2012 (8) TMI 557 - AT - Income Tax

Brought forward business loss - benefit denied applying provisions of S79 - change in shareholding - Held that - Perusal of records shows that the shares of the Tata Industries Ltd. have been transferred to Tata Power Co. Ltd. Both the companies are companies in which public are substantially interested as both the company s shares are traded in the stock market. Hence, facts of the case are covered by provisions of Sec. 2(18)(b)(B)(c) and therefore the claim of set off of brought forward losses are not hit by provisions of Sec. 79 Exclusion of depletion of Producing properties while computation of book profit u/s 115JB - Revenue contended that depletion of Producing properties cannot be treated as depreciation - Held that - As per Guidance Note of the ICAI, depreciation also includes depletion of natural resources through the process of extraction or use. After considering the finding of the Tribunal and the guidance note issued by ICAI, we are of the considered view that the assessee is entitled to claim depletion alongwith depreciation for calculating the Book Profit u/s. 115JB Foreign exchange loss resulting in the enhancement of loan liability taken to acquire assets in earlier year - revenue or capital expenditure - Held that - Since Tribunal in earlier year allowed the claim u/s 43A. Hence, the same is allowed. Foreign exchange loss allocated to development expenses - revenue or capital expenditure - Held that - Starting of the commercial production is not the only condition as provided u/s 42(1)(b) but it is one of the conditions, as the assessee has satisfied that this condition has been fulfilled , we restore this matter back to the files of the AO with the direction to verify whether the assessee complies/fulfills other conditions as provided u/s. 42(1)(b)

Summary

Issues Involved:
1. Disallowance of foreign exchange loss allocated to sub-sea equipment.
2. Disallowance of foreign exchange loss allocated to development expenses.
3. Denial of benefit of brought forward business loss under Sec. 79.
4. Computation of book profit under Sec. 115JB.

Issue-wise Detailed Analysis:

1. Disallowance of Foreign Exchange Loss Allocated to Sub-sea Equipment:
The assessee claimed a foreign exchange loss of Rs. 20,06,079/- due to fluctuation, enhancing loan liability for acquiring assets, under Sec. 43A. The Assessing Officer (AO) disallowed this, treating it as a capital expenditure since the assets were fully depreciated in earlier years. The CIT(A) upheld this disallowance. However, the Tribunal noted that a similar issue was resolved in favor of the assessee in the previous year (ITA No. 5569/Del/2003), allowing the claim under Sec. 43A. Consequently, the Tribunal allowed the assessee's claim for the current year.

2. Disallowance of Foreign Exchange Loss Allocated to Development Expenses:
The assessee claimed Rs. 1,25,93,021/- as revenue expenses under Sec. 42 for development costs. The AO disallowed it, considering it capital in nature and deferred until the start of commercial production, which the AO claimed had not commenced. The CIT(A) upheld this view. The Tribunal, referencing the previous year's ITAT decision, noted that the AO had confirmed the start of commercial production for the current year. Therefore, the Tribunal directed the AO to verify if other conditions under Sec. 42(1)(b) were met and allowed the claim for statistical purposes.

3. Denial of Benefit of Brought Forward Business Loss Under Sec. 79:
The AO denied the set-off of brought forward business loss due to a change in shareholding, invoking Sec. 79. The assessee argued that it was a deemed public company under Sec. 2(18)(b) and thus exempt from Sec. 79. The CIT(A) rejected this, stating the change in voting power exceeded 51%. The Tribunal, upon analyzing Sec. 2(18)(b)(B)(c) and the shareholding pattern, found that both Tata Industries Ltd. and Tata Power Co. Ltd. were companies in which the public were substantially interested. Thus, the Tribunal held that the set-off was not hit by Sec. 79 and directed the AO to allow the claim.

4. Computation of Book Profit Under Sec. 115JB:
The AO adjusted the book profit by disallowing depletion of producing properties, treating it as deferred revenue expenses instead of depreciation. The CIT(A) upheld this. The Tribunal, referencing the ICAI guidelines and the ITAT Chennai Bench decision, held that depletion of producing properties qualifies as depreciation. Consequently, the Tribunal directed the AO to recompute the book profit under Sec. 115JB, including the depletion claim.

Other Grounds:
Grounds 2 & 3 were not pressed by the assessee and were dismissed. Grounds 7, 8, and 9 were deemed consequential or general and did not require specific adjudication.

Conclusion:
The appeal was partly allowed, with significant relief granted on the primary issues of foreign exchange loss allocation, brought forward business loss set-off, and book profit computation.