TMI Blog2016 (9) TMI 1435X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed. Addition under repairs and maintenance - Held that:- CIT(A) had merely allowed repairs and maintenance towards machinery and other expenditure of ₹ 17,16,77,432/- based on account-wise details filed before him without examining in detail true nature of expenditure incurred with reference to invoices, bills etc. In our considered opinion, the CIT(A) not to have allowed the same without examining true nature of expenditure with reference to external evidence - to meet ends of justice, we remit this ground to the file of the AO for fresh adjudication after affording due opportunity to the assessee. MAT - reduce a sum being lower of brought forward loss or depreciation from book profit under section 115JB - Held that:- The lower of depreciation loss or business loss is required to be set off against book profit determined. In the present case, the amount of unabsorbed depreciation, loss is to be set off against book profit is required determined. In this case, there is unabsorbed depreciation loss of ₹ 113,14,04,000/- and business loss of Rs. ₹ 37,17,10,000/-, depreciation loss of ₹ 37,17,10,000/- lower of the two is required to be set off against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We uphold the order of the CIT(A) and dismiss the ground of appeal filed by the assessee-company. - ITA No.510/Bang/2014, ITA No.662/Bang/2014 - - - Dated:- 27-9-2016 - Shri Vijay Pal Rao, Judicial Member and Shri Inturi Rama Rao, Accountant Member Revenue by : Shri Sanjay Kumar, CIT(DR) Assessee by : Shri Sampath Raghunathan, Advocate ORDER Inturi Rama Rao, AM : These are cross-appeals filed by the assessee as well as the revenue directed against the order of the Commissioner of Income-tax-I, Bangalore [CIT(A)] dated 27/01/2014 for the assessment year 2010-11. 2. Briefly facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. Return of income for the assessment year 2010-11 was filed on 30/09/2010 declaring loss of ₹ 26,35,60,265/- under normal provisions of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. After processing the said return of income under sec.143(1), the case was selected for scrutiny assessment by issuing requisite statutory notice us 143(2) of the Act dated 25/08/2011 and the assessment was completed u/s 143(3) vide order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure on repairs and in respect of machinery and others only to the extent of ₹ 17,16,79,432/-. 4.3 With regard to set off of lower of brought forward business loss or unabsorbed depreciation against book profits for the purpose of computing tax liability u/s 115JB, the CIT(A) held that lower or loss or depreciation whichever is lower should be considered on cumulative basis for the purpose of set off against book profits while computing tax liability u/s 115JB of the Act. Thus, the appeal was partly allowed by the CIT(A). 5. Being aggrieved by that part of the order of the CIT(A) granting relief to assessee-society, the revenue has preferred ITA No.662/Bang/2014 raising the following grounds of appeal: 1. The directions of the CIT (A) is opposed to law and the facts and circumstances of the case. 2. The CIT (A) erred in holding that the AO was not justified in rejecting the assessee's claim that the FE gain of ₹ 29,83,65,068 was not a revenue receipt by relying on the decision in the case of CIT v. Woodward Governor India (P) Ltd. [2007] 294 ITR 451 (Delhi) without appreciating the fact that the assessee could not prove that the ECB loan was for capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition of ₹ 29,83,65,068/-. 9. On before the CIT(A), the CIT(A) had concluded that ECB external commercial borrowings on which foreign exchange gain was earned was utilized on capital account based on ECB returns filed before RBI. After concluding that the gain made on account of foreign exchange fluctuation is on capital account, after referring to the judgment of the Hon ble Delhi High Court in the case of CIT vs. Woodward Governor India (P) Ltd. (294 ITR 451) and after referring to CBDT circular No.5 dated 09/10/1967 held that gain made on account of restatement of external commercial borrowings is on capital account and not liable to tax. The relevant finding of the CIT(A) is as follows: 2.3 Fluctuation in the rates of foreign exchange can result in either a gain or a loss depending on whether the value of the currency appreciates or depreciates. If the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital issued in the business, the appreciation or depreciation in the value of the foreign currency would result in either profit or trading loss. Thus, the gain or loss would be on the revenue account. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of promoting family planning amongst its employees. Further, in computing the capital gains arising to the assessee on the sale or transfer of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, will be added to the original actual cost of the asset. The proposed section also secures that where there is a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad due to a change in the exchange value of the rupee; the original, actual cost of the asset will be correspondingly reduced. The additional rupee liability incurred on imported capital assets or, as the case may be, any decrease in such liability, in the circumstances stated in the earlier paragraph will not, however, be taken into account in computing the actual cost of the asset for the purpose of deduction on account of development rebate. 34. This was further illustrated in Circular No. 5 : issued by the CBDT dated 9-10-1967 in the following terms: The pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble High Court of Delhi in the case of CIT Vs. Woodward Governor India (P) Ltd. (2007) 294 ITR 451 (Delhi) wherein it was held that- 32. We then turn to the position with regard to the losses on capital account where higher depreciation or investment allowance could be claimed as a result of the reworking of the cost of asset consequent upon the appreciation in the rate of foreign exchange. We proceed to examine the position prior to the amendment to section 43A with effect from 1-4-2003 and the change as a result of that amendment. 33. Section 43(1) of the Act defines actual cost for the purpose of depreciation to mean the actual cost of the asset to the assessee. There was no provision for the assessment of the actual cost at a stage subsequent to the date of acquisition of the asset. Depreciation had to be worked out thereafter only on the basis of the actual cost at the time of acquisition to provide for the subsequent revisions to the actual cost. Section 43A was inserted by the Finance Act, 1967 with effect from 1-4-1967. In the explanatory process contained in the Bill preceding the Act it was explained as under:- The proposed section 43A, in substance, secures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act. The said provisions of section 43A are as under: 43A. Special provisions consequential to changes in rate of exchange of currency.- Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment- (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange Management Act, 1999 (42 of 1999), for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this section shall, in respect of so much of the sum specified in the contract as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein. Originally, provisions of section 43A were introduced in the Act by the Finance Act 1967 w.e.f. 1/4/1967 to provide for adjustment in actual cost of the assets pursuant to change in foreign exchange rates. As a result of insertion of this provision, cost of capital asset on account of exchange fluctuation is required to be adjusted and depreciation is to be allowed with reference to adjusted actual cost. This position was clarified by the CBDT in Circular No.5 dated 09/10/1967 which is as under: 11.1 Even the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under : 2. The Government agrees that for the purposes of the calculation of depreciation allowance, the cost of capital assets imported before the date of devaluation should be written off to the extent of the full amount of the additional rupee liability incurred on account of devaluation and not what is actually paid from year to year. The proposed legal provision in the matter is intended to be framed on this basis. [Emphasis supplied] 32. One more aspect needs to be mentioned. Section 43(1) defines actual cost for the purpose of grant of depreciation etc. to mean the actual cost of the assets to the assessee . Till the insertion of the unamended section 43A there was no provision in the Income-tax Act for adjustment of the actual cost which was fixed once and for all, at the time of acquisition of the asset. Accordingly, no adjustment could be made in the actual cost of the assets for purposes of grant of depreciation for any increase/decrease of liability subsequently arising due to exchange fluctuation. Consequently, section 43A was introduced in the Act by Finance Act, 1967 with effect from 1-4-1967 in the above terms to provide for adjustment in the actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were for making payment and not on payment which is now brought in by amendment to section 43A vide Finance Act, 2002. 34. Lastly, we are of the view that amendment of section 43A by the Finance Act, 2002 with effect from 1- 4-2003 is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended section 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words at the time of making payment . In other words, under the unamended section 43A, actual payment was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended section 43A with effect from 1-4-2003 such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee submitted that details of expenditure runs into voluminous and furnishing of entire details is cumbersome. The entire expenditure is incurred only towards consumables, machineries etc. 15. We heard rival submissions and perused material on record. The CIT(A) had merely allowed repairs and maintenance towards machinery and other expenditure of ₹ 17,16,77,432/- based on account-wise details filed before him without examining in detail true nature of expenditure incurred with reference to invoices, bills etc. In our considered opinion, the CIT(A) not to have allowed the same without examining true nature of expenditure with reference to external evidence. Therefore, to meet ends of justice, we remit this ground to the file of the AO for fresh adjudication after affording due opportunity to the assessee. 16. The fourth ground of appeal challenges the direction of the CIT(A) to reduce a sum of ₹ 1,31,59, 000/- being lower of brought forward loss or depreciation from book profit under section 115JB of the Act. The assessee, while calculating tax liability under section 115JB of the Act, had claimed set off of brought forward loss of ₹ 36,33,40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,- i. the accounting policies; ii. the accounting standards adopted for preparing such accounts including profit and loss account; iii. the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation I-For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- a) the amount of income-tax paid or payable, and the provision therefor; ot b) the amounts carried to any reserves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t include depreciation; (b) the provisions of this clause shall not apply if the amount of loss(brought forward or unabsorbed depreciation is nil; or] (iv) to (vi) .. (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 1794 of the Sick Industrial Companies (Special Provisions) Act, 1985(1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation.-For the purposes of this clause, net worth shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 395 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or (viii) the amount of deferred tax, if any such amount is credited to the profits and loss account. Explanation 2.-For the purposes of clause (a) of Explanation 1, the amount of income-tax shall includei. any tax on distributed profits under section 115-0 or on distributed income under section 115R ii. any interest ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he books of account. The term loss has been defined for the purposes of this clause as exclusive of the amount of depreciation. 10. Here it would be relevant to mention that section 115J, the original predecessor of section 115JB also has Explanation which provides the mechanism for computing the book profit . Clause (iv) provides for the reduction of the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of section 205 of the Companies Act, 1956 are applicable. There was controversy on the interpretation of term loss in clause (iv) of the Explanation as to whether the loss should be considered as before or after taking into account the amount of depreciation. The Hon ble Supreme Court in the case of Surana Steels (P.) Ltd. v. Dy. CIT [1999] 237 ITR 7771 held that the term loss occurring in clause (b) of first proviso to section 205(1) of Companies Act has to be read as amount arrived at after taking into account the depreciation and accordingly the same was to be read and understood in the context of section 115J also. Resultantly the term loss was understood as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstead of the amount as can be seen from the heading of section 40 - Amounts not deductible . From here we can easily deduce that for the purposes of clause (iii) of Explanation (1) the unabsorbed depreciation for all the earlier years is to be clubbed into one amount; and the amount of brought forward loss (before depreciation) is also to be taken by summing up all the figures of loss of earlier years, and then the lower of these two amounts is to be reduced from the net profit as shown in the profit loss account so as to comply with the prescription of clause (iii) of Explanation (1). Similar position is coming up from the pressing into service of the word loss in this clause in contradistinction to the word losses , as has been done in the marginal notes to sections 72, 73, 74, 74A and 75 etc. From here we gather that by using the words amount and loss in this clause, the point has been made clear that it is a composite figure each of the unabsorbed depreciation and brought forward loss, that merits consideration. 13. Moving still further we find from the language of this clause that there is no reference to considering the brought forward loss or unabsorbed depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation and unabsorbed business loss are to be maintained year-wise. 15. We are not convinced with this line of thinking for the reason that what is contemplated by sub-sections (1) and (5) is that the other provisions of the Act should be considered as in operation while giving effect to section 115JB. Reference to other provisions of this Act clearly indicates that what is provided in section 115JB should be religiously followed accordingly and anything over and above that will be subject to the other provisions of the Act. By no stretch of imagination can it be construed as substituting the other provisions of the Act in place of what is specifically made available in this section, insofar as the computation of book profit is concerned, the entire mechanism for its calculation is clearly set out in Explanation (1). Not only starting point being the net profit as shown in the profit loss account but also all the amounts which are to be increased as stipulated in clauses (a) to (h) and those which are to be reduced as specified in clauses (i) to (vii) find separate mention in the scheme of the section itself. So the computation of book profit is to be done strictly as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of computing Book profit , if the amount of unabsorbed depreciation of brought forward loss is Nil. In other words it has been provided that the reduction is not to be permitted if one of these two figures namely, loss brought forward or unabsorbed depreciation, is nil. To put it simply if one of these two figures is Nil, then the other figure will be ignored altogether. The rationale behind this portion of enactment is not to unnecessarily allow the reduction of one, if the other is not there. Since the loss is to be considered before depreciation and if there is brought forward loss only, but no corresponding unabsorbed depreciation or vice versa, then no reduction is to be made of the amount of brought forward loss or unabsorbed depreciation, as the case may be. In the earlier part of the order we have held that if there is loss brought forward and unabsorbed depreciation for more than one year, then one combined figure each of unabsorbed depreciation and brought forward loss for such years is to be determined for consideration. Adverting to the facts of our case, we find that none of the figures of unabsorbed depreciation or brought forward loss is Nil, hence this part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following grounds of appeal: The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: 1. Depreciation on the intangible assets of ₹ 40,001,168 On the facts and in the circumstances of the case, the learned CIT(A) erred in facts and law in confirming the disallowance of depreciation on intangible assets on the ground that evidence of actual cost were not furnished, without considering the detailed submission made by the Appellant. On the facts and in the circumstances of the case, the learned CIT(A) erred in facts and law in confirming the disallowance of depreciation on the intangible assets having upheld the Appellant's claim of acquiring business and commercial right. 2. Repairs maintenance expenses for building of ₹ 116,521,222 and machinery of ₹ 18,863,568 On the facts and in the circumstances of the case, the learned CIT(A) erred in facts and in law in confirming the disallowance of repairs and maintenance expenses for building and machinery on the grounds that details/invoices/bills/vouchers were not furnished, without taking cognizance of the invoices and the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goodself has mentioned that the amount capitalised do not quality as 'intangible assets' and accordingly; depreciation on such Intangible assets is not justified. In this regard, we wish to submit the following: During the phase of incorporation of the Airport (i.e. till Airport opening date), the company spent time and cost in connection with various agreements to be entered into for obtaining the right to develop operate the Airport and for obtaining support from the state government. Such costs incurred towards the following agreement were classified as intangible assets: Concession Agreement Concession Agreement grants the company the exclusive right and privilege to carry out the development, design, financing, construction, commissioning, maintenance, operation and management of the Airport. The right to revenue and profits are directly derived by the company from the rights provided in the agreement. Communication, Navigation and Surveillance CCNS')/Air Traffic Management CATM') Agreement The CNS/ATM agreement is necessary for the establishment of a proper ATM system for proper governance of the Airport. The CNS/ATM are an essential f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the expenditure also related to leasehold rights in land which par takes character of the land which does not qualify for depreciation. We uphold the order of the CIT(A) and dismiss the ground of appeal filed by the assessee-company. 26. The second ground of appeal relates to disallowance of repairs and maintenance of expenses towards building of ₹ 11,65,21,222/- and machinery and other expenditure of ₹ 1,88,63,568/-. In the appeal filed by the revenue we remitted the matter back to the file of the AO for de novo examination of the issue. Similarly, we remit this ground also to the file of the AO for de novo examination after affording due opportunity of hearing to the assessee. This ground of appeal is accordingly disposed of. 27. Ground No.3 relates to determination of correct amount to be set off against profits determined on book profit under section 115JB. Since in the revenue s appeal, we remitted this issue back to the file of the AO for fresh adjudication, this ground of appeal does not survive. 28. Ground Nos.4 and 5 are consequential in nature and does not require any adjudication. 29. In the result, the assessee s appeal is partly allowed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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