Advocate Anuj Kisnadwala has raised the pertinent question as to whether a new asset which is lying idle due to the CoronaVirus Pandemic can be said to be “used” for business purposes so to be eligible for depreciation under section 32 of the Income-tax Act, 1961. The ld. author has explained the distinction between ‘ready to use‘ and ‘forced idleness‘. He has pointed out that the CBDT has the power u/s 119 of the Act to give relief to the assessees in such cases. He has also explained the remedies available to the taxpayer should the CBDT not be willing to grant relief
1) Due to unprecedented Covid-19 crisis, the Central Government declared national lockdown with effect from 24th March 2020.Commencement of use of a capital asset is one task which has been, amongst others, hindered by the lockdown. Take a case of a factory which was to begin the production before 31-3-2020 but could not, due to national lockdown. Or take a case of a building scheduled to be functional in the month of April 2020, but now delayed. In all such cases, the capital asset i.e. plant, building, vehicle etc, could not be put to use due to lockdown, although the asset could have been ready and put to use but for lockdown.
Consequences of non-satisfaction of ‘put to use’ condition
2) As per the provisions of S. 32(ii) of the Act, in order to claim depreciation, a capital asset should be ‘put to use’ in the relevant previous year. In absence of asset being put to use, there is no question of depreciation being allowed on it. Similarly, all incidental expenses incurred till the asset has been put to use, would be considered as capital in nature and required to be capitalised. This includes interest expenditure incurred on the capital borrowed for the purpose of acquisition/construction of capital asset. As per the proviso to S. 36(1)(iii) of the Act, interest expenditure pertaining to the period after the asset was first put to use can be allowed as revenue expenditure. Any interest expenditure for the period prior to that needs to be capitalised and treated as part of the cost of capital asset (Refer Explanation 8 to S. 43(1) of the Act)
3) Thus, a business entity would be deprived of claim of depreciation and expenses due to its inability to put the asset in use. This would be so inspite of the fact that the inability is due to circumstances beyond the control. Needless to say that in a given case this may have huge impact on tax liability. More particularly, the asset scheduled to be put to use in last week of March 2020 may have material impact on tax and interest liability for A.Y. 2020-21. Even in cases where asset is scheduled to be put to use in first quarter of F.Y. 2020-21, there would be impact on claim of interest for A.Y. 2021-22.
The concepts of ‘ready to use’ and ‘forced idleness’
4) In several cases, where the asset is ready for use, the courts have equated the same with ‘put to use’ and granted consequential benefit of depreciation. However, the said concept cannot be applied in the present case as in the above examples, the asset is not ready for use. It cannot be said that the asset which is not ready in all respect should be granted the status of ‘put to use’ because of declaration of lockdown.
5) Similarly, in several cases, where the asset cannot be used by the assessee due to circumstances beyond its control, the courts have granted depreciation by holding that the asset continues to be in use. However, all such cases are relating to a situation where the asset was already put to use before such forced idleness. In the present case, the asset has never been put to use in the past and hence the concept of ‘forced idleness’ also cannot be pressed into service.
Application to CBDT u/s 119 of the Act to grant relaxation from the condition of ‘put to use’
6) S. 119(2)(c) of the Act confer power on the Central Board of Direct Taxes(CBDT) to grant relaxations from the requirement of any provisions of Chapter IV or Chapter VI-A if the assessee fulfils certain conditions. The issue to be examined in this article is whether assessee can approach CBDT and successfully claim above relief by invoking powers u/s 119(2)(c) of the Act. The relevant portion of the Section 119 of the Act is reproduced as under:
“119. (1) The Board may, from time to time, issue such orders,………
(2) Without prejudice to the generality of the foregoing power,-…..
(c) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order for reasons to be specified therein, relax any requirement contained in any of the provisions of Chapter IV or Chapter VI-A, where the assessee has failed to comply with any requirement specified in such provision for claiming deduction thereunder, subject to the following conditions, namely:—
(i) the default in complying with such requirement was due to circumstances beyond the control of the assessee; and
(ii) the assessee has complied with such requirement before the completion of assessment in relation to the previous year in which such deduction is claimed”
7) Thus, the power u/s 119(2)(c) of the Act can be used by CBDT and the requirement of Chapter IV in respect of claiming deduction can be relaxed if following conditions are satisfied;
i) The assessee is facing genuine hardship;
ii) The default in complying with the requirement of the provisions was due to circumstances beyond control of assessee;
iii) The assessee has complied with the requirements of the provisions before completion of assessment.
8) Before dealing with the above conditions, it would be relevant to note that
i) The claim of depreciation, interest and expenses under the head profits from business falls under Chapter IV of the Act and hence covered by the above S. 119(2)(c) of the Act.
ii) For claiming depreciation and expenditure, asset must be ‘put to use’. This is one of the requirements of the provision of the Act. Thus the condition being sought to be relaxed is that of ‘put to use’.
iii) The provision empowers CBDT to grant relaxation in respect of ‘deduction’. While interest and expenses are deduction, the depreciation, technically, is allowance. However, considering legislative intent and liberal construction of the powers of CBDT u/s 119 of the Act placed by the courts, it can be safely constred that relief of depreciation can also be granted under above section.
iv) It would be for the assessee to prove that but for the lockdown, the assessee would have ‘put to use’ the asset.
8) Coming back to the first pre-condition of genuine hardship, it is to be reiterated that it is for the assessee to establish that the asset would have been put to use in the relevant period but for the difficulties created due to lockdown. It is also to be brought on record that due to this, the total income and tax liability has been materially affected. Once this is established, it would not be difficult at all to contend that there is a genuine hardship caused to the assessee. In fact, several circulars issued by central and state governments in relation to lockdown and other related issues recognise the hardship. Several orders have been passed by Hon’ble Supreme Court and Hon’ble High Courts acknowledging the hardship ensuing due to lockdown. The CBDT itself has recognised the hardships faced by the tax payers and issued a general order u/s 119 of the Act relaxing the compliance of TDS/TCS provisions.In any case, this is a matter of fact and common knowledge to everyone. In this background, if the assessee is visited with tax and interest liability due to its inability to put to use the asset, it is certainly a case of genuine hardship.
Default was due to circumstances beyond the control of assessee
9) As stated above, assessee need to establish that, but for the lockdown, the asset would have been put to use in the relevant period. This is a factual aspect to be established by bringing necessary evidence on record.
Compliance with the requirement before completion of assessment
10) The condition of put to use must be complied with before the assessment of the relevant year (A.Y. 2020-21 or 2021-22 as the case may be) is completed.
Order of the CBDT can be challenged in Writ
11) If the application is rejected by CBDT, there is no right of appeal provided under the Act against such order. The only remedy is to challenge such order before the Hon’ble High Court by filing a Writ. It is noted that, by and large, the Courts have held that the condition of hardship is to be liberally construed in order to advance substantial justice. For example, the Hon’ble Bombay High Court in the case of Artist Tree (P) Ltd. v. CBDT (369 ITR 691) while deciding the issue u/s 119 of the Act held as under:
"11. The expression "genuine hardship" came up for consideration of the Supreme Court in the case of B.M. Malani (Supra), wherein, by reference to New Collins Concise English Dictionary, the Supreme Court accepted the position that "genuine" means not fake or counterfeit, real, not pretending (not bogus or merely a ruse). Further, a genuine hardship would, inter alia, mean a genuine difficulty”
12) In light of the decisions of the Hon’ble High Courts and considering the fact that business community, in general, has suffered tremendously, it is expected that the assessee would get desired relief under the above provision.
Consequences of rejection of petition under Section 119(2)(c) of the Act
13) Even if the application is ultimately rejected, the assessee cannot be visited with penal consequences u/s 270A of the Act. This is for the reason that the case of disallowance of depreciation and other expenses, including interest, do not fall within the meaning of misrepresentation of income as defined in section 270A(8) of the Act. There is no misrepresentation or suppression of facts, unrecorded investment, unsubstantiated expenditure, recording of any false entry in books, non-recording of any receipt in books or failure to report any international transaction (clause (a) to (f)). Similarly, it is also not a case of under reported income as assessee can be said to have a bonafide explanation and all material facts to substantiate explanation are disclosed (S. 270A(6)(a)). However, for above, the assessee should have filed an application with CBDT before filing return of income. Further, here again, the assessee should be in a position to establish that, but for the lockdown, the asset would have been put to use.
14) Thus, there may not be any liability of penalty, although if tax liability is not discharged, consequential interest would follow (which would not be waived u/s 119).
15) In a case where a capital asset is ready or almost ready, it would be unjust to deny depreciation, from commercial view point also. For, the depreciation is granted also for the reason of efflux of time. Similarly, interest and other cost incurred during lockdown period can not be said, in true sense, to be relatable to bring the capital asset in to existence. These are the additional justifications, if need be.
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