2008 (12) TMI 431 - AT - Income Tax

Summary

Issues Involved:
1. Depreciation on capitalized interest.
2. Applicability of section 44C to head office expenditure.

Summary:

Issue 1: Depreciation on Capitalized Interest

The revenue contested the CIT(A)'s decision to allow relief of Rs. 6,85,95,042 on account of depreciation on capitalized interest. The assessee had debited interest on capital borrowed for capital expenditure, which was added back to income, and claimed depreciation on this amount. The CIT(A) found that the interest was not capitalized in the books but added to the income, thus entitling the assessee to depreciation. The ITAT upheld CIT(A)'s decision, stating that since the interest was treated as capital in nature and added to the cost of assets, the assessee was entitled to depreciation. Therefore, this ground was dismissed.

Issue 2: Applicability of Section 44C to Head Office Expenditure

The revenue challenged the CIT(A)'s direction to allow head office expenditure without applying section 44C, arguing that the expenditure was not head office expenditure but reimbursement to a third party. The CIT(A) noted that the expenditure was incurred by BG International Ltd., an affiliate, and not the head office, thus section 44C was not applicable. Additionally, the CIT(A) held that even if considered head office expenditure, the PSC with the Government of India, read with section 42(1), allowed such deductions. The ITAT agreed, stating that section 42(1) and the PSC provided a special regime for deductions, overriding section 44C. The ITAT referenced the Supreme Court's decision in CIT v. Enron Oil & Gas India Ltd., which emphasized the PSC's independent accounting regime. Consequently, this ground was also dismissed.

Conclusion:

In conclusion, the ITAT dismissed the appeal, upholding the CIT(A)'s decisions on both grounds.