2003 (6) TMI 188 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of depreciation due to foreign exchange rate fluctuation.
2. Disallowance of deferred revenue expenditure.
3. Disallowance of interest on borrowed funds for plant and machinery.
4. Addition of profit on cancellation of forward work contract.
5. Short deduction u/s 80-I.

Summary:

1. Disallowance of Depreciation Due to Foreign Exchange Rate Fluctuation:
The Tribunal directed the AO to allow depreciation on the enhanced value of the cost of assets due to fluctuation in foreign exchange rates, concurring with its previous decision in the assessee's own case for asst. yr. 1992-93. This ground of appeal was allowed.

2. Disallowance of Deferred Revenue Expenditure:
The appellant incurred Rs. 45,79,906 on foreign technicians' fees and design charges, treating it as deferred revenue expenditure. The AO disallowed Rs. 9,15,981 claimed in the P&L a/c, and the CIT(A) treated the entire expenditure as capital. The Tribunal set aside this issue, directing the AO to re-examine the agreement with Showa Manufacturing Co. Ltd. to determine whether the expenditure was revenue or capital. This ground was allowed for statistical purposes.

3. Disallowance of Interest on Borrowed Funds for Plant and Machinery:
The AO disallowed Rs. 18,93,880 interest on borrowed funds for plant and machinery, treating it as capital expenditure. The Tribunal, citing various judicial precedents, held that interest on borrowed funds for business purposes, including acquisition of capital assets, is allowable u/s 36(1)(iii). The addition sustained by the CIT(A) was deleted.

4. Addition of Profit on Cancellation of Forward Work Contract:
The appellant realized Rs. 22,76,671 as profit from cancelling a forward contract for foreign currency loan repayment. The AO treated it as business profit, and the CIT(A) alternatively considered it speculation profit. The Tribunal, referencing judicial precedents, held that the profit was a capital receipt not chargeable to tax, as it was related to the acquisition of fixed assets. This ground of appeal was allowed.

5. Short Deduction u/s 80-I:
The AO reduced certain amounts from business profit while allowing deduction u/s 80-I. The Tribunal examined the details and held that insurance claims and most interest and miscellaneous receipts were business income derived from the industrial undertaking, thus eligible for deduction u/s 80-I. However, rent was not considered business profit. This ground of appeal was partly allowed.

Appeal for Asst. Yr. 1994-95:
The issues for asst. yr. 1994-95 were similar to those for asst. yr. 1993-94. The Tribunal allowed the claim for enhanced depreciation due to exchange rate fluctuation, set aside the issue of technical fee and design charges for fresh examination, and directed the AO to allow deduction u/s 80-I as per the directions for asst. yr. 1993-94. Both appeals were allowed in part.