipments and consumables. The assessee also continued to provide 2 ITA No.5389/Del/2011 post sales services and maintenance and repair of Xerox product and product franchise fee charged from these authorised service providers. The return of income was filed on 24.09.2007 declaring income at Rs.15,94,77,090/-. The Assessing Officer made certain additions out of which the CIT (A) has sustained certain additions. Against which, the assessee is in appeal by taking the following grounds :-
"1. That the assessment order dated 28.09.2011 passed u/s 143(3) in pursuance of directions given by the Dispute Resolution Panel in their order dated 24.08.2011 passed u/s 144C(5) of the Income-tax Act, 1961 is erroneous in law and on facts.
2. Whether on the facts and in law, the Dispute Resolution Panel is justified in directing the Assessing Officer to disallow depreciation of Rs.28,21,208/- on De-capitalized assets by stating that assets converted into stock in trade at nominal value of Re.1/- are not eligible for depreciation as such assets were not put to use for the purpose of business of the assessee company?
That the above direction given by the Dispute Resolution Panel is not correct as the assessee consistently follows the same accounting policy year to year and no understatement of income has been reported by adopting such accounting policy.
3. Whether on the facts and in law, the Dispute Resolution Panel is justified in directing the Assessing Officer .to disallow depreciation of Rs.6,03,122/- on fixed assets written off in the books, details of which were filed before the Panel, on the ground that these assets ceased to exist and were not used during the year?
4. Whether on the facts and in law, the Dispute Resolution Panel is justified in directing the Assessing Officer to add a sum of Rs.1,39,94,000/- on the ground that by changing the accounting policy of recognizing the sale on 3 ITA No.5389/Del/2011 completion of installation and acceptance by the customers as against on delivery followed in earlier years, the assessee company has deferred the sales and has underreported the profit during the assessment year under appeal?
4.1 That the above direction given by the Dispute Resolution Panel by stating that frequent changes in the method of accounting lead to underreporting of income, is not correct as the method of accounting followed from F.Y. 2006- 07 is as per the Accounting Standard - 9 issued by the Institute of Chartered Accountants of India.
5. That the interest withdrawn u/s 234D and 244A and initiation of penalty u/s 271(1)(c) are bad in law.
6. The appellant craves leave to add, modify or amend any of the grounds of appeal either before or at the time of hearing."
3. Ground Nos.1 and 6 are general in nature and does not require any adjudication.
4. Ground No.5 is against levying the interest u/s 234D and withdrawal of interest granted 244A and initiation of penalty u/s 271(1)(c). On this, we hold that the charging of interest u/s 234D is mandatory and consequential, hence dismiss this plea of assessee. The withdrawal of interest granted u/s 244A is as per law and no interference is called for, hence this plea of assessee is dismissed. The ground taken for initiation of penalty u/s 271(1)(c) is premature, hence, this issue raised in ground no.5 is dismissed.
4ITA No.5389/Del/2011
5. In the ground no.2, the issue involved is confirming the disallowance by DRP of depreciation of Rs.28,21,208/- on de-capitalised assets.
6. While pleading on behalf of the assessee, ld. AR submitted that certain fixed assets were not capable of use for captive consumption and were discarded from block of assets and converted into stock-in-trade. This conversion was done at a nominal value which was deducted from the opening WDV from the block on which the depreciation was claimed. He further submitted that the assets converted into stock-in-trade are generally used assets and incapable of any further use, therefore, the saleable or market value of these is negligible. Since these assets are being technology products. Therefore, these assets tend to become obsolete in a very short span of period as new and more advanced technology comes into operation. He further submitted that most of the assets which are converted into stock-in-trade had either been outlived their useful functional life or were not cost effective. Further, certain assets became defective due to which they had to be de-capitalised. In these circumstances, the assessee was justified in reducing the nominal value from running WDV of the block of the assets under which such assets fell. He further submitted that for the tax treatment, the depreciation under the amended provisions of section 32 of the Act is 5 ITA No.5389/Del/2011 calculated by applying the specified rate to the WDV of block of assets. He further submitted that after introduction of depreciation on block of assets concept w.e.f. 01.04.1988, depreciation is available on the relevant block of assets and not on individual assets as the individual item or asset loses its identity when it is mixed with the block of assets. The depreciation is allowable on the WDV at the end of the relevant previous year for a block of assets which was computed by adding to the opening WDV of the said block of assets, actual cost of the assets acquired during the year and deducting therefrom moneys payable including scrap value, if any, in respect of assets sold or discarded during the year. It is submitted that the phrase "moneys payable" refers to the cash received on account of sale or scrapping of the asset. Ld. AR draw our attention to the provisions of section 43(6)(c) of the Act where the WDV has been defined. He further submitted that the provisions of law clearly suggests that where the asset whose WDV is Rs.100/- is de-capitalised and valued at Rs.1/-, depreciation on the remaining Rs.99/- shall be continued to be allowed even though the asset does not physically exist in the block of assets. This concept of depreciation of block of assets was introduced and the assets forming part of the block of assets need not be identifiable, however, it will continue to form a part of the assets. If any asset is sold then the block of assets reduced by the selling price of the asset and 6 ITA No.5389/Del/2011 depreciation shall be allowable on the remaining WDV of block of assets. Thus, he pleaded that it is clear from the provisions of law that it is not necessary to continue to exist or should continue to be used for the business purposes for the claim of the depreciation. Once the asset is a part of block of assets, the depreciation can be continued to be allowed even if the same is sold or de-capitalised or demolished or destroyed. He further submitted that where the assets have been transferred to inventory and duly accounted for and whenever they are sold, the profit on their sale shall be accounted for in the profit and loss account. Therefore, there shall be no loss to the revenue by this transaction which is completely according to the provisions of Income-tax Act, 1961. He further submitted that in earlier provisions of the Act, there was a clause for terminal depreciation which was allowable in the year of sale of the asset. Under the concept of block of assets, the terminal depreciation concept has been done away with and now the loss on sale of assets is not booked in the year in which asset is sold. The depreciation on such assets constituted in the block is continued to be allowed till the block remains in the books of account. He submitted that such proposition of law has been accepted by the ITAT in the assessee's own case in ITA No.680/Del/2006 for assessment year 2002-03. In that year, certain fixed assets could not be located on physical verification and assessee wrote off 7 ITA No.5389/Del/2011 the same in the books of account. Finally, the ITAT held that even though these fixed assets were written off, the depreciation shall be continued to be allowed on the block of assets after deducting the scrap value of these assets from the block of assets, if any. The assessee's case of de-capitalisation / discarding of assets from the block of assets is also covered by the decision of ITAT in assessee's own case, hence, depreciation cannot be disallowed on the assets so discarded during the year under consideration. He finally submitted that the legal position on allowability of depreciation on the assets forming a part of the block of assets which have been sold or written off or not found, discarded or destroyed or demolished that once an asset is a part of the block of assets and it is put to use, the depreciation will be allowed till the block of assets continued to exist even if the relevant assets are sold, discarded, destroyed or demolished. Such a proposition has been upheld by Hon'ble Delhi High Court in assessee's own case where an asset forming part of the block of assets is not found or is not traceable or is lost, then also depreciation continued to be allowed on such assets as long as the block of assets do exist. In this case, the assessee has discarded the assets from the block of assets at a value of Rs.1/- and has taken to inventory as stock-in-trade at Rs.1/-. Therefore, depreciation will continue to be allowed on these assets which have been taken into inventory. Reliance 8 ITA No.5389/Del/2011 was placed on the decision of Hon'ble Delhi High Court in the case of Yahama Motor India Pvt. Ltd. reported in 328 ITR 297 (Del.). He further submitted that there was no loss to the revenue as the asset taken at Rs.1/- in the inventory whenever these were sold, the entire difference between sale price and cost of Rs.1/- shall be offered to tax as income and ultimately, the revenue will be the net gainer. The assessee has submitted complete details which have been discarded and taken to inventory. The assessee has strong internal controls to record all the entries. He pleaded to delete the addition.
7. On the other hand, the ld. DR relied on the orders of the authorities below. He submitted that the assets were having marketable value. It has been converted to stock-in-trade on nominal value. The actual value of asset has to be reduced from the block of assets as these assets were transferred to stock-in-trade. These assets were not discarded or destroyed. It was also submitted that certain assets have been leased out again and these have been re-capitalised in the block of assets at the value at which such assets were de-capitalised. Thus, the actual value was not reflected on transfer. He also submitted that depreciation cannot be allowed on the assets which are forming part of the stock-in-trade. He finally relied on the orders of the authorities below. 9 ITA No.5389/Del/2011
8. We have heard both the sides on the issue. The assessee is engaged in the business of trading of Xerographic Equipments, Printers, Scanners, Faxes, Multi Functional Devices and consumables parts thereof. The assessee leased out the equipments to the customers on an operating lease basis and these equipments are capitalised and depreciation is claimed for tax purposes in accordance with the provisions of the Act. These operating leased assets were returned to the assessee either on the termination of the lease or otherwise after a period of six months, then the assessee is following a practice to convert these assets into stock-in-trade at a nominal value of Rs.1/- as these used assets are not having any readymade market for further leasing. This nominal value is reduced from the block of assets. In some of the cases, these assets are again leased out then they are recapitalized in the block of assets at the nominal value at which these were decapitalised. However, certain used assets remained in stock-in-trade and whenever these are sold, the profit is offered for taxation. This method of accounting is being followed consistently by the assessee. When the assets are recapitalized at the nominal value at which it is decapitalised then there is no effect on the taxability of the assessee. Similarly, whenever these used assets are converted into stock-in-trade and sold subsequently and the surplus on the 10 ITA No.5389/Del/2011 sale is offered for taxation then there is no harm to the revenue. Considering all these facts, we allow this ground of assessee's appeal.
9. In the ground no.3, the issue involved is disallowance of depreciation of Rs.6,03,122/- on the fixed assets which has been written off in the books of account and where the assets ceased to exist. The Assessing Officer made an addition of Rs.20,99,837/- in respect of fixed assets written off during the year. The DRP in its direction dated 24.08.2011 has reduced the amount to Rs.6,03,122/-. The DRP sustained this amount on the basis that this disallowance has past history and the matter has travelled up to High Court and the department's appeal has been disposed off and the High Court order is awaited.
10. We have heard both the sides on the issue. At the outset, ld. AR submitted that this issue is covered in favour of the assessee by the decision of Hon'ble Delhi High Court in assessee's own case. In the subsequent year, i.e. assessment year 2008-09, the DRP itself has given the relief to the assessee which is evident from its order dated 30.08.2012. The relevant para is 3 to 3.2 of the order. The issue has already been decided in favour of the assessee by the Hon'ble jurisdictional High Court. The DRP, in the assessment year 2008-09, while disposing off the objections of the assessee on the same issue, has held as under :- 11 ITA No.5389/Del/2011
"3. The AO has proposed to disallow an amount of Rs.8,89,960/- on account of depreciation claim in respect of fixed assets written-off during the year.
3.1 It was submitted that the assessee could not locate certain fixed assets having book value of Rs.22,24,899/- on conducting physical verification. Therefore, the assessee decided to write off the book value of the fixed assets in its profit and loss account Since there was no scrap value for such assets no adjustment was made to the written down. value of the respective block of assets for computing depredation under the provisions of the Act The assessee further submitted that out of these assets around 92% (in terms of cost) were purchased prior to year 2000 and another 7% were purchased before 2005 but after 2000. These assets which were written off were tangible movable assets which over a period of time would have broken or lost. The assessee also clarified that same issue has already been: decided in favour of the assessee in the asstt. year 2002-03 by Hon'ble ITAT (Delhi bench). It was also made clear that the appeal of the Revenue before jurisdictional Delhi High Court against stands decided in favour of the assessee. It was further submitted that in the asstt. year 2004-05 identical disallowance has been deleted by the Commissioner of Income tax (Appeals).
3.2 We have considered the material on record. The Hon'ble Delhi High Court vide its order dated 27.07.2011 has held that tax authorities were not justified in working out the depreciation on block of assets by reducing the value of assets which have either to be discarded or destroyed or sold or written off. The ITAT's decision to remit the matter back to the A.O. to recompute the depreciation only after ascertaining the scrap value of assets which have been discarded or written off in the books during the year under consideration was endorsed by Delhi High Court assessee submitted that the assets written off do not have an scrap value and section 43(6)(c) which defines WDV of a block assets states that the WDV of the assets has to be reduced by the money payable in respect of any asset falling within that block which is sold or discarded or demolished or destroyed during the previous year together with the amount of scrap value, if any. The assessee submitted that there is no value of these assets and hence no reduction 12 ITA No.5389/Del/2011 needs to be made. Similar issue had come up in the asstt. year 2007-08 and DRP-II vide its direction dated 24.08.2011 decided not to interfere with the draft asstt. order as the order of the High Court was awaited. But now the order of Delhi High Court has been received and the Assessing Officer vide her letter dated 06.08.2012 has submitted that proposal for filing SLP against the order dated 27.07.2011 of Delhi High Court was sent to the Directorate of Legal & Research, New Delhi but the same was not approved for filing SLP. Thus the issue has attained finality in favour of the assessee. Therefore, the proposed addition of Rs.8,89,960/- on this issue is directed to be deleted."
Since the facts of the case are same and the issue is covered in favour of the assessee by the decision of Hon'ble jurisdictional High Court in assessee's own case, therefore, we allow this ground of assessee's appeal and direct to re-compute the depreciation and allow the necessary relief to the assessee.
11. In the Grounds No.4 & 4.1, the issue involved is regarding making the addition of Rs.1,39,94,000/- on the ground that by changing the accounting policy of recognising the sale on completion of installation and acceptance by the customers as against on delivery followed in earlier years.
12. While pleading on behalf of the assessee, ld. AR submitted that till the just immediate preceding year, assessee was recognising revenue on sale of certain equipments which were sold subject to the condition of installation at the premises of the customers. Thus, the revenue was recognized on the delivery of equipments at the customers place. 13 ITA No.5389/Del/2011 However, from the financial year 2006-07, which is the relevant year for the year under consideration, the assessee has recognised the sales of its product/equipment on the completion of installment and acceptance of the equipments at the customer's premises. Ld. AR submitted that no doubt, the assessee has to calculate its income under the head business and profession under Section 145 of the Act in accordance with method of accounting regularly adopted by the assessee. The assessee has for bonafide reasons adopted this method of recognition of sales as in many of the cases, the goods delivered were reported as the sales were become null and void and the agents were already paid the commissions. Therefore, to comply with the Accounting Standard 9 of the Institute of Chartered Accountants of India which deals with the recognition of revenue, the assessee has adopted policy to recognise the revenue on the installation and acceptance of the equipments on the customer's premises. This method of recognising revenue is beneficial to the assessee for the business as the revenue is recognised when significant risks and rewards on the ownership has been transferred to the buyers and the assessee that is seller retains no effective control over the goods. Therefore, the change in accounting policy was necessitated to align the same to comply with the requirement of accounting standards. It is also submitted that assessee, after adopting this accounting policy, is consistently following 14 ITA No.5389/Del/2011 this policy in the subsequent years. The DRP's observation that there was frequent change in the method of accounting is unjustified and unsustainable. Ld. AR also relied on the decision of Hon'ble Supreme Court in the case of CIT vs. M/s. Excel Industries Ltd. Reported in 2013- TIOL-52-SC-IT-LB.
13. Ld. DR relied on the orders of the authorities below.
14. We have heard both the sides on the issue. The assessee has adopted the accounting policy of recognising the sales on completion of installation and acceptance of the goods at customer's premises. This policy is in compliance to the Accounting Standard 9 of the Institute of Chartered Accountants. The accounting policy adopted by the assessee is subsequently being followed in subsequent year. The decision of Hon'ble Supreme Court in the case of CIT vs. Excel Industries Ltd., cited supra, deals with such eventualities wherein the Hon'ble Supreme Court has held that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party from whom the income becomes due to pay that amount. Hon'ble Supreme Court has also held that income accrued when it becomes due but it must also be accompanied by a corresponding liability of other party to pay the amount, only then can it be said that for the purpose of liability that the 15 ITA No.5389/Del/2011 income is not hypothetical and really accrued to the assessee. The relevant portion of the Hon'ble Apex Court judgment read as under :-
"On appeal, the Apex court held that, the counsel for the Revenue submitted that in view of the provisions of Section 28(iv) of the Act, the value of the benefit obtained by the assessee is its income and is liable to tax under the head "Profits and gains of business or profession". We are unable to accept the contention of counsel for the Revenue for several reasons. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In the case of Morvi Industries Ltd. v. Commissioner of Income-Tax (Central) (2002-TIOL-779-SC-IT-LB) in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: "......the date of payment .......does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately.
this Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount;
income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee;
in so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the Customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical 16 ITA No.5389/Del/2011 income which may or may not materialise and its money value is therefore not the income of the assessee;
applying the tests laid down by various decisions of this Court, namely, whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realisation of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and Section 28(iv) of the Act would be inapplicable the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic;
secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the counsel for the Revenue;
it appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip- flop on the issue and it ought let the matter rest rather than spend the tax payers' money in pursuing litigation for the sake of it;
thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told 17 ITA No.5389/Del/2011 that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.
we dismiss the civil appeals with no order as to costs, but with the hope that the Revenue implements its litigation policy a little more practically and a little more seriously."
Assessee has adopted this accounting policy as per Standard 9 of Institute of Chartered Accountants of India. It has been constantly followed thereafter. Revenue is recognised on installation and acceptance of goods at the premises of the customers. In view of this factual matrix, we hold that this issue is covered in favour of the assessee by the decision of Hon'ble Supreme Court. We direct to delete this addition.
15. In the result, the appeal of the assessee is partly allowed. Order pronounced in open court on this 12th day of December, 2014.
Sd/- sd/-
(I.C. SUDHIR) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 12th day of December, 2014
TS
18
ITA No.5389/Del/2011
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR/ITAT