2024 (11) TMI 492 - AT - Income Tax

Disallowance of depreciation claimed on Plant Machinery on amount of ECB as waived during the previous year - AO was of the opinion that the treatment of asset of the said waiver as capital receipt is not correct because as per Section 43(1) of the Act, actual cost of plant and machinery should be cost borne by the assessee and depreciation should be given on actual cost only. HELD THAT - While calculating the disallowance of depreciation, the AO has adjusted cost of plant and machinery by reducing the amount of ECB waived off during the year and has calculated the depreciation on the adjusted amount of cost of plant and machinery imported. The re-computation of depreciation has been done from AY 2009-10 to AY 2015-16 and the same has been disallowed. The disallowance has been made by invoking the provision of Section 43(1) and 41(1) of the Act. It is also a fact that, purchase of capital asset is a different transaction from availing a loan in the form of ECB. The waiver of loan is on capital account and the ratio laid down in the case of Mahindra Mahindra 2018 (5) TMI 358 - SUPREME COURT squarely applies wherein, as held that waiver of loan in respect of capital equipment cannot be taxed u/s 41(1) of the Act. Since the assets were purchased in AY 2009-10, therefore provision of Section 43(1) of the Act are not applicable as in that year, the cost of asset was not directly or indirectly met by any other person. Also decided in Tata Iron Steel Co 1997 (12) TMI 5 - SUPREME COURT we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan, it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court in favour of assesee. Appeal of revenue dismissed.

Summary

Issues Involved:

1. Disallowance of depreciation on Plant & Machinery due to waiver of External Commercial Borrowing (ECB).
2. Applicability of Section 43(1) of the Income Tax Act for reworking depreciation allowance.
3. Definition and interpretation of "actual cost" under Section 43(1).
4. Reliance on judicial precedents, specifically Mahindra & Mahindra Ltd. and other cases.
5. Ignoring the ratio of judgments by Kerala High Court and Apex Court regarding "actual cost."
6. Consideration of ITAT Bangalore's decision on inflated capital costs.

Detailed Analysis:

1. Disallowance of Depreciation on Plant & Machinery:
The core issue was whether the assessee was entitled to claim depreciation on the original cost of plant and machinery despite the waiver of a portion of the ECB. The Assessing Officer (AO) argued that the waiver should reduce the cost of the asset, thereby affecting the depreciation calculation. However, the CIT(A) disagreed, holding that the waiver was a capital receipt and did not alter the original cost of the asset for depreciation purposes. This position was supported by the Supreme Court's decision in Mahindra & Mahindra, which established that loan waivers related to capital equipment are not taxable under Section 41(1).

2. Applicability of Section 43(1) for Reworking Depreciation:
The revenue contended that Section 43(1) should be applied to rework depreciation in subsequent years. However, the CIT(A) maintained that Section 43(1) applies only in the year of purchase and not for reworking depreciation in later years. The Tribunal upheld this view, noting that the cost of the asset had not been met by any other person in the year of purchase, thus Section 43(1) was not applicable for altering depreciation retrospectively.

3. Definition of "Actual Cost" under Section 43(1):
The AO's interpretation of "actual cost" was challenged. The CIT(A) and the Tribunal emphasized that the actual cost refers to the cost incurred by the assessee at the time of acquisition, not affected by subsequent financial arrangements like loan waivers. This interpretation aligns with the Supreme Court's stance in Tata Iron & Steel Co., which clarified that the cost of an asset remains unaffected by the manner of loan repayment.

4. Reliance on Judicial Precedents:
The CIT(A) relied heavily on the Mahindra & Mahindra case, where the Supreme Court ruled that loan waivers for capital assets do not constitute taxable income under Section 41(1). The Tribunal supported this reliance, finding it applicable to the present case, where the waiver of ECB did not alter the original acquisition cost for depreciation purposes.

5. Ignoring Kerala High Court and Apex Court Judgments:
The revenue argued that the CIT(A) ignored relevant judgments by the Kerala High Court and Apex Court, which they claimed supported their position. However, the Tribunal found these cases distinguishable, as they dealt with different contexts and did not directly address the situation of loan waivers affecting depreciation.

6. Consideration of ITAT Bangalore's Decision:
The revenue cited a decision by ITAT Bangalore, suggesting that the legislative intent was to prevent inflated capital costs for higher depreciation claims. Despite this, the Tribunal found that the facts of the present case did not involve any inflation of costs, as the waiver was a separate transaction from the asset purchase.

Conclusion:

The Tribunal concluded that the CIT(A)'s decision to delete the disallowance of depreciation was correct. The waiver of the ECB was a capital receipt and did not affect the "actual cost" of the assets for depreciation purposes. The appeal by the revenue was dismissed, affirming the CIT(A)'s reliance on the Mahindra & Mahindra precedent and the interpretation of Section 43(1) as applicable only in the year of asset acquisition.