2016 (7) TMI 693 - AT - Income Tax

Eligibility for deduction u/s. 80IB - exchange rate difference - CIT(A) has allowed the claim of deduction u/s. 80IB heavily relying upon the decision of Amba Impex 2005 (12) TMI 58 - GUJARAT High Court - Held that - In the light of the aforementioned decision of the Hon ble High Court, we find that there is clear dissimilarity of the facts in as much as in the case of the assessee, the gain has arisen out of the hedging made by the assessee. The assessee has entered into a forward contract and has been benefitted by the fluctuations in foreign exchange irrespective of the fact whether trade agreement exists or not. In other words, the exchange rate fluctuation gain does not have any first degree nexus with the export sales of the assessee. In the absence of the first degree nexus the ratio laid down by the Hon ble Supreme Court in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT squarely apply. Since the ld. CIT(A) has decided the issue in favour of the assessee, heavily relying upon the decision of Amba Impex (supra) and since we have substantively distinguished the facts of the case in hand with the facts of the case before the Hon ble High Court (supra). We set aside the findings of the ld. CIT(A) and restore that of the A.O. - Decided in favour of revenue Allowability of depreciation on plant - Held that - CIT(A) was of the opinion that there is a merit in the case of the assessee. The plant and machineries were used during the year and, therefore, eligible for depreciation and accordingly directed the A.O. to allow the depreciation as per the law. As before us, the ld. D.R. could not bring any cogent material evidence on record to controvert the findings of the ld. CIT(A), as the findings of the ld. CIT(A) are based on the verification of direct evidences, we decline to interfere. - Decided in favour of assessee

Summary

Issues:
1. Allowance of exchange rate difference for deduction u/s. 80IB of the Act.
2. Allowance of depreciation on plant.

Analysis:
1. Exchange Rate Difference for Deduction u/s. 80IB:
The appeal by the Revenue challenged the order of Ld. CIT(A) allowing the exchange rate difference for deduction u/s. 80IB of the Act. The assessee, engaged in manufacturing, claimed deduction for the exchange rate difference. The A.O. rejected the claim, citing the principles from the case of Sterling Food. The ld. CIT(A) favored the assessee, relying on the decision of the Hon'ble High Court of Gujarat in the case of Amba Impex. The Tribunal noted the substantial question of law before the High Court regarding the treatment of exchange rate differences on exports. However, the Tribunal found dissimilarity in the present case where the gain arose from hedging, not directly linked to export sales. Hence, the Tribunal set aside the CIT(A)'s decision and restored that of the A.O., disallowing the exchange rate difference for deduction u/s. 80IB.

2. Depreciation on Plant:
Regarding the depreciation on plant amounting to &8377; 20,32,557, the A.O. disallowed it as the business activities at Unit-I were not conducted during the year. The assessee explained the complementary nature of work between Unit-I and Unit-II, supported by evidence of plant and machinery usage. The ld. CIT(A) found merit in the assessee's case, allowing the depreciation. The Tribunal upheld the CIT(A)'s decision, noting that it was based on direct evidence and declined to interfere. Therefore, the depreciation on the plant was allowed as per the law.

In conclusion, the appeal filed by the Revenue was partly allowed, disallowing the exchange rate difference for deduction u/s. 80IB but allowing the depreciation on the plant. The Tribunal's decision was pronounced on 09-06-2016.