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TMI Blog2023 (12) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... by CIT(A)-II, Indore. I.T.A.No.784/Ind/2019 Revenue 2013-14 Cross Appeal I.T.A.No.12/Ind/2019 Assessee 2014-15 Order dated 11.10.2018 passed by CIT(A)-II, Indore. I.T.A.No.23/Ind/2019 Revenue 2014-15 Cross Appeal I.T.A.No.13/Ind/2019 Assessee 2015-16 Order dated 11.10.2018 passed by CIT(A)-II, Indore. I.T.A.No.24/Ind/2019 Revenue 2015-16 Cross Appeal Since these appeals are related to the same assessee; argued by same representatives and involve certain issues of common nature; they were heard together at the request of parties and are being disposed of by this common order for the sake of convenience and clarity. 2. Heard the learned Representatives of both sides at length and case records perused. 3. The registry has informed that ITA No. 22/Ind/2019 is filed by Revenue after a delay of 3 days and therefore time-barred. Ld. DR for the revenue submitted that the delay is very small and caused by administrative procedure. He prayed to condone the delay in the interest of justice. We are satisfied with the reasoning and prayer made by Ld. DR. Therefore, the delay is condoned and appeal is proceeded for hearing. 4. The grounds raised by parties are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,07,797/- because the Hon'ble CIT(A) has not given exact working and basis of disallowable depreciation and the same cannot be worked out on the basis of figures available in various schedules and audit report filed electronically? 2. Whether on the facts and in the circumstances of the case, the Hon'ble CIT(A) was justified in deleting the disallowance made on account of sundry creditors u/s 41(1) of the I. T. Act? Assessee's ITA No. 12/Ind/2019 for AY 2014-15: 1. That the Ld. CIT(A) erred in maintaining disallowance of deprecation to the extent of Rs. 2,87,14,642/- (actually this figure should have been 1,49,11,045/-) out of claim of depreciation of Rs. 4,36,25,687/-. That since the assessee has used plant and machinery in the business during the year, entire claim of Rs. 4,36,25,687/- was to be allowed. The same require to be now allowed. Revenue's ITA No. 23/Ind/2019 for AY 2014-15: 1. Whether on the facts and in the circumstances of the case, the Hon'ble CIT(A) was justified in restricting the disallowance on account of depreciation on plant and machinery at Rs. 2,87,14,642/- instead of total disallowance of Rs. 4,36,25,687/- because the Ld. CIT(A) has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70,708/- , major expenditure of Rs. 3,700 + 1,79,050 was on visits by Shri R.C. Gupta, President of assessee-company to Spain; followed by expenditure of Rs. 47,353 + 28,539 + 3,718 + 548 on visits by Mr. Amitva Sarkar to Istanbul/turkey; and the rest of expenditure is incurred on passport/visa fee of some persons. He submitted that all visitors are employees of assessee and a small amount of Rs. 2,500/- is incurred for passport/visa fee of Mr. Vivek Loiwal, director of company. He carried us to the country-wise breakup of imports/exports done by assessee and submitted that the assessee has made imports/exports from Spain and Turkey besides other countries. He submitted that gross value of import and export made by assessee during the year was Rs. 10,01,34,723/- and Rs. 22,56,64,881/- respectively. He submitted that the assessee is a company; the expenditure is incurred for visits by employees (a nominal expenditure for director's visa and passport fee); and the assessee is having a high value of imports/exports from/to foreign countries including the countries where visits were done. Therefore, according to Ld. AR, the expenditure is clearly incurred for business purposes and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck company by Board for Industrial and Financial Reconstruction (BIFR). In terms of rehabilitation package sanctioned by BIFR, the assessee entered into One Time Settlement (OTS) with its lending Bank whereunder the assessee got waiver of the principal amount of loan. The waiver was granted in AY 2007-08 and while completing scrutiny-assessment of AY 2007-08, the then assessing authority adopted "Nil" value of the opening W.D.V. of fixed assets and thereby disallowed the depreciation claimed by assessee. The AO did this on the basis of provision of section 43(1) read with Explanation 10 to section 43(1). During current AY 2012-13 under consideration, Ld. AO followed his predecessor's approach of AY 2007-08 and accordingly disallowed entire depreciation of Rs. 3,89,37,375/- claimed by assessee in current year vide Para No. 5 of assessment-order. During first-appeal, Ld. CIT(A) agreed with the observation of AO but, however, he made some modification. He observed that that the AO was wrong in disallowing full depreciation. He took a view that the disallowance has to be restricted in relation to the assets acquired prior to OTS but there cannot be disallowance of depreciation qua the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the actual cost of the asset to the assessee." 14. Ld. AR submitted that the revenue's stand is such that the waiver of loan obtained by assessee under OTS falls within "reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority" as occurring in the main body of section 43(1) or within "Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee" as occurring in Explanation 10 to section 43(1). But this stand is totally mis-conceived. He submitted that the main body of section 43(1) is applicable where any portion of cost of asset is directly or indirectly met by any person or authority. In the same vein, Explanation 10 is applicable only where any portion of cost of asset is directly or indirectly met by Govt. or any auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee of any part of the machinery purchased in 1967, was met by the Atlanta Corporation. The Appellate Tribunal held that the remission of the liability by Atlanta Corporation long after the liability was incurred cannot be relied on to hold that Atlanta Corporation met directly or indirectly, part of the cost of the machinery of the assessee purchased as early as 1968, as per section 43(1) of the Act, if the cost of the asset is met directly or indirectly. At the time of purchase of the machinery, by any other person or authority, to that extent, the actual cost of the asset to the assessee will stand reduced. But it is far cry to state that though at the time of purchase of the machinery, no person met the cost either directly or indirectly, if, long thereafter a debt incurred in that connection is written off, it could be equated to a position that the financier met part of the cost of the asset to the assessee. We are unable to accept the plea that the remission of the liability by Atlanta Corporation can, in any way, be said to be one, where the corporation met directly or indirectly the cost of the asset to the assessee. In this view of the matter, we are of the view that rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er provides that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement so received, shall not be included in the actual cost of the asset to the assessee. The amendment made through Explanation 10 will take effect from 1st April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years." 22. Even the aforesaid provisions of Expln. 10 will apply only when there is a subsidy or grant or reimbursement. In the present case there was no such subsidy or grant or reimbursement. There was only a waiver of the amounts due for purchase of machinery which cannot fall within the scope of any of the aforesaid expressions used in Expln.10. Even otherwise Sec43(1) is applicable only in the year of purchase of machinery and in the present case the purchase of the machinery in question was not in AY 01-02 . Therefore the actual cost which has already been recognised in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year in which depreciation is to be allowed are (a) addition actual cost of asset acquired during the year and (b) reduction of monies receivable on sale, discarding, demolition or destruction of the assets and its scrap value." 24. As far as the validity of initiation of reassessment proceedings are concerned, we find that there were no assessments u/s. 143(3) of the Act and only an intimation had been issued. In the circumstances, we have to view that the ld. CIT(Appeals) was right in coming to the conclusion that the reopening of assessment u/s. 148 was valid. We therefore uphold the order of the ld. CIT(A) on the issue of validity of initiation of reassessment proceedings u/s. 148 of the Act. 25. On the merits of the addition made by the AO in all the assessment years, we are of the view that the disallowance of depreciation cannot be sustained. The CIT(A), in our view, ought to have deleted the disallowance of depreciation in full. We hold accordingly and allow the relevant grounds of appeal of the assessee." (c) Aditya Oil & Chemicals Ltd, ITA No.4878/Mum/2010, dated 08.02.12 (Mumbai ITAT): "Now the revenue grounds are left for adjudication. Ground No. 2 raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is held that explanation (10) to s. 43(1) does not apply to the facts of the case and therefore, WDV of assets is not to be reduced by the amount of loan waived by the banks. This ground is decided in favour of the assessee." Aggrieved, the revenue is in appeal before us. 22. The learned DR strongly relied upon the order of the AO and submitted that the AO has rightly reduced the principal amount of loan written off of Rs. 4,91,16,833/- from the WDV of building, plant and machinery by invoking explanation (10) to section 43(1) of the Act, but, the CIT(A) was wrong in directing the AO not to reduce the WDV of the assets by the principal amount of loan waived. The learned DR further submitted that the decision relied upon by the CIT(A) in the case of Cochin Company Ltd. (supra) prayer to insertion of explanation 10 to section 43(1) of the Act. Therefore, he contended that the order of CIT(A) may be set aside and that of the AO restored. 23. The learned counsel for the asesssee, on the other hand, relied upon the order of the CIT(A). 24. We have heard the parties and perused the record as well as gone through the orders of the authorities below. It is observed that the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t could be equated to a position that the financier met part of the cost of the asset to the assessee. We are unable to accept the plea that the remission of liability by Atlanta Corporation can, in any way, be said to be one, where the Corporation met directly or indirectly the cost of the asset to the assessee. In this view of the matter, we are of the view that the remission by Atlanta Corporation could not be reduced from the cost of the machinery of the assessee for the purpose of income-tax". 25. The principle laid down by the Hon'ble Kerala High Court in the said case is squarely applicable to the facts of the case under consideration. 26. In so far as Explanation 10 to section 43(1) is concerned, the same is extracted below: "Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the questions raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee. But even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, cost of the asset will not change. What has to be borne in mind is that cost of an asset and cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with no repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of loan cannot affect the cost of asset. The actual cost must depend on the amount paid by the assessee to acquire the cost. The amount may have been borrowed by the assessee but even if the assessee did not repay the loan, it will not alter the cost of asset. This observation-cuminterpretation given by Hon'ble Supreme Court has also been used by ITAT, Bangalore in Akzo Nobel Coatings (supra), Para No. 23 of order reproduced earlier, while deciding the case of waiver of loan. In any case, the decision in CIT Vs. Cochin Co. (P) Ltd. (1990) 184 ITR 230 (Kerala HC); Akzo Nobel Coatings India Private Ltd. Vs. DCIT (Bangalore ITAT) (2012) 139 ITD 612; Aditya Oil & Chemicals Ltd, ITA No.4878/Mum/2010, dated 08.02.12 (Mumbai ITAT) relied upon by Ld. AR and dealt with by us in foregoing paragraph, are directly dealing the present issue of waiver of bank loan in favour of assessee and the Ld. DR for the revenue could not make out a case to distinguish those decisions on facts or in law nor he has brought any contrary ruling to demonstrate any judicial view in favour of revenue. Therefore, respectfully following these decisions, we too hold that the AO is not justified to reduce WDV of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, Ld. AR too prayed us to remand the issue to AO in the same terms i.e. to examine allowability u/s 37(1). Ld. DR strongly opposed the prayer of Ld. AR. 24. We have considered rival submissions of both sides. First of all, both sides agree that after decision of Hon'ble Supreme Court in Checkmate Services (supra), the issue is very much clear that the deduction is not allowable to assessee in terms of section 36(1)(va)/43B. Now, coming to the issue of allowability u/s 37(1), we firstly refer the verdict of section 37(1) which reads as under: "37. General (1) any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". [Emphasis supplied] Thus, the language of section 37(1) is very clear and leaves no room for any doubt or otherwise interpretation. The words "not being expenditure of the nature described in section 30 to 36" mentioned therein are clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the same goes out of scope of section 37(1). Being so, we not inclined to remand this issue back to AO for any re-adjudication as prayed for by Ld. AR. As held by Hon'ble Supreme Court in Checkmate Service (supra), we approve the disallowance made by AO. Revenue's ground is allowed. Ground No. 2: 26. This ground relates to the disallowance of Rs. 4,50,271/- made by AO on account of prior period expenses claimed by assessee. 27. The AO has made this disallowance, in Para No. 4 of assessment-order, by observing that the assessee has claimed 'prior period expenses' which did not relate to the year under consideration. When the AO confronted the assessee to show justification of deduction, the assessee submitted that the expenses have crystallised during the year but the AO was not satisfied with the plea of assessee. During first-appeal, Ld. CIT(A) allowed deduction by observing as under: "6.1 It is clear from the above facts of the case that the said expenses do not pertain to the year under consideration; therefore, the addition on the same cannot be sustained. Hence, the addition so made by the AO is hereby deleted and accordingly, this ground of appeal is allowed." 28. Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of depreciation on plant and machinery. In fact, this ground is counter-part of ground No. 2 raised in Assessee's appeal for AY 2012-13 adjudicated by us in earlier part of this order. As noted by us there, the AO made full disallowance of depreciation of Rs. 3,89,37,375/- but the CIT(A) restricted/upheld disallowance partly to the extent of Rs. 1,82,66,673/- only qua the assets acquired pre-OTS and deleted extra disallowance qua the assets acquired post-OTS. Now, the revenue's grievance is such that the CIT(A) ought to have upheld full disallowance of Rs. 3,89,37,375/- since there was no details available with him for working of pre-OTS and post-OTS components. 32. We have already discussed this issue at length while adjudicating Ground No. 2 of Assessee's appeal for AY 2012-13 in earlier discussion and held that the lower-authorities were not justified to make disallowance of any part of depreciation, not even that part of depreciation which was referrable to the assets acquired pre-OTS. Therefore, the Revenue's ground does not have any merit and the same is dismissed. Assessee's ITA for AY 2013-14: Ground No. 1: 33. This ground relates to the disallowance of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that merely balance outstanding for more than 3 years cannot be the reason for taxing the amount to the income of the appellant by invoking the provision of section 41(1) of the I.T. Act. 7.3 Let us understand what does section 41(1) says. The language of provision of section 41(1) of the I.T. Act read as under :- "5(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first- mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not; or" 7.4 The limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for enforcement of debt. However, we find that this amount was subsequently settled by the assessee in the succeeding years therefore, the assessee has not derived or obtained any benefit in respect of such trading liability. Therefore, the addition made on the basis of presumption cannot be sustained in the eyes of law. The Ld. AR has relied in the case of CIT v/s Southern Roadways Ltd. 282 ITR 379 wherein the decision of the Apex Court in the case of CIT v/s Sugauli Sugar Works (P) Ltd., (1999) 152 CTR (SC) 46: (1999) 236 ITR 518(SC) was considered and it was held that the principle that expiry of period of limitation prescribed under the Limitation Act, could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied it is clear that some entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the Section. The other decision as relied by the Ld. AR has mentioned above are also support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound is similar to Ground No. 3 of Revenue's appeal for AY 2012-13 already adjudicated by us in foregoing paragraph. Hence, our same view shall apply mutadis mutandis. Respectfully applying the same, Revenue's ground is dismissed. Ground No. 2: 42. This ground relates to the disallowance delayed payment of employees' contribution to Provident Fund (PF) made by AO but deleted by CIT(A). The ground is similar to Ground No. 1 of Revenue's appeal for AY 2012-13 already adjudicated by us in foregoing paragraph. Hence, our same view shall apply mutadis mutandis. Respectfully applying the same, Revenue's ground is allowed. Assessee's ITA for AY 2015-16: Ground No. 1: 43. This ground relates to the disallowance of depreciation on plant and machinery. The ground is similar to Ground No. 2 of Assessee's appeal for AY 2012-13 already adjudicated by us in foregoing paragraph. Hence, our same view shall apply mutadis mutandis. Respectfully applying the same, Assessee's ground is allowed. Revenue's ITA for AY 2015-16: Ground No. 1: 44. This ground relates to the disallowance of depreciation on plant and machinery. The ground is similar to Ground No. 3 of Revenue's appeal for AY 2012-13 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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