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2013 (2) TMI 67 - AT - Income TaxPrior period expense - Whether payment of royalty and cess under the Mining & Minerals Development & Regulation Act is a statutory liability and covered under provisions of Sec. 43B - Additional demand of Royalty paid during the year to the Government claim in the P & L a/c as Adjustments relating to earlier years as Prior Period expenses Held that - Assessee has been claiming deduction u/s 43B on account of royalty and cess continuously since for the last so many years and moreover section 43B though specifically does not cover the term royalty or cess but by implication covers all statutory payments. The Mines & Minerals Development Regulation Act, 1957 is a statutory Act and all payments paid to Govt. under the provision of this Act are necessarily statutory payments. Therefore, the payment made by the assessee was covered by the provisions of section 43B - In favour of the assessee Higher rate of Depreciation u/s 32 - Whether UPS and Fibre Optic Computer Networking is a part of computer system for claiming depreciation @ 60% - Held that - Following the decision in case of BSES YAMUNA POWERS Ltd (2010 (8) TMI 58 - DELHI HIGH COURT) that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. The computer accessories and peripherals cannot be used without the computer. Therefore, 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 In favour of assessee In respect of Fibre Optic Computer Networking - Held that - A civil foundation for plant partakes the nature of plant for depreciation, similarly an AC or T.V. installed in a bus partakes the nature of commercial vehicle and an electric cable when used in a building partakes the nature of building while it becomes part & plant which used in a machine. Following the same principle, we hold that computer fibre networking when used in conjunction with computers will be eligible for depreciation as is available to computers In favour of assessee Disallowance u/s 14A Rule 8D applicable prospectively or retrospectively - Expenditure in relation to exempt income Held that - As decided in case of Maxopp Investment Ltd. (2011 (11) TMI 267 - DELHI HIGH COURT) that Rule 8D was applicable from assessment year 2008-09. Section 14A and Rule 8D would operate prospectively but that does not mean that the A.O. is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If the A.O. is satisfied that the assessee has correctly reflected the amount of such expenditure he has to do nothing for this. On the other hand, if he is satisfied 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 Remand back to A.O. Depreciation u/s 32 Block of asset Whether depreciation has been allowed u/s 32 of assets of which WDV had reached 5% & these were though not in active use and no depreciation has been charged under Companies Act Held that - 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. The benefit of depreciation is available to block of asset. the depreciation as per Companies Act was not charged as their WDV had reached 5% and these were though not in active use but these were used less as compared to other assets and therefore were eligible for depreciation In favour of assessee Disallowance of liability for long service award - Assessee had claimed on the basis of accrual valuation as per accounting standard AS-15 Held that - As per service agreement with the employee the determination of liability for long service award was calculated as per accounting standard AS-15 norms and were rightly provided for in the books of the company as the liability had arisen as on the date of balance sheet and the assessee had rightly debited the corresponding amount to the P&L Account In favour of assessee Disallowance of liability for LTC encashment - unascertained and contingent liability Held 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 provision of LTC encashment provided by the assessee in its books of accounts on the basis of AS-15, was a deductible amount from the profits of the company In favour of assessee
Issues Involved:
1. Disallowance of prorata depreciation on account of downward revaluation of assets. 2. Disallowance of additional demand of royalty paid to the government as prior period expenses. 3. Depreciation on 'Fiber Optic Computer Networking' and its classification. 4. Depreciation on 'UPS' of computers and its classification. 5. Disallowance under Section 14A read with Rule 8D. 6. Depreciation on intangible asset of mining rights. 7. Depreciation on water supply and sewerage plant. 8. Addition on account of interest on foreign exchange fluctuation. 9. Depreciation on assets not in active use. 10. Provision for long service awards. 11. Provision for LTC encashment. Detailed Analysis: 1. Disallowance of Prorata Depreciation on Downward Revaluation of Assets: The CIT(A) confirmed the disallowance of prorata depreciation of Rs. 5926.05 lakhs on account of downward revaluation of assets. The Assessing Officer (AO) disallowed the depreciation on the reduced amount of assets, relying on sections 43(1), 43(6), and 32(1) of the Income Tax Act. The assessee's argument that the revaluation should not affect depreciation was rejected, and the CIT(A) upheld this view, following the ITAT's earlier decision. 2. Disallowance of Additional Demand of Royalty: The CIT(A) confirmed the disallowance of Rs. 31 lakhs paid as additional royalty to the government, treating it as prior period expenses. The AO held that the liability did not arise during the year under consideration. The assessee argued that the payment was a statutory liability under section 43B, but the CIT(A) upheld the AO's decision due to lack of evidence of the liability arising in the current year. 3. Depreciation on 'Fiber Optic Computer Networking': The AO treated 'Fiber Optic Computer Networking' as an ordinary asset and allowed depreciation at 15% instead of 60%, leading to a disallowance of Rs. 14.97 lakhs. The CIT(A) upheld this decision, rejecting the assessee's argument that the networking system was an integral part of the computer system. 4. Depreciation on 'UPS' of Computers: The AO treated 'UPS' of computers as an ordinary asset and allowed depreciation at 15% instead of 60%, leading to a disallowance of Rs. 6.73 lakhs. The CIT(A) upheld this decision, rejecting the assessee's argument that UPS was an integral part of the computer system. 5. Disallowance under Section 14A read with Rule 8D: The AO disallowed Rs. 201 lakhs under section 14A, applying Rule 8D to calculate the disallowance based on 0.5% of average investment. The CIT(A) upheld this decision, following the prescribed formula and rejecting the assessee's argument that no major expenses were incurred to earn the exempt income. 6. Depreciation on Intangible Asset of Mining Rights: The CIT(A) confirmed the disallowance of depreciation on mining rights, following the ITAT's earlier decision to remit the matter back to the AO to determine whether mining rights are intangible assets and whether the expenditure is revenue or capital in nature. 7. Depreciation on Water Supply and Sewerage Plant: The CIT(A) deleted the addition of Rs. 65.80 lakhs made by the AO on account of depreciation on water supply and sewerage plant, following the ITAT's earlier decisions in favor of the assessee. 8. Addition on Account of Interest on Foreign Exchange Fluctuation: The CIT(A) deleted the addition of Rs. 1445 lakhs made by the AO on account of interest on foreign exchange fluctuation, following the ITAT's earlier decisions in favor of the assessee. 9. Depreciation on Assets Not in Active Use: The CIT(A) deleted the addition of Rs. 35.64 lakhs made by the AO on account of depreciation on assets not in active use, following the ITAT's earlier decisions and the principle that depreciation is available to the block of assets. 10. Provision for Long Service Awards: The CIT(A) deleted the addition of Rs. 2186 lakhs made by the AO on account of provision for long service awards, following the jurisdictional High Court's decision that such provisions are deductible if they are definite and determined liabilities. 11. Provision for LTC Encashment: The CIT(A) deleted the addition of Rs. 9775 lakhs made by the AO on account of provision for LTC encashment, holding that the provision was made in accordance with accounting standards and was a definite and determined liability. Conclusion: The appeal filed by the assessee is partly allowed, and the appeal filed by the revenue is dismissed. The ITAT upheld the CIT(A)'s decisions on various grounds, including depreciation on water supply and sewerage plant, interest on foreign exchange fluctuation, and provisions for long service awards and LTC encashment. The matters related to depreciation on mining rights and disallowance under section 14A were remitted back to the AO for further consideration.
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