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2016 (10) TMI 1358 - AT - Income TaxDisallowance of bad debts to the extent of 4/5th u/s 35D - HELD THAT - From the facts of the case it is apparent that the loss arising due to the non recoverability of the advances made to M/s. Cicon Environment Technologies Ltd. pertains to the expansion program of the current business of the assessee. Section 35D(1) of the Act clearly stipulates that where the assessee after commencement of its business in connection with the extension of its undertaking or in connection with its setting up of a new unit incur any expenditure after 31st day of March 1998 towards preparation of feasibility report preparation of project report and for conducting market survey then the assessee will be entitled to deduction for an amount equal to 1/5th of such expenditure for each of the five successive previous years. But in the case of the assessee the loss is due to non recoverability of advances made and not for any expenditure incurred by the assessee. Therefore we are of the considered view that the assessee deserves deduction for the entire loss instead of amortization under section 35D of the Act. Hence we hereby direct the learned Assessing Officer to treat the amount as business loss and grant deduction provided the debt is written off in the books of accounts of the assessee. Thus this issue is allowed in favour of the assessee as indicated hereinabove. Disallowance of compensation payment made for delayed commissioning of windmills - HELD THAT - We find merit in the contention of the learned Authorized Representative. The amount of Rs.65.00 lakhs paid by the assessee to its client was due to the delay in commissioning of the project and in order to compensate for the loss of profit. Further the assessee had also received an amount of Rs.3.00 crores as interest free advances for the execution of the project which is also required to be compensated. Considering all these facts and as a result of mutual agreement between the assessee and its client the assessee had paid Rs.65.00 lakhs as compensation. Such compensation no doubt falls in the revenue field and therefore it has to be allowable as deduction as per section 37 of the Act. Hence we hereby direct the learned Assessing Officer to delete the addition made on account of the disallowance of Rs.65.00 lakhs in the hands of the assessee. Thus this issue is allowed in favour of the assessee. Claim of bad debt in respect of advances made to M/s. Soprano Holdings Pvt. Ltd. - HELD THAT - Assessee s claim of bad debt written off on account of advance made to M/s. Soprano Holdings P. Ltd. is allowable u/s.28 of the Act. The Assessing Officer is directed to allow the same. Bad debts allowed to the extent of 1/5th of the total claim - HELD THAT - Since in the assessee s appeal herein above we have allowed the entire deduction of Rs.65.00 lakhs claimed by the assessee provided it is written off in the books of accounts of the assessee for the relevant assessment year this ground raised by the Revenue is also disposed off accordingly. Disallowance of bad debts written off being land advance given to M/s.Wipro Finance Ltd. - HELD THAT - We are of the considered view that the assessee has incurred loss during the course of its regular business and therefore it is entitled to claim the same as business loss. Therefore we hereby direct the learned Assessing Officer to delete the addition in the hands of the assessee. Addition being rupee fluctuation loss on foreign currency convertible bonds - CIT-A ) held that the assessee would be only entitled for deduction on account of rupee fluctuation losses on the FCCBs in the year of actual redemption/ conversion - HELD THAT - Accounting Standard 11 clearly stipulates that the monetary items such debtors creditors and loans should be converted at the closing rate and reported as such in the balance sheet by charging the same to the profit loss account. Accounting Standards are nothing but tools to determine the actual profit or loss incurred by the assessee during the relevant year - in the case of CIT Vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT has clearly held that an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any differences loss or gain arising on conversion of such liability at closing rate should be recognized in the profit loss account for the reporting period. Therefore we are of the considered view that the assessee would be entitled for deduction towards the loss incurred provided the provisions of section 43A of the Act relating to change in rate of exchange of currency is not applicable in the case of the assessee. Hence we hereby direct the learned Assessing Officer to examine the applicability of section 43A of the Act in the case of the assessee and if the same is not applicable allow the claim of deduction or such proportionate amount on which section 43A of the Act is not applicable. It is ordered accordingly. Additional depreciation - As per AO higher claim of depreciation more than what is prescribed by the Companies Act is not allowable while computing the book profit under section 115JB - HELD THAT -The circular No.2/89 issued by the Finance Ministry clearly states that any company is entitled to provide higher depreciation in the books based on risk like technological risks perceived by the management genuine realizable value according to market practice etc.In the case of the assessee the genuineness of the additional claim of depreciation by the assessee is not disputed. There is no bar under the Companies Act to charge higher depreciation other than what is recommended under the Companies Act. The Assessing Officer is barred from making any adjustments on the book profit for the purpose of computing tax under section 115JB of the Act other than what is specified in the Act. Commissioner of Income Tax (Appeals) after considering all these facts has rightly held the issue in favour of the assessee. Therefore we do not find it necessary to interfere with the order of the learned Commissioner of Income Tax (Appeals).
Issues Involved:
1. Disallowance of bad debts under section 35D of the Act. 2. Disallowance of compensation payment for delayed commissioning of windmills. 3. Claim of bad debt in respect of advances made to M/s. Soprano Holdings Pvt. Ltd. 4. Disallowance of bad debts written off for land advance given to M/s. Wipro Finance Ltd. 5. Addition of rupee fluctuation loss on foreign currency convertible bonds. 6. Additional depreciation claimed by the assessee. Detailed Analysis: Issue 1: Disallowance of Bad Debts under Section 35D of the Act - Facts: The assessee claimed bad debts of Rs.1,02,00,000/- for advances made to M/s. Cicon Environmental Technologies Ltd. for a project that was abandoned. - Assessing Officer's View: Disallowed the claim, treating the expenditure as preliminary expenses under section 35D, which can only be amortized upon successful commissioning of the project. - Commissioner of Income Tax (Appeals) Decision: Allowed 1/5th of the expenses (Rs.20,40,000/-) to be written off per year starting from the year the project was abandoned. - Tribunal's Decision: Directed the Assessing Officer to treat the entire amount of Rs.1,02,00,000/- as business loss and grant deduction, provided the debt is written off in the books of accounts. Issue 2: Disallowance of Compensation Payment for Delayed Commissioning of Windmills - Facts: The assessee paid Rs.65,00,000/- to M/s. Indonet Global Ltd. as compensation for delayed commissioning of windmills. - Assessing Officer's View: Disallowed the entire claim due to lack of substantiation. - Commissioner of Income Tax (Appeals) Decision: Allowed Rs.22,04,432/- as interest payment but disallowed the balance. - Tribunal's Decision: Directed the Assessing Officer to delete the addition and allow the entire Rs.65,00,000/- as a deductible expense under section 37 of the Act. Issue 3: Claim of Bad Debt in Respect of Advances Made to M/s. Soprano Holdings Pvt. Ltd. - Facts: The assessee claimed bad debts of Rs.2,00,00,000/- for advances made to M/s. Soprano Holdings Pvt. Ltd. - Assessing Officer's View: Disallowed the claim as the debt was not related to any revenue transaction or incidental to the business. - Commissioner of Income Tax (Appeals) Decision: Allowed the claim following the Tribunal's decision for the assessment year 2004-05. - Tribunal's Decision: Upheld the Commissioner of Income Tax (Appeals) decision, allowing the bad debt claim. Issue 4: Disallowance of Bad Debts Written Off for Land Advance Given to M/s. Wipro Finance Ltd. - Facts: The assessee claimed a loss of Rs.1,47,00,000/- for an advance given for land purchase that was not materialized. - Assessing Officer's View: Disallowed the claim as the loss had not crystallized during the relevant assessment year. - Commissioner of Income Tax (Appeals) Decision: Confirmed the disallowance, stating the advance was not a regular business asset. - Tribunal's Decision: Directed the Assessing Officer to allow the claim as business loss. Issue 5: Addition of Rupee Fluctuation Loss on Foreign Currency Convertible Bonds - Facts: The assessee claimed a deduction of Rs.4,78,44,777/- for rupee fluctuation loss on foreign currency convertible bonds. - Assessing Officer's View: Disallowed the claim as the loss was notional and contingent. - Commissioner of Income Tax (Appeals) Decision: Held that the loss can only be allowed in the year of actual redemption/conversion. - Tribunal's Decision: Directed the Assessing Officer to allow the claim provided section 43A of the Act is not applicable. Issue 6: Additional Depreciation Claimed by the Assessee - Facts: The assessee claimed additional depreciation of Rs.3,02,62,222/- on second-hand windmills. - Assessing Officer's View: Disallowed the excess claim of depreciation while computing book profit under section 115JB of the Act. - Commissioner of Income Tax (Appeals) Decision: Allowed the claim, stating that higher depreciation is permissible under the Companies Act and the Assessing Officer cannot make adjustments other than those specified in the Act. - Tribunal's Decision: Upheld the Commissioner of Income Tax (Appeals) decision, allowing the additional depreciation claim. Conclusion: - The appeals in ITA Nos.936 & 937/Mds/2015 of the assessee were allowed. - ITA No.1823/Mds/2015 of the Revenue was partly allowed for statistical purposes. - ITA No.1824/Mds/2015 of the Revenue was dismissed.
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