2002 (10) TMI 241 - AT - Income Tax

Summary

Issues Involved:
1. Nature of compensation received from HP.
2. Depreciation on computers converted from stock-in-trade to fixed assets.
3. Deduction of liability for foreign exchange rate fluctuation.
4. Claim of deduction under Section 80-IA.
5. Disallowance of depreciation for units exempt under Section 10A.
6. Claim of deduction under Section 10A.

Detailed Analysis:

1. Nature of Compensation Received from HP:
The assessee argued that the compensation of Rs 60.80 crores received from HP was for the loss of several rights, including the right to use the HP name, manufacture HP products, and access HP's patents and marketing strategies. The assessee claimed that these rights formed a capital asset, and their extinguishment impaired its income-earning apparatus, thus the compensation should be treated as a capital receipt, not assessable to tax. The AO, however, treated the compensation as a taxable capital gain under Sections 45 and 55 of the IT Act, asserting that the termination of the joint venture agreement (JVA) resulted in the transfer of a capital asset. The CIT(A) upheld the AO's decision, emphasizing that the rights and privileges under the JVA constituted a capital asset. The Tribunal, however, concluded that the compensation was for the loss of the right to use the HP trademark and brand name, not for the right to manufacture. Since the cost of acquisition of such rights could not be determined, the compensation was not taxable as capital gains for the assessment year in question.

2. Depreciation on Computers Converted from Stock-in-Trade to Fixed Assets:
The AO reduced the capitalization value of computers from Rs. 6,10,68,073 to Rs. 3,38,29,430 by applying notional depreciation for earlier years. The CIT(A) upheld this decision, citing the rapid obsolescence of computer technology. The assessee argued that the assets were treated as stock-in-trade and their cost was never allowed in earlier assessments. The Tribunal directed the AO to verify the actual amount of closing stock transferred to fixed assets and allow depreciation based on this verified amount.

3. Deduction of Liability for Foreign Exchange Rate Fluctuation:
The AO disallowed the assessee's claim of Rs 2,60,80,000 for foreign exchange rate fluctuation on the principal loan amount, considering it a capital expenditure. The CIT(A) upheld this decision. The assessee argued that the liability should be considered accrued under the mercantile system of accounting, citing various judicial precedents. The Tribunal set aside the CIT(A)'s order and directed the AO to re-examine the claim in light of the principles laid down by the Special Bench of the Tribunal in the case of Oil & Natural Gas Corpn. Ltd.

4. Claim of Deduction under Section 80-IA:
The AO disallowed the deduction under Section 80-IA for the Pondicheri unit due to a negative gross total income. The assessee argued that the profits of the eligible business should be computed as if it were the only source of income, as per Section 80-IA(7). The Tribunal remanded the issue back to the AO for reconsideration in light of the relevant provisions, giving the assessee an opportunity to substantiate the claim.

5. Disallowance of Depreciation for Units Exempt under Section 10A:
The AO disallowed depreciation for units whose incomes are exempt under Section 10A, resulting in a double disallowance. The CIT(A) upheld this decision. The Tribunal directed the AO to verify whether the assessee had already made the disallowance in the return and to rectify the double disallowance if confirmed.

6. Claim of Deduction under Section 10A:
The assessee's grievance that the CIT(A) did not adjudicate the claim of Rs 76,94,880 under Section 10A was noted. The Tribunal set aside the CIT(A)'s order on this point and remanded it for fresh decision, ensuring reasonable opportunity for both parties to present their cases.

Conclusion:
The appeal was partly allowed, with several issues remanded for fresh consideration and decision by the AO or CIT(A), ensuring compliance with legal principles and providing the assessee an opportunity to substantiate its claims.