2010 (6) TMI 620 - AT - Income Tax

Depreciation on account of foreign exchange fluctuation disallowed - Held that - As decided in CIT v. Woodward Governor India (P.) Ltd. 2009 (4) TMI 4 - SUPREME COURT additional liability due to exchange fluctuation would result in modification of the actual cost in the year in which increase or decrease arises on account of such fluctuation - thus value of the asset would move in accordance with change in foreign exchange rates as on the last day of the previous year and assessee would be eligible for claiming depreciation based on such value for the impugned assessment year - Decided in favor of the assessee Provision of leave encashment disallowed - Held that - Revenue has not disputed that assessee had made the provision for leave encashment in accordance with actuarial valuation - As held in Bharat Earth Movers (2000 (8) TMI 4 - SUPREME Court) liability that could arise on account of leave encashment was in praesenti. Assessee has made available actuarial certificate and provision was an ascertained liability. Just because in the earlier years it was accounting leave encashment based on actual payment cannot preclude it from moving to a scientific method especially when it was following mercantile system of accounting - no error in the order of the CIT(A) in deleting such addition while computing the book profits for the purpose of ascertaining MAT liability - Decided in favor of the assessee. Provision for bad and doubtful debts disallowed - Held that - Parliament in its wisdom chose to add cl. (g) to the Explanation to s.115JA whereby any amount set aside for diminution of value of any asset had to be added back to the net profit as shown in the P&L a/c for computing the book profit for ascertaining the MAT liability. As held in Mysore Breweries Ltd. (2009 (9) TMI 829 - KARNATAKA HIGH COURT) retrospective insertion of cl. (g) had to be considered. Hence provision for bad debt needed to be added back to the net profit while working out MAT liability. In favour of revenue. Loss from assessee s windmill operations - whether be deleted while working out the MAT liability - Held that -he amount of profits derived by the industrial undertaking from the business of generation and distribution of power has to be reduced from the net profit irrespective of the fact that whether such profits appear in the P&L a/c or not. If that be so can we extend it to say that even if it were losses then also it had to be considered as an addition. In our opinion the clear answer is a no - AO does not have any jurisdiction to go beyond the net profit shown in the P&L a/c the except to the extent provided in the Explanation. Further we also find that assessee had never claimed any loss as such but on the other hand receipts and expenses were separately shown and AO had himself computed a loss and made the addition. Thus the AO had made a wrong application of the Explanation. He misinterpreted cl. (iv) thereof by making an addition relying on that clause which specifically provided for reduction. CIT(A) was justified in deleting the addition made to the net profit of the assessee the losses arising to it on windmill operation. In favour of assessee. Disallowance towards provision for wealth-tax while computing its book profits for the purpose of ascertaining MAT liability - Held that - The provision for wealth would come within the ambit of cl. (a) of Explanation to 115JA of the Act. We set aside the order of the CIT(A) in this regard and restore the order of the AO. In favour of revenue. Expenditure incurred for fly air ash collection system - revenue v/s capital - Held that - Assessee for the purpose of collecting the fly ash had made a construction in a property not owned by it on a condition agreed with TNEB that the construction and the equipment would become latter s property. If that be so we wonder how it could be considered as capital asset of the assessee. Just because it facilitated the smooth procurement of an essential raw material it could not be said that any enduring benefit had come to the assessee. As decided in CIT v. TVS Lean Logistics Ltd. 2007 (6) TMI 44 - HIGH COURT MADRAS wherein it was held that hen an assessee had constructed a building on a leasehold land it could not be considered that there was any acquisition of capital asset. In favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on account of foreign exchange fluctuation.
2. Disallowance towards provision of leave encashment.
3. Addition to book profits on account of provision for bad and doubtful debts.
4. Addition to book profits of the loss from windmill operations.
5. Addition of provision for leave encashment while computing book profits.
6. Addition of provision for wealth-tax while computing book profits.
7. Nature of expenditure for fly ash collection system.

Detailed Analysis:

1. Disallowance of depreciation on account of foreign exchange fluctuation:
The Revenue's grievance was that the CIT(A) deleted the disallowance of depreciation on foreign exchange fluctuation, arguing that the ships were sold before the assessment year 2003-04, making the proviso to Section 43A inapplicable. The CIT(A) relied on the Delhi High Court's decision in CIT v. Woodward Governor India (P.) Ltd. and the Supreme Court's affirmation, which held that additional liability due to exchange fluctuation modifies the actual cost in the year the fluctuation arises. The Tribunal found the CIT(A)'s view justified, supporting the asset's value adjustment based on exchange rates at the financial year's end. Thus, the Revenue's ground was dismissed.

2. Disallowance towards provision of leave encashment:
The Revenue contended that the provision for leave encashment should be disallowed as it was a change in the accounting method. The CIT(A) allowed the provision, citing it as an ascertained liability based on actuarial valuation and supported by the Supreme Court's decision in Bharat Earth Movers v. CIT. The Tribunal upheld the CIT(A)'s decision, noting the provision was scientifically made and bona fide, dismissing the Revenue's ground.

3. Addition to book profits on account of provision for bad and doubtful debts:
The AO added the provision for bad and doubtful debts to book profits, considering it an unascertained liability. The CIT(A) deleted this addition, arguing it was a diminution of asset value, not a liability. The Tribunal noted the retrospective amendment to Section 115JA by Finance (No. 2) Act, 2009, requiring such provisions to be added back to book profits. Thus, the Tribunal quashed the CIT(A)'s order and restored the AO's addition, allowing the Revenue's ground.

4. Addition to book profits of the loss from windmill operations:
The AO added the windmill operation losses to book profits, interpreting profits in Explanation to Section 115JA to include losses. The CIT(A) disagreed, stating the AO could only make specified adjustments to net profits. The Tribunal supported the CIT(A), emphasizing that the Explanation did not extend to losses and that the AO misinterpreted the provision. Thus, the Revenue's ground was dismissed.

5. Addition of provision for leave encashment while computing book profits:
The AO added the provision for leave encashment to book profits, considering it unascertained. The CIT(A) deleted this addition, viewing it as an ascertained liability. The Tribunal upheld the CIT(A)'s decision, consistent with its earlier ruling on the same issue for the assessment year 1999-2000, dismissing the Revenue's ground.

6. Addition of provision for wealth-tax while computing book profits:
The AO added the provision for wealth-tax to book profits under Explanation (a) to Section 115JA. The CIT(A) deleted this addition, interpreting the provision to apply only to income-tax. The Tribunal, referencing its decision in EID Parry (India) Ltd., held that the provision for wealth-tax falls under Explanation (a) and should be added back. Thus, the Tribunal set aside the CIT(A)'s order and restored the AO's addition, allowing the Revenue's ground.

7. Nature of expenditure for fly ash collection system:
The AO treated the expenditure on constructing a fly ash collection system as capital, citing enduring benefits. The CIT(A) viewed it as revenue expenditure, noting the system became the property of TNEB and referencing the Supreme Court's decision in Madras Auto Service (P.) Ltd. The Tribunal agreed with the CIT(A), emphasizing the lack of ownership and enduring benefit to the assessee, dismissing the Revenue's ground.

Conclusion:
The Tribunal's judgment resulted in a mixed outcome, with some grounds dismissed and others allowed, leading to a partial allowance of the Revenue's appeals for both assessment years.