2008 (5) TMI 340 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation of s. 43A(1) of the IT Act regarding entitlement of depreciation u/s 32.
2. Carry forward of unabsorbed depreciation from the assessment year 1994-95 to 2003-04.

Summary:

Issue 1: Interpretation of s. 43A(1) of the IT Act regarding entitlement of depreciation u/s 32

The assessee company, engaged in the manufacture and sale of Oxo Alcohol, imported plant and machinery with payment in foreign currency. Due to exchange rate fluctuations, the assessee claimed higher depreciation based on the increased asset value. The AO contended that 'actual cost' should be based on the cost at the time of purchase and additional amounts paid through instalments, excluding future instalments' differential amounts. The AO cited a Ministry of Law clarification stating that intermediary exchange rate fluctuations are irrelevant.

The first appellate authority accepted the assessee's claim, referencing CIT vs. Arvind Mills Ltd. and New India Industries Ltd. The authority noted that the Finance Act, 2002 amended s. 43A w.e.f. 1st April, 2003 to base depreciation on actual payment, which should not apply retrospectively. The assessee's mercantile accounting system requires cost determination on an accrual basis.

The Revenue appealed, arguing that intermediary fluctuations are irrelevant for determining actual cost, citing CIT vs. Century Enka Ltd. and CIT vs. Gujarat State Fertilizer Co. Ltd. The assessee countered that the pre-amendment s. 43A focused on liability from exchange rate fluctuations, not actual payments, and the prospective amendment supports this interpretation.

The Tribunal concluded that the amended provisions are not clarificatory and do not apply retrospectively. The decisions in New India Industries Ltd. and CIT vs. Madras Fertilizers Ltd. support the assessee's position. The Tribunal dismissed the Revenue's appeals for the assessment years 1994-95 to 1999-2000, directing the AO to allow depreciation based on the actual cost determined per s. 43A(1).

Issue 2: Carry forward of unabsorbed depreciation from the assessment year 1994-95 to 2003-04

The AO denied carrying forward unabsorbed depreciation from the assessment year 1994-95, citing an eight-year limit starting from the assessment year 1997-98. The assessee argued that the Finance Act, 2001 revived the earlier provisions allowing indefinite carry forward, supported by CBDT Circulars.

The Tribunal agreed with the assessee, noting that the provisions as of 1st April, 2002, allowed carrying forward unabsorbed depreciation without the eight-year limit. The Tribunal set aside the tax authorities' orders and directed the AO to permit carrying forward depreciation from the assessment year 1994-95.

Conclusion:

The appeals filed by the Revenue are dismissed, and the appeal filed by the assessee is allowed.