2018 (8) TMI 1647 - HC - Income Tax

Claim of depreciation on Foreign Exchange Fluctuation - Held that - Question no.1 has already been decided against the revenue by way of a judgement in the case of CIT v. Woodward Governor India (P) Ltd. 2009 (4) TMI 4 - SUPREME COURT . Relief under Section 35D(2)(C)(iv) - no such claim was made by the assessee before the Assessing Officer during the assessment proceedings in as much as the expenses claimed were not incurred in connection with the installation of Plant and Machinery or construction of the infrastructure of the Company ? - Held that - The question no.2 has also been decided against the revenue by way of several judgements all over India including the case of Autolite India Ltd. v. CIT 2003 (7) TMI 53 - RAJASTHAN HIGH COURT in which it has been categorically held that the expenses incurred on issue of public subscription of shares or of debentures of the company, any payment made against commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus would be eligible for benefit of Section 35D Capitalization of expenses incurred on advertisement, salary and wages, travelling and conveyance and staff welfare expenses - Held that - There are concurrent judgements of the CIT as well as that of the Tribunal that any amounts expended by an assessee, which are pre-operative in nature and are in fact made prior to coming in or the existence of the business itself would no doubt be a capital expenditure and, therefore, both the CIT as well as the Tribunal have allowed the assessee to capitalise the expenses made prior to the existence or the formation of the Company and have allowed depreciation on them as capital expenses and rightly so on facts there is no doubt that these amounts, which were expended by the assessee were prior to the setting up of the business and prior to the date when the business ran or started making profits. - decided in favour of assessee

Summary

Issues:
1. Claim of depreciation on Foreign Exchange Fluctuation
2. Relief under Section 35D(2)(C)(iv) of the Act
3. Capitalization of expenses incurred on advertisement, salary, wages, traveling, conveyance, and staff welfare expenses

Analysis:

Claim of Depreciation on Foreign Exchange Fluctuation:
The appeal by the revenue under Section 260-A of the Income Tax Act, 1961 was against an order of the Income Tax Appellate Tribunal for the assessment year 1993-94. The first question of law raised was regarding the allowance of depreciation on Foreign Exchange Fluctuation without considering the provisions of Section 43A of the Act. The Court noted that the issue of depreciation on Foreign Exchange Fluctuation had been previously decided against the revenue in a judgment, and thus, upheld the Tribunal's decision in favor of the assessee.

Relief under Section 35D(2)(C)(iv) of the Act:
The second question raised was related to the relief under Section 35D(2)(C)(iv) of the Act. The Court referred to various judgments, including Autolite India Ltd. v. CIT, which supported the eligibility of certain expenses for the benefit of Section 35D. It was observed that expenses incurred on public subscription of shares, debentures, and other related activities were eligible for the said relief. Consequently, the Court decided this question against the revenue and in favor of the assessee.

Capitalization of Expenses:
The final question concerned the capitalization of expenses incurred on advertisement, salary, wages, traveling, conveyance, and staff welfare expenses. Both the CIT and the Tribunal had concurrent judgments that pre-operative expenses made prior to the existence of the business would be considered capital expenditure. The Court agreed with the decisions of the CIT and the Tribunal, emphasizing that such expenses made before the business started generating profits were rightly capitalized. Therefore, this question was also decided in favor of the assessee and against the revenue.

Conclusion:
The High Court dismissed the appeal filed by the revenue, citing the decisions made on all three substantial questions of law in favor of the assessee. The Court upheld the Tribunal's decisions on the issues of depreciation on Foreign Exchange Fluctuation, relief under Section 35D(2)(C)(iv) of the Act, and the capitalization of pre-operative expenses. Consequently, the appeal was dismissed with no costs awarded.