1998 (8) TMI 124 - AT - Income Tax

Depreciation Rate Of Depreciation Compulsory Acquisition Written Down Value Transfer By Way Of Exchange Contract Of Sale

Issues Involved:
1. Depreciation Allowable
2. Adjustment in respect of foreign exchange fluctuations in respect of capital assets
3. Foreign exchange fluctuations in respect of revenue expenses
4. Expenditure on Round Bidding
5. Gifts received under United Nations Development Programme
6. Contributions to Panvel Municipality, Maharashtra State Electricity Board, and Gujarat Electricity Board

Detailed Analysis:

1. Depreciation Allowable:
The primary issue revolved around the disallowance of depreciation claimed by the appellant under section 32 of the Income-tax Act, 1961. The appellant argued that the depreciation should be allowed as the assets were used for more than 180 days. The Assessing Officer (AO) disallowed the claim, interpreting the statutory transfer of assets to the new corporation as a "sale" under section 43(6)(c). The CIT(A) upheld this view, stating that the word "sold" included transfers by operation of law. However, the Tribunal disagreed, noting that the statutory transfer did not constitute a "sale" or "exchange" as per the definitions in the Act. The Tribunal concluded that the appellant was entitled to full depreciation as claimed, directing the AO to allow it.

2. Adjustment in respect of foreign exchange fluctuations in respect of capital assets:
The appellant claimed an adjustment of Rs. 36,23,14,733 on accrual basis under section 43A of the Income-tax Act. The AO allowed the claim only on a payment basis, not on accrual. The CIT(A) upheld this decision. The Tribunal, however, referred to the Supreme Court's decision in Arvind Mills Ltd., which mandated that the increased liability due to exchange rate fluctuations should be adjusted against the actual cost of the asset on accrual basis. The Tribunal directed the AO to allow the adjustment as claimed by the appellant.

3. Foreign exchange fluctuations in respect of revenue expenses:
The appellant claimed Rs. 115,56,31,950 as a deduction for foreign exchange fluctuations on revenue expenses on an accrual basis. The AO allowed a higher amount of Rs. 1,39,48,03,857 on a payment basis. The CIT(A) upheld the AO's decision, stating that the liability must accrue within the accounting year. The Tribunal agreed with the CIT(A), noting that the appellant failed to provide necessary documents to support the claim on an accrual basis. Thus, the Tribunal upheld the disallowance of Rs. 1,15,56,31,950.

4. Expenditure on Round Bidding:
The appellant incurred Rs. 65,62,983 on round bidding expenses, which the AO disallowed 10% of, based on past disallowances. The CIT(A) upheld this disallowance. The Tribunal found that the expenses were properly accounted for and audited, and there was no justification for the ad hoc disallowance. The Tribunal directed the AO to delete the disallowance of Rs. 6,56,298.

5. Gifts received under United Nations Development Programme:
The AO treated Rs. 2,29,40,751 received as gifts of equipment as taxable income, as there was no evidence of it being a gift. The CIT(A) upheld this view. The appellant submitted additional evidence, which the Tribunal admitted. The Tribunal set aside the orders of the CIT(A) and AO, directing the AO to re-examine the evidence and decide afresh whether the amount was taxable.

6. Contributions to Panvel Municipality, Maharashtra State Electricity Board, and Gujarat Electricity Board:
The AO disallowed Rs. 1,62,29,398 as capital expenditure not represented by assets owned by the appellant. The CIT(A) upheld this disallowance. The appellant submitted additional evidence, which the Tribunal admitted. The Tribunal set aside the orders of the CIT(A) and AO, directing the AO to re-examine the evidence and decide afresh, considering the principles laid down by the Supreme Court in relevant judgments.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO to allow the depreciation claim, adjust the actual cost of assets for foreign exchange fluctuations on an accrual basis, delete the ad hoc disallowance of round bidding expenses, and re-examine the issues of gifts received and contributions made to various authorities. The disallowance of foreign exchange fluctuations on revenue expenses on an accrual basis was upheld.

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