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2014 (2) TMI 522 - HC - Income Tax


Issues Involved:

1. Foreign exchange gains from cancellation of forward contracts and their inclusion in export turnover for Section 80HHC benefits.
2. Depreciation rate applicable to temporary parking sheds.
3. Allowability of expenditure related to advance for R&D equipment under Section 35(1)(iv).
4. Classification of expenditure on replacement of dies and moulds as revenue expenditure.
5. Deduction of entry tax paid under Section 43B.

Issue-wise Detailed Analysis:

1. Foreign Exchange Gains from Cancellation of Forward Contracts:

The Tribunal initially allowed the assessee's claim that foreign exchange gains from forward contracts should be included in the export turnover for Section 80HHC benefits, referencing the Supreme Court's decision in CIT Vs. K.Ravindranathan Nair. However, the High Court noted the lack of material facts to determine whether these gains were directly related to specific export contracts or were speculative. The matter was remitted back to the Assessing Officer for a de novo consideration to ascertain the exact nature of these gains and their eligibility under Section 80HHC.

2. Depreciation on Temporary Parking Sheds:

The Tribunal had allowed 100% depreciation on the temporary parking sheds, but the High Court disagreed. The High Court emphasized that the sheds, given their substantial cost and expected lifespan of 20 years, were not temporary. It restored the Assessing Officer's decision to allow only 10% depreciation, aligning with the nature and longevity of the sheds.

3. Expenditure on R&D Equipment:

The Tribunal upheld the assessee's claim for expenditure on R&D equipment under Section 35(1)(iv), referencing CIT Vs. Rane Brake Linings Ltd. The High Court agreed with this decision, confirming that the expenditure was allowable.

4. Expenditure on Replacement of Dies and Moulds:

The Tribunal classified the expenditure on replacement of dies and moulds as revenue expenditure, citing the Karnataka High Court's decision in CIT Vs. Mysore Spun Concrete Pipe Pvt. Ltd. The High Court supported this view, stating that dies and moulds are integral parts of machinery and their replacement qualifies as current repairs under Section 31, not as capital expenditure under Section 37. The High Court referenced several Supreme Court decisions, including CIT Vs. Saravana Spinning Mills P. Ltd. and CIT Vs. Ramaraju Surgical Cotton Mills, to support its conclusion.

5. Deduction of Entry Tax Paid:

The Tribunal allowed the deduction of entry tax paid under Section 43B, despite the Revenue's argument that such tax was set off against sales tax liability. The High Court upheld this decision, clarifying that the treatment of entry tax under the Sales Tax Act does not affect its deductibility under the Income Tax Act. The High Court emphasized that the actual payment of entry tax qualifies for deduction, rejecting the Revenue's plea of double deduction.

Judgment Summary:

- The High Court remitted the issue of foreign exchange gains from forward contracts back to the Assessing Officer for further examination.
- The High Court restored the Assessing Officer's decision to allow 10% depreciation on temporary parking sheds.
- The High Court upheld the Tribunal's decision on the allowability of R&D expenditure under Section 35(1)(iv).
- The High Court confirmed that the expenditure on replacement of dies and moulds should be treated as revenue expenditure under Section 31.
- The High Court upheld the Tribunal's decision to allow the deduction of entry tax paid under Section 43B.

Conclusion:

- T.C.(A) No. 173 of 2009 was partly allowed, remitting the foreign exchange gains issue back to the Assessing Officer and allowing the Revenue's appeal on the depreciation rate.
- T.C.(A) No. 174 of 2009 was dismissed, upholding the Tribunal's decisions on R&D expenditure, replacement of dies and moulds, and entry tax deduction. No costs were awarded.

 

 

 

 

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