2019 (12) TMI 367 - AT - Income Tax

Disallowances of depreciation - determination of WDV - Actual cost of acquisition - increase in cost of assets on account of loss arising on cancellation of forward, foreign exchange contracts. - Held that - since forward foreign exchange contracts were taken for acquiring capital assets, the profits/loss arising on settlement of such contracts had to be adjusted against the cost of the concerned capital asset in terms of section 43A of the Act, and depreciation was to be allowed on such adjusted value of the capital assets. - Decision in the case of assessee own case 2010 (5) TMI 716 - ITAT BANGALORE followed. Disallowances of depreciation - increased WDV of assets transferred on amalgamation - Held that - the WDV of assets transferred on amalgamation in the hands of the amalgamating company has to be necessarily computed in terms of Explanation (2) to section 43(6) of the Act. As can be seen from the above, in terms of Explanation (2) to section 43(6), while computation the WDV on amalgamation, depreciation actually allowed has to be reduced. - Explanation (3) being a deeming fiction, operates only in a particular conditions and in order to remove an anomaly, which otherwise would have been created under the other provisions of the Act. It thus follows that while interpreting Explanation (3), one needs to be aware of the intention of the statute. These provisions along with their intent have been explained elaborately by the Hon'ble Bombay High Court 1990 (7) TMI 44 - BOMBAY HIGH COURT Accordingly, in terms of Explanation (3) to section 43(6), in the present case, unless the unabsorbed depreciation of the amalgamating companies is carried forward in the hands of the amalgamated company u/s 32(2) of the Act, Explanation (3) cannot be read into Explanation (2) to simply conclude that depreciation 'actually allowed' also includes unabsorbed depreciation. The meaning of the term actually allowed is interpreted by the Hon'ble Supreme Court, in the case of CIT v. Doom Dooma India Ltd. 2009 (2) TMI 9 - SUPREME COURT The WDV in the hands of the amalgamated company was to be calculated without considering the unabsorbed depreciation of the amalgamating companies, for which set off was never allowed. - Decided in favor of assessee. Treatment of interest income - business income or income from other sources - The fixed deposits were kept with banks in the normal course of business for extending guarantee to the Government authorities - Held that - till the company commences its business and earns income, if they have kept their surplus funds in short deposits in order to earn interest that income is chargeable under section 56 of the Act. However, once the assessee commences its business and earns income and in additions to the income so earned, the company also earns interest by way of such deposits, then the said income cannot be construed as income from other sources. - Ld.CIT(A) has rightly treated the interest income from fixed deposits under the head income from business. Treatment of sales tax subsidy as capital in nature instead of revenue in nature - Held that - one has to understand the purpose for which said subsidy was given by the State Government. - the subsidy was granted to the assessee for setting up of a unit and to incentives was given to promote industry in a backward area of Karnataka and thereby generating employment in the state. Thus, the purpose of the concession/incentives was clearly not to provide general assistance to carry on its business as alleged by the Ld.AO. The said subsidy, although was qualify in terms of sales tax exemption on purchase of raw materials and plant and machinery and also, on sale of finished goods after commencement of production, but the purpose of the subsidy was to reimburse the cost of expenditure incurred for setting up the new industry. - Therefore, we are of the considered view that when, the subsidy was given with an object to effect new industries in the backward area of the state in terms of sales tax exemption, then the said subsidy shall be treated as capitol receipt. Interest u/s 234B - advance tax - assessment of income u/s 115JB - MAT - Held that - In the current year, as well the liability for interest under section 234B of the Act has arisen only on account of a retrospective amendment to the provision of section 115JB of the Act, 1961 with effect from AY 2001-02. Accordingly, the assessee would not have anticipated the retrospective amendment at the time of making the payments for advance tax, but to estimate the liability to pay advance tax on the basis of existing provisions. - No interest liability.

Issues Involved:
1. Disallowance of depreciation on fixed assets due to exchange loss on forward contracts.
2. Disallowance of depreciation on loss arising from cancellation of forward contracts in the previous year.
3. Allowance of depreciation on increased Written Down Value (WDV) of assets transferred on amalgamation.
4. Classification of interest income as business income or income from other sources.
5. Treatment of sales tax subsidy as capital or revenue receipt.
6. Levy of interest under section 234B on total income computed under section 115JB due to retrospective amendment.
7. Reduction of sales tax subsidy from book profits under section 115JB.

Detailed Analysis:

1. Disallowance of Depreciation on Fixed Assets Due to Exchange Loss on Forward Contracts:
The Tribunal examined whether the loss arising from the cancellation of forward foreign exchange contracts should be capitalized to the cost of fixed assets under section 43A of the Income Tax Act. The Tribunal referred to the assessee's own case for AY 2005-06 and the Supreme Court's decision in ACIT v. Elecon Engineering Co. Ltd., concluding that such losses should be adjusted against the cost of the capital assets and depreciation should be allowed on the adjusted value. The Tribunal upheld the CIT(A)'s decision to allow the adjustment and rejected the revenue's appeal.

2. Disallowance of Depreciation on Loss Arising from Cancellation of Forward Contracts in the Previous Year:
The Tribunal considered the assessee's claim for consequential depreciation for the current year on the loss arising from forward contracts settled in the previous year. It referred to the ITAT Bangalore bench's decision for AY 2005-06, which allowed such losses to be added to the cost of assets under section 43A. The Tribunal upheld the CIT(A)'s decision to allow consequential depreciation and rejected the revenue's appeal.

3. Allowance of Depreciation on Increased WDV of Assets Transferred on Amalgamation:
The Tribunal examined whether the WDV of assets transferred on amalgamation should be computed considering unabsorbed depreciation. It referred to Explanation (2) and (3) to section 43(6) and various judicial precedents, including the Bombay High Court's decision in CIT v. Silical Metallurgic Ltd., which held that WDV should be computed without considering unabsorbed depreciation. The Tribunal upheld the CIT(A)'s decision to allow depreciation on the increased WDV and rejected the revenue's appeal.

4. Classification of Interest Income as Business Income or Income from Other Sources:
The Tribunal considered whether interest income earned on fixed deposits kept for business purposes should be classified as business income. It referred to the Karnataka High Court's decision in the assessee's own case for AY 1995-96, which held that such interest income should be taxed as business income. The Tribunal upheld the CIT(A)'s decision to treat the interest income as business income and rejected the revenue's appeal.

5. Treatment of Sales Tax Subsidy as Capital or Revenue Receipt:
The Tribunal examined whether sales tax subsidy received from the Government of Karnataka should be treated as capital or revenue receipt. It referred to the industrial policy of Karnataka and various judicial precedents, including the Supreme Court's decision in Chaphalkar Brothers, which emphasized the purpose of the subsidy. The Tribunal concluded that the subsidy was granted for setting up a new industry and should be treated as capital receipt. It upheld the CIT(A)'s decision and rejected the revenue's appeal.

6. Levy of Interest Under Section 234B on Total Income Computed Under Section 115JB Due to Retrospective Amendment:
The Tribunal considered whether interest under section 234B could be levied on the basis of a retrospective amendment to section 115JB. It referred to the ITAT Bangalore bench's decision in the assessee's own case for AY 2005-06, which held that no interest could be levied where liability arises due to retrospective amendment. The Tribunal upheld the CIT(A)'s decision to delete the interest liability and rejected the revenue's appeal.

7. Reduction of Sales Tax Subsidy from Book Profits Under Section 115JB:
The Tribunal considered whether sales tax subsidy, being capital in nature, should be reduced from book profits computed under section 115JB. It referred to the ITAT Mumbai Tribunal's decision in the assessee's own case for AY 2004-05 and various judicial precedents, which held that capital receipts should not be included in book profits. The Tribunal directed the AO to exclude the sales tax subsidy from book profits and allowed the assessee's cross-objection.

Conclusion:
The Tribunal dismissed the revenue's appeal on all grounds and allowed the assessee's cross-objection, providing detailed reasons for each issue based on judicial precedents and statutory provisions.

← Previous Next →