2013 (5) TMI 759 - HC - Income Tax

Depreciation on Butchlor Plant - Plant was ready for use but was not actually put to use due to adverse market conditions - Held that - As decided in Commissioner of Income-tax vs. Viswanath Bhaskar Sathe (1937 (3) TMI 11 - BOMBAY HIGH COURT) wherein in the context of section 10 of the Income Tax Act 1922 held that the word used in the said section may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate particularly during the monsoon season. As decided in Whittle Anderson Ltd. v. CIT 1968 (12) TMI 27 - BOMBAY High Court Capital Bus Service Pvt. Ltd. v. CIT 1980 (2) TMI 69 - DELHI High Court that if plant and machinery are kept in ready condition but production could not be made on account of factors beyond the control of the assessee depreciation should not be denied on that count as it is presumed that the plant and machinery were put to use for the assessee s business. Thus in in the light of the fact of present case the Butachlor plant had in fact been used for the purpose of manufacturing Butachlor for several years and had continued to be so used till the market conditions became adverse and thereafter also though the same was kept idle it was kept in readiness for use as and when the market revived it cannot be said that the said plant was not in use during the assessment years under consideration merely because the same was not put to actual use during the said period. Tribunal was justified in allowing depreciation claim - in favour of assessee. Receipt by way of gain on cancellation of foreign exchange contracts - revenue v/s capital - Held that - As decided in DCIT(Assessment) vs. Garden Silk Mills Ltd. ( 2009 (2) TMI 95 - GUJARAT HIGH COURT) the surplus received on cancellation of forward foreign exchange contract was a capital receipt not liable to tax and that it did not fall under section 28(iv). Exclusion of excise duty at the time of valuing closing stock at the end of the accounting period - Held that - As decided in ACIT vs. Narmada Chematur Petrochemicals Ltd. (2010 (8) TMI 263 - Gujarat High Court) wherein held that excise duty is required to be excluded at the time of valuation of the closing stock on finished goods at the end of the accounting period. In favour of assessee. Interest relatable to diversion of interest bearing funds to interest free advances - Held that - When no interest bearing funds have been diverted to the sister concern by way of interest free advances the question of going into the commercial expediency of such loans would not arise - there is no diversion of interest bearing funds to interest free advances. In favour of assessee. Donation of Rs.25 lakhs to the Narmada Integrated Rural and Environmental Development Society (NIRDES) - claimed full deduction under section 37(1) - Held that - As decided in Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. Commissioner of Income- Tax 1996 (10) TMI 2 - SUPREME Court contribution to the Public Welfare Fund at the instance of the Government authorities was allowed as a deduction on the ground that it was motivated by commercial consideration. Tribunal was justified to hold that the contribution made to the welfare fund was not opposed to public policy and that the same was motivated purely by commercial consideration and that the deduction was allowable u/s 37(1) - in favour of assessee.

Issues Involved:
1. Depreciation on Butachlor Plant
2. Gain on Cancellation of Foreign Exchange Contracts
3. Exclusion of Excise Duty at the Time of Valuing Closing Stock
4. Disallowance under Section 36(1)(iii) of the Income Tax Act
5. Deduction under Section 37(1) for Donation to Voluntary Organisation

Detailed Analysis:

1. Depreciation on Butachlor Plant
The primary issue was whether the assessee was entitled to depreciation on the Butachlor plant, which was ready for use but not actually put to use due to adverse market conditions. The Tribunal noted that the plant was installed and used until the financial year 1992-93. However, due to adverse market conditions, production was halted, but the plant was kept in a ready-to-use condition. The Tribunal ruled in favor of the assessee, stating that if plant and machinery are kept ready for use but production could not be made due to factors beyond the control of the assessee, depreciation should not be denied. The Tribunal's decision was supported by various High Court rulings, including Whittle Anderson Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax vs. Vayithri Plantation Ltd. The Tribunal's decision was upheld, and the assessee was entitled to depreciation under section 32 of the Act.

2. Gain on Cancellation of Foreign Exchange Contracts
The second issue was whether the gain on cancellation of foreign exchange contracts was a capital receipt not liable to tax. The Tribunal followed the decision of the High Court in Deputy Commissioner of Income Tax (Assessment) vs. Garden Silk Mills Ltd., which held that such gains are capital receipts and not taxable. The Tribunal's decision was upheld.

3. Exclusion of Excise Duty at the Time of Valuing Closing Stock
The third issue was whether excise duty should be excluded at the time of valuing closing stock. The Tribunal followed the decision in Assistant Commissioner of Income-Tax vs. Narmada Chematur Petrochemicals Ltd., which held that excise duty should be excluded. The Tribunal's decision was upheld.

4. Disallowance under Section 36(1)(iii) of the Income Tax Act
The fourth issue was the disallowance of interest under section 36(1)(iii) related to the diversion of interest-bearing funds to interest-free advances. The Tribunal followed a previous judgment in Tax Appeal No.401/2000, which was in favor of the assessee. The Tribunal's decision was upheld.

5. Deduction under Section 37(1) for Donation to Voluntary Organisation
The fifth issue was whether the donation of Rs.25 lakhs to a voluntary organization was deductible under section 37(1). The Tribunal found that the donation was made as per the direction of the State Government, which was a major shareholder in the assessee company. The donation was considered commercially expedient as it was intended to benefit the assessee's business by enhancing the future demand for fertilizers. The Tribunal's decision was supported by the Supreme Court's ruling in Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. Commissioner of Income-Tax, which allowed deductions for contributions made for public welfare if they benefited the business. The Tribunal's decision was upheld.

Conclusion:
The Tribunal's decisions on all issues were upheld, favoring the assessee. The appeals were dismissed, affirming the Tribunal's rulings on depreciation, gains on foreign exchange contracts, exclusion of excise duty, disallowance under section 36(1)(iii), and deduction under section 37(1).

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