DCIT, Bangalore V. M/s Akzo Nobel Coatings Pvt. Ltd., Bangalore

ITA 1164/BANG/2010

• Counselvise Citation: 116421114 RSA 2010
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 19-06-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 21-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FARAHAT HUSSAIN QURESHI CITII
• Assessee Lawyers: KAUSHIK MUKHERJEE
• Keywords: Reopening of assessment; Capital asset; Depreciation; Cost of acquisition; Wholly owned subsidiary; Reason to believe; Unabsorbed depreciation; Reassessment proceedings
• Section: 143(3); 32; 147; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NOS.751 TO 755 & 1131/BANG/2010 AND ITA NO.349/BANG/2011 ASSESSMENT YEARS : 2001-02 TO 2007-08 AKZO NOBEL COATINGS INDIA PRIVATE LIMITED, PLOT NOS. 62P, 62A, 62B & 43E, HOSKOTE INDUSTRIAL AREA, BANGALORE 562 114. PAN : AAACC 8072B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. APPELLANT RESPONDENT ITA NOS.771 TO TO 773 & 1164/BANG/2010 ASSESSMENT YEARS : 2001-02 TO 2003-04 & 2006-07 THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, BANGALORE. VS. AKZO NOBEL COATINGS INDIA PRIVATE LIMITED, PLOT NOS. 62P, 62A, 62B & 43E, HOSKOTE INDUSTRIAL AREA, BANGALORE 562 114. PAN : AAACC 8072B APPELLANT RESPONDENT ASSESSEE BY : SHRI KAUSHIK MUKHERJEE, C.A. REVENUE BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II( DR) DATE OF HEARING : 04.09.2012 DATE OF PRONOUNCEMENT : 14.09.2012 ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 2 OF 22 O R D E R PER BENCH THESE ARE SEVEN APPEALS BY THE ASSESSEE AND FOUR APPEALS BY THE REVENUE AGAINST DIFFERENT ORDERS OF THE CIT(APPEALS ), LTU, BANGALORE. 2. THE ISSUES RAISED BY THE ASSESSEE AND REVENUE IN DIFFERENT ASSESSMENT YEARS ARE STATED IN THE CHART GIVEN BELO W:- ASSESSEES APPEAL NO. & AY 751/10 2001- 02 752/10 2002- 03 753/10 2003- 04 754/10 2004- 05 755/10 2005- 06 1131/10 2006- 07 349/11 2007- 08 PROCEEDINGS UNDER SECTION 147/148 147/148 147/148 155(4) 143(3) 143(3) 143(3) ISSUES GROUND NO. GROUND NO. GROUND NO. GROUND NO. GROUND NO. GROUND NO. GROUND NO. VALIDITY OF THE ORDER PASSED BY THE CIT(A) TO THE EXTENT AGAINST THE ASSESSE 1 1 1 1 1 1 1 VALIDITY OF REASSESSMENT PROCEEDINGS 2 2 2 - - - - VALIDITY OF PROCEEDINGS U/S. 155(4) - - - 2 - - - REDUCTION OF :- WAIVER OF LOAN AMOUNT FROM WDV, DEPRECIATION ALLOWANCE, CARRYFORWARD OF UNABSORBED DEPRECIATION 3(A,B&C) 3(A,B,C &D) 3(A,B,C &D) 3(A,B&C) 2(A,B&C) 1 (A,B,C &D) 2 TO 8 NOT SETTING OFF BROUGHT FORWARD BUSINESS LOSS FIRST AGAINST TOTAL INCOME AND SETTING OFF OF UNABSORBED DEPRECIATION FIRST. - - - - - - 9 ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 3 OF 22 REVENUES APPEAL NO. & AY 771/10 2001-02 772/10 2002-03 773/10 2003-04 2004-05 2005-06 1164/10 2006-07 PROCEEDINGS UNDER SECTION 147/148 147/148 147/148 155(4) 143(3) 143(3) ISSUES GROUND NO. GROUND NO. GROUND NO. GROUND NO. REDUCTION OF :- WAIVER OF LOAN AMOUNT FROM WDV, DEPRECIATION ALLOWANCE, CARRYFORWARD OF UNABSORBED DEPRECIATION 1,2,3,4,5 1,2,3,4,5 1,2,3,4,5 1,2,3,4,5 RELIANCE ON CASE LAWS PLACED BY THE AO 6,7 6,7 6,7 APPEAL NOT FILED BY THE DEPT. - 3. THE MATERIAL FACTS NECESSARY FOR ADJUDICATION OF THESE APPEALS ARE AS FOLLOWS: THE ASSESSEE IS A MANUFACTURER AND TRADER OF POLYME R BASED INDUSTRIAL PAINTS AND SEALANT PRODUCTS. IT WAS IN CORPORATED ON 13.05.1994 AS A 100% SUBSIDIARY OF COURTAULDS HOLDING BV, NETH ERLANDS. THE ASSESSE, FOR THE PURPOSE OF ESTABLISHING MANUFACTUR ING FACILITIES AT HOSKOTE PLANT, BANGALORE, WANTED TO IMPORT MACHINERIES. TH E ASSESSEE MADE AN APPLICATION TO RBI FOR OPENING FOREIGN CURRENCY ACC OUNT OUTSIDE INDIA. RBI IMPOSED A CONDITION THAT THE ASSESSEE SHOULD OBTAIN BANK GUARANTEE FROM VARIOUS SUPPLIERS FOR 1/3 RD ADVANCE PAYMENT FOR THE PURCHASE OF MACHINERY. THIS WAS NOT FEASIBLE FOR THE ASSESSEE. THE ASSESS EE HAD APPOINTED ANOTHER GROUP ENTITY VIZ., COURTAULDS ENGINEERING L TD. UK (CEL, UK) AS ENGINEERING CONTRACTORS TO DESIGN, ENGINEER AND CAR RY OUT THE PROJECT MANAGEMENT OF BUILDING THE FACTORY FOR THE ASSESSEE . SINCE GETTING ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 4 OF 22 ENOUGH BANK GUARANTEES FROM THE SUPPLIERS WAS NOT P OSSIBLE, THE ASSESSEE SOUGHT ASSISTANCE FROM CEL, UK. CEL, UK FUNDED TH E FIRST INSTALMENT OF ADVANCE PAYMENTS AND THE EQUIPMENTS WERE IMPORTED A ND INSTALLED AT HOSKOTE PLANT. THIS HAPPENED IN APRIL, 1996. 4. IN THE F.Y. 1997-98, THE AKZO NOBEL GROUP ACQUI RED COURTAULDS GROUP WORLDWIDE INCLUDING THE ASSESSEE. IN THE MEA N TIME, THE SUPPLIERS OF THE MACHINERY STARTED INSISTING ON THE BALANCE PAYM ENT. SINCE THE ASSESSEE COULD NOT OBTAIN THE RBI APPROVAL, CEL, UK PAID THE MONIES TO SUPPLIERS OF PLANT & MACHINERY. THUS THE FUNDS FOR SUPPLY OF MACHINERY WHICH WERE ORIGINALLY PAYABLE BY THE ASSESSEE TO TH E SUPPLIERS OF MACHINERY BECAME PAYABLE THE ASSESSEE TO CEL, UK. THE ASSESSEE APPLIED FOR PERMISSION TO RBI FOR MAKING REMITTANCE S TO CEL, UK. THIS WAS IN JULY, 1998. 5. ON 04.01.1999, THE ASSESSEE WAS RENAMED AS AKZO NOBEL COATINGS INDIA PVT. LTD. AS ALREADY STATED, AKZO NOBEL GRO UP ACQUIRED COURTAULDS GROUP WORLDWIDE INCLUDING THE ASSESSEE. CONSEQUENT LY THE AMOUNT DUE BY THE ASSESSEE TO CEL, UK WAS TRANSFERRED TO ANOTHER COMPANY VIZ., INTERNATIONAL COATINGS LTD. THEREAFTER, THE DEBT A SSIGNED TO INTERNATIONAL COATINGS LTD. WAS TRANSFERRED AKZO INTERNATIONAL BV , NETHERLANDS, WHICH WAS PURSUANT TO THE CHANGE IN THE HOLDING COMPANY. 6. AS A PART OF THE BUSINESS RESTRUCTURING AND BECA USE OF THE ABSENCE OF RBI APPROVAL FOR MAKING REMITTANCES OF MONIES DU E FOR SUPPLY OF MACHINERY AND TAKING NOTE OF THE BUSINESS EXIGENCY, AKZO INTERNATIONAL BV DECIDED TO WAIVE THE MONEY PAYABLE IN RESPECT OF IN RESPECT OF SUPPLY OF ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 5 OF 22 MACHINERIES TO THE ASSESSEE. THUS, THE ASSESSEE WA S THE BENEFICIARY OF THE WAIVER OF LOAN TO THE EXTENT OF Q 13,48,09,000. THIS WAIVER OF THE LOAN WAS IN APRIL, 2000. 7. IN RESPECT OF THE PLANT & MACHINERY WHICH WAS PU RCHASED BY THE ASSESSEE FOR WHICH THE ASSESSEE DID NOT MAKE PAYMEN TS AND THE AMOUNT OUTSTANDING FOR SUCH PURCHASES WERE MADE BY THE PAR ENT COMPANY AND ULTIMATELY WAIVED BY THE PARENT COMPANY, THE ASSESS EE CLAIMED DEPRECIATION RIGHT FROM THE A.Y. 1997-98 UPTO A.Y. 2000-01. IT IS IMPORTANT TO MENTION THAT THE ASSESSEE CONSIDERED THE ACTUAL COST OF THE MACHINERY AT THAT POINT OF TIME I.E., IN AY 97-98 AS THE MONI ES PAYABLE TO THE SUPPLIER OF MACHINERIES VIZ., RS.13,48,09,000. THE ASSESSEE WAS ALLOWED DEPRECIATION IN THE ASSESSMENT PROCEEDINGS. IN THE A.Y. 2001-02, THE ORIGINAL RETURN WAS PROCESSED U/S. 143(1) OF THE AC T. THIS ASSESSMENT WAS HOWEVER REOPENED BY THE AO BY ISSUING NOTICE U/S. 1 48 OF THE ACT. THE FACTS WITH REGARD TO THE WAIVER OF THE LOAN PAYABLE FOR ACQUIRING THE MACHINERIES CAME TO THE KNOWLEDGE OF THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS FOR AY 04-05. ACCORDING TO THE AO, O N THE WAIVER OF LOAN BY THE PARENT COMPANY, THE WRITTEN DOWN VALUE (WDV) OF THE PLANT & MACHINERY HAD TO BE REWORKED BY REDUCING FROM THE O PENING WDV THE AMOUNT OF LOAN WHICH HAD BEEN WAIVED BY THE PARENT COMPANY VIZ., A SUM OF Q 13,48,09,000. THE AO ACCORDINGLY WORKED OUT THE D EPRECIATION ALLOWABLE ON PLANT & MACHINERY BY REDUCING THE WDV ON WHICH DEPRECIATION HAD TO BE ALLOWED FOR AY 01-02. SIMIL ARLY IN A.Y. 2002-03, AND 03-04, DEPRECIATION WAS REWORKED BY MAKING ADJU STMENTS TO THE WDV IN PROCEEDINGS U/S. 148 OF THE ACT. IN A.Y. 2004-0 5 TO 2007-08, IN THE ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 6 OF 22 ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE ACT, THE AO REDUCED THE DEPRECIATION CONSEQUENT TO ADJUSTMENT OF THE OPENIN G WDV WHICH WAS MADE IN A.Y. 2001-02. 8. ON APPEAL BY THE ASSESSEE, THE LD. CIT(APPEALS) WAS OF THE VIEW THAT THE ENTIRE WAIVER OF THE LOAN CANNOT BE REDUCE D FROM THE WDV OF THE BLOCK OF ASSETS. HE HELD THAT DEPRECIATION ALLOWAN CE ALREADY ALLOWED FROM THE DATE OF PURCHASE OF PLANT & MACHINERY TILL A.Y. 2000-01 SHOULD ALONE BE REDUCED FROM THE OPENING WDV AS ON 01.04.2001. THE RELEVANT FINDINGS OF THE CIT(A) IN THIS REGARD WERE AS FOLLOWS:- 4.5 I HAVE CONSIDERED THE APPELLANTS SUBMISSION PUT FORTH ABOVE. THE APPELLANT CONTENDS THAT THE FACT THAT AK ZO GROUP FUNDED THE APPELLANT IN ACQUIRING THE ASSETS SHOWS THAT THE TRANSACTION IS A LOAN TRANSACTION. WHEN A PERSON AV AILS A LOAN, IT HAS TO BE REPAID IN ACCORDANCE WITH THE TERMS AND C ONDITIONS PRESCRIBED FOR THE PURPOSE. IF THE LOAN IS UTILISED FOR ACQUIRING ANY ASSETS, IT CANNOT BE TERMED AS MEETING OF A PORTION OF THE COST OF ANY ASSET. LOAN IS AVAILED AS A SOURCE OF FINANCE W HILE THE DEPRECIATION IS ALLOWED ON THE ACTUAL USER OF THE A SSET. THEREFORE, AVAILING OF LOAN AND CLAIM OF DEPRECIATION ARE TWO DISTINCT THINGS, WHICH CANNOT BE CLUBBED TOGETHER. THIS ISSUE HAS BE EN DISCUSSED IN DETAIL BY THE AO AT PARAS 5.1 TO 5.7 OF THE ASSE SSMENT ORDER, WHICH HAVE BEEN SUMMARISED IN PARA 4.1 OF THIS ORDE R SUPRA. AS DISCUSSED IN THE PRECEDING PARAS, THE APPELLANT HAD ACQUIRED THE MACHINERY FROM ITS SISTER CONCERN BETWEEN 1994-95 A ND 1996-97 AND THE COST OF MACHINERY WAS RS.13,48,09,000/-. SI NCE THE RBI DID NOT GRANT PERMISSION FOR REMITTANCE OF THE COST IN FOREIGN EXCHANGE TO THE FOREIGN COMPANY, THE SELLER WAIVED THE LIABILITY DURING THE FY 2000-01. CONSEQUENT TO THE WAIVER, T HE APPELLANT COMPANY CREDITED THE AFORESAID AMOUNT IN THE CAPITA L RESERVE ACCOUNT AND REDUCED THE SUNDRY CREDITORS BALANCE IN ITS BOOKS OF ACCOUNT. THIS FACT IMPLIES CESSATION OF LIABILITY O N ACCOUNT OF THE COST OF THE ASSETS AND CANNOT BE CONSTRUED AS WAIVE R OF LOAN. THUS, THERE IS NO MERIT IN THE APPELLANTS CONTENTI ON. HENCE, IT IS NOT TENABLE. ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 7 OF 22 4.6 THE APPELLANT HAS ALSO MADE THE FOLLOWING SUBM ISSIONS: 2.7.7 WITHOUT PREJUDICE TO OUR AFORESAID SUBMISSIO NS, THE APPELLANT FURTHER OBJECTS TO THE METHOD OF DETERMINATION OF WRITTEN DOWN VALUE OF ASSETS. IN T HESE CALCULATIONS, ENTIRE COST OF THE IMPORTED ASSET HAS BEEN REDUCED AND NOT THE VALUE ARRIVED NET OF DEPRECIATI ON. AS THE HONBLE CIT (A) MAY NOTICE, WHAT OPENING WRITTE N DOWN VALUE REPRESENTS ARE THE WRITTEN DOWN VALUE OF THE ASSETS AND NOT THE ORIGINAL COST OF THE ASSET. HENCE, IF A T ALL ANYTHING IS TO BE REDUCED, THEN IT SHALL BE WRITTEN DOWN VALUE OF UNDERLYING ASSETS AND NOT THE ORIGINAL COS T OF THE ASSET ITSELF. IF ORIGINAL COST OF ASSET PURCHASED D URING FY 1994-95 TO FY 1996-97 IS REDUCED FROM THE WRITTEN D OWN VALUE OF ASSETS FOR THE ASSESSMENT YEAR 2001-02, TH AT WOULD AMOUNT TO INCORRECT VALUE OF ASSETS FOR THE PURPOSE OF DEPRECIATION AND THE DEPRECIATION SO CALCULATED WIL L NOT BE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32 OF THE ACT. 2.7.8. HENCE, WITHOUT PREJUDICE TO OUR OTHER SUBMISSIONS, THE APPELLANT SUBMITS THAT, IF AT ALL ANY VALUE IS TO BE REDUCED IT HAS TO BE ONLY WITH REFERENCE TO V ALUE WHICH IS ARRIVED NET OF DEPRECIATION. 4.7 THERE IS FORCE IN THE APPELLANTS SUBMISSIONS PUT FORTH ABOVE. THE FACT REMAINS THAT THE ORIGINAL COST OF A SSETS PURCHASED DURING THE FY 1994-95 TO 1996-97 WAS REDU CED FROM THE WDV OF ASSETS FOR THE AY 2001-02. FURTHER, IT IS CONTENDED THAT IT IS NOT OPEN TO THE AO TO MAKE ADJ UST OF COST OF ASSETS OF EARLIER YEARS IN A SUBSEQUENT YEAR. TH E PROVISIONS OF SECTION 43(6) DO NOT ENVISAGE REDUCTION OF COST OF ASSETS IN THE GUISE OF DEPRECIATION AND DISALLOWANCE OF DEPRE CIATION ALREADY CLAIMED. THE DEPRECIATION CLAIMED ON IMPORT ED MACHINERY AT RS. 13,48,08,881/- IS WORKED OUT AS UN DER: ASST. YEAR DEPRECIATION (RS.) COST OF ACQUISITION 13,48,0881 1997-98 2,60,81,052 1998-99 2,52,96,992 1999-2000 2,03,20,420 2000-01 1,57,77,604 8,74,76,068 ----------------- WDV AS ON 1/4/2000 4,73,32.813 ----------------- ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 8 OF 22 (I) IF AT ALL DEPRECIATION IS DISALLOWANCE, IT IS O N THE WDV OF RS.4,73,32,83/- DURING THE PREVIOUS YEARS RELEVANT TO THE AY 2001-02 TO AY 2003-04. THEREFORE, THE AO IS DIRECTE D TO RECALCULATE THE DEPRECIATION AND ALLOW THE SAME ACC ORDINGLY. (EMPHASIS SUPPLIED). 9. AGGRIEVED BY THE RELIEF GRANTED BY THE CIT(A), T HE REVENUE HAS PREFERRED APPEALS FOR AYS 2001-02 TO 2003-04 & 2006 -07. AGGRIEVED BY THE ORDERS OF THE CIT(A) IN NOT ACCEPTING THE CLAIM OF THE ASSESSEE IN FULL, THE ASSESSEE HAS FILED APPEALS BEFORE THE TRIBUNAL FOR THE AYS 2001-02 TO 2007-08. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. C OUNSEL FOR THE ASSESSEE SUBMITTED THAT U/S. 32(1) OF THE INCOME TA X ACT, 1961 (THE ACT), IN RESPECT OF BLOCK OF ASSETS, DEPRECATION HAS TO B E ALLOWED ON THE WDV AT SUCH PERCENTAGE AS MAY BE PRESCRIBED. IT WAS BROUG HT TO OUR NOTICE THAT THE TERM WRITTEN DOWN VALUE HAS BEEN DEFINED UNDE R THE PROVISIONS OF SECTION 43(6)(C) OF THE ACT. IT WAS HIS SUBMISSION THAT THE WRITTEN DOWN VALUE MEANS WRITTEN DOWN VALUE AS ON THE BEGINNING OF THE PREVIOUS YEAR AND AS ADJUSTED BY THE INCREASE IN THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK ACQUIRED DURING THE PREVIOUS YEAR AND BY INCREASING THE MONIES PAYABLE IN RESPECT OF ANY ASSET FALLING WITH THAT B LOCK WHICH IS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THE PRE VIOUS YEAR. IT WAS THE SUBMISSION THAT THE AOS ACTION IN REDUCING THE AMO UNT OF LOAN WAIVED BY THE SUPPLIER OF MACHINERY CANNOT BE SAID TO BE FALL ING WITHIN THE EXPRESSION SOLD, DISCARDED, DEMOLISHED, OR DESTROYED. IT WA S HIS SUBMISSION THAT CONSEQUENTLY THE WDV CANNOT BE DISTURBED BY THE AO. FURTHER REFERENCE WAS ALSO MADE BY THE LD. COUNSEL FOR THE ASSESSEE T O THE DECISION OF THE ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 9 OF 22 HONBLE SUPREME COURT IN THE CASE OF CIT V. TATA IRON & STEEL CO. LTD. (231 ITR 285)(SC) , WHEREIN THE HONBLE SUPREME COURT HELD THAT THE MANNER OF REPAYMENT OF LOAN AVAILED BY AN ASSESSEE FOR THE PURCHASE OF AN ASSET ON WHICH DEPRECIATION IS CLAIMED, CANNOT H AVE ANY IMPACT ON ALLOWING DEPRECIATION ON SUCH ASSETS. REFERENCE WA S ALSO MADE TO THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CA SE OF COCHIN CO. PVT. LTD. (184 ITR 230)(KER) FOR IDENTICAL PROPOSITION. 11. FURTHER SUBMISSIONS WERE MADE ON THE CONCEPT OF BLOCK OF ASSETS AND AS TO HOW ONCE AN ASSET ENTERS THE BLOCK OF ASS ETS, IT BECOMES PART OF BLOCK OF ASSETS AND BECOMES PART OF THE WDV AND THA T THE WDV CAN CHANGE ONLY ON INSTANCES SET OUT IN SECTION 43(6)(C ) OF THE ACT. IT WAS ALSO SUBMITTED THAT EXPLANATION 10 TO SECTION 43(1) WILL NOT APPLY TO THE PRESENT CASE BECAUSE THE AMOUNT WAIVED BY THE PARENT COMPAN Y CANNOT BE SAID TO BE COST OF THE ASSET MET DIRECTLY OR INDIRECTLY BY ANY AUTHORITY IN THE FORM OF SUBSIDY OR GRANT OR REIMBURSEMENT. 12. THE LD. DR REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE ORDERS OF THE LOWER AUTHORITIES. HIS SUBMISSION WA S THAT THE LD. CIT(A) ERRED IN GIVING PARTIAL RELIEF TO THE ASSESSEE AND THAT THE ORDER OF THE AO IN THIS REGARD SHOULD BE RESTORED. 13. THE PARTIES ALSO MADE SUBMISSIONS WITH REGARD T O VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS. ON THIS ISSUE WHICH A RISES FOR CONSIDERATION ONLY IN AYS 2001-02 TO 2003-04, THE CIT(A) HAD GIVE N HIS DECISION AS FOLLOWS:- ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 10 OF 22 3.6 I HAVE CAREFULLY CONSIDERED THE APPELLANTS S UBMISSIONS AND PERUSED THE ASSESSMENT ORDERS. IN THIS CONTEXT, IT WOULD HE RELEVANT TO MENTION EXPLANATION 2 TO SECTION 147 OF THE ACT, WHICH READS AS UNDER: EXPLANATION 2 FOR THE PURPOSES OF THIS SECTION, THE FOLLOWING SHALL ALSO DEEMED TO BE CASES WHERE INCOM E CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT, NAMELY:- (A) WHERE NO RETURN OF INCOME HAS BEEN FURNISHED B Y THE ASSESSEE ALTHOUGH HIS TOTAL INCOME OR TOTAL INCOME OF ANY OTHER PERSON IN RESPECT OF WHICH HE IS ASSESSABLE U NDER THIS ACT EXCEEDED THE MAXIMUM AMOUNT WHICH IS NOT CHARGEABLE TO INCOME TAX; (B) WHERE A RETURN OF INCOME HAS BEEN FURNISHED BY THE ASSESSEE BUT NO ASSESSMENT HAS BEEN MADE AND IT IS NOTICED BY THE ASSESSING OFFICER THAT HE ASSESSEE H AS UNDERSTATED THE INCOME OR HAS CLAIMED EXCESSIVE LOS S, DEDUCTION, ALLOWANCE OR RELIEF IN THE RETURN; (C) WHERE AN ASSESSMENT HAS BEEN MADE, BUT (I) INCOME CHARGEABLE TO TAX HAS BEEN UNDERASSESSE D; OR (II) SUCH INCOME HAS BEEN ASSESSED AT TOO LOW A RAT E; OR (III) SUCH INCOME HAS BEEN MADE THE SUBJECT OF EXCE SSIVE RELIEF UNDER THIS ACT; OR (IV) EXCESSIVE LOSS OR DEPRECIATION ALLOWANCE OR AN Y OTHER ALLOWANCE UNDER THIS ACT HAS BEEN COMPUTED. 3.7 IN THE INSTANT CASE, CLAUSE (B) OF EXPLANATION 2 TO SECTION 147 OF THE ACT IS APPLICABLE AS IN THE RETURN OF IN COME FURNISHED THE APPELLANT HAS CLAIMED EXCESSIVE ALLOWANCE ON AC COUNT OF DEPRECIATION. THE APEX COURT IN THE CASE OF ACIT VS RAJESH JHAVERY STOCK BROKERS P. LTD. REPORTED IN (2007) 29 1 ITR 500 AFTER CONSIDERING VARIOUS DECISIONS RENDERED BY IT IN THE PAST, CONSTRUED THE WORDS REASON TO BELIEVE IN SECTION 147 OF THE ACT AND HELD THAT, IF THE AO HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPOSE THAT ANY INCOME HAS ESCAPED ASSESSMENT, THE N IT COULD BE SAID THAT THE AO HAD REASON TO BELIEVE THAT THE INC OME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. THE APEX COURT FURTH ER HELD THAT THE EXPRESSION REASON TO BELIEVE IN SECTION 147 O F THE ACT CANNOT BE READ TO MEAN THAT THE AO SHOULD HAVE FINA LLY ASCERTAINED THE FACT BY LEGAL EVIDENCE OR CONCLUSIO N. THE APEX COURT FURTHER HELD THAT, AT THE STAGE OF ISSUE OF N OTICE U/S 148 OF THE ACT, THE ONLY QUESTION TO BE CONSIDERED IS, WHE THER THERE WAS RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COUL D HAVE FORMED A REQUISITE BELIEF AND NOT WHETHER THE MATER IALS WOULD CONCLUSIVELY PROVE ESCAPEMENT OF INCOME. ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 11 OF 22 16. SECTION 147 AUTHORISES AND PERMITS THE ASSESSI NG OFFICER TO ASSESS OR REASSESS INCOME CHARGEABLE TO TAX IF H E HAS REASON TO BELIEVE THAT INCOME FOR ANY ASSESSMENT YEAR HAS ESCAPED ASSESSMENT. THE WORD REASON IN THE PHRASE REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATION. IF THE ASSESSING OFFICER HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPO SE THAT INCOME HAD ESCAPED ASSESSMENT, IT CAN BE SAID TO HA VE REASON TO BELIEVE THAT AN INCOME HAD ESCAPED ASSESSMENT. T HE EXPRESSION CANNOT BE READ TO MEAN THAT THE ASSESSIN G OFFICER SHOULD HAVE FINALLY ASCERTAINED THE FACT BY LEGAL E VIDENCE OR CONCLUSION. THE FUNCTION OF THE ASSESSING OFFICER I S TO ADMINISTER THE STATUTE WITH SOLICITUDE FOR THE PUBL IC EXCHEQUER WITH AN INBUILT IDEA OF FAIRNESS TO TAXPAYERS. AS O BSERVED BY THE SUPREME COURT IN CENTRAL PROVINCES IN CENTRAL P ROVINCES MANGANESE ORE CO. LTD. V ITO (1991) 191 ITR 662, FO R INITIATION OF ACTION UNDER SECTION 147(A) (AS THE PROVISION ST OOD AT THE RELEVANT TIME) FULFILLMENT OF THE TWO REQUISITE CON DITIONS IN THAT REGARD IS ESSENTIAL. AT THAT STAGE, THE FINAL OUTCOME OF THE PROCEEDING IS NOT RELEVANT. IN OTHER WORDS, AT THE INITIATION STAGE, WHAT IS REQUIRED IS REASON TO BELIEVE, BUT NOT THE ESTABLISHED FACT OR ESCAPEMENT OF INCOME. AT THE ST AGE OF ISSUE OF NOTICE, THE ONLY QUESTION IS WHETHER THERE WAS RELEVANT MATERIAL ON WHICH A REASONABLE PERSON COUL D HAVE FORMED A REQUISITE BELIEF WHETHER THE MATERIALS WOU LD CONCLUSIVELY PROVE THE ESCAPEMENT IS NOT THE CONCER N AT THAT STAGE. THIS IS ALSO BECAUSE THE FORMATION OF BELIEF BY THE ASSESSING OFFICER IS WITHIN THE REALM OF SUBJECTIVE SATISFACTION [SEE ITO V SELECTED DALURBAND COAL CO. P. LTD. (199 6) 217 ITR 597 (SC); RAYMOND WOOLLEN MILLS LTD. V ITO [(1999) 236 34(SC)]. 17. THE SCOPE AND EFFECT OF SECTION 147 AS SUBST ITUTED WITH EFFECT FROM APRIL 1, 1989, AS ALSO SECTIONS 148 TO 152 ARE SUBSTANTIALLY DIFFERENT FROM THE PROVISIONS AS THEY STOOD PRIOR TO SUCH SUBSTITUTION, UNDER THE OLD PROVISIONS OF S ECTION 147, SEPARATE CLAUSES (A) AND (B) LAID DOWN THE CIRCUMST ANCES UNDER WHICH INCOME ESCAPING ASSESSMENT FOR THE PAST ASSESSMENT YEARS COULD BE ASSESSED OR REASSESSED. T O CONFER JURISDICTION UNDER SECTION 147(A) TWO CONDITIONS WE RE REQUIRED TO BE SATISFIED: FIRSTLY, THE ASSESSING OFFICER MUS T HAVE REASON TO BELIEVE THAT INCOME, PROFITS OR GAINS CHARGEABLE TO INCOME- TAX HAVE ESCAPED ASSESSMENT, AND, SECONDLY, HE MUST ALSO HAVE REASON TO BELIEVE THAT SUCH ESCAPEMENT HAS OCC URRED BY REASON OF EITHER OMISSION OR FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY OR TRULY ALL MATERIAL FACTS NECES SARY FOR HIS ASSESSMENT OF THAT YEAR. BOTH THESE CONDITIONS WERE ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 12 OF 22 CONDITIONS PRECEDENT TO BE SATISFIED BEFORE THE ASS ESSING OFFICER COULD HAVE JURISDICTION TO ISSUE NOTICE UND ER SECTION 148 READ WITH SECTION 147(A). BUT UNDER THE SUBSTIT UTED SECTION 147 EXISTENCE OF ONLY THE FIRST CONDITION S UFFICES. IN OTHER WORDS, IF THE ASSESSING OFFICER FOR WHATEVER REASON HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMEN T IT CONFERS JURISDICTION TO REOPEN THE ASSESSMENT. IT I S, HOWEVER, TO BE NOTED THAT BOTH THE CONDITIONS MUST BE FULFIL LED IF THE CASE FALLS WITHIN THE AMBIT OF THE PROVISION TO SEC TION 147. THE CASE AT HAND IS COVERED BY THE MAIN PROVISION AND N OT THE PROVISO. 18. SO LONG THE INGREDIENTS OF SECTION ARE FULFILL ED, THE ASSESSING OFFICER IS FREE TO INITIATE PROCEEDING UN DER SECTION 147 AND FAILURE TO TAKE STEPS UNDER SECTION 143(3) WILL NOT RENDER THE ASSESSING OFFICER POWERLESS TO INITIATE REASSESSMENT PROCEEDINGS EVEN WHEN INTIMATION UNDER SECTION 143(1) HAD BEEN ISSUED. (I) APPLYING THE RATIO LAID DOWN BY THE APEX COURT IN THE AFORESAID CASE, IT HAS TO BE SEEN IN THE PRESENT CA SE WHETHER THE AO HAD ANY CAUSE OR JUSTIFICATION TO FORM A REASONA BLE BELIEF THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. 3.8 IT IS OBSERVED THAT THE APPELLANT FURNISHED IT S RETURNS OF INCOME AS INDICATED AT PAGE 2 SUPRA. THE RETURNS WE RE PROCESSED U/S 143(1) AND SUBSEQUENTLY NO ORDERS U/S 143(3) WE RE PASSED. AS SUCH, THE AO HAD NO OCCASION TO SCRUTINISE THE CORR ECTNESS OF THE LOSS, DEDUCTION, ALLOWANCE OR RELIEF CLAIMED IN THE RETURNS OF INCOME. DURING THE COURSE OF THE ASSESSMENT PROCEED INGS FOR THE AY 20O4- 05, THE AO NOTICED THAT THE APPELLANT IMPO RTED CERTAIN MACHINERY FROM AKZO NOBEL INTERNATIONAL, THE SISTER CONCERN OF THE APPELLANT, DURING THE FY 1994-95 TO 1996-97 WOR TH RS.13,48,09,000/-. THE PAYMENT TO THE SISTER CONCE RN COULD NOT BE MADE AS THE RBI DID NOT GRANT PERMISSION FOR THE SAME AS IT INVOLVED RELEASE OF FOREIGN EXCHANGE. CONSEQUENTLY, THE FOREIGN COMPANY I.E. THE SELLER, WAIVED THE LIABILITY OF RS .13,48,09,000/- DURING THE FY 2000-01. THE WAIVED AMOUNT OF RS.13,4 8,09,000/- WAS CREDITED TO THE CAPITAL RESERVE ACCOUNT, WHICH REDUCED THE SUNDRY CREDITORS IN THE APPELLANTS BOOKS. NO ADJUST MENT HAS BEEN MADE TO THE WDV OF THE CONCERNED ASSETS ON ACCOUNT OF WAIVER EITHER PRIOR TO OR IN THE FINANCIAL YEAR 2000-01. O BSERVING THUS, THE AO HELD THAT THE AMOUNT OF PURCHASE PRICE OF TH E ASSET WAIVED BY THE SELLER IS NOT COST TO THE APPELLANT AND CONS EQUENTLY IT WAS NOT ELIGIBLE FOR DEPRECIATION ALLOWANCE U/S 32 OF T HE ACT IN RESPECT OF THIS ASSET. THIS BEING THE REASON, THE A O INITIATED ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 13 OF 22 PROCEEDINGS U/S 147 OF THE ACT AND, IN MY CONSIDERE D OPINION, THE PROCEEDINGS SO INITIATED ARE VALID. 3.9 IT ALSO TRANSPIRES THAT NOTICE U/S 148 WAS I SSUED ON 1/2/2007 WITH THE PRIOR APPROVAL OF THE ADDL. CIT AS REQUIRE D U/S 51(2) OF THE ACT. THUS, THE NOTICE HAS BEEN ISSUED WITHIN TH E TIME LIMIT I.E BEFORE THE EXPIRY OF SIX YEARS FROM THE END OF THE AY 2001-02. THUS, THE OBJECTIONS IN THIS REGARD ARE NOT TENABLE . THE APPEAL IN THIS GROUND FAILS. 14. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CIT(A) ON VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS. THE LD. DR RELIED ON THE ORDERS OF T HE CIT(A) IN SO FAR AS IT CONCERNS VALIDITY OF INITIATION OF REASSESSMENT PRO CEEDINGS. WE WILL CONSIDER THE ISSUE WITH REGARD TO VALIDITY OF INITI ATION OF REASSESSMENT PROCEEDINGS A LITTLE LATER. WE WILL FIRST DEAL WIT H THE ISSUE REGARDING REDUCTION OF WDV OF THE BLOCK OF ASSETS AND CONSEQU ENT DISALLOWANCE OF DEPRECIATION CLAIM. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON THE ABOVE ISSUE. THE FACTS ARE NOT IN DISPUTE. THE ASSESSEE ACQUIRED PL ANT & MACHINERY FOR ITS HOSKOTE PLANT IN APRIL, 1996. THE ASSESSEE DID NOT MAKE ANY PAYMENTS FOR THE PURCHASE OF PLANT & MACHINERY, ULTIMATELY THE C EL, UK, ONE OF THE GROUP COMPANY MADE PAYMENTS OF THE MACHINERY TO THE SUPPLIERS. THE ASSESSEE THEREAFTER RECOGNIZED THIS LIABILITY FOR P AYMENT FOR PURCHASE OF MACHINERY AS PAYABLE TO CEL, UK. LATER ON, CEL, UK WAS TAKEN OVER BY AKZO INTERNATIONAL BV. AKZO INTERNATIONAL BV WAIVE D REPAYMENT OF MONIES DUE ON PURCHASE OF MACHINERY. IT IS NOT IN DISPUTE THAT IN APRIL, 1996 WHEN THE MACHINERY WAS PURCHASED, THE ACTUAL COST WAS RE CORDED IN THE BOOKS OF ACCOUNT INCLUDING THE MONIES PAYABLE TO THE SUPPLIE R OF MACHINERIES. EVEN ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 14 OF 22 TODAY THE ASSESSEE HAS NOT MADE ANY ADJUSTMENT IN I TS BOOKS OF ACCOUNTS RECOGNIZING THE WRITE OF AMOUNTS PAYABLE FOR PURCHA SE OF MACHINERIES. THE BENEFIT AS A RESULT OF WAIVER OF THE LOAN WAS SHOWN IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE IN THE BALANCE SHEET AS A CAPITAL R ECEIPT NOT CHARGEABLE TO TAX. THE ABOVE CLAIM OF THE ASSESSEE HAS ALSO BEEN ACCEPTED BY THE REVENUE. THE ASSESSEE HAS CLAIMED DEPRECIATION OF THOSE MACHINERIES FROM THE A.Y. 1997-98. IN APRIL, 2000, AKZO INTERN ATIONAL BV, THE PARENT COMPANY WAIVED THE AMOUNTS PAYABLE BY THE ASSESSEE FOR PURCHASE OF MACHINERIES. THIS FACT CAME TO THE KNOWLEDGE OF TH E AO IN THE COURSE OF ASSESSMENT PROCEEDINGS FOR THE AY 2004-05. THEREAF TER ACTION WAS INITIATED U/S. 148 TO REDUCE THE WDV OF THE RELEVAN T BLOCK OF ASSETS AND WITHDRAW THE DEPRECIATION ALREADY GRANTED TO THE AS SESSEE IN THE PAST. SUCH ACTION WAS INITIATED ONLY FROM A.Y. 2001-02 TO 2006-07. A NOTICE U/S. 148 FOR AY 2001-02 WAS ISSUED BY THE AO ON 01.02.20 07. THIS IS PROBABLY BECAUSE THE AO COULD NOT REOPEN THE EARLIER ASSESSM ENT YEARS AS THEY COULD NOT BE REOPENED IN VIEW OF THE LIMITATION OF TIME LAID DOWN IN SECTION 149 OF THE ACT. THE QUESTION NOW TO BE DECIDED BY THE TRIBUNAL IS AS TO WHETHER THE ACTION OF THE REVENUE COULD BE JUSTIFIE D. THE RELEVANT PROVISIONS OF LAW IN THIS REGARD HAVE TO BE SEEN. THE CONCEPT OF BLOCK OF ASSETS WAS INTRODUCED WITH EFFECT FROM 01.04.1988. SECTION 32 (1) OF THE INCOME TAX ACT, 1061 (THE ACT) READS AS FOLLOWS: 32. (1) IN RESPECT OF DEPRECIATION OF - (I) BUILDING, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; (II) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, L ICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH T OF ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 15 OF 22 SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1998, OWNED WHOLLY OR PARTLY, BY THE ASSESSES AND USED FO R THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCT IONS SHALL BE ALLOWED - (I) .. (II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERC ENTAGE ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED. 16. SECTION 43(6) OF THE ACT DEFINES THE EXPRESSION WRITTEN DOWN VALUE AND IT READS AS UNDER:- (6) 'WRITTEN DOWN VALUE' MEANS . ( C ) IN THE CASE OF ANY BLOCK OF ASSETS, ( I ) IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1ST DAY OF APRIL, 1988, THE AGGREGATE OF THE WRITTEN DOWN VALUES OF A LL THE ASSETS FALLING WITHIN THAT BLOCK OF ASSETS AT THE B EGINNING OF THE PREVIOUS YEAR AND ADJUSTED, (A) BY THE INCREASE BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK, ACQUIRED DURING THE PREVIOUS YEA R; ( B ) BY THE REDUCTION OF THE MONEYS PAYABLE IN RESPEC T OF ANY ASSET FALLING WITHIN THAT BLOCK, WHICH IS SOLD OR DISCARDED OR DEMOLISHED OR DESTROYED DURING THAT PREVIOUS YEAR TOGETHER WITH THE AMOUNT OF THE SCRAP VALUE, IF ANY, SO, HOWEVER, THAT THE AMOUNT OF SUCH REDUCTION DOES NOT EXCEED THE WRITTEN DOWN VALUE AS SO INCREASED; AND 17. THE TERM BLOCK OF ASSETS IS DEFINED IN SECT ION 2(11) OF THE ACT AS UNDER:- 2( 11 ) BLOCK OF ASSETS MEANS A GROUP OF ASSETS FALLING WITHIN A CLASS OF ASSETS COMPRISING ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 16 OF 22 ( A ) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLAN T OR FURNITURE; ( B ) INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COP YRIGHTS, TRADE- MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS O R COMMERCIAL RIGHTS OF SIMILAR NATURE, IN RESPECT OF WHICH THE SAME PERCENTAGE OF DEPRECIA TION IS PRESCRIBED; 18. PRIOR TO THE INTRODUCTION OF NEW CONCEPT OF BL OCK OF ASSETS WITH EFFECT FROM 01.04.1988, DEPRECIATION USED TO BE CLAIMED SE PARATELY ON EACH ASSET. THE LEGISLATURE FOUND THAT THIS WAS A CUMBE RSOME PROCEDURE LEADING TO VARIOUS DIFFICULTIES. THIS NECESSITATED INTRODUCTION OF THE CONCEPT OF BLOCK ASSETS AND ALLOWABILITY OF DEPRECIATION ON SUCH A BLOCK. THE RATIONALE BEHIND SUCH A PROVISION IS CONTAINED IN C IRCULAR NO.469 DATED 23.09.1986 ISSUED BY THE CENTRAL BOARD OF DIRECT TA XES (CBDT). AFTER REFERRING TO THE BUDGET SPEECH OF THE FINANCE MINIS TER WHEREIN REFERENCE WAS MADE TO THE PROPOSAL TO INTRODUCE A SYSTEM OF A LLOWING DEPRECIATION IN RESPECT OF BLOCK OF ASSETS INSTEAD OF THE PRESENT S YSTEM OF DEPRECIATION ON INDIVIDUAL ASSETS AT PARAGRAPH 6.3, THE BOARD STATE D AS FOLLOWS: AS MENTIONED BY THE ECONOMIC ADMINISTRATION REFOR MS COMMISSION (REPORT NO.12, PARA 20), THE EXISTING SY STEM IN THIS REGARD REQUIRES THE CALCULATION OF DEPRECIATION IN RESPECT OF EACH CAPITAL ASSET SEPARATELY AND NOT IN RESPECT OF BLOC K OF ASSETS. THIS REQUIRES ELABORATE BOOK-KEEPING AND THE PROCESS OF CHECKING THE ASSESSING OFFICER IS TIME CONSUMING. THE GREATER D IFFERENTIATION IN RATES, ACCORDING TO THE DATE OF PURCHASE, THE TY PE OF ASSET, THE INTENSITY OF USE, ETC., THE MORE DISAGGREGATE HAS T O BE THE RECORD KEEPING. MOREOVER, THE PRACTICE OF GRANTING THE TER MINAL ALLOWANCE AS PER SECTION 32(1)(III) OR TAXING THE B ALANCING CHARGE AS PER SECTION 41(2) OF THE INCOME-TAX ACT, NECESSI TATE THE KEEPING OF RECORDS OF DEPRECIATION ALREADY AVAILED OF BY EACH ASSET ELIGIBLE FOR DEPRECIATION. IN ORDER TO SIMPLI FY THE EXISTING CUMBERSOME PROVISIONS, THE AMENDING ACT HAS INTRODU CED A SYSTEM OF ALLOWING DEPRECIATION ON BLOCK OF ASSETS. THIS WILL MEAN THE CALCULATION OF LUMP-SUM AMOUNT OF DEPRECIA TION FOR THE ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 17 OF 22 ENTIRE BLOCK OF DEPRECIABLE ASSETS IN EACH OF THE F OUR CLASSES OF ASSETS NAMELY, BUILDING, MACHINERY, PLANT AND MACHI NERY. 19. THE RATIONALE AND PURPOSE FOR WHICH THE CONCEPT OF BLOCK ASSET WAS INTRODUCED, AS REFLECTED IN THE CBDTS CIRCULAR DAT ED 23.09.1988 IS THAT ONCE THE VARIOUS ASSETS ARE CLUBBED TOGETHER AND BE COME BLOCK ASSET WITHIN THE MEANING OF S. 2(11), IT BECOMES ONE ASSE T. EVERY TIME, A NEW ASSET IS ACQUIRED, IT IS TO BE THROWN INTO THE COMM ON HOTCHPOTCH, I.E., BLOCK ASSET ON MEETING THE REQUIREMENT OF DEPRECIATION BE ING ALLOWABLE AT THE SAME RATE. INDIVIDUAL ASSETS LOSE THEIR IDENTITY AN D BECOME AN INSEPARABLE PART OF BLOCK ASSET IN SO FAR AS CALCULATION OF DEP RECIATION IS CONCERNED. THE MERGER OF VARIOUS ASSETS INTO THE BLOCK ASSET C AN BE ALTERED ONLY WHEN THE EVENTUALITY CONTAINED IN CLAUSE (C) OF S. 43(6) TAKES PLACE, VIZ., WHEN A PARTICULAR ASSET IS SOLD, DISCARDED OR DESTROYED IN THE PREVIOUS YEAR (OTHER THAN THE PREVIOUS YEAR IN WHICH FIRST BROUGHT IN US E). EVEN IN THAT EVENT, THE AMOUNT BY WHICH THE MONEYS PAYABLE IN RESPECT OF TH AT PARTICULAR BUILDING, MACHINERY, ETC. TOGETHER WITH THE AMOUNT OF SCRAP V ALUE IS TO BE DEDUCTED FROM TOTAL WRITTEN DOWN VALUE OF THE BLOCK ASSET. IT IS THUS CLEAR FROM THE AFORESAID PROVISIONS THAT THE ONLY WAY BY WHICH THE WRITTEN DOWN VALUE ON WHICH DEPRECIATION IS TO BE ALLOWED AS PER THE PROV ISIONS OF SEC.32(1) (II) CAN BE ALTERED IS AS PER THE SITUATION REFERRED TO IN SEC.43(6)(C)(I) A AND B. NEITHER WAS THERE PURCHASE OF THE RELEVANT ASSETS D URING THE PREVIOUS YEAR NOR WAS THERE SALE, DISCARDING OR DEMOLISHING OR DE STRUCTION OF THOSE ASSETS DURING THE PREVIOUS YEAR. THUS THE RECOURSE BY THE REVENUE TO THOSE PROVISIONS ON THE FACTS AND CIRCUMSTANCES OF THE PR ESENT CASE, IN OUR VIEW, CANNOT BE SUSTAINED. ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 18 OF 22 20. WE SHALL EXAMINE THE ISSUE FROM THE PROVISIONS OF SEC.43(1) OF THE ACT AND EXPLANATION 10 THERETO ALSO. SECTION 43(1) OF THE ACT IS REPRODUCED HEREUNDER: - (1) ACTUAL COST MEANS THE ACTUAL COST OF THE ASS ETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THERE OF, IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY: BY THE FINANCE (2) ACT, 1998, EXPLANATION 10 TO SEC TION 43(1) WAS INSERTED WITH EFFECT FROM 1.4.1999. IT READS AS UNDER: EXPLANATION 10 - WHERE A PORTION OF THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE HAS BEEN MET DIRECTLY OR I NDIRECTLY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUT HORITY ESTABLISHED UNDER ANY LAW OR BY ANY OTHER PERSON, I N THE FORM OF A SUBSIDY OR GRANT OR REIMBURSEMENT (BY WHATEVER NAME CALLED), SO MUCH OF THE COST AS IS RELATABLE TO SUCH SUBSIDY OR GRANT OR REIMBURSEMENT SHALL NOT BE INCLUDED IN THE ACTUAL C OST OF THE ASSET TO THE ASSESSEE: PROVIDED THAT WERE SUCH SUBSIDY OR GRANT OR REIMBURSEMENT IS OF SUCH NATURE THAT IT CANNOT BE D IRECTLY RELATABLE TO THE ASSET ACQUIRED, SO MUCH OF THE AMO UNT WHICH BEARS TO THE TOTAL SUBSIDY OR REIMBURSEMENT OR GRAN T THE SAME PROPORTION AS SUCH ASSET BEARS TO ALL THE ASSETS IN RESPECT OF OR WITH REFERENCE TO WHICH THE SUBSIDY OR GRANT OR REI MBURSEMENT IS SO RECEIVED, SHALL NOT BE INCLUDED IN THE ACTUAL CO ST OF THE ASSET TO THE ASSESSEE. 21. THE AFORESAID EXPLANATION WAS EXPLAINED BY THE BOARD IN CIRCULAR NO.772 DATED 23.12.1998 [REPORTED IN (1999) 235 ITR (ST.)35]. THE RELEVANT PART OF THE CIRCULAR IS REPRODUCED BELOW: 22.2 EXPLANATION 10 PROVIDES THAT WHERE A PORTI ON OF THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE HAS BEEN NET D IRECTLY OR INDIRECTLY BY THE CENTRAL GOVERNMENT OR A STATE GOV ERNMENT OR ANY AUTHORITY ESTABLISHED UNDER ANY LAW OR BY ANY O THER PERSON, IN THE FORM OF A SUBSIDY OR GRANT OR REIMBURSEMENT (BY WHATEVER NAME CALLED), THEN, SO MUCH OF THE COST AS IS RELAT ABLE TO SUCH ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 19 OF 22 SUBSIDY OR GRANT OR REIMBURSEMENT SHALL NOT BE INCL UDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. COST INCU RRED/PAYABLE BY THE ASSESSEE ALONE COULD BE THE BASIS FOR ANY TAX A LLOWANCE. THIS EXPLANATION FURTHER PROVIDES THAT WHERE SUCH SUBSID Y OR GRANT OR REIMBURSEMENT IS OF SUCH NATURE THAT IT CANNOT BE D IRECTLY RELATABLE TO THE ASSET ACQUIRED, SO MUCH OF THE AMO UNT WHICH BEARS TO THE TOTAL SUBSIDY OR REIMBURSEMENT OR GRAN T THE SAME PROPORTION AS SUCH ASSET BEARS TO ALL THE ASSETS IN RESPECT OF OR WITH REFERENCE TO WHICH THE SUBSIDY OR GRANT OR REI MBURSEMENT SO RECEIVED, SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. THE AMENDMENT MADE THROUGH EXPLANATIO N 10 WILL TAKE EFFECT FROM 1 ST APRIL, 1999, AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASSESSMENT YEAR 1999-2000 AND SUBSE QUENT YEARS. 22. EVEN THE AFORESAID PROVISIONS OF EXPLN. 10 WILL APPLY ONLY WHEN THERE IS A SUBSIDY OR GRANT OR REIMBURSEMENT. IN THE PRE SENT CASE THERE WAS NO SUCH SUBSIDY OR GRANT OR REIMBURSEMENT. THERE WAS ONLY A WAIVER OF THE AMOUNTS DUE FOR PURCHASE OF MACHINERY WHICH CANNOT FALL WITHIN THE SCOPE OF ANY OF THE AFORESAID EXPRESSIONS USED IN EXPLN.1 0. EVEN OTHERWISE SEC43(1) IS APPLICABLE ONLY IN THE YEAR OF PURCHASE OF MACHINERY AND IN THE PRESENT CASE THE PURCHASE OF THE MACHINERY IN QUEST ION WAS NOT IN AY 01- 02 . THEREFORE THE ACTUAL COST WHICH HAS ALREADY B EEN RECOGNISED IN THE BOOKS IN THE AY PRIOR TO AY 01-02 CANNOT BE DISTURB ED IN AY 01-02. IN THIS REGARD THERE IS A LACUNA IN THE LAW AND IT IS FOR T HE LEGISLATURE TO PROVIDE APPROPRIATE SAFEGUARDS IN THIS REGARD. IT IS TRUE THAT THE ASSESSEE ON THE ONE HAND GETS THE WAIVER OF MONIES PAYABLE ON PURCH ASE OF MACHINERY AND CLAIMS SUCH RECEIPT AS NOT TAXABLE BECAUSE IT IS CA PITAL RECEIPT. ON THE OTHER HAND THE ASSESSEE CLAIMS DEPRECIATION ON THE VALUE OF THE MACHINERY FOR WHICH IT DID NOT INCUR ANY COST. THUS THE ASSE SSEES STAND TO BENEFIT BOTH WAYS. AS PER THE LAW AS IT PREVAILS AS ON DAT E, WE ARE OF THE VIEW THAT THE REVENUE IS WITHOUT ANY REMEDY. THE ONLY WAY TH AT THE REVENUE CAN ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 20 OF 22 REMEDY THE SITUATION IS THAT IT HAS TO REOPEN THE A SSESSMENT FOR THE YEAR IN WHICH THE ASSET WAS ACQUIRED AND FALL BACK ON THE P ROVISIONS OF SEC.43(1) OF THE ACT WHICH SAYS THAT ACTUAL COST MEANS THE AC TUAL COST OF THE ASSETS TO THE ASSESSEE. EVEN THIS CAN BE DONE ONLY WHEN A FTER THE WAIVER OF THE LOAN WHICH WAS USED TO ACQUIRE MACHINERY. BY THAT TIME IF THE ASSESSMENTS FOR THAT AY GETS BARRED BY TIME, THE RE VENUE IS WITHOUT ANY REMEDY. EVEN THE PROVISIONS OF SEC.155 DO NOT PROV IDE FOR ANY REMEDY TO THE REVENUE IN THIS REGARD. 23. THE AO HAS MADE A REFERENCE TO THE PROVISIONS O F SECTION 43(6)(B) OF THE ACT. IN OUR OPINION, THESE PROVISIONS WERE NOT APPLICABLE TO THE PRESENT CASE. THE APPLICABLE PROVISIONS TO THE PRE SENT CASE ARE SECTION 43(B)(C) OF THE ACT. IT IS ALSO NOTICED THAT THE H ONBLE SUPREME COURT IN THE CASE OF CIT V. TATA IRON & STEEL CO. LTD. (SUPRA) HAS TAKEN A VIEW THAT REPAYMENT OF LOAN BORROWED BY AN ASSESSEE FOR THE P URPOSE OF ACQUIRING ASSET HAS NO RELEVANCE TO THE COST OF ASSETS ON WHI CH DEPRECIATION HAS TO BE ALLOWED. SIMILAR VIEW WAS ALSO EXPRESSED BY THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT V. COCHIN CO. PVT. LTD. (184 ITR 230) (KER) , AS ALREADY STATED, AS FOLLOWS:- WDV AS AT THE BEGINNING OF THE PRECEDING YEAR AS W ELL AS THE DEPRECIATION ACTUALLY ALLOWED IN THAT YEAR HAVE REA CHED FINALITY AND CANNOT BE CHANGED IN THE ASSESSMENT YEAR UNDER APPEAL. THEY COULD HAVE BEEN CHANGED ONLY IF THE ASSESSMENT OF THAT OR EARLIER YEARS COULD BE RE-OPENED. SUCH AN ACTION W AS BARRED BY LIMITATION. FURTHER, AS PER SECTION 43(6)(C)(II) & (I), THE ONL Y ADJUSTMENTS PERMITTED IN THE WDV OF THE BLOCK WITH REFERENCE TO THE YEAR IN WHICH DEPRECIATION IS TO BE ALLOWED ARE (A) ADDITIO N ACTUAL COST OF ASSET ACQUIRED DURING THE YEAR AND (B) REDUCTION OF MONIES ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 21 OF 22 RECEIVABLE ON SALE, DISCARDING, DEMOLITION OR DESTR UCTION OF THE ASSETS AND ITS SCRAP VALUE. 24. AS FAR AS THE VALIDITY OF INITIATION OF REASSES SMENT PROCEEDINGS ARE CONCERNED, WE FIND THAT THERE WERE NO ASSESSMENTS U /S. 143(3) OF THE ACT AND ONLY AN INTIMATION HAD BEEN ISSUED. IN THE CIR CUMSTANCES, WE HAVE TO VIEW THAT THE LD. CIT(APPEALS) WAS RIGHT IN COMING TO THE CONCLUSION THAT THE REOPENING OF ASSESSMENT U/S. 148 WAS VALID. WE THE REFORE UPHOLD THE ORDER OF THE LD. CIT(A) ON THE ISSUE OF VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS U/S. 148 OF THE ACT. 25. ON THE MERITS OF THE ADDITION MADE BY THE AO IN ALL THE ASSESSMENT YEARS, WE ARE OF THE VIEW THAT THE DISALLOWANCE OF DEPRECIATION CANNOT BE SUSTAINED. THE CIT(A), IN OUR VIEW, OUGHT TO HAVE DELETED THE DISALLOWANCE OF DEPRECIATION IN FULL. WE HOLD ACCORDINGLY AND A LLOW THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE. 26. THE ONLY OTHER GROUND THAT REMAINS FOR CONSIDER ATION IN AYS 2007-08 IS GROUND NO.8 I.E., IN ITA NO.349/B/11. THE SAME READS AS FOLLOWS: 8. THE LEARNED COMMISSIONER ERRED IN NOT APPRECI ATING THE APPELLANTS CONTENTIONS WITH RESPECT TO ASSESSING O FFICERS ACTION OF SETTING OFF THE UNABSORBED DEPRECIATION AGAINST THE TOTAL INCOME WITHOUT GIVING EFFECT TO THE BROUGHT FORWARD BUSINESS LOSS REPORTED IN THE RETURN OF INCOME OF EARLIER YEARS. ON THE ABOVE ISSUE RAISED IN GR.NO.8, WE FIND THAT THE LD. CIT(A) HAS DIRECTED THE AO TO VERIFY THE RECORDS AND ALLOW THE CLAIM OF THE ASSESSEE. THE CIT(A) HAS DIRECTED THAT THE CARRY FORWARD BUSI NESS LOSS SHOULD BE FIRST SET OFF AND THEREAFTER THE UNABSORBED DEPRECIATION HAS TO BE SET OFF. SECTION 72 OF THE ACT GIVES PRIORITY IN THE MATTER OF SETTING OFF OF CARRY ITA NO.751 TO 755 & 1131/10, 349/11& 771 TO 773 & 1164/BANG/10 PAGE 22 OF 22 FORWARD BUSINESS LOSS AND DEPRECIATION, AND IT LAYS DOWN THAT CARRY FORWARD BUSINESS LOSS HAS TO BE SET OFF AGAINST BUSINESS IN COME FOR THAT ASSESSMENT YEAR. SECTION 32(2) OF THE ACT PROVIDES FOR SET OFF OF UNABSORBED DEPRECIATION. THOSE PROVISIONS ARE SUBJE CT TO PROVISIONS OF SECTION 72(2) OF THE ACT. SECTION 72(2) PROVIDES T HAT SET OFF HAS TO BE FIRST GIVEN FOR CARRY FORWARD BUSINESS LOSS. IT IS THUS CLEAR THAT THE CLAIM OF THE ASSESSEE THAT PRIORITY OF SET OFF SHOULD BE BROUGHT FORWARD BUSINESS LOSS AND THEREAFTER UNABSORBED DEPRECIATION IS FOUND TO BE CORRECT. THE AO IS ACCORDINGLY DIRECTED TO VERIFY AND GIVE EFFECT, KEE PING IN MIND THE OBSERVATIONS REFERRED TO ABOVE. 27. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED AND THE APPEALS OF THE REVENUE ARE DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 14TH DAY OF SEPTEMBER, 2012. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 14 TH SEPTEMBER, 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.