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2011 (3) TMI 1027 - AT - Income TaxDisallowed - depreciation on the power plants as per the cost of acquisition of the assets - Provisions of section 47, 47A, section 2(47)(v) or (vi) and section 32, held that transaction in the present case has to be treated as transfer and the transferor company is liability to pay capital gains tax - In the hands of the transferee, the cost of asset regarding exemption u/s 47(iv) cannot be given and the same has to be treated as withdrawn u/s 47A of the Act and the cost of assets in the hands of the transferee shall be cost for which the assessee company acquired - Since the assessee company seized to be a subsidiary of transferor company, provisions of section 47(iv) will not apply and therefore the transaction in the hands of the assessee company has to be treated as transfer at the cost at which it had acquired the asset - The assessee gets the relief accordingly. Interest earned on the deposits and advances - The interest expenditure paid in respect of capital borrowed for acquisition of an asset for extension of the existing business or profession was allowable as revenue expenditure but by the proviso inserted w.e.f. 1.4.2004 by the Finance Act, 2003, such interest paid in respect of capital borrowed for acquisition of asset for the extension of existing business or profession shall not be allowable for any period beginning from the date on which capital was borrowed for acquisition of the asset till the date on which such asset was first put to use - Admittedly, the dominant purpose for the loan taken was for the extension of the existing business by way of setting up a new power generation plant at Bhilai - Since assessee had been denied the benefit by inserting a specific proviso to section 36(1)(iii), therefore, matching principle shall help assessee - Hence, set aside the order of the CIT (A) on this issue and restore the order of the Assessing Officer.
Issues Involved:
1. Depreciation on power plants as per cost of acquisition. 2. Deletion of addition on account of interest earned on deposits and advances. Issue-wise Detailed Analysis: 1. Depreciation on Power Plants as per Cost of Acquisition: The primary contention here involves the depreciation claimed by the assessee company on power plants acquired from Steel Authority of India Limited (SAIL). The revenue challenged the depreciation claim on the basis that the provisions of Section 47(iv) read with Section 43 and Explanation 3 to Section 43(1) of the Income-tax Act, 1961, were applicable. The revenue argued that the cost of the power plants should be taken at the Written Down Value (WDV) in the books of the transferor (SAIL) rather than the acquisition cost based on MECON's valuation. The assessee contended that it was not a wholly-owned subsidiary of SAIL and that capital gains tax had been admitted by the transferor. The ITAT had previously decided this issue in favor of the assessee in ITA No.03/Del/2005 for the assessment year 2001-02, concluding that the transfer of captive power plants should be treated as a transfer and the cost of acquisition for depreciation should be the value at which the assessee acquired the assets. The tribunal reiterated its earlier decision, confirming that the assessee was not a wholly-owned subsidiary of SAIL at the relevant time, and thus, the provisions of Section 47(iv) did not apply. Consequently, the depreciation should be computed based on the actual cost of acquisition. 2. Deletion of Addition on Account of Interest Earned on Deposits and Advances: This issue pertains to the deletion of an addition of Rs.3,31,58,000/- made by the Assessing Officer on account of interest earned on deposits and advances during the construction period of a new power unit at Bhilai. The revenue argued that the interest earned should be assessed as income from other sources, citing the Supreme Court judgment in Tuticorin Alkalies Chemicals Fertilizers Ltd. vs. CIT 227 ITR 172 (SC). The revenue further contended that the principle of netting of interest should not apply. The assessee maintained separate books for the new unit and argued that the interest earned on deposits made from surplus funds and advances for expansion should be adjusted against the Incidental Expenses During Construction (IEDC). The CIT (A) had granted relief to the assessee, relying on the Supreme Court judgment in Bongaigaon Refinery and Petrochemicals Ltd. vs. CIT 251 ITR 329, which allowed such adjustments. However, the tribunal held that the interest earned on surplus funds and advances should be categorized as income from other sources and should be taxed accordingly. The tribunal emphasized that the netting principle does not apply in this case, as the interest income does not have an immediate nexus with the business of the assessee. The tribunal also noted that the amendment to Section 36(1)(iii) by the Finance Act, 2004, disallows the deduction of interest paid on capital borrowed for the acquisition of an asset for the extension of existing business until the asset is first put to use. The tribunal concluded that the interest earned on surplus funds and advances should be taxed as income from other sources and set aside the CIT (A)'s order, restoring the Assessing Officer's addition. Conclusion: The appeals regarding the depreciation on power plants (ITA Nos.4668 to 4672/Del/2010) were dismissed, upholding the assessee's claim for depreciation based on the actual cost of acquisition. However, the appeal concerning the interest earned on deposits and advances (ITA No.4673/Del/2010) was allowed, with the tribunal ruling that such interest should be taxed as income from other sources and not adjusted against IEDC.
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