2021 (3) TMI 1072 - HC - Income Tax

Claim of depreciation @ 60% on switches and routers - HELD THAT - The judgment delivered by the Delhi High Court in the case of CIT vs. BSES YAMUNA POWERS LTD 2010 (8) TMI 58 - DELHI HIGH COURT has concluded the controversy as held that the computer accessories and peripherals such as printers, scanners and server etc., form an integral part of the computer system. Thus it can be safely held that the switches and routers as they cannot be used without computer, they form part of peripherals of the computer and entitled to depreciation at 60%. The revenue has not been able to controvert the said finding of the Tribunal and therefore, in light of the judgment delivered by the Delhi High Court, the first substantial question of law is answered in favour of the assessee and against the revenue. Disallowance of foreign exchange loss on forward contracts - allowable revenue expenditure u/s 37 - HELD THAT - The issue stands covered by the judgment delivered by the Bombay High Court in the case of CIT vs. D.CHETAN CO. 2016 (10) TMI 629 - BOMBAY HIGH COURT . As carefully gone through the entire record and the case of the assessee is that the loss is on account of the restatement of debtors and creditors, book liability etc., which was incurred on account of the forward contracts which includes both realized and unrealized losses. The details of gain and loss on account of the fluctuations of foreign exchange were filed before the assessing officer. However, the assessing officer merely relying upon Instruction No.3/2010 issued by the Central Board of Direct Taxes concluded that it is a notional loss and has to be treated as a speculative loss in terms of Section 43(5) of the Act. Assessing officer did not dispute the fact that the loss incurred by the respondent assessee is in the ordinary course of its business and therefore, would fall within the exceptions provided in the proviso to Section 43(5) of the Act. Therefore, the judgment delivered in the case of D.Chethan and Co., (supra) squarely covers the present case. As held that the assessing officer has not given a finding that the transaction entered into by the assesseee was a speculative in nature and the revenue at no point challenged the assertion of the assessee that the activity of entering into the forward contract was in the regular course of its business. Therefore, in the present case when the assessing officer has neither disputed the fact that the loss was in the regular course of business nor rendered any finding that the transaction was speculative in nature except making a bald statement, the Tribunal was justified in relying upon case of D.Chetan and Co., (supra). - In WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT held the loss on account of foreign exchange fluctuation is allowable as a deduction under Section 37(1) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of deduction under Section 10B for onsite subcontract work.
2. Disallowance of depreciation at 60% on switches and routers.
3. Disallowance of foreign exchange loss on forward contracts.

Detailed Analysis:

1. Disallowance of Deduction under Section 10B for Onsite Subcontract Work:
The assessing authority disallowed the deduction under Section 10B for income from onsite subcontract work given to associated enterprises, claiming the profit was not eligible for deduction. The Tribunal, however, found that the work of software development was undertaken by the assessee, and the risk and reward under the agreement belonged to the assessee, not the associated enterprises. The Tribunal dismissed the Revenue’s appeal, relying on a similar case (Mphasis Software Services India P. Ltd.), which had not reached finality. The Tribunal's decision was challenged, but the court upheld the Tribunal's view, noting that the arrangement was not solely to avoid taxes and the assessee was eligible for the deduction.

2. Disallowance of Depreciation at 60% on Switches and Routers:
The assessing officer disallowed the depreciation claimed by the assessee at 60% on switches and routers, arguing they were not parts and accessories of computers. The Tribunal set aside this disallowance, following the Delhi High Court's decision in CIT vs. BSES Yamuna Powers Ltd., which held that computer accessories and peripherals such as printers, scanners, and servers form an integral part of the computer system and are entitled to higher depreciation. The court agreed, stating that switches and routers, being integral to the computer system, are eligible for 60% depreciation, thus answering the first substantial question of law in favor of the assessee.

3. Disallowance of Foreign Exchange Loss on Forward Contracts:
The assessing officer disallowed the foreign exchange loss claimed by the assessee, considering it speculative as per Section 43(5) of the Act and notional. The Tribunal set aside this disallowance, referencing the Bombay High Court's decision in CIT vs. D. Chetan & Co., which allowed such losses as business losses. The court noted that the assessing officer did not dispute that the loss was incurred in the ordinary course of business and did not find the transactions speculative. The Supreme Court's decision in CIT vs. Woodward Governor India (P.) Ltd. further supported that such losses are deductible under Section 37(1) of the Act. Consequently, the second substantial question of law was also answered in favor of the assessee.

Conclusion:
The appeal was dismissed, with the court upholding the Tribunal's decisions on all substantial questions of law, ruling in favor of the assessee and against the revenue.