TMI Blog2009 (6) TMI 1000X X X X Extracts X X X X X X X X Extracts X X X X ..... ia has waived off a loan of ₹ 5,073 crores. In response to a query raised by assessing officer, it was submitted that the Govt. had advanced considerable loan from its Steel Development Fund (SDF] for modernization and expansion of various plants of the assessee company. These loans were given on interest at a relatively high rate prevailing in the market in those years. The Govt. of India in its wisdom waived the loans granted from SDF to the extent of ₹ 5,073 crores and also its own loan of ₹ 381 crores on 18.02.2000. The assessee company accordingly wrote back SDF loan of ₹ 5,073 crores due to Govt. It was submitted by the assessee that SDF loans were in capital field and not in revenue and hence remained a capital receipt when the same was waived and, therefore, the waived amount was not liable to tax. 3. It was also submitted that the assessee had advanced loan of ₹ 381 crores to Scope SAIL, a subsidiary of the assessee company. After SDF loans were waived by the Govt. of India, the assessee waived corresponding loans to Scope of ₹ 381 crores. The assessee further waived/wrote off SDF loans of ₹ 2,073 crores due from Scope. This loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that as the total interest capitalized during the last five years was about 2,618 crores, the fixed assets should be written down to the extent of interest capitalized. The report thus made it clear that the loans granted by the Govt. were for modernization of various plants of the assessee company and the assessee has capitalized the interest on these loans in various years which obviously resulted in increase in the WDV of the fixed assets. The assessing officer, therefore, took the view that when the loan has been waived off by the Govt. and WDV of assets had been reduced by the assessee to that extent, the assessee was eligible to claim depreciation at the reduced WDV and not the original WDV, in view of provisions of section 43(1) defining term actual cost read with provisions of section 32(1) of the Act. Thus depreciation was allowable to the assessee on the reduced WDV of the assets. The assessing officer accordingly disallowed the difference in the amount of depreciation on the original WDV and reduced WDV and an addition of ₹ 6,40,62,069/- was made on this account. 6. On appeal before CIT (A) it was submitted that the assessee was incurring heavy los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He placed reliance on several decisions for the proposition that the remission of debt by a lender cannot be treated as meeting the cost of assets. 7. The ld. CIT (Appeals) examined the contention of the assessee in the light of provisions of section 43(1) of the Act and the decisions relied upon by the assessee. He observed that Finance (No.2) Act, 1998 inserted Explanations (9) and (10). The scope and effect of inserting Explanation (10) has been brought out in Circular No. 772, according to which where a portion of cost of an asset acquired by an assessee had been met directly or indirectly by the Central Govt. or a State Govt. or any authority established under any law or by any other person, in form of a subsidy or grant or reimbursement (by whatever name called), then so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. The amendment was brought with effect from 1/04/1999 and, therefore, it was relatable to assessment year 1999-2000 and subsequent years. The ld. CIT (Appeals) further noted that from the letters dated 31st March, 1989, 7/09/1989, 12/07/1989, 30th March, 1990 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d section 32 of the Act. He accordingly upheld the order passed by the assessing officer. 8. The ld. CIT (Appeals) also noted that the decision in the case of Tata Iron and Steel Company Ltd. rendered by the Hon'ble apex court related to the period prior to insertion of Explanation (10). Similarly the decision in the case of Cochin Company Pvt. Ltd., Ravi Leather Pvt. Ltd.; and Bharat Coach Company Ltd. were also related to period prior to the amendment in section 43(1) of the Act. Therefore, these decisions were not applicable to the facts of the assessee's case. The ld. CIT (Appeals) also distinguished the decision on facts. The ld. CIT (Appeals) further observed that the decision in the case of Ravi Leather Pvt. Ltd. relied on by the assessee supported the case of the assessing officer wherein it had been held that interest-free loan converted into grant was to be reduced from actual cost of the machinery for the purpose of calculating depreciation and investment allowance. 9. Before us the ld. AR of the assessee submitted that subsidies or grants relatable to the cost of machine are to be reduced for purpose of working out actual cost of the machinery. Loan and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest capitalised and had suggested for reduction in the value of assets. Also in view of restructuring scheme and waiver of the loan and interest by the Central Government the assessing officer was well within his jurisdiction to carryout necessary corrections/ rectifications to the actual cost to the assessee including written down value. The provisions of Explanation (10) to section 43(1) would be rendered redundant if the contention of the assessee is accepted that they have no relevance with waiver of loan. As regards the contention of the ld. AR of the assessee that no adjustment with respect to written down value of the asset is not permitted as per section 43(6)(c) of the Act, Ld CIT(DR) submitted that correction/rectification was permissible with reference to written down value of machinery. He placed reliance on the decision of Hon'ble Madras High Court in the case of Ravi Leathers Pvt. Ltd. vs CIT 240 ITR 702, wherein it has been held that the Tribunal was right in holding that the grant given by the foreign company was deductible from the original cost/written down value of machinery for the purpose of depreciation and investment allowance. He also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eof, if any, as has been met directly or indirectly by any other person or authority. The next step is to ascertain the written down value of individual asset and then aggregate the values of assets which form the particular block of assets. Hence, after April 1, 1962, by virtue of the definition in section 43(1), the actual cost to the assessee which is necessary to be ascertained for the purpose of computing the written down value, any contribution to the cost which has gone to meet directly or indirectly the actual cost to the assessee has to be taken into account and the actual cost has to be reduced by such contributions even if they have proceeded from any other person or authority. 11.3 In CIT vs. Hides and Leather Products Pvt. Ltd. 101 ITR 61, 74 (Guj.), the assessee who maintained its accounts on the mercantile system purchased a piece of machinery from a foreign firm in 1955. No amount was paid towards the price thereof on the ground that there was some defect in the machinery. The liability to the foreign supplier was shown in the books of account and balance-sheet of the assessee. But in 1960 by making appropriate entries the assessee wrote back the amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the assessee was entitled to depreciation only on the value of buses and not on the amount representing the route permit. 11.5 In the case of Gauri Shankar Finance Ltd, vs. CIT 248 ITR 713 (Kar.), the assessee has two types of business, that is, hire purchase of vehicles and of leasing of consumer durables. The assessee claimed depreciation under section 32 of the Act on the consumer durables/goods leased on the plea that the assets were owned by the assessee and were used by it in its business of leasing, The assessing authority, however, denied depreciation to the assessee on the said assets by holding that the assessee was neither the owner of the assets nor assets were put to any commercial use by it. Assessee was getting the vouchers and other purchase documents made out in its name. It was also found that the assessee was arranging transaction of its leasing business in a way as if the legal ownership vests with it. But, however, it never came to possess the assets in reality. The assets were not shown in the schedule annexed to the balance sheet of the assessee. It was also found that the assessee had never declared the 'scrap value of assets' during thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was given for the purposes of acquisition of assets. We may like to mention here that the correctness of decision of Hon'ble Gujarat High Court in the case of CIT vs. Hides and Leather Products Pvt. Ltd. (supra) was questioned before Hon'ble Supreme Court in the case of in case of Saharanpur Electric Supply Co Ltd vs CIT 194 ITR 294. Their Lordships of Hon'ble Supreme Court dismissed the argument advanced on behalf of ld counsel by observing as under (at pages 208 and 309): ..........Shri Dastur challenged the correctness of this decision insofar as it held that the original cost itself did not stand modified as a result of the subsequent development. We are not concerned with that aspect here. All that is relevant is that this is a decision which permits an alteration in the figure of actual cost consequent on subsequent factual occurrences that do not relate back. It also shows that the actual cost for 1961-62 could be scaled down for the assessment year 1962-63. There are also other decisions which make it clear that the original cost of an asset may change after the year of installation or erection as a result of further liabilities arising later: CIT vs. U.P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;] (c) in the case of any block of assets,- (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,- (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced:- (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the circumstances of the case so warrant. 14. Hon'ble Supreme Court in the case Saharanpur Electric Supply Co Ltd vs CIT 194 ITR 294 while examing the issue relating to actual cost held as under (Head Notes): The first step, statutorily prescribed for the determination of the written down value of any asset for any year, is for the assessing officer to determine its actual cost. This is a mandatory step which the assessing officer cannot be prevented from taking merely because the actual cost of the asset had already been determined in one or more earlier years. The definition of written down value in section 43(6) of the Income-tax Act, 1961, envisages the computation of the actual cost of each asset, for every assessment year, not only in respect of assets acquired during the previous year, but also in respect of assets acquired before the previous year. This naturally has to be done with reference to the factual or legal position that might prevail during the relevant previous year and could be taken into account for the relevant assessment year. The section does not say that the computation of the actual cost of the asset has to be based only on the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the cost is met by someone else, but the legislature had to decide whether an assessee should be allowed to claim an allowance or depreciation in respect of the asset on the artificial basis of the cost of the asset rather than on what he has actually spent to acquire that asset and whether the working of the original provision, as interpreted by courts, had not conferred an undue advantage or benefit on the assessee. This was not considered by the legislature to be equitable and, therefore, it was altered by legislation. It accords with reason that the provision should be interpreted to say that, at least after amendment, the assessee should not be allowed depreciation on the basis of earlier figure of cost. It is incontrovertible that, under section 43(1) read with section 43(6), the officer has to determine the actual cost for all assets, new or old and the definition of section 43(1) only requires that, at the time of doing so, he has to examine whether the actual cost has been fully laid out by the assessee or has been met by someone else in whole or in part. The words has been met squarely fit into this region of the section and the use of those words does not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for specific purposes of meeting a portion of the cost of the asset though quantified as or geared to a percentage of such cost, it does not partake the character of payment intended either directly or indirectly to meet the actual cost. 16. Explanation 10 to section 43(1) was inserted the Finance Act (No.2), 1998 with effect from 1/04/1999 which reads as under: Explanation 10:- Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee: Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the asset. In the case before us the loan has been waived off by the Central Government. Therefore, the facts of the case before us are entirely different and distinguishable from the facts of Tata Iron and Steel Company Ltd. (Supra). The second issue before Hon'ble Supreme Court in the case of Tata Iron and Steel Company Ltd. (Supra) related to reduction of loan amount due to foreign exchange fluctuation. Section 43A has been inserted in the statute w.e.f. 01.4.1967 by the Finance (No. 2) Act 1968, whereas the assessment years involved in the case of Tata Iron and Steel Company were 1960-61 and 1961-62. Under section 43A, where an assessee acquires any asset from a country outside India for the purpose of his business or profession and, in consequence of a change in the rate of exchange at any time after acquisition of such assets, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset for repayment of the whole or a part of moneys borrowed by him from any person directly or indirectly, in foreign currency specifically for the purpose of acquiring the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isation of various steel plants of the assessee. Accordingly the assessee's case is squarely covered by the decision of Hon'ble Supreme court in the case of Sharanpur Electric Supply Co Ltd (Supra) and therefore the assessing officer was justified in reducing the cost of assets by the amount of loan waived off by the central Government. The facts of the case are covered by the decision of Hon'ble Supreme Court in the case of Saharanpur Electric Supply Company Ltd. (Supra); Hon'ble Gujarat High Court in the case of CIT v/s Hides and Leather Products P. Ltd. (Supra); Ravi Leathers P, Ltd. (supra); and Gaurishanker Finance Co Ltd (supra) wherein it has been held that the cost of assets may change prospectively depending upon the circumstances of the case. Accordingly, in our considered view Ld. CIT(A) was justified in confirming the reduction of loan amount by reducing WDV of block of assets by the amount of loan waived by Central Government u/s 43 of the Act and then allowing the depreciation on reduced figure of WDV. 18. The next issue for consideration relates to confirming the addition in respect of deferred revenue expenses. The first item of disallowance relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Madras Industrial Development Corporation (supra) had held that where the benefit is spread over a number of years, the expenditure should be allocated in the years during which the benefit was derived. He accordingly upheld the order of the assessing officer that spread over was justified in respect of VRS expenditure and over-head expenses. 20. Before us the ld. AR of the assessee submits that there is no concept of deferred revenue expenditure. Therefore, the entire expenditure on VRS and removal of over-burden is allowable as deduction in the year in which the expenditure was incurred. He placed reliance on the decision of the ITAT in the case of CIT vs. Ashiana Syntex Ltd. 117 I.T.D. page 1 (Ahd.)(SB). He further submitted that VRS expenses were revenue expenditure, as held by Hon'ble Madras High Court in the case of CIT vs. Sympson and Co. Ltd. 230 ITR 749 (Mad). He also placed reliance on the decision of Hon'ble Supreme Court in the case of CIT vs. Sirpur Paper Mills 237 ITR 41 (SC) for the proposition that conditions imposed for spread over of expenditure on five years were not valid. Notification issued by the CBDT could not curtail scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion studies, development of expenses on alternative method of production and removal of over-burden was in the field of revenue expenditure and was incurred wholly and exclusively for the purpose of business. Therefore, the authorities below were not justified in treating the expenditure as capital expenditure and allowing the expenditure over a period of five years. The assessing officer is directed to allow the claim of the assessee in the year in which the expenditure was incurred. 22. The next issue for consideration, which is common in all the three assessment years, relates to disallowance of interest of 8 per cent payable to KFW, Germany. The facts of the case relating to this ground of appeal are that the assessee had availed loan in foreign currency from M/s. KFW, Germany on interest at the rate of 8.75 per cent per annum. The assessee claimed the interest paid under section 36(1)(iii) of the I. T. Act. In assessment year 1998-99, the assessing officer disallowed the claim on the ground that although the interest payable was at the rate of 8.75 per cent, but actually the assessee had paid only 0.75 per cent of the interest on this loan and out of the balance 8 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Control Environmental Management Schemes of Rourkela Steel Plant. In this cases payments shall be effected in local currency with debt discharging effect. If the exchange rate losses fall below the provisions thus made, remaining provisions shall be written back, the amount thus released shall also be used for Pollution Control Environmental Management Schemes of Rourkela Steel Plant. Interest shall be charged from the date at which disbursements are debited to the date at which repayments are credited to KFW's account specified in Article 3.12. 17. It is thus evident that instead of full payment of interest to KFW, the liability being the interest on the loan has been directed to be allocated in spice in the agreement of the loan. As per article 9.1 (f) the borrower being the assessee herein shall furnish to KFW any and all such information and records of the projects and its further progress. The Article 3.2 (a) thus specifies the interest liability and Article 9.1 (f) clearly specifies that all information in regard to the said Article 3.2. In the agreement, there is no article for the waiver of any portion or liability incurred as per the terms of the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s own case in assessment year 1998-99 and no new facts have been brought on record, we do not find any reason to differ from the view taken by this Tribunal. Accordingly, the assessing officer is directed to allow the claim of the assessee on payment of interest at the rate of 8.75 per cent as claimed by the assessee. 26. The next issue for consideration relates to disallowance of 10 year bond issue expenses. The assessing officer during the course of assessment proceedings noted that the assessee had issued non-convertible bonds and claimed expenditure on account of arrangers' fee, bank charges, under writing fee etc., which had been debited to share premium reserve in the books of accounts, but in the return of income the expenditure was claimed under section 36(1)(iii) of the Act. The assessing officer was of the view that section 36(1)(iii) of the Act allows interest on borrowed capital as revenue expenditure whereas the expenditure incurred by the assessee was in the nature of bank charges, under-writing commission, expenditure on literature etc. and it was clearly outside the scope of section 36(1)(iii) of the Act. The assessing officer also noted that the assessee, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71 which are though for allowances of expenditure incurred vis-a-vis section 35D held to be allowable in the years for which the expenditure is actually incurred. In the circumstances, the finding of the ld. CIT (A) and the AO on this issue is reversed and the AO is directed to allow the assessee's claim for expenses in relation to the issue of bonds as claimed. 30. Since the issue is squarely covered by the decision of the ITAT, respectfully following the same, the assessing officer is directed to allow the claim of the assessee for expenses in relation to issue of bonus as claimed. 31. The next issue for consideration, which is common in assessment years 2000-01 and 2001-02, relates disallowance of expenditure incurred in relation to water supply and sewerage plant, During the course of assessment proceedings the assessing officer noted that the assessee had constructed certain water supply and sewerage plant. In addition to meeting the requirements of various factories of the assessee, these plants were also utilized for residential townships by the assessee at different factory sites. In earlier assessment years 75 per cent of the expenditure was taken for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the said order passed under section 263, the same is required to be decided against it even for the years under consideration going by the rule of consistency. 5. After considering the rival submissions and perusing the relevant material on record, we find it difficult to accept the contention of the learned DR based on the rule of consistency. As submitted by the learned counsel for the assessee before us, the order of learned CIT passed under section 263 for assessment year 1985-86 deciding a similar issue against the assessee company was not challenged by it in an appeal before the Tribunal taking into consideration its marginal tax implications. Moreover, the assessee company being a public sector undertaking was required to cross many procedural hurdles such as obtaining a COD approval for preferring an appeal before the Tribunal. Be that as it may, in all the subsequent years i.e. assessment year 1986-87 and onwards, the entire water supply and sewerage plant was treated as plant and machinery by the assessee company its for the purpose of claiming depreciation and in the assessment year 1986-87, this treatment given by the assessee was not disturbed by the department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the liability on account of employees benefit scheme of ₹ 86.58 crores as deferred revenue expenditure. The assessee claimed additional amount of ₹ 69.26 crores in computation of income under the head 'employees family benefit scheme.' It was explained by the assessee that company had a large number of integrated factories as well as mines etc. Despite all safety precautions taken, accidents do occur in factory as well as mines resulting in death or permanent physical disability like loss of limb etc. In order to discharge its liability as a good employer and avoid the families of workers becoming destitute the company pays each worker the last salary drawn by the worker to the family of a worker dying or becoming incapable while on duty. This continues for a period of service left for the worker. The company till last year had been accounting these payments as expense in the year of payment. However, in the year under consideration the auditors were of the opinion that a liability is a definite and determined one as both the period of future payments as well as the quantum of payment were known and determined. Accordingly, the company provided liability in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aluation. Thus the assessee has provided whole of the expenditure in current year which was to incurred in several so many years to come. The liability of assessee is known on year to year basis and assessee was rightly claiming such amounts in returns of income. It is not a case where liability would arise in future for which provision is to be made on scientific basis. In such cases the provision is made on actuarial basis and payment is made on occurrence of the event. In the case of assessee the event occurs first and provision is made for balance year of service to be rendered by a particular employee and claimed as deduction for entire sum in one go. In our view the assessee is claiming future expenditure which was not allowable had the employee was not visited by the unfortunate accident. Therefore the decision of Hon'ble Supreme Court in the case of Bharat Earthmovers 245 ITR 428 (SC) is not applicable to the facts of assessee's case. Accordingly we do not find any infirmity in the order passed by the Ld CIT(A) upholding the addition. 40. The next issue for consideration relates to disallowance of claim of ₹ 214 lakhs on account of public deposit scheme int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 214 lakhs on computerization was not allowable. 42. Before us the ld. AR of the assessee submitted that interest provided on late renewal of PDS treated as prior period expenses and has not been allowed by the assessing officer. The liability to pay interest crystalised during the year at the time of renewal and, therefore, the interest was allowable in the year under consideration. He placed reliance on the following decisions:- (1) Shri Ram Piston and Rings Ltd 174 Taxman 147 (Del); (2) Saurashtra Cement Ltd. vs. CIT 213 ITR 523 (Guj.); and (3) Swadeshi Cotton Mills Ltd. vs. CIT 125 ITR 33 (All). On other hand the ld. Sr. DR supported the order of the ld. CIT (Appeals). 43. We have heard both the parties and gone through the assessment order and the order of the ld. CIT (Appeals) carefully. The assessing officer has added the amount of ₹ 214 lakhs on the ground that the difference was found in computerized list as compared to overall balances as per financial records. Though the assessee has taken a plea before the assessing officer that the difference of ₹ 214 lakhs occurred because of renewal of PDS in the year under consideration in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (Appeals). He, therefore, upheld the order passed by the assessing officer on the ground that mining rights have not been enumerated in the section as intangible rights. 47. Before us the ld. AR of the assessee submitted that depreciation on intangible assets is available under section 32(1)(ii) of the Act with effect from 1/04/1999 i.e. on assets acquired after 31st March, 1998. The assessing officer did not consider the mining rights as business or commercial rights and accordingly disallowed the claim. It has further been submitted that the claim in earlier years is pending before the ld. CIT (Appeals) for rectification. Alternatively, it has been pleaded that the expenses are revenue in nature and should be allowed. He placed reliance on the decision of Hon'ble Andhra Pradesh High Court in the case of CIT vs. Panyam Cement and Mineral Industries Ltd. 228 ITR 212 (AP) and in the case of CIT vs. Wokem P. Ltd. Co. 258 ITR 350 (Raj). On the other hand, the ld. Sr. DR submitted that the depreciation on intangible rights is available with effect from 1/04/1999 on assets acquired after 1/04/1998. The year in which the mining rights were obtained is not available on record a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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