O.K. Narayanan, Accountant Member - (1.) THIS appeal is filed by the Revenue. The relevant assessment year is 1996-97. The appeal is directed against the order passed by the CIT(A)-I at Chennai on 20-11-1999 and arises out of the assessment completed Under Section 143(3) of the Income Tax Act, 1961.
(2.) The assessee is a shipping company. The assessee company had filed its return of income for the impugned assessment year declaring NIL income. The positive income was set off against the brought forward loss of the preceding assessment years. The return of income filed by the assessee company was initially processed Under Section 143(1)(a) with certain prima facie adjustments having been made. Thereafter, the case was selected for scrutiny and the assessment was completed Under Section 143(3) of the Act. In the course of assessment proceedings, among other things, the assessing officer has stressed on two items. The first item is that of the incidental expenses incurred by the assessee company in selling four ships out of its fleet during the previous year relevant to the assessment year under appeal. The assessee company had sold four ships during the relevant previous year. The assessee company has incurred certain expenditure by way of commission and others in selling those ships. The assessee company reduced such incidental sales expenses from the consideration received against the sale of four ships. The net proceeds were treated as the de facto consideration received on sale of the ships and the said net amount was reduced from the block of assets for the purpose of depreciation. The assessing officer took the view that the monies payablein respect of any depreciable asset falling within the block of assets have to be reduced from the value of available block of assets for the purpose of granting the depreciation allowance. The assessing officer has placed reliance on the provisions contained in Section 43(6) read with the Explanation below Section 41(4). The assessing officer held the view that the gross amount of consideration needs to be deducted from the block of assets. While making the said adjustment in the value of block of assets relating to ships, the assessing officer further treated the incidental expenses in a different manner. He held that the incidental expenses relating to the sale of ships were in the nature of capital expenditure and, therefore, could not be allowed as a deduction in computing the income of the assessee company. An addition of Rs. 26,94,591 was made by the assessing authority on this ground.
(3.) THE second item probed into by the assessing officer was the claim of depreciation made by the assessee company in respect of two new ships purchased by it during the previous year under consideration. THE assessee company had purchased two ships, viz. M.T. KISHORE and M.T. KAMLESH. THE two ships were purchased for a consideration of Rs. 329,67,94,190. THE ships were acquired by the assessee company during the second half of the relevant previous year. Accordingly, the assessee company claimed depreciation @50% of the normal rate of depreciation prescribed for the ships. But, the assessing officer was of the view that even though it could be held that the ships were acquired by the assessee company before the end of the relevant previous year, i.e. on 31-03-1996, it could not be held that the assessee had become the owner of those ships as on the last date of the previous year. This observation of the assessing officer regarding the ownership of the two ships was based on the provisions of the Merchant Shipping Act, 1962. Even though, not explained in the assessment order, it must be the impression of the assessing authority that as the ownership of those two ships were not transferred and registered in the name of the assessee company as on 31-03-1996 as per the provisions of the Merchant Shipping Act, 1962, the assessee could not be treated as the dejure owner of the ships. In addition to the above observation, the assessing officer had also held a view that the assessee had not used those ships for the purpose of its business during the relevant previous year. THE assessing officer relied on the directors' report and the annual report of the assessee company to come to the above observation that the ships were not actually used for the business purposes during the relevant previous year. For the two reasons stated above, the assessing officer held that the assessee company was not entitled for the depreciation for the impugned assessment year 1996-97. Accordingly he disallowed the depreciation of the new two ships acquired by the assessee company during the previous year and added back the amount to the income of the assessee company.;