2008 (12) TMI 246 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under Section 80-IB of the IT Act, 1961.
2. Allowance of 100% depreciation on certain plant and machinery.
3. Depreciation on enhanced value of fixed assets due to foreign currency liability fluctuations.
4. Disallowance under Section 14A related to dividend income.
5. Deduction under Section 80HHC on export of capital assets.

Issue-wise Detailed Analysis:

1. Deduction under Section 80-IB of the IT Act, 1961:
The assessee claimed deduction under Section 80-IB for its two units, which was denied by the AO and upheld by the CIT(A). The CIT(A) did not follow the Tribunal's earlier decisions favoring the assessee, stating that each year should be considered separately. The Tribunal noted that the activities in the current year were identical to previous years where the deduction was allowed, emphasizing judicial discipline. The Tribunal followed its earlier decisions, holding that the assessee's activities amounted to manufacturing or producing an article or thing, thus eligible for deduction under Section 80-IB. The Tribunal also addressed the AO's rejection based on the employment of the minimum number of workers, directing the CIT(A) to admit additional evidence and decide afresh. Regarding the value of transferred machinery, the Tribunal clarified that the value should be taken as recorded in the books of account, not the market value, and directed the AO to re-examine this aspect.

2. Allowance of 100% depreciation on certain plant and machinery:
The CIT(A) upheld the AO's action of not allowing 100% depreciation on certain machinery, stating it was meant only for mineral oil concerns. The Tribunal, referencing its earlier decisions, directed the AO to allow higher depreciation for machinery used in mineral oil operations, modifying the assessment order accordingly.

3. Depreciation on enhanced value of fixed assets due to foreign currency liability fluctuations:
The AO disallowed the assessee's claim for depreciation on the enhanced value of fixed assets due to foreign currency fluctuations, considering it notional. The CIT(A) upheld this view. The Tribunal, citing the Delhi High Court's decision in CIT vs. Woodward Governor India (P) Ltd., held that the liability should be allowed on an accrual basis with reference to the exchange rate at the year's end, directing the AO to rework the liability and allow the claim accordingly.

4. Disallowance under Section 14A related to dividend income:
The AO disallowed a portion of expenses under Section 14A, relating to earning tax-free dividend income. The Tribunal, following its earlier decision for the previous year, restored the matter to the AO for fresh adjudication, ensuring the assessee is provided a reasonable opportunity to be heard.

5. Deduction under Section 80HHC on export of capital assets:
The Tribunal upheld the CIT(A)'s decision, disallowing the deduction under Section 80HHC for the export of capital assets, consistent with its earlier ruling that such benefits are not available for capital assets not constituting trading items of the assessee.

Conclusion:
The appeal was partly allowed, with the Tribunal directing re-examination of certain issues and affirming others based on previous rulings and judicial principles.