2020 (3) TMI 1486 - AT - Income Tax

Additional depreciation - use of asset less than 180 days - CIT (A) deleting the disallowance of 50% additional depreciation - HELD THAT - CIT(A) followed the judgment of Cosmo Films Ltd. 2012 (9) TMI 281 - ITAT DELHI and held that if only half of additional depreciation is allowed in the first/initial year because of user of less than 180 days the balance half of the additional depreciation has to be allowed in the following year as unabsorbed depreciation and amendment made by Finance Act 2016 proviso to Section 32 (1)(ii) of the I.T. Act 1961 is retrospective. D/R could not bring to our notice any contrary decision/judgment in this regard. As assessee relied on decisions of the CIT(A) like Birla Corporation Ltd. 2014 (12) TMI 436 - ITAT KOLKATA and Century Enka Ltd. 2015 (5) TMI 647 - ITAT KOLKATA As the CIT(A) has followed the propositions of law laid down by different benches of the ITAT on this issue which are cited above we find no infirmity in his order and hence this ground of the revenue in both the appeals. Compensation received for under performance of SMS EMU CO machine installed in the financial year 2007-08 - whether the compensation received on account of technical loss is a capital receipt or a revenue receipt? - HELD THAT - As decided in Saurashtra Cement Ltd. 2010 (7) TMI 11 - SUPREME COURT delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant which would obviously lead to delay in coming into existence of the profit-making apparatus rather than a receipt in the course of profit-earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit-earning source not in the ordinary course of their business in our opinion was a capital receipt in the hands of the assessee. Decided in favour of assessee. Delay in deposit of employees contribution towards ESI - CIT(A) on facts held that the ESI payments in question were made in September 2008 and hence made before the prescribed due date of filing of the return u/s 139 of the Act and hence allowable. This factual position could not be disputed by the ld. D/R. Hence we uphold the order of the ld. CIT(A) and dismiss Ground of the revenue in both these appeals. Disallowance u/s 14A - CIT(A) deleted the disallowance made of proportionate interest for the reason that the assessee had interest free own funds in excess of investments on the presumption that interest free funds were utilized for investment - HELD THAT - This presumption is in accordance with the propositions of the law laid down in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT Thus we uphold the order of the ld. CIT(A) and delete this disallowance. Hence Ground of the revenue in both the appeals are dismissed. Depreciation on block assets - D/R submits that this was not claimed by the assessee - On a query from the Bench he submits that the depreciation in question has to be allowed as per law though not claimed by the assessee. Thus we dismiss this ground of the revenue in both the appeals. Speculative loss v/s normal business loss - forex derivatives loss and forex loss - HELD THAT -As relying on M/s. Gujarat NRE Coke Ltd. 2019 (12) TMI 974 - ITAT KOLKATA we allow the claim of the assessee by holding that forex loss and forex loss is in the revenue field and has to be allowed as expenditure u/s 37 of the Act. On issue of forex loss we find that it is on capital account as it was incurred on forward booking of yen in respect of a capital asset. Thus the disallowance to this extent is upheld.

Summary

The core legal questions considered in this judgment pertain to the following issues: (1) Whether additional depreciation under the Income Tax Act is allowable in the assessment year when plant and machinery was put to use for less than 180 days in the previous year and 50% additional depreciation was already claimed; (2) Whether compensation received for underperformance of machinery constitutes capital receipt or revenue receipt; (3) Whether delay in deposit of employees' contribution towards provident fund and ESI attracts disallowance under relevant provisions; (4) Whether disallowance under section 14A read with Rule 8D(ii) is justified; (5) Whether depreciation can be enhanced on block assets not claimed in the return; and (6) The nature of foreign exchange losses-whether they are speculative or business losses, and their deductibility under section 37(1) of the Act.

Issue 1: Allowability of Additional Depreciation

The legal framework involves section 32(1)(ii) of the Income Tax Act, which provides for additional depreciation on new machinery put to use for less than 180 days in the previous year. The Tribunal relied on the decision of the Delhi Bench of the ITAT in DCIT vs. Cosmo Films Ltd., which held that if only half of the additional depreciation is allowed in the initial year due to less than 180 days usage, the balance half is allowable in the subsequent year as unabsorbed depreciation. This principle was further supported by decisions in Birla Corporation Ltd. vs. DCIT and Century Enka Ltd. vs. DCIT.

The Court observed that the amendment by Finance Act, 2016, introducing a proviso to section 32(1)(ii), is retrospective and supports this approach. The revenue's contention that the machinery was no longer new and hence not eligible for additional depreciation was not supported by any contrary judicial pronouncement. Therefore, the Court upheld the CIT(A)'s order allowing the balance additional depreciation, dismissing the revenue's ground.

Issue 2: Nature of Compensation for Underperformance of Machinery

The question was whether compensation received for underperformance of a machine installed in 2007-08 is a capital receipt or taxable revenue receipt. The Assessing Officer treated the compensation as income, relying on CIT v. Manna Ramji & Co., where compensation for rent was held taxable. However, the assessee contended, supported by judgments such as CIT vs. Saurashtra Cement (SC), Xpro India Ltd. (ITAT Kolkata), and Deputy Commissioner of Income-tax vs. Tongani Tea Co. Ltd., that the compensation represented a capital receipt.

The CIT(A) analyzed the facts and held that the compensation for technical loss (Rs. 5,16,27,109) was for permanent impairment of the asset's performance, which affects the asset's value and life, thus constituting a capital receipt. The compensation for financial loss (Rs. 3,09,76,266) was accepted as revenue receipt. The Court endorsed this reasoning, noting that the compensation was not a discount, subsidy, or reimbursement but a settlement for failure to meet performance parameters, supported by the settlement deed excerpt.

The Supreme Court's decision in Saurashtra Cement was pivotal, where it was held that compensation linked to the procurement of a capital asset, representing sterilization of the profit-earning apparatus, is a capital receipt. The Court emphasized that the question of capital or revenue receipt depends on facts and legal conclusions drawn therefrom, not a single decisive test. Applying these principles, the Court upheld the CIT(A)'s order treating the technical loss compensation as capital receipt, dismissing the revenue's appeal on this point.

Issue 3: Disallowance for Delay in Deposit of Employees' Contribution

The revenue challenged the deletion of disallowance for delay in deposit of employees' contribution towards provident fund and ESI, arguing that provisions of section 36(1)(va) read with section 2(24)(x) govern such contributions and require strict compliance. The CIT(A) found that payments were made before the due date for filing the return under section 139, a fact undisputed by the revenue. Consequently, the Court upheld the CIT(A)'s deletion of disallowance, dismissing this ground.

Issue 4: Disallowance under Section 14A read with Rule 8D(ii)

The CIT(A) deleted the disallowance of proportionate interest (Rs. 80,800) made under section 14A read with Rule 8D(ii), reasoning that the assessee had interest-free own funds in excess of investments, and thus the presumption that interest-free funds were used for investments was justified. This approach aligns with the Bombay High Court's ruling in Commissioner of Income Tax vs. HDFC Bank Ltd. The Court found no infirmity in this reasoning and dismissed the revenue's appeal on this ground.

Issue 5: Enhancement of Depreciation on Block Assets Not Claimed in Return

The revenue contended that depreciation was enhanced on block assets without being claimed in the return. The Departmental Representative conceded that depreciation must be allowed as per law, even if not claimed. The Court accordingly dismissed this ground, holding that the law mandates allowance of depreciation irrespective of claim.

Issue 6: Nature and Deductibility of Foreign Exchange Losses

The assessee filed a cross-objection challenging the CIT(A)'s treatment of certain forex losses as speculative rather than normal business losses. The Court examined losses of Rs. 90,78,000 (forex derivatives loss), Rs. 6,25,200 (loss on forward booking of yen), and Rs. 2,03,816 (loss on revaluation of packing credit loan).

Relying on the decision of the Kolkata 'C' Bench in DCIT vs. Gujarat NRE Coke Ltd. and the Supreme Court decision in CIT vs. Woodward Governor India Pvt. Ltd., the Court held that foreign exchange losses arising in the normal course of business, including losses on cancellation and revaluation of forward contracts, are allowable as business expenditure under section 37(1). The Court noted that the AO had erroneously disallowed such losses on the ground of lack of business expediency, but the evidence showed that the assessee regularly engaged in import and export and hedged foreign exchange risk through such contracts.

Accordingly, the Court allowed the claim for forex losses of Rs. 90,78,000 and Rs. 2,03,816 as revenue losses deductible under section 37(1). However, the forex loss of Rs. 6,25,200 incurred on forward booking of yen in respect of a capital asset was held to be capital in nature, and the disallowance was upheld to that extent.

Conclusions and Significant Holdings

On the issue of additional depreciation, the Court upheld the principle that the balance half of additional depreciation is allowable in the subsequent year if only half was claimed initially due to less than 180 days usage, relying on ITAT precedents and retrospective amendment.

Regarding compensation for underperformance of machinery, the Court affirmed the classification of compensation for technical loss as capital receipt, applying the Supreme Court's broad principles distinguishing capital and revenue receipts, emphasizing the permanent impairment of the asset.

The Court confirmed that delay in deposit of employees' contributions is excused if payments are made before the return filing deadline, and disallowance under section 14A is not justified where interest-free funds exceed investments, following High Court precedent.

Depreciation must be allowed as per law even if not claimed, and the Court rejected the revenue's attempt to deny it.

On foreign exchange losses, the Court distinguished between business losses and capital losses, allowing losses arising from normal business operations and hedging activities under section 37(1), while upholding disallowance of capital-related forex loss.

The final determinations are that all grounds raised by the revenue are dismissed, except the disallowance of capital-related forex loss which is upheld, and the assessee's cross-objection is allowed in part to the extent of recognizing certain forex losses as business losses deductible under section 37(1).