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TMI Blog2013 (2) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... red in confirming the addition made by the AO by treating the 'Fiber Optic Computer Networking' as an ordinary asset instead of being a part of the Computer systems and consequently disallowing Rs. 14.97 lacs of depreciation claimed and the disallowance /allowance is not correct on facts. 4. The CIT [A] has erred in confirming the addition made by the AO by treating the 'UPS' of computers as an ordinary asset instead of being a part of the Computer systems due to wrong appreciation of information and consequently disallowing Rs. 6.73 lacs of depreciation claimed. 5. The CIT [A] has erred in confirming the disallowance of Rs. 201 lakhs u/s 14A read with Rule 8D with disregard to the decision of the Bombay High Court on the issue. 6.1 The CIT [A] has erred in confirming the disallowance of depreciation on the intangible asset of mining rights despite changes in Section 32 of the Income Tax Act 1961, and or in the alternate claim that the addition to Mining Rights in the current year were of Revenue in nature, despite the fact that the Hon'ble ITAT had set aside similar issues besides in other years and the CIT [A] having allowed it as a Revenue expense in some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the following additions:- 1. Claim of depreciation on assets consequent to waiver of loan. Rs.5926.05 lakhs. 2. Adjustment pertaining to previous years. Rs. 31 lakhs 3. Depreciation on water supply & sewerage plant. Rs. 65.80 lakhs 4. Difference in foreign exchange fluctuation. Rs. 1445.00 lakhs 5. Depreciation on assets not in active use. Rs. 35.64 lakhs 6. Depreciation on Computer Fibre Optic Networking. Rs. 14.97 lakhs 7. Depreciation on UPS/Inverters. Rs. 6.73 lakhs 8. Disallowance u/s 14A. Rs. 201 lakhs 9. Delay in deposit of PF. Rs. 298.46 lakhs 10. Provision for long service award. Rs. 2186 lakhs. 11. Provision for LTC encashment. Rs. 9775 lakhs. 4. Dissatisfied with the order of Assessing Officer, the assessee filed appeal before ld CIT(A). In respect of each disallowance brief facts, submissions by assessee and findings of Ld CIT(A) are as under:- 1. Excess Claim of Depreciation on assets consequent to waiver of loan: 5. During assessment proceedings, the Assessing Officer observed that assessee was granted waiver of loan to the extent of 5.073 crores by the Govt. of India out of loans granted by it from Steel Development Fund. During th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was payment of Rs. 31 lakhs paid to Govt. of India on account of additional royalty in respect of raw material acquired in earlier years. The assessee had explained that additional royalty of Rs. 31 lakhs paid in this year on account of iron ore extracted in earlier year was an allowable expense in terms of section 43B of the Income Tax Act, 1961 and also submitted that Ld CIT(A) had been allowing this expenses from assessment year 2001-02. The Assessing Officer did not agree with the contentions of the assessee and held that debit was not admissible as it was not proved that liability had incurred during the year under consideration. 8. Before the Ld CIT(A), the assessee pleaded that periodically amount payable by the company to Govt. on account of royalty is determined and in such circumstances, when higher quantum of royalty is determined and the difference between the determined and already amount is demanded, the same is paid and since it was a statutory payment and hence was allowable u/s 43B of Income Tax Act. The assessee further explained that in the year under consideration the amount of Rs. 30,57,629/- was determined as additional royalty from Durgapur Steel Plant which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any appeal before any High Court. The Assessing Officer, however, did not agree with the contentions of assessee and made an addition of Rs. 65.80 lakhs. 10. Before ld CIT(A), the same arguments were reiterated and following the earlier ITAT order in respect of assessment year 2000-01, 2001-02 and 2002-03 dated 25.9.2009, the Ld CIT(A) deleted the addition of Rs. 65.80 lakhs. 4. Difference in Foreign Exchange Fluctuation:- 11. The assessee had availed a loan from KFW Germany for expansion and modernization of its steel plant and the term loan carried interest rate of 8.75% The company was to get subsidy equal to 4% of loan for the purpose of putting up pollution equipment plants and another 4% of loan in the form of subsidy was to be given to the company for meeting foreign exchange fluctuation on the KFW loans. The Assessing Officer observed that company is debiting interest @ 8.75% and is crediting 4% to pollution equipment reserve and 4% to foreign exchange fluctuation reserve and balance 0.75% is remitted as interest. The assessee explained that when the assessee purchases pollution control equipment, it does not debit it to Pollution Control Equipment Account but debit it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 30.3.2010 had deleted the similar disallowance for assessment year 2006-07. The Ld CIT(A) on the basis of order of ITAT for assessment year 2006-07 directed to delete the addition of Rs. 1445 lakhs. 5. Depreciation on assets not in active use:- 13. The Assessing Officer during the assessment proceedings noted that auditors in the accounts for the year ended 31.3.2001 had appended a note to the effect that assets with WDV of Rs. 1178 lakhs were not in active use and he further observed that claim of depreciation on such un-used assets is continuously being claimed by the assessee and was being disallowed by the Department continuously. The assessee submitted before the Assessing Officer that WDV of assets shown were under the Companies Act, 1956 and as per accounting standard the fixed assets should be depreciated to the extent of cost less realizable scrap and in the event of non-determination of scrap value 5% of cost has to be taken as scrap value and no further depreciation has to be charged. It further explained that WDV of such assets had come down to 5% after 95% already being charged as depreciation over the years. It was further submitted that these assets were l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computer. It was also submitted that networking was an integral part of computer system without which the data from the main CPU of the computer can neither be assessed nor stored back in the computer after processing. Reliance was placed on the decision of Supreme Court v. Karnataka Power Corporation 247 ITR 268 wherein it was held that building used for power generating plant was part of generating system and was eligible for depreciation as plant & machinery. Similarly reliance was placed on the decision of ITAT Calcutta Bench in ITO v. Samiram Majumdar 98 ITD 119 and ITAT Delhi Bench decision in Expeditious International v. Addl. CIT 118 TTJ 652 wherein it was held that printer, scanner NT server were integral parts of computer system. However, the Ld CIT(A) did not accept the contentions of assessee and upheld the order of Assessing Officer. 7. Depreciation on UPS/Inverters:- 17. The Assessing Officer observed that there was addition of Rs. 9.22 lakhs on account of UPS Inverter in the computer block of asset and depreciation @ 60% had been claimed. The Assessing Officer held that UPS/Inverter were part of office equipment and depreciation @ 15% was allowable as against cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further submitted that dividend was received from joint venture companies to which assessee had transferred its assets and got shares for a part of consideration and since the assets were quite old and no loans were outstanding against such assets, therefore, there was no borrowing and consequently no interest expenditure for acquisition of share was incurred. It was further submitted before Assessing Officer that in assessment year 2001-02, the Assessing Officer had made a nominal disallowance of 5% of gross dividend u/s 14A and Ld CIT(A) had reduced the disallowance to 1%/. Ld Assessing Officer in assessment year 2005-06 had made a disallowance of 1% of gross dividend in view of CIT(A)'s order for the assessment year 2001-02. The assessee further submitted detailed working showing that loans outstanding in the books was for specific purpose and no loans were raised for making investment in shares and in fact it was submitted that company was the net earner of interest instead of payer of interest. The Assessing Officer, however, did not agree with the contentions of assessee and as per Rule 8D calculated the disallowance of interest on the basis of 0.5% of average investment hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Supreme Court judgment in the case of Bharat Earth Mover Ltd. v. CIT 245 ITR 428 made an addition of Rs. 2186 lakhs. 23. Before the Ld CIT(A), the assessee repeated the same arguments before the Assessing Officer. The Ld CIT(A) after considering the submissions of assessee deleted the addition of Rs. 2186 lakhs. 11. Provision for LTC Encashment:- 24. The Assessing Officer also observed from clause 5.2. of Schedule-III to audited accounts that the assessee company had provided Rs. 97.75 crores towards LTC encashment facility in respect of employees who had not availed the facility up to 31st March, 2007. On being asked the assessee company replied that accounting standard - 15 on employees benefits provide that long term employees benefits are those which are not payable wholly within 12 months after the end of period in which employees render the related service. He submitted that as on the balance sheet date, the present value of net benefits/obligation accrued is to be recognized as a liability for long term employees benefits. The assessee further submitted that employees of the company were eligible to claim LTC anywhere in India in a block period of four years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) & (2) of the said Act. The Ld AR further submitted that mining in India is governed by Mines & Mineral Development & Regulation Act and payment of royalty is governed by clause 9(1)& (2) and since the Act is a statutory regulation, the payments made to Govt. on the basis of this Act is necessarily a statutorily payment and therefore was eligible for deduction u/s 43B of the Act. He further argued that the assessee has been claiming similar deduction for the past so many years and in each year the deduction was allowed. 31. On the other hand, the Ld DR argued that royalty does not fall under the eligible payments for deduction u/s 43B and the assessee was following mercantile system of book keeping and therefore the liability must arise in the year of debit and therefore the Assessing Officer had rightly disallowed the payment of royalty amounting to Rs. 31 lakhs relating to earlier year. 32. In his rejoinder, the Ld AR submitted that section 43B (a) states that any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called under any law for the time being imposed is eligible for deduction u/s 43B of the Act. He submitted that the payment of royalty is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of DCIT v. Data Craft India Ltd. 133 TTJ 377 wherein router and switches were held to be part of computers and were held to be eligible for depreciation @ 60%. As regards judgment of Nestle India Ltd. relied upon by the Ld DR he argued that this was a very old judgment as compared to Hon'ble Delhi High Court judgment relied upon by him. In view of above, he argued that computer fibre networking and UPS/Inverters were eligible for depreciation @ 60%. 37. We have heard the rival submissions of the parties and have gone through the material available on record. We hold that the computer peripherals such as UPS system/inverter are essentially part of computer system and computer in the modern age cannot work independently without these basic peripherals. Therefore, following various judgments of Hon'ble Courts we hold that UPS/Inverters/Printers are eligible for depreciation @ 60%. Therefore, grounds No.3 of assessee's appeals is allowed. 38. As regards depreciation on computer fibre networking, we agree with the argument advanced by Ld DR that it is like wiring which is used for inter connecting the computers. However, on the principle that a civil foundation for plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the objection and analysis and for cogent reason that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of reasonable and acceptable method of apportionment. Following the findings of Hon'ble high Court, we set aside this matter to the office of Assessing Officer for calculation of disallowance u/s 14A on the basis of reasonable and acceptable method of apportionment of expenses. 43. As regards ground No.6 relating to payment for mining rights, the Ld AR submitted that the Hon'ble ITAT in assessment year 2002-03 & 2003-04 had set aside the similar matter to the office of Assessing Officer. Therefore, he submitted that the same can be remitted back to the office of Assessing Officer. Our attention was invited to page 98 of paper book wherein the Tribunal's order dated 25.6.2009 covering the relevant aspect was placed. 44. On the other hand, the Ld DR submitted that since mining rights do not form part of intangible assets and therefore no depreciation is allowable and the Assessing Officer has rightly deleted the allowance of depreciation. 45. We have heard the rival submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block of assets on block concept introduced in section 32 of the Income Tax Act, 1961 from 1998-99 onwards. He further argued that Ld CIT(A) has deleted the similar disallowance in assessment year 2001-02 and Department has not preferred any appeal against the said deletion. Reliance was placed in the case of CIT v. Bharat Aluminium Co. Ltd. (2010) wherein it was held that expression used for business purposes would mean use of block of Assets and not any specific asset. 50. The Ld DR, on the other hand, put reliance on the order of Assessing Officer and also relied upon the case law reported in the case of Vinyl Cement Ltd. 25 SOT 235. (Mum.). 51. We have heard the rival submissions of the parties and have gone through the material available on record. We find that the assessee had rightly classified assets not in active use and had stated that no depreciation has been charged as per Companies Act. However, from 1988-89 after introduction of block of asset the individual asset has lost its identity and it does not matter whether some part of block of asset did not function during a particular year. It is sufficient if some of the block of assets is operational during the year. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vail LTC in the relevant block period due to exigencies of business and the liability was not unascertained/contingent but definite and determined and was also paid in full in the subsequent years. Beside, the employees who had en-cashed the LTC entitlement were subjected to income tax as a perquisite and Ld CIT(A) had allowed the same keeping in view that the amount was taxed. 56. The Ld DR, on the other hand, relied upon the order of Assessing Officer. 57. We have heard the rival submissions of the parties and have gone through the material available on record. We find that LTC entitlement was eligible for encashment and the company had provided for its liability on the basis of accrual method. The LTC encashment was liable to tax in the hands of employees under the I.T. Act. The provisions on account of LTC encashment were made in accordance with accounting standard AS-15 which are mandatory. The Assessing Officer had disallowed the provision as undefinite and undetermined liability without going into the facts of the case. We are of the considered opinion that provision of LTC encashment provided by the assessee in its books of accounts on the basis of AS-15, was a deductible ..... X X X X Extracts X X X X X X X X Extracts X X X X
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