2006 (5) TMI 116 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Rule 115 of the IT Rules, 1962 for computing depreciation.
2. Calculation of depreciation on the actual cost of assets based on the exchange rate at the end of the accounting period.
3. Applicability of the second proviso to Section 32(1)(ii) of the IT Act regarding assets used for less than 180 days.
4. Deletion of disallowance of depreciation allowance amounting to Rs. 54,46,21,124.
5. Deletion of disallowance of expenditure on guest house accommodation for employees.

Issue-wise Detailed Analysis:

1. Applicability of Rule 115 of the IT Rules, 1962 for computing depreciation:
The CIT(A) accepted the contention that Rule 115 of the IT Rules, 1962 is applicable, and the actual cost of the assets should be considered in foreign currency (Dutch Guilders). The income derived should then be converted into Indian rupees by applying the current exchange rate at the end of the accounting period. The CIT(A) emphasized that the assessee, a foreign company, maintained accounts in Dutch Guilders and the actual cost of the assets was recorded in Dutch Guilders. Therefore, for computing depreciation, the exchange rate as on the last day of the accounting period should be applied.

2. Calculation of depreciation on the actual cost of assets based on the exchange rate at the end of the accounting period:
The CIT(A) rejected the AO's application of the exchange rate from 1985 and instead held that the current exchange rate as of the last day of the accounting period should be used. The CIT(A) reasoned that the assessee's income should be computed in the currency in which its accounts are maintained, and the income so derived should be converted into Indian rupees at the current exchange rate. This approach was supported by various judicial precedents and accounting standards.

3. Applicability of the second proviso to Section 32(1)(ii) of the IT Act regarding assets used for less than 180 days:
The CIT(A) held that the second proviso to Section 32(1) could only be invoked if the assets were acquired during the current financial year and put to use simultaneously. Since the vessels were acquired prior to the accounting year, the question of applying the 50% rate of admissible depreciation did not arise. This interpretation was supported by the Mumbai Tribunal's decision in a similar case, which emphasized that both conditions (acquisition and use within the same year) must be cumulatively satisfied for the proviso to apply.

4. Deletion of disallowance of depreciation allowance amounting to Rs. 54,46,21,124:
The CIT(A) deleted the disallowance made by the AO, holding that the assessee was justified in claiming depreciation based on the exchange rate at the end of the accounting period. The CIT(A) reasoned that the actual cost of the assets should be considered in foreign currency and converted into Indian rupees using the current exchange rate. This approach was consistent with the provisions of the IT Act and the DTAA between India and the Netherlands.

5. Deletion of disallowance of expenditure on guest house accommodation for employees:
The CIT(A) treated the guest house expenses as revenue expenditure allowable under Section 37 of the IT Act. However, the counsel for the assessee conceded that this issue was covered in favor of the Revenue by the Supreme Court's decision in Britannia Industries Ltd. vs. CIT. Consequently, the Tribunal reversed the CIT(A)'s order on this issue and allowed the Revenue's ground, disallowing the guest house expenses.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on the applicability of Rule 115 and the calculation of depreciation based on the current exchange rate. It also agreed with the CIT(A) that the second proviso to Section 32(1) did not apply as the assets were not acquired in the current financial year. However, the Tribunal reversed the CIT(A)'s decision on the guest house expenses, following the Supreme Court's ruling in Britannia Industries Ltd. vs. CIT. The appeal was thus partly allowed.