2010 (9) TMI 1122 - AT - Income Tax

Summary

Issues Involved:
1. Depreciation on Pollution Control Equipment for AY 2003-04.
2. Depreciation on Building Housing Captive Thermal Power Plant for AY 2005-06.
3. Provision for Leave Encashment for AY 2005-06.
4. Provision for Bad and Doubtful Debts in Book Profits for AY 2005-06.
5. Additional Depreciation on Thermal Power Plant for AY 2005-06.
6. Depreciation on Electrical Fittings for AY 2005-06.
7. Interest under Section 234B and 234C on MAT Liability for AY 2005-06.
8. Foreign Exchange Fluctuation Loss in Short Term Capital Gains for AY 2002-03.
9. Penal Payments to Sales Tax Department for AY 2002-03.

Issue-wise Detailed Analysis:

1. Depreciation on Pollution Control Equipment for AY 2003-04:
The Revenue challenged the CIT(A)'s direction to allow 100% depreciation on pollution control equipment. The AO had denied this claim due to lack of certification and evidence. The CIT(A) relied on a certificate from a former employee, which the AO found insufficient. The Tribunal upheld the CIT(A)'s decision for equipment purchased but remanded the issue of civil construction expenses back to the AO for further verification.

2. Depreciation on Building Housing Captive Thermal Power Plant for AY 2005-06:
The Revenue contested the CIT(A)'s allowance of 20% depreciation on the building housing the thermal power plant. The AO had disallowed it, treating it as a general building. The CIT(A) applied the functional test and followed the Supreme Court's decision in Karnataka Power Corporation, treating the building as a plant. The Tribunal upheld the CIT(A)'s decision.

3. Provision for Leave Encashment for AY 2005-06:
The Revenue argued against the CIT(A)'s deletion of disallowance for provision for leave encashment, citing changes in Section 145. The Tribunal found that the provision was based on actuarial valuation and upheld the CIT(A)'s decision, referencing the Supreme Court's decision in Bharath Earth Movers.

4. Provision for Bad and Doubtful Debts in Book Profits for AY 2005-06:
The AO added back the provision for bad debts while computing book profits under Section 115JB, treating it as a contingent liability. The CIT(A) disagreed, stating the provision represented actual bad debts. The Tribunal, referencing the retrospective amendment to Section 115JB and the Supreme Court's decision in Apollo Tyres, upheld the AO's addition.

5. Additional Depreciation on Thermal Power Plant for AY 2005-06:
The AO denied additional depreciation, stating the thermal power plant did not expand the cement manufacturing capacity. The CIT(A) agreed. The Tribunal, however, referenced jurisdictional High Court decisions and allowed the additional depreciation, stating the new machinery need not have operational connectivity to the existing manufacturing process.

6. Depreciation on Electrical Fittings for AY 2005-06:
The AO restricted depreciation on electrical fittings to 15%, treating them separately from plant and machinery. The CIT(A) upheld this. The Tribunal, considering the items were part of the thermal power plant, allowed depreciation at the higher rate applicable to plant and machinery.

7. Interest under Section 234B and 234C on MAT Liability for AY 2005-06:
The assessee contested the levy of interest on MAT liability. The Tribunal, referencing the clear differentiation in Section 115JB, upheld the levy of interest, distinguishing it from the earlier Section 115J.

8. Foreign Exchange Fluctuation Loss in Short Term Capital Gains for AY 2002-03:
The AO did not consider the foreign exchange fluctuation loss in computing short term capital gains, treating it as notional. The CIT(A) agreed. The Tribunal upheld this, referencing Section 43A, which excludes adjustments for depreciable assets under Section 50.

9. Penal Payments to Sales Tax Department for AY 2002-03:
The AO disallowed penal payments, and the CIT(A) upheld this. The Tribunal found no evidence to suggest the payments were compensatory and upheld the disallowance.

Conclusion:
The Tribunal provided a mixed outcome, upholding some of the CIT(A)'s decisions, remanding specific issues back to the AO for further verification, and allowing certain claims based on jurisdictional High Court and Supreme Court precedents.