Hewlett Packard Financial Services (India) Pvt. Ltd. v. Dy. CIT (Based on matching facts for AY 2011-12)

ORDER

Ms. Padmavathy S, Accountant Member.- This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals)-4, Mumbai [In short ‘CIT(A)’] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 25.10.2016 for Assessment Years (AY) 2011-12. The assessee raised grounds pertaining to the following issues:

2. The assessee is a company incorporated on 18.01.2001 and is a subsidiary of HPFS Ventures Holdings Ltd. USA. The assessee is engaged in the business of providing innovative technology leasing and financial asset management solutions to customers in India. Accordingly, the assessee earns income from loan arrangements, hire purchase and finance lease (other than hire purchase). The assessee filed the return of income for AY 2011-12 on 30.11.2011 declaring a total loss of Rs. 33,28,16,228/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The assessment was completed vide order dated 30.03.2015 u/s. 143(3) where the income of the assessee is recomputed at Rs. 1,25,44,94,907/- and after setting of the brought forward unabsorbed depreciation of Rs. 1,17,96,85,023/- the assessed income was computed at Rs. 7,48,09,884/-. The Assessing Officer (AO) also made certain adjustments to the book profits u/s. 115JB which resulted in the re-computation of book profits at Rs. 98,88,83,576/-. On further appeal the CIT(A) gave partial relief to the assessee and the assessee is in appeal against the order of the CIT(A) towards the additions / disallowances sustained.

3. The assessee has claimed depreciation at 60% on Digital Press Printer which is leased out to M/s. S.L. Prop Pack Ltd. and M/s. Stationary Point India Ltd. The AO issued a show-cause notice asking the assessee to explain why the depreciation cannot be restricted to 15%. The assessee submitted before the AO that the printer cannot work without computer and that the definition of Computer as per Information Technology Act, 2000 includes any input /output /storage /communication facilities which are connected or related to the computer system. The assessee relied on various decisions in this regard. The AO however did not accept the submissions of the assessee and held that HP Indigo Digital Press Printer is a Printing Press doing the speciality job and is not a computer printer commonly used. The AO further held that though computer may be involved, the printer does not bear the character of machine that cannot be held to the peripheral to the computer. Accordingly, the AO allowed depreciation @ 15% and disallowed the differential depreciation. On further appeal, the CIT(A) upheld the decision of the AO by holding that

“4.2 I have considered the findings of the Assessing Officer as well as rival submission of the Appellant, carefully. It is very obvious that the Appellant has leased out H.P. Indigo 5500-4 and 3500-4 Colours Digital Press to the various parties which are not at all part & parcel of computer, but are independent machinery being utilized through computer, Further, it is important to note that such Digital Press Printer is not like Computer Printer supposed to be peripheral of computer but is independent equipment. Therefore, such independent equipment/machinery cannot be regarded as ‘Computer. This fact can be verified from invoices submitted by the Appellant through letter dated 24.08.2016. The contention that this Digital Printing Press is a part & parcel of computer is not tenable. Further, the reliance placed in the case of CIT v. Taj Mahal Hotel 82 ITR 44 (SC) is of no avail to the Appellant rather it goes against the Appellant that the term must be construed in its popular sense which people conversant with subject matter. Definitely, Printing Press and Digital Press cannot be construed as “Computer” Further, such Digital Printing Press cannot be presumed to be Computer Accessories or Scanners or Servers, which are integral part of the computer part. Therefore, the ratio in the case of ITO v. Samiran Majumdar 98 ITD 119(Kol.). CIT v. BSES Yamuna Powers Ltd. ITA No. 1267/2010(Delhi HC) & other decisions are not applicable to the facts of the case. Similarly, other decisions relied upon by the Ld. A.R. refers to the computer printers whereas this Digital Press Printer is independent machinery may be used through computer, cannot be termed as simple computer printers or a scanners hence, these cases are not applicable to the facts of the case. In the case of Nestle India Ltd. v. DCIT (2007)111 TTJ 498(ITAT, Delhi), it is held that UPS though annexed with power control system and for running computer is not part of computer hence, not entitled for higher rate of depreciation. Similarly, the ATM is being used by computer but is not entitled at higher rate of depreciation applicable to the computers as held in the case of HDFC Bank Ltd. v. ACIT (2011) TIOL 101 ITAT, Mumbai. Similarly, in the case of S.T. Reddiar & Son v. DCIT 129 ITD 475, it has been held that machines for designing & printing using computer technology are not computers hence, are not entitled for higher rate of depreciation.

Thus, considering the facts of the case and various legal propositions relevant to this issue, I also come to the conclusion that the Assessee is not entitled for higher rate of depreciation on HP Indigo Digital Press Printer leased out to various parties independently. Thus, the disallowance made by the Assessing Officer is confirmed.”

4. The ld. AR submitted that HP Indigo Digital Press Printer cannot work without the aid of the computer and that it is a settled position that the peripherals which are integral part of the computer that cannot be used without the computer are to be considered as computers for the purpose of allowing hire rate of deprecation at 60%. The ld. AR further submitted that since the Act does not defined a term “Computer” the definition under the Information Technology Act has to be considered as it reflects the common parlance of the definition that will aid to interpret the actual meaning of computer. The ld. AR also submitted that HP Indigo Digital Press Printer is an integrated part with the computer in as much as without necessary software and computing capabilities the printer cannot be operated. The ld. AR placed reliance on the decision of Hon’ble Madras High Court in the case of CIT v. Cactus Imaging India Pvt. Ltd.  (Madras) where it has been held that the printer being a part of computer is eligible for depreciation @ 60%. The ld. AR submitted that the similar view has been held by the Jurisdictional High Court in the case of CIT v. Saraswat Infotech Ltd. where ATM Machines are held to be eligible for depreciation @ 60% for the reason that the ATM cannot function without the help of computer and would be part of the computer used in the banking industries. The ld. AR argued that the ratio laid down in these case are applicable to the issue under consideration and therefore the assessee is entitled to claim depreciation @ 60% on HP Indigo Digital Press Printer.

5. The ld. DR on the other hand submitted written submissions which contained the following arguments

“6.1 Assessee has sought to treat the said press as any printer connected to a computer. The function or purpose of digital press is way different than a simple printer or scanner and therefore cannot be equated as such. As mentioned by AO in its order the functions of digital printer are to print marketing collateral, photo albums, direct mail, labels, folding cartons, flexible packaging, books, manuals and speciality jobs. It can be seen that these functions are way different than the simple printer. It’s a speciality machine designed to undertake large scale printing of different kinds. Further AO has also mentioned that the HP Indigo uses proprietary, patented technology in such machines.

6.2 Thus this machine cannot be considered as some peripheral to computer. In fact computer is peripheral of the said digital press.

6.3 What one has to examine is “whether the given machine/object in question is an integral part of a computer system or computer system is an integral part of given machine/object”. In the instant case computer system is an integral part of the digital press. In such scenario said machine cannot be characterised or categorised as a computer.

6.4 Further assessee has argued that said digital press is operated through computer. All inputs are given through the computer. Without computer same cannot be operated and therefore same needs to be treated as such. This argument of the assessee is totally misplaced. Any system which is using some computer function will certainly have a critical role in operation of the system. Without computer function it would/might not operate but it does not render such system to be categorised as computer. For example in today’s world almost all new cars have computer functions used in them in some form or the other. They have digital screens. Many of the car functions can be operated through such screens. The CPU used in cars allow the car to move in cruise mode whereby, based on sensor inputs about distance and speed of the cars running in front or alongside, it computes the appropriate speed for cruising. However on account of computer function playing a crucial role, car cannot be termed as computer. Similarly in case of a lathe machine operated using computer (called as CNC Machine) wherein all inputs with respect to machining of job are given through a computer screen. Lathe machine then carries out machining work to produce the output job as per specifications. But this cannot or does not justify categorising lathe machine as computer. Digital printing press is just another example in line with the above two illustrations.”

6. We heard the parties and perused the material on record. It is a settled position that a printer being integral part of computer is eligible for depreciation @ 60% and various judicial forums have been consistently holding this view. The Hon’ble Madras High Court in the case of Cactus Imagine India Pvt. Ltd. (supra) has considered a similar issue where it has been held that

“2. These tax case appeals, by the Revenue, have been admitted on the following substantial question of law:

7. We need not labour much to answer the substantial question of law, which has arisen for consideration in the instant case, as in the assessee’s own case, the question has been decided in favour of the assessee and the appeal filed by the Revenue, viz, TC. (A) No. 867 of 2014, was dismissed by the Hon’ble Division Bench by judgment dated 18.11.2014. The operative portion of the judgment reads as follows:

8. From the aforementioned decision, we find, the Division Bench noted the decision of the Commissioner of Income Tax (Appeals) for the assessment years 2003-04 and 2004-05, which was affirmed by the Tribunal and the orders passed by the Tribunal are challenged in the appeals before us. Therefore, we deem it fit and appropriate to consider the submission of the learned counsel for the Revenue. The decision in the case of Bimetal Bearings Ltd. (supra) explains as to how an entry has to be interpreted in a taxation statute

9. The Hon’ble Division Bench took note of the decision of the Hon’ble Supreme Court pointing out that the entry to be interpreted is in a taxing statute; full effect should be given to all words used therein and if a particular article would fall within a description, by the force of words used, it is impermissible to ignore the description, and denote the article under another entry, by a process of reasoning.

10. It was further pointed out that the rule of construction by reference to contemporanea expositio is a well-established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous.

11. By applying the rule of interpretation, we find that the relevant entry under old appendix I Clause III(5) states “computers including computer software” and the Notes under the Appendix defines ‘computer software in Clause 7 to mean any computer program recorded on disc, tape, perforated media or other information storage device. Noteworthy to mention that the notes contained in the appendix, the term “computer” has not been defined. Therefore, as pointed out by the Division Bench in Bimetal Bearings Lid (supra), if a particular article would fall within the description by the force of words used, it is impermissible to ignore the word description. Thus, going by the usage of the equipment purchased by the petitioner, we have to take a decision.

12. The Commissioner of Income Tax (Appeals) on examining the manner in which the equipment functions by way of video demonstration, recorded that the printer cannot be used without a computer, that is, it is part of the computer system.

13. In paragraph 6 of the order passed by the Commissioner of Income Tax (Appeals), it has been stated that it can be inferred that the machines “computer printers” under consideration can either be called computers-printers, since a lot of independent functions done by the computers are done by these printers and they can be called an integral part of the computer system. Therefore, the Commissioner of Income Tax (Appeals) came to the conclusion that it should be treated as part of the computer and an accessory to the Computer. This factual finding cannot be dislodged by us, as no material has been placed by the Revenue before this Court.”

7. From the perusal of the above decision of the Hon’ble High Court, we notice that the underlying principle for allowing hire rate of deprecation to printers is that the printers are integral part of the computer system that cannot function without computer. We further notice that the Hon’ble Bombay High Court in the case of Sarswat Infotech Ltd. has allowed hire rate of deprecation to ATM Machines on the same principle.

8. In the given case it is submitted that HP Indigo Digital Press Printer is a digital offset printer predomenently used for commercial jobs like printing industrial labels, plastic cards speciality products etc. The printer receives commands from a computer attached to it for carrying out the printing function and the computer contains a software programme i.e. specific to such printer where the design intended to be printed is created / modified in the computer. The computer then converts its input command into a machine readable format which HP Indigo Digital Press Printer uses to execute the printing function. From the perusal of these facts as submitted, it is clear that HP Indigo Digital Press Printer cannot work in isolation and can perform the act of printing only with the support of the computer. Accordingly, we see merit in the submission that HP Indigo Digital Press Printer is integral part of the computer that cannot function independently. Therefore, respectfully the ratio laid down in the judicial precedents, we hold that HP Indigo Digital Press Printer is entitled for depreciation @ 60% as applicable to computers. The grounds raised by the assessee in this regard are allowed.

9. During the course of assessment proceedings the AO issued a notice u/s. 133(6) of the Act to M/s Hewlett – Packard India Sales Pvt. Ltd. (HPIS) and from the reply received noticed that HPIS has written off bad debts of Rs. 11,77,01,185/- towards the assessee. Accordingly, the AO called on the assessee to justify as to why the liability outstanding against HPIS should not be treated as ceased. The assessee submitted that HPIS records sales in its books immediately on raising invoice on the assessee whereas the assessee records the liability towards HPIS only upon acceptance of equipment by the customer. The assessee submitted that in respect of the amount written off by HPIS the sales invoice would have been accounted against the assessee and in the absence of acceptance the assessee would not have recognized the liability towards HPIS. The assessee also submitted that since no liability is recorded against HPIS the writing off of bad-debts to the books of HPIS does not result in cessation of liability in the hands of the assessee due to different accounting practices adopted by HPIS and the assessee. However, the AO did not accept the submissions of the assessee stating that the assessee has not supported the said contentions with actual documents. The AO further held that the impugned transactions are totally unrecorded which is not acceptable and accordingly treated the amount as addition u/s. 41(1) of the Act. Before the CIT(A) the assessee made similar submissions and further stated that the addition u/s. 41(1) would arise only where the assessee has earlier been allowed a deduction in any previous year. The assessee also submitted that in any case the transaction with HPIS is that of purchase of capital asset and that the liability towards the purchase is not recorded in the books of the assessee until the books are accepted by the customers. The CIT(A) after considering the submissions of the assessee held that

“5.2. I have circumspected the facts and circumstances of the case and have carefully considered the finding of the Assessing Officer as well as rival submission of the Appellant, the facts of the case is that M/s. Hewlett Packard H.P. (I) Pvt. Ltd. has sold out goods to the Appellant company worth of Rs. 11,77,01,185/-Subsequently, in this year this company has written off such liability as Bad Debt. This fact was noticed by the Assessing Officer through inquiry u/s.133(6) of the Income-tax Act, 1961. Obviously, such written off of liability by the seller of goods/IT equipments which are being leased out by the Appellant, a gain or income to the Appellant. It may not be taxable u/s 41(1) of the Income-tax Act, 1961 if such amount have not allowed or claimed as deduction in any A.Y. but such cessation of liability is taxable because the Appellant has claimed depreciation on such equipment and secondly, it’s business is related to leasing of assets which is a stock-in-trade or an asset which are subject to business transactions of revenue nature. The claim of the Appellant that this transaction is capital in nature is not tenable because of the nature of business activity of the Appellant. The Appellant was incorporated in India on 18.01.2001 which is subsidiary of M/s. Hewlett Packard Financial Services, Venture Services Holding, U.S.A. The Appellant has certificate to engage in leasing business as a non-banking Financial Company from Reserve Bank of India. As admitted by the Assessee, it is engaged in the business of providing innovative technology, leasing and financing assets of Management as well as to customers in India. Thus, apart from loan arrangement, it also does hire purchase and finance lease business. The Appellant claims depreciation on all such equipment, projects is given on lease. “Thus, it is very evident that such cessation of liability by the principal is a revenue gain to the Appellant. The Ld. Assessing Officer has rightly noted in Para 9.3 of the assessment order that the Assessee has not shown the transaction in his books of accounts and when inquiry was made from the principal, it came to the notice that the sale price have been written off but Assessee has suppressed the same whereas there is a visible gain of such trading liability as Bad Debts. Obviously, by letter dated 24.04.2014, the Appellant has not given satisfactory reply to the Assessing Officer. The relevant part of the letter have been reproduced by the Assessing Officer in Para 9.2 of the assessment order. Thus, the contention of the Appellant that such expenditure has been paid in earlier year hence, Sec.41(1) cannot be applied, is out of context) Reason is very obvious that IT equipment has been purchased and depreciation has been claimed and selling party has become principal, has written off the trading liability, hence, there is a gain/income to the Appellant because Appellant had not to pay purchase price of the goods on which depreciation has been claimed. Therefore, the addition so made of Rs.11,77,01,185/-is sustained.”

10. The ld. AR submitted that the facts pertaining to have been clearly explained before the CIT(A) and in this regard drew our attention to the submissions made before the CIT(A). (page 386 of PB). The ld. AR argued that the provisions of section 41(1) would get resolved only on satisfaction of the condition that there is a liability that ceased to exist and that the liability is a trading liability. The ld. AR further argued that even assuming that the liability ceased to exist it is not a trading liability for the assessee since the purchase from HPIS is a transaction capital in nature towards assets to be given to customers on hire purchase/finance lease. The ld. AR also argued that the lower authorities have made the addition without examining the factual position as submitted by the assessee that the liability towards which the addition is made has not been recorded in the books of accounts of the assessee. The ld. AR in this regard placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT v. Shri Vardhman Overseas Ltd.  (Delhi).

11. The ld. DR on the other hand submitted that the assessee failed to substantiate the claim that the amount which has been written off by HPIS is not recorded as liability in the books of the assessee. Accordingly, the ld. DR supported the order of the lower authorities.

12. We heard the parties and perused the material on record. The AO based on the reply received in response to notice u/s. 133(6) noticed that HPIS has written off certain amount as bad-debts against the amount recoverable from the assessee. The AO accordingly, held that there is a cessation of corresponding liability in the hands of the assessee and therefore made an addition u/s. 41(1). The contention of the assessee is that the accounting treatment of the capital asset purchased for giving it to customer on hire purchase or finance lease is that the asset and the corresponding liability is recorded in the books of the assessee only when the customer who has ordered the asset except the asset. The alternate contention of the assessee is that the purchase of capital asset against which the liability is created is not a trading liability and no deduction has been claimed earlier by the assessee. Accordingly, it is contended that the provisions of section 41(1) are not applicable. In this regard we notice that the Hon’ble Delhi High Court in the case of Shri Vardhman Overseas Ltd. (supra) has considered the issue of addition u/s. 41(1) where it has been held that

“11. The question before us is limited to the applicability of Section 41(1) of the Act. The section in so far as it is relevant for our purpose is as below:

We may straightaway clarify that Explanation I which was inserted w.e.f. 1.4.1997 is not attracted to the present case since there was no writing off of the liability to pay the sundry creditors in the assessee’s accounts. Therefore, as rightly pointed out by the learned standing counsel for the income tax department, the question has to be considered de hors Explanation / to Section 41(1). When we do so, what we find from clause (a) is that in order to invoke the section, it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. There is no dispute in the present case that the amounts due to the sundry creditors had been allowed in the earlier assessment years as purchase price in computing the business income of the assessee. The second question is whether by not paying them for a period of four years and above the assessee had obtained some benefit in respect of the trading liability allowed in the earlier years. The argument of the learned standing counsel that the nonpayment or non-discharge of the liability in favour of the sundry creditors resulted in “some benefit in respect of such trading liability” in a practical sense or common sense and, therefore, the section was rightly invoked, with respect, overlooks the words following the above quoted words, namely, “by way of remission or cessation thereof. As a matter of construction, it seems to us that it is not enough that the assessee derives some benefit in respect of such trading liability, but it is also essential that such benefit arises “by way of remission or cessation of the liability. The words in clause (a) viz., “some benefit in respect of such trading liability by way of remission or cessation thereof should be read as a whole and not in the manner suggested by the learned standing counsel.

12. That takes us to the next question as to what constitutes remission or cessation of the liability. It cannot be disputed that the words “remission” and “cessation” are legal terms and have to be interpreted accordingly. In State of Madras v. Gannon Dunkerley & Co (Madras) Ltd. AIR 1958 SC 560 Venkatarama Aiyyar J. explained the general rule of construction that words used in statutes must be taken in their legal sense and observed:- “The ratio of the rule of interpretation that words of legal import occurring in a statute should be construed in their legal sense is that those words have, in law, acquired a definite and precise sense and that, accordingly, the legislation must be taken to have intended that they should be understood in that sense. In interpreting an expression used in a legal sense, therefore, we have only to ascertain the precise connotation which it possesses in law”. In our opinion, this rule should be applied to the interpretation and understanding of the words “remission” and “cessation” used in the section.”

13. From the perusal of the above decision it is clear that for the purpose of making the addition under section 41(1) it must be first established that the assessee had obtained some benefit in respect of the trading liability which was earlier allowed as a deduction. In assessee’s case, the revenue has not brought anything on record to establish that the assessee has claimed any benefit by way deduction in earlier years but has fully relied on the fact that HPIS has written of the balance outstanding against assessee’s name as bad debts. The onus in this regard falls on the revenue in the light of the assessee’s contention that liability even if assumed to have ceases to exist is towards purchase of asset to be given to customers on hire purchase. The CIT(A) has held that the assessee has claimed depreciation on the asset against which the liability ceased should be brought to tax under section 41(1). From the plain reading of the provisions of section 41(1) it is clear that an allowance or deduction would have been claimed in respect of loss, expenditure or trading liability whereas depreciation allowance is not a loss or expenditure or a trading liability as submitted by the ld AR. Further from the orders of the lower authorities we notice that the revenue has not taken into consideration the submission that the amount written off were not accounted in the books of the assessee due to different accounting statements. We further notice that no factual examination is carried out by the revenue in this regard and no details / evidences have been called for from the assessee. In view of these discussion we are of the view that mere write off of bad debts by HPIS cannot result in an addition under section 41(1), without establishing that the assessee has recorded the impugned transaction as a trading liability against HPIS in earlier years and that the assessee has obtained some benefit in respect of the said trading liability by claiming any loss or expenditure pertaining to the same. The AO is accordingly directed to delete the addition made under section 41(1) of the Act. The grounds raised by the assessee in this regard are allowed.

14. The AO on perusal of the return filed for the year under consideration noticed that the assessee has claimed brought forward unabsorbed depreciation from AYs 2002-03 to 2008-09 as tabulated below:

15. The AO further noticed that the assessee did not file the return of income for AYs 2002-03 to 2008-09 except for AY 2003-04 and issued a show-cause notice to the assessee as to why the brought forwards unabsorbed depreciation should not be disallowed. The AO also called on the assessee to file copy of order u/s. 143(1) or any document in support of its claim of return for these years. The assessee submitted before the AO that the return for AYs 2002-03 and 2003-04 were filed within the time prescribed u/s. 139(4) and that for the rest of the AYs the returns were filed beyond the due date. The assessee further submitted that the carry forward of unabsorbed depreciation is deemed to be part of and stand on the same footing as current depreciation and that there is no time limit for carry forward of unabsorbed depreciation. Accordingly, the assessee submitted that the unabsorbed depreciation should be allowed to be carry forward even where no return is filed. The AO did not accept the submissions of the assessee and disallowed the claim of depreciation on the ground that the assessee has not filed any valid return of income. On further appeal, the CIT(A) held that

“6.3. As evident from the above admission of the Appellant that return of income from A.Y.2002-03 to A.Y.2008-09 have never been filed on time. Thus, it is very evident that such return of income, if these have been filed have definitely been not filed within time limit and further no notice u/s.148 of the I.T. Act, 1961 has been issued for escapement assessment hence, no depreciation could be allowed mechanically without scrutinizing the veracity of claim and correctness of income. It is also very important to keep into notice that the Ld. Assessing Officer has mentioned in the assessment order that no valid return of income has been filed and claim was disallowed in A.Y.2009-10. Further, the Ld. Assessing Officer gets support from the decision of Madras High Court, in the case of Sri Rajarathinam Transports Pvt. Ltd. v/s. CIT(1993)  (Mad.). When no return of income has been filed and no assessment has been made in A.Y.2002-03 to 2008-09, claim of the Appellant must not be accepted mechanically. Sec. 139(3) of the I.T. Act, 1961 provides that if any Assessee/person has sustained in loss, he has to furnish return of income within the time allowed under sub-section 1 of Sec. 39 of the I.T. Act, 1961. In most of the case relied upon by the Assessing Officer, facts are different as in those cases, depreciation have been quantified or legally ascertained in earlier year. Here in these cases, return of income was not filed and no assessment was made u/s.143(1) or u/s.143(3) or u/s.147 or u/s. 154 hence, it cannot be presumed that such claim of depreciation is correct, genuine and based on evidences or is legally allowable. Therefore, after gap of 6 years, if such claim is made without filing valid return of income, such claim of the Appellant cannot be entertained mechanically, therefore, stand of the Assessing Officer is approved and claim of the Appellant is rejected.”

16. The ld. AR submitted that as per the provisions of section 32(2) the unabsorbed depreciation becomes part of the depreciation of the current year and therefore the same cannot be denied on the ground that no return has been filed by the assessee. The ld. AR drew our attention to the requirement u/s 80 towards submission of return for losses which contains all losses except unabsorbed depreciation. The ld. AR also drew our attention to the provisions of section 139(3) which specifically covers all carry forward losses except unabsorbed depreciation stating that the assessee is required to file the return of loss in the prescribed form. Accordingly, the ld. AR argued that the combined perusal of the above provisions of the Act makes it clear that the requirement to file the return of income in order to carry forward unabsorbed depreciation is not provided in the Act and therefore the assessee’s claim cannot be denied on that ground. The ld. AR also argued that the return for all the AYs were filed by the assessee though beyond the due dates prescribed u/s. 139(4) which the AO could have considered and issued notice u/s. 148. Since the AO did not issue the notice u/s 148 the ld. AR argued that the return filed by the assessee beyond the due date u/s.139 is deemed to have been accepted by the AO. The ld. AR without prejudice made an alternate claim that in case the unabsorbed depreciation is not allowed to be carry forwards then the written down value of the asset should be increased to that extent. The ld. AR further submitted that by denying the carry forward of unabsorbed depreciation and by reducing the cost of asset by depreciation would amount to double disallowance which is not tenable.

17. The ld. DR on the other hand submitted that the returns filed beyond the due date u/s 139(4) is a non-est return and therefore the unabsorbed depreciation for the years where the assessee has not filed the return of income cannot be allowed to be carry forward. The ld. DR further submitted that the alternate plea of the assessee regarding WDV cannot be allowed since the depreciation allowance is mandatory. The relevant extract from the written submissions of the ld DR in this regard is extracted below –

“7.1 With respect to assessee’s argument that to claim unabsorbed depreciation there is no need to file return within due date, the undersigned relies on the reasoning given by AO and CIT(A) in this argument of the assessee.

7.2 Secondly assessee’s argument to consider the returns filed after due date specified for belated returns u/s 139(4) cannot be accepted as same is beyond the provisions of statute. Section 139(4) allows any person, who has failed to furnish a return within the time allowed, to furnish a belated return before three months prior to the end of the relevant assessment year or before completion of assessment whichever is earlier. Therefore, any return filed after this dead line u/s 139(4) automatically or by default becomes a non-est return. Or in other words it amounts to ‘no filing of any return of income’. Therefore, any claim made under such non-est return is equivalent to no claim.

7.3 Thirdly Assessing Officer has no jurisdiction to accept any such returns, It is beyond his jurisdiction to consider any such returns and claims made therein. There is no provision under Income Tax Act which allows/authorises the Assessing Officer to accept such returns. Even section 139(8A), which allows belated returns with certain conditions, was inserted much later ie. by Finance Act 2022 w.e.f. 01.04.2022 and thus same is not applicable to assessee. Assessee had recourse only u/s 119(2)(b) as such condonation powers lie only with CBDT. U/s 119(2)(b) the CBDT may, if it considers it desirable or expedient so to do for avoiding genuine hardship to an assessee, authorise any income tax authority to admit any such application or claim after expiry of the period specified under the Act. Section 119(2)(b) is reproduced as under:

Thus assessee has to make an application in prescribed form to CBDT for condoning the delay. In the instant case no any such application is made by the assessee. Simply filing copies of return with Assessing Officer does not make it an application u/s 119(2)(b) of the Act.

7.4 Further assessee has argued that since the Assessing Officer did not expressly reject such returns connotes that these returns are accepted or valid returns. This is not acceptable for the very reasons mentioned above. Assessing Officer does not any have authority or jurisdiction to accept or consider such returns. Any action on part of Assessing Officer to accept these returns would have been absolutely ultra vires to his authority. Therefore, any inaction or absence of action on part of Assessing Officer, to reject these returns expressly, does not make them valid returns. These returns were nonest ab-initio. Assessing Officer could never have validated these returns.

7.5 Further assessee has argued that for any apprehension about the correctness of claims the Assessing Officer could have issued notice u/s 148 or 142(1) in order to scrutinise these returns. This argument is also not acceptable for the same reasoning as explained in above paras. For non-est returns there remains no cause of action with Assessing Officer to issue any notice u/s 142(1) or 148. Further u/s 148, the Assessing Officer, just based on apprehension, cannot issue a notice u/s 148. It was well settled that cause of action u/s 148 only arises from a reason to believe about escapement of income based on the concrete material. Just having apprehension does not empower the Assessing Officer to issue notice u/s 148.

7.6 Without prejudice to whatever submitted above it is also stated that allowing such returns will defeat the very purpose of the concept of “Limitation” as mandated under any statute including Income Tax Act This will amount to allowing any person to claim depreciation allowance for any number of past years. For example in the year 2024-25, if someone files return for year 2011-12 claiming depreciation allowance for that year to be carried forward and allowing set-off of the same against income of current year. In such scenario does the Assessing Officer has any authority to scrutinise the returns for the year 2011-127 In no circumstances the Assessing Officer can issue any notice for that year. And in the absence of any scrutiny, it will amount to allow any claim, as made by assessee, for any past year without any time limit whatsoever. Allowing the plea of assessee will give rise to a judicial precedence whereby any person can file a return for ‘any past year’ claiming carry forward and set-off of depreciation allowance to reduce the tax liability against the current year income. And the Assessing Officer will not have any option but to accept any such claims. This is certainly not acceptable as per scheme of statute.

7.7 In alternative assessee has submitted that if its returns and claim of depreciation made therein is not considered then he should be allowed to increase its written down value for the current year to that extent. This plea of the assessee is also not acceptable as allowing the same would amount to allowing its first plea. In other words what assessee is asking is same benefit in the garb of something else. What needs to be understood is the effect of both the pleas are one and the same. In first plea assessee was asking to carry forward of all unabsorbed depreciation to the current year and in this alternative plea assessee is asking that if not allowed to carry forward then increase the WDV by the same amount. Thus, which is not allowed by law directly assessee is seeking the same indirectly.

7.8 Further this alternative plea of the assessee is not acceptable for the very reasons mentioned in above paras. What assessee is asking for is depreciation allowance for a capital asset, which was bought in past year, in the current year. The same question arises here again that, does Assessing Officer has any authority to entertain any such claim. There is no provision under Income Tax Act which authorises the Assessing Officer to allow any such depreciation allowance in the current year for anything purchased in earlier years. The very issue comes here again as to how can AO verify the authenticity of such claim. At the cost of repetation the same example as given in para 7.6 above can be considered again. If assessee claims that it had purchased a machine or capital asset for Rs. 1000 in year 2011-12 and now in the return for year 2024-25 it is asking that the for computing depreciation the WDV be considered at Rs. 1000 as in the mean time no returns were filed to claim the unabsorbed depreciation and its carry forward. Now in the year 2025-26 can Assessing Officer scrutinise the authenticity of such claim. Can he issue a notice for AY 2010-11 to seller of capital asset to verify the genuineness of the said capital asset. Does the said seller who has to reply to the notice of the AO is mandated to keep the record for said transaction till perpetuity. He might have weeded out the relevant records as same being out of period of limitation window. Does AO has any recourse in such scenario? Or is he simply required to accept all these details as it is as given by assessee. Thus, allowing such claim will again will create a judicial precedent whereby any person can claim purchase price as WDV for computing the depreciation of current year. And the Assessing Officer will have no option but to accept the same.

7.9 Further accepting alternative plea will also create a self-contradictory scenario. Initially assessee was claiming that a capital asset was purchased in earlier year and also put to use in that year however for want of valid return no such claim is allowed by the Revenue. Then alternatively assessee is asking for depreciation on purchase value as WDV assuming that the capital asset is put to use only in current year whereas factually asset was in use for all these years. In other words, on one hand assessee has a factual claim that the asset is actually used for business purpose since earlier years and on the other hand ssessee is requesting to presume that asset is put to use only in current year. This is beyond any logic. Income Tax Act does not allow any presumption with respect to put to use condition mentioned therein Section 32 of Income Tax Act. What Act mandates in clear terms is the year in which asset is put to use. There is no deeming clause used anywhere with respect such scenario. Thus what is expressly required as per the provisions of Act cannot be presumed or assumed as against the facts. Thus, on this count also argument of assessee is not acceptable.

7.10 Further assessee has also claimed that all these returns were duly audited and therefore are reliable documents. This plea of the assessee is liable to be rejected for the following reasons. Firstly, any audited document does not sanctify it to be beyond scrutiny by authority. Secondly period of limitation has no bearing on the fact that if accounts are audited or not. It operates independently.

7.11 Further Section 32(2) start as “Where, in the assessment of the assessee, full effect cannot be given to any allowance. “. Thus, it clearly mentions that the depreciation for which full effect cannot be given in assessment. That means the return should be assessed to determine the amount of unabsorbed depreciation. Section 32(2) in clear terms states that the return needs to be assessed to find out the amount of depreciation allowance to which effect cannot be given. And for assessing any return there should be a valid return first. In case of assessee no such valid returns were there and therefore the question of assessing the same and accordingly allowing any unabsorbed depreciation simply does not arise.

18. We heard the parties and perused the material on record. The assessee in the return of income has claimed brought forward unabsorbed depreciation pertaining to AYs 2002-03 to 2008-09. The AO/ CIT(A) did not allow the carry forward stating that the assessee has not filed the return of income within the due date specified under section 139. In this regard it is relevant to take note of the details of return of income filed by the assessee for these AYs

19. The contention of the assessee is that for the purpose of carry forward of unabsorbed depreciation the law does not provide that the return of income is required to be filed within the due dates specified under section 139. In this regard our attention was drawn to provisions of section 80 and section 139(3) of the Act which read as under –

139 – Return of income.

(1) to (1C) ***

(3) If any person who has sustained a loss in any previous year under the head “Profits and gains of business or profession” or under the head “Capital gains ” and claims that the loss or any part thereof should be carried forward under sub-seciion (1) of section 72, or sub-seciion (2) of section 73, or subsection (2) of section 73A or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).

80 – Submission of return for losses.

Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or subsection (2) of section 73A or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.

20. From the plain reading of the above sections it is clear that the losses under the head “profits and gains from business of profession” and loss under “Capital Gains” are not allowed to be carried forward if the return is not filed within the due date for filing the return as specified under section 139(1). Accordingly, the assessee’s argument is that the requirement to file the return of income within the due date under section 139(1) is applicable to business loss and not to unabsorbed depreciation which is carried forward under section 32(2). The revenue’s contention is that the provisions of section 32(2) allows the carry forward of unabsorbed depreciation is allowed only to the extent determined in assessment and in assessee’s case where the return is non est cannot be allowed to be carried forward. In this regard we have perused the other provisions relating to setoff and carry forward of loss such as section 78 which restricts the Carry forward and set off of losses in case of change in constitution of firm or on succession to the losses under Chapter VI where as unabsorbed depreciation is carried forward under section 32(2) under Chapter IV. Now coming to section 157 containing provisions relating to intimation of loss by the AO in the course assessment we notice that the said section provides for intimation of various losses under section 72(1), section 73(2), section 74 (1) / 74(3) or section 74A(3) but does not talk about the unabsorbed depreciation under section 32(2). After the combined perusal of the various provisions under the Act as discussed herein above, we are inclined to agree with the contention of the assessee that the requirement to file the return of income within the due date under section 139(1) is not a condition precedent to carry forward the unabsorbed depreciation. Further in this regard, we notice that the Hon’ble Andhra Pradesh High Court in the case of CIT v. Sri Vijayalakshmi Minerals & Trading Co.  ITR 243 (Andhra Pradesh) has considered the issue of carry forward of unabsorbed depreciation where the return is considered as non est under the erstwhile section 139(10) and held that the unabsorbed depreciation in respect of preceding assessment year where return was non est by virtue of section 139(10) could be carried forward to current assessment year and set off against the profit of that year. When we apply the said ratio to the present case, there is merit in the contention that the unabsorbed depreciation for AYs 2002-03 to 2008-09 cannot be denied to be carried forward on the ground that the return for the said AYs are non est. It is also relevant to consider Explanation 5 to section 32 which provides the provisions of section 32(1) shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income. In other words even if the assessee has not claimed the depreciation allowance in the return of income the law deems it to have been claimed. In assessee’s case the in the returns filed beyond the due dates under section 139(1), the assessee has claimed depreciation and therefore in our view the AO cannot deny the unabsorbed depreciation as not having been claimed since the return of income is non est. In view of these discussions we direct the AO to consider the return of income filed by the assessee for AYs 2002-03 to 2008-09 for the purpose of determining the unabsorbed depreciation and allow the carry forward of the same in accordance with law. The assessee is directed to submit the required details with regard to the depreciation claimed in AYs 2001-03 to 2008-09 before the AO and cooperate with the proceedings. It is ordered accordingly.

21. On perusal of the P&L A/c the AO noticed that the assessee has debited a sum of Rs. 4,00,00,000/- towards “provision for TDS Certificate” under the head “Administrative & Other Expenditure”. The assessee submitted that wherever there are short receipts from the customers after deducting TDS and no TDS Certificate is issued by the customers, the assessee creates a provision towards the TDS amount. The assessee further submitted that the amount is an allowable deduction since the assessee is neither able to recover the amount from the customers nor able to claim credit for TDS without certificate. The AO rejected the submissions of the assessee stating that allowing the claim of the assessee would amount to allowing deduction towards income-tax paid or payable. The AO further held that no reasons have been submitted by the assessee as to why the assessee has not taken any action against the customers. The AO also held that the short receipt of amount from the customers cannot be treated as business loss since the amount represents tax deducted by the customers on behalf of the assessee. Accordingly, the AO disallowed the provision made by the assessee towards TDS. The AO also adjusted the said disallowance against the book profits computed under section 115JB of the Act. On further appeal, the CIT(A) upheld the action of the AO on both counts.

22. The ld. AR submitted that the assessee has received amount against the invoices raised where the customers have short paid and have not issued the TDS certificate. The ld. AR further submitted that the assessee is not able to claim credit for the TDS since the certificate has not been received from the customers. The ld. AR also submitted that the amount not recoverable is therefore written off by the assessee and has used the nomenclature “provision for TDS certificate” whereas in effect the amount written off is bad-debits. Accordingly, the ld. AR submitted that the amount should be allowed as a deduction. The ld. AR with regard to the adjustment made by the AO towards the provision for TDS against book profit u/s 115JB argued that the adjustment does not fall within the purview of the adjustments as provided in section 115JB.

23. The ld. DR on the other hand submitted that the amount claimed as deduction by the assessee is a provision and is not an actual write off. The ld. DR further submitted that the assessee has not substantiated the basis on which the provision is created and therefore, the lower authorities have correctly disallowed the amount. The ld. DR on the issue of adjustment made to profit fairly conceded that if the amount pertains to bad debts then there is no provision u/s 115JB to make the said adjustment.

24. We heard the parties and perused the material on record. The assessee has made a provision against the amount not recoverable from the customers towards TDS deducted by them since the customers have neither made the full payment nor they issued the TDS certificate. In other words, the provision made by the assessee is towards the short payments received from the customers. Accordingly in our view, there is merit in the submission that the provision made is towards the bad debts though the same is accounted as Provision for TDS. Therefore denying the deduction on the ground that if it is allowed would amount to allowing deduction towards tax. Having said, we notice that the assessee has made an adhoc provision of Rs.4,00,00,000 towards the unrecoverable amount and it is not coming out clearly from the facts before us whether the amount is an actual write off in the books of accounts or a mere provision made. Since the AO has denied the deduction on the ground that Tax cannot be claimed as a deduction, the AO has not examined the allowability in the light of the provisions of section 36(1)(vii). Therefore we remit the issue back to the AO with a direction to examine the claim of deduction under the provisions of section 36(1)(vii) and allow the same in accordance with law. The assessee is directed to submit the relevant details in support of the claim before the AO. It is ordered accordingly.

25. On the issue of adjustment made towards the above disallowance to the book profit under section 115JB, we notice that the AO has made the adjustment on the premise that the amount claimed is a provision made towards income tax paid or payable. We have in the above paragraph have held that the provision made by the assessee is towards amount unrecoverable akin to bad debts. Accordingly we direct the AO to delete the adjustment made to book profit under section 115JB in this regard.

26. Ground No.5 is with regard to disallowance of depreciation claimed on assets given on finance lease. The ld. AR during the course of hearing submitted that the ground is not pressed since the order of the CIT(A) was subsequently rectified u/s 154 (order dated 11.08.2017) and the disallowance was deleted. Accordingly, the ground is dismissed as not pressed.

27. Ground No. 6 is with regard to short credit of TDS and in this regard we notice that the CIT(A) has given a direction to the AO to allow the full credit of TDS where the TDS has been deposited into Government Account and there is no deficiency in the documents submitted by the assessee. The ld. AR submitted that section 205 of the Act restricts the recovery of tax from the assessee in case where the tax is deductable at source to the extent to which tax has been deducted from the income. Therefore, the ld. AR argued that the direction of the CIT(A) to give credit only if the TDS have been deposited into the Government Account is not correct. We in this regard issue direction to the AO to examine the facts and give credit to the assessee in accordance with law keeping in mind the provisions of section 205 of the Act. It is ordered accordingly.

28. Ground No.7 is with regard to interest u/s 234B and penalty u/s 271. The ground is consequential and does not warrant a separate adjudication.

29. In result, appeal filed by the assessee is partly allowed.