2012 (4) TMI 233 - HC - Income Tax

Reduction of Written Down Value of block of assets by the amount of loan waived by the Central Government - Explanation 10 to Section 43(1) - depreciation on reduced written down value Held that - unable to accept the contention of the assessee that the case is not covered by the main provisions of Section 43(1) because of the treatment given by the assessee in its books of account. - in the books of account, the assessee had actually reduced the cost/WDV of the assets by the amount of the loans waived by the Government of India - It is true that the manner in which entries are made in the books of account is not conclusive of the question, which has to be resolved on a true interpretation of the provisions of law. However, the real nature of a transaction can be understood by reference to the contemporaneous act of the parties, which would throw considerable light on their true intention and their understanding of the transaction. The assessee s case is caught within the mischief of Section 43(1) itself and in this view of the matter it may not be necessary to examine the impact of Explanation 10 to the Section inserted with effect from 1.4.1999. The judgment of Apex Court in the case of PJ Chemicals Ltd. (1994 (9) TMI 1 - SUPREME Court) distinguished. The case of the assessee may not, therefore, fall under Explanation 10, but having regard to the facts as found which we have alluded to earlier, the waiver of the loan amounted to the meeting of a portion of the cost of the assets under the main provisions of Section 43(1) of the Act. The waiver of the loan is not a mere quantification of a subsidy granted generally for industrial growth. It was granted specifically to the assessee and the assessee in its books of accounts reduced the cost of the assets by the amount waived. This reflected a contemporaneous understanding of the purpose of the grant of the loan on the part of the assessee. As already mentioned earlier, the assessee is a public sector undertaking and the loan and the later waiver were from the Government of India. The loans under the SDF were specifically for meeting the capital cost of the assets, on which depreciation was being claimed. - Decided against the assessee.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal erred in law and on merits in confirming the reduction of Written Down Value (WDV) of block of assets by the amount of loan waived by the Central Government as per Explanation 10 to Section 43(1) of the Income Tax Act, 1961.
2. Whether the Tribunal was correct in law and on merits in confirming the reduction of cost of assets by the amount of waiver of loan by the Central Government and thereafter computing depreciation on the reduced cost in terms of Explanation 10 to Section 43(1) and Section 32 of the Act.
3. Whether the waiver of loan would result in reduction of actual cost under Section 43(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Reduction of WDV by Loan Waived by the Government:
The assessee, a public sector undertaking, had several loans waived by the Government of India, which were originally taken to meet the cost of assets. The Assessing Officer (AO) reduced the cost of the assets by the amount of loans waived and accordingly disallowed a portion of the depreciation claimed by the assessee. The Tribunal upheld the AO's decision, leading to the present appeals.

The High Court noted that the assessee had reduced the cost of assets in its books of account by the amount of the loans waived but claimed depreciation in the returns without such reduction. The Court observed that the manner in which entries are made in the books of account, while not conclusive, can shed light on the true nature of the transaction. The Court found that the loans were granted towards the cost of the assets, and the waiver should be treated similarly.

2. Application of Explanation 10 to Section 43(1):
The assessee argued that Explanation 10 to Section 43(1) does not apply to the waiver of loans and that the waiver should not reduce the cost of assets. The Court, however, held that the main provisions of Section 43(1) were sufficiently broad to cover the case. The Court emphasized that the waiver of loans amounted to meeting a portion of the cost of the assets, thus falling under the main provisions of Section 43(1).

The Court distinguished the case from the Supreme Court ruling in CIT v. P.J. Chemicals Ltd. (1994), where the subsidy was not intended to meet the cost of the assets directly or indirectly. In contrast, in the present case, the loans were specifically for meeting the capital cost of the assets.

3. Waiver of Loan and Reduction of Actual Cost:
The Court framed an additional substantial question of law to address whether the waiver of loan would result in reduction of actual cost under Section 43(1). The Court concluded that the waiver of the loan should indeed result in the reduction of the actual cost of the assets under Section 43(1). The contemporaneous treatment of the loan waiver in the assessee's books of account indicated that the loans were towards meeting the cost of the assets.

The Court held that the waiver of the loan was not merely a subsidy for industrial growth but was specifically related to the cost of the assets. The waiver, therefore, reduced the actual cost of the assets, impacting the depreciation calculation.

Conclusion:
The High Court dismissed the appeals, holding that the waiver of loans by the Government should reduce the actual cost of the assets under Section 43(1) of the Income Tax Act. The substantial question of law framed by the Court was answered in the affirmative, against the assessee and in favor of the Revenue. The questions of law framed earlier became academic in light of this conclusion. The appeals were dismissed with no costs.

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