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2008 (2) TMI 656 - AT - Income TaxDisallowance of Depreciation - Business expenditure - Loss due to exchange fluctuation - Computation of books profit u/s 115JB - Addition made by Deferred Tax and Provision for bad and doubtful debts Disallowance of Depreciation - Assets of International Division - assets in question were acquired six years back and were regularly used in the business - HELD THAT - In the present case, it is seen that the assets of international division is not a separate block of assets. The block of assets of the entire assets of all the divisions form block of assets. Even these were ready for use though not used actually. Accordingly, applying the ratio laid down in the case of Capital Bus Service (P.) Ltd. 1980 (2) TMI 69 - DELHI HIGH COURT the claim is allowable. This ground accordingly fails. Disallowance on being depreciation claimed @ 100 per cent on assets in nature of temporary structure - assessee had taken premises on lease for a period of three years in its Infotech Division - It is correct to hold that an alternate claim can be made before the learned CIT(A) for the first time and in disposing of the appeal under section 251 of the Act, the Commissioner (Appeals) have power to pass such orders as he thinks fit. His powers include powers to reduce, enhance or annul the assessment. Having power to reduce the assessment, the learned CIT(A) was justified in entertaining claim as to whether the expenses can be allowed as revenue expenditure. We find that the expenses in a leased premises on partition, false ceiling, painting, white-washing, renovation of toilets etc. are revenue expenditure and do not bring into existence any capital asset as such. Accordingly, the claim of the assessee was rightly allowed by the learned CIT(A). Disallowance being 50 per cent of the expenditure for recruitment and training of its staff personnel - Enduring benefit is one of the tests to determine whether the expenditure is capital or revenue. However, it is not a foolproof test and even in some occasion such test will fail if the circumstances so demand. This was so precisely laid in the case of Alembic Chemicals Works Co. Ltd. 1989 (3) TMI 5 - SUPREME COURT . The training expenses is an ongoing process and do not bring into existence any capital asset to the assessee. By training its personnel the business of the assessee is carried on more efficiently and smoothly. It only facilitates proper functioning keeping in view the new technology advances. Thus, expenditure being inclined wholly and exclusively for the purpose of business which cannot be categorized as capital expenditure, cannot be spread over number of years. Accordingly, ground No. 4 fails. Disallowance on being loss due to exchange fluctuation on the amount borrowed on foreign currency for the purpose of working capital - No dispute to the fact that the loan in foreign currency was taken on revenue account and in relation to working of the company. The only ground for disallowance is that the loss does not arise till the loan is repaid. The High Court in the case of CIT v. Woodward Governor India (P.) Ltd. 2007 (4) TMI 118 - DELHI HIGH COURT had opined that if the foreign currency loan is obtained on revenue account, the loss due to fluctuation accrues at the end of the financial year even if such loan is not repaid during the year. The liability is an ascertained liability and not a contingent liability. Accordingly, the loss was rightly held allowable by the learned CIT(A). Addition on account of deferred tax liability while computing book profit u/s 115JB - The word tax is defined in section 2( 43 ) of the Act. As per the definition tax means income-tax chargeable under the provisions of this Act. The provision for deferred tax is not tax payable under the Act. The deferred tax liability is created where the assessee gains tax advantage of temporary nature which are payable in subsequent years. When tax liability of subsequent years are determined, the amount is decreased from deferred tax liability and actual provision is made for the current tax liability. What can be added under clause ( a ) of Explanation to section 115JB is the income paid or payable on the current income computed under the provisions of the Act and not the liability which is deferred or becomes payable in subsequent years. Thus, the deferred tax liability provided not being falling in clause ( a ) of Explanation to section 115JB cannot be added to book profit for purpose of section 115JB of the Act. Addition on being provision for bad and doubtful debts while computing book profit u/s 115JB of the Act - The Hon ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT 2002 (5) TMI 5 - SUPREME COURT , held that the AO cannot recast the profit and loss account if the same is prepared in accordance with Parts II III of Schedule VI of the Companies Act for the purpose of computing book profit under section 115J. Accordingly, the amount of provision for bad and doubtful debts cannot be considered as amount credited to reserve and hence cannot be added while computing book profit under section 115JB. The amount is not a provision for making liability as by making provision the assessee merely restates the assets. Thus even under clause ( c ) of Explanation to section 115JB the same cannot be added while computing book profit. In the result, the appeal is dismissed.
Issues Involved:
1. Disallowance of depreciation on assets of SRF International Division. 2. Disallowance of depreciation on temporary structures. 3. Disallowance of 50% of recruitment and training expenses. 4. Disallowance of loss due to exchange fluctuation on foreign currency loan. 5. Addition of deferred tax liability while computing book profit under section 115JB. 6. Addition of provision for bad and doubtful debts while computing book profit under section 115JB. Issue-wise Detailed Analysis: 1. Disallowance of depreciation on assets of SRF International Division: The first ground of appeal concerns the deletion of disallowance of depreciation of Rs. 2,21,878 on assets of SRF International Division. The Assessing Officer disallowed the depreciation on the grounds that the assets were not used during the year. The CIT(A) held that the assets had been used in earlier and subsequent years, and the term 'user' includes passive user. The ITAT upheld the CIT(A)'s decision, stating that once assets form part of the block of assets, depreciation is allowable on the entire block, even if individual assets are not used in a particular year. 2. Disallowance of depreciation on temporary structures: The second and third grounds relate to the deletion of disallowance of Rs. 16,39,293 being depreciation claimed at 100% on temporary structures. The Assessing Officer reclassified the expenditure under 'Furniture and Fixture' and restricted the depreciation to 10%. The CIT(A) held that the expenditure was of a revenue nature and allowable fully in the current year. The ITAT agreed, stating that the expenses on leased premises for making them suitable for business are revenue expenditures and do not bring into existence any capital asset. 3. Disallowance of 50% of recruitment and training expenses: The fourth ground concerns the deletion of disallowance of Rs. 77,12,847, being 50% of recruitment and training expenses. The Assessing Officer allowed only 50% of the expenses, considering the long-lasting benefit derived. The CIT(A) held that the expenditure enhances the productivity and is revenue in nature. The ITAT upheld this view, stating that training expenses do not bring into existence any capital asset and cannot be spread over multiple years. 4. Disallowance of loss due to exchange fluctuation on foreign currency loan: The fifth ground pertains to the deletion of disallowance of Rs. 16,39,293 due to exchange fluctuation loss on a foreign currency loan. Both counsels agreed that the issue is covered by the decision of the Delhi High Court in CIT v. Woodward Governor India (P.) Ltd., which allows such losses to be claimed in the year they accrue, even if the loan is not repaid. 5. Addition of deferred tax liability while computing book profit under section 115JB: The sixth ground involves the addition of Rs. 77.82 crores on account of deferred tax liability while computing book profit under section 115JB. The CIT(A) held that deferred tax liability is not related to the tax liability of the current year's book profit and should not be added while computing book profit. The ITAT upheld this view, stating that deferred tax liability is neither tax paid nor payable for the year and is only an accounting adjustment to match income and expenses. 6. Addition of provision for bad and doubtful debts while computing book profit under section 115JB: The final ground concerns the addition of Rs. 1,51,73,289 being provision for bad and doubtful debts while computing book profit under section 115JB. The CIT(A) held that the provision is for diminution in the value of assets and not an excess provision to be treated as a reserve. The ITAT agreed, stating that the provision for bad and doubtful debts cannot be added to the book profit as it is not carried to any reserve and merely restates the assets. Conclusion: The ITAT dismissed the appeal, upholding the CIT(A)'s decisions on all grounds, thereby allowing the assessee's claims for depreciation, revenue expenditure, and exclusion of deferred tax liability and provision for bad debts from book profit calculations.
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