1999 (12) TMI 112 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of unabsorbed depreciation of the erstwhile Spartek Granites Ltd.
2. Disallowance of interest payable on loans for acquiring capital assets.
3. Disallowance of depreciation on additional liability due to foreign exchange fluctuation.
4. Relief under section 80HH and section 80-I.

Issue-wise Detailed Analysis:

1. Disallowance of Unabsorbed Depreciation:
The first ground pertains to the disallowance of Rs. 26,37,500 as unabsorbed depreciation from Spartek Granites Ltd., which was amalgamated with the appellant-company. This depreciation was carried forward to the assessment year 1992-93 but was disallowed by the Assessing Officer and confirmed by the CIT(A). The appellant-company decided not to press this ground further. The disallowance was based on Explanation 2(b) under section 43(6) read with section 72A of the Income-tax Act, 1961, which stipulates that the actual cost of the block of assets in the amalgamated company should be the written down value of the block of assets in the amalgamating company, reduced by the depreciation allowed in the preceding year. Since the Central Government did not approve the Scheme of Amalgamation, the carry forward of unabsorbed depreciation was not permissible. Consequently, this ground was dismissed, and the disallowance of Rs. 26,37,500 was confirmed.

2. Disallowance of Interest Payable on Loans:
The second ground concerns the disallowance of Rs. 25,62,371 as interest payable on loans borrowed for acquiring fixed assets of Spartek Granites Ltd. The Assessing Officer treated this interest as capital expenditure, relying on the Supreme Court decision in Challapalli Sugars Ltd. v. CIT, which mandates capitalizing interest paid before the commencement of production. The CIT(A) upheld this view, stating that the two divisions (Ceramics and Granites) were separate and independent units. However, the appellant argued that the interest should be treated as revenue expenditure since commercial production had commenced before the amalgamation, and there was complete unity and inter-dependence between the two divisions. The Tribunal found that the amalgamation created a single legal entity with common management, funds, and business activities, satisfying the tests laid down by the Supreme Court in Standard Refinery & Distillery Ltd. and India Cements Ltd. Consequently, the interest of Rs. 25,62,371 was deemed revenue expenditure and eligible for deduction. The Assessing Officer was directed to allow this deduction while withdrawing the differential depreciation allowed as capital expenditure.

3. Disallowance of Depreciation on Additional Liability Due to Foreign Exchange Fluctuation:
The third ground involves the disallowance of depreciation on additional liability due to foreign exchange rate fluctuations. The appellant claimed depreciation on the enhanced cost of plant and machinery acquired through a Foreign Exchange Deferred Payment Loan, which was disallowed by the Assessing Officer. The Tribunal held that under section 43A, the additional liability due to exchange rate fluctuation should be added to the cost of the asset, and depreciation should be allowed on this enhanced cost. The Tribunal directed the Assessing Officer to compute the additional liability for the previous year 1991-92 and allow depreciation accordingly. The Tribunal also addressed the rate of exchange to be used, concluding that the market rate certified by an authorized dealer should be considered, as per the Budget Speech and RBI Circulars, recognizing the market rate as determined by the Central Government.

4. Relief Under Section 80HH and Section 80-I:
The fourth ground pertains to the relief under sections 80HH and 80-I. The Assessing Officer had granted relief under section 80HH first and then deducted the relief under section 80-I from the remainder. The Tribunal directed that both deductions should be allowed independently, following an earlier Tribunal order and a CBDT Circular. Additionally, the appellant contended that interest received from M/s. Neycer India Ltd., an industrial undertaking in a backward area, should be considered for relief under section 80HH. The Tribunal rejected this contention, agreeing with the CIT(A) that the profit earned by M/s. Neycer could not be construed as the profit derived by the appellant. However, the Tribunal accepted the alternative contention that the corresponding interest expenditure should be excluded from the computation of relief under section 80HH.

Conclusion:
The appeal was partly allowed, with the Assessing Officer directed to modify the assessment as per the Tribunal's findings on the various grounds. The disallowance of unabsorbed depreciation was confirmed, the interest payable on loans was allowed as revenue expenditure, depreciation on additional liability due to foreign exchange fluctuation was allowed, and relief under sections 80HH and 80-I was directed to be computed independently.