The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the compensation received by Echjay Industries on account of a defective product cannot be adjusted with the Written Down Value (WDV) of the assets.
The assessee Company is engaged in the business of manufacturing engineering products and exports. The case of the assessee originally assessed under Section 143(3) of the Income Tax Act, 1961, determining total income at Rs. 14,77,02,280/- against the returned income of Rs. 12,74,92,260/-.
The assessee preferred an appeal before the Commissioner of Income Tax (Appeal) [CIT(A)] and in its first round; the matter has already travelled up to ITAT. The Co-ordinate Bench restored the matter back to the Assessing Officer on the appeal of the department pertaining to the issue of Depreciation.
In compliance with the order of the coordinate bench, the Assessing Officer again assessed the case under Section 143(3) read with Section 254 of the Income Tax Act by restricting the claim of depreciation to Rs. 1,23,86,490/- against the claim of Rs. 2,92,09,742/-.
The assessee was aggrieved with the order of the Assessing Officer passed under Section 143(3) read with Section 254 of the Income Tax Act in the second round of assessment proceedings and preferred an appeal before the CIT(A), who in turn reversed the order of the Assessing Officer and allowed the appeal of the assessee in his order under Section 250 of the Income Tax Act.
The assessee received a compensation of Rs. 16,05,27,977/- from German Supplier M/s THYSSEN Industries AG. In that year, the Assessing Officer reduced this amount from the cost of the plant, accordingly WDV was revised resulting in reducing the claim of depreciation. This money of compensation received is on account of a defect in the machine supplied.
The Two-member bench comprising of Amit Shukla (Judicial member) and Gagan Goyal (Accountant member) held that the stand of the assessee is correct and the action of the Assessing Officer is liable to be reversed. As the assessee has incurred the full cost of acquisition out of its own pocket and no part of the cost has been borne by anybody else.
In the given circumstances, the amount of compensation received cannot be equated with “Cost bear by third party”. Hence WDV of the assets cannot be adjusted by this amount of compensation received by the assessee. As a result, the ground raised by the revenue was dismissed.
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