2009 (7) TMI 902 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of waiver of outstanding principal amount of loan as subsidy, grant, or reimbursement u/s 43 Explanation 10 of the Income-tax Act, 1961.
2. Confirmation of disallowance of depreciation by the Assessing Officer and CIT(A).

Summary:

Issue 1: Treatment of Waiver of Loan
The primary issue in this appeal is whether the waiver of the outstanding principal amount of loan by Wipro Finance Ltd. should be treated as a subsidy, grant, or reimbursement towards the cost of fixed assets as envisaged u/s 43 Explanation 10 of the Income-tax Act, 1961. The assessee argued that the loan was obtained for working capital requirements and not for purchasing plant and machinery. The Assessing Officer and CIT(A) inferred that the loan waiver should reduce the actual cost of the plant and machinery, thereby affecting the depreciation calculation. However, the Tribunal observed that there was no direct or indirect nexus between the loan taken and the purchase of plant and machinery. The loan was not intended to meet the cost of the assets, and the waiver of the loan does not fall under the terms "subsidy," "grant," or "reimbursement" as defined in Explanation 10 of section 43(1).

Issue 2: Disallowance of Depreciation
The Assessing Officer disallowed 25% of the depreciation on Rs. 86,02,061 by reducing this amount from the cost of plant and machinery, which was confirmed by the CIT(A). The Tribunal, however, concluded that the waiver of the loan by Wipro Finance Ltd. could not be related to the purchase of plant and machinery and thus should not reduce the actual cost for the purpose of calculating depreciation. The Tribunal emphasized that the waiver of the loan is not equivalent to a subsidy, grant, or reimbursement and does not affect the actual cost of the asset.

Conclusion:
The appeal filed by the assessee is allowed, and the waiver of the loan amounting to Rs. 86,02,061 should not be treated as a subsidy, grant, or reimbursement towards the cost of fixed assets u/s 43 Explanation 10 of the Income-tax Act, 1961. Consequently, the disallowance of depreciation by the Assessing Officer and CIT(A) is not justified.