Income Tax Appellate Tribunal - Delhi
Steel Authority Of India Ltd, New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : 'G', NEW DELHI
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.2167/Del/2008
(ASSESSMENT YEAR : 2003-04)
Steel Authority of India Limited, vs. Addl.CIT, Range 9,
4th Floor, Ispat Bhavan, Lodi Road, New Delhi.
New Delhi - 110 003.
(PAN : AAACS7062F)
(Appellant) (Respondent)
ASSESSEE BY : Shri M.P. Rustogi, Advocate with
Shri P.M. Shastri, CA
REVENUE BY : Shri Gaja Nand Meena, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal filed by the revenue arises out of the order of the CIT (Appeals)-XII, New Delhi dated 8.4.2008 for the assessment year 2003-04. The following grounds of appeal are taken by the assessee :
"1. Both the authorities below have erred in presuming unilateral writing down of assets to the extent of Rs.3001 crore as Grant or subsidy received from others towards meeting cost of assets.
1.2 Both the authorities below have erred in decreasing the depreciation by Rs.268.72 crores on the amount by which the assets have been valued/ revalued down by wrongly applying the provisions of Sections 32 & 43 of the Income Tax Act 1961.
2.1 Both the authorities below have erred in treating cost of Removal of Overburden of mines of Rs.1,719 lacs as deferred revenue and there by disallowing 80% of it disregard to many decisions on this issue holding it to be of Revenue nature.2 ITA No.1710/Del/2009
2.2 Both the authorities below have wrongly relying on the decision of Madras Industrial Development Corp. Ltd., Vs CIT 225 ITR 802 [SC].
3.1 Both the authorities below have erred in treating the liability on account of "Employees Benefit Scheme" [for liability for employees becoming incapacitated or loosing life in accidents while on duty] as deferred revenue and thereby disallowing 80% of it.
3.2 Without prejudice to the above ground, the quantum of disallowance worked out at Rs.7,469 lacs as 80% of the effective claim of Rs.2,410 lacs is wrong.
4.1 The authorities below have erred in disallowing u/s 43B of the Income Tax Act 1961, the PF dues of Rs.5,582.97 lakhs deposited beyond due dates but before the due date for filing of the return in utter disregard to many decisions, including the Hon'ble Supreme Court, on this issue holding it to be allowable.
4.2 The authorities below have erred in not allowing the additional claim u/s 43B of the Income Tax Act 1961, of the PF dues of Rs.1,088 lakhs disallowed in AY 2002-03 which were deposited in the current year in utter disregard to the provisions of the Act and many decisions, including the Hon'ble Supreme Court, on this issue holding it to be allowable.
5. The authorities below have erred in treating the Bond issue expenses of Rs.65.60 lacs as 'Deferred Revenue expense' which is to be amortized or as covered by the provisions of Section 350 of the Income Tax Act.
6.1 Both the authorities below have erred in disallowing Rs.1,248 lacs or 8.00% out of the interest at 8.75% payable to KFW Germany.
6.2 Without prejudice to the foregoing they should have allowed the expenses incurred [Rs.2,841 + 1,593 lacs] which have been set-off towards the subsidies of 8% received from KFW, Germany in this and earlier years.
7.1 The authorities below have erred in not allowing the depreciation on 'Mining Rights' [not being cost of land of mines] claimed u/s 32 as intangible assets / commercial or business rights.
7.2 Without prejudice to above, the authorities below have erred in not allowing expenses (in alternate to depreciation on it) incurred during the year in respect of Mining Rights as revenue expenses u/s 28 and 37 of the Income Tax Act.
3 ITA No.1710/Del/20098. That the above grounds are independent and without prejudice to each other.
9. That the appellant seeks leave to add, amend, alter, abandon or substitute any of the above grounds at the time of heavy of appeal."
GROUND NOS.1.1 & 1.2
2. The issue involved in ground nos.1.1 & 1.2 is related to the fact that the assessee received a loan from Steel Development Fund (hereinafter referred to "SDF") operated by the Ministry of Steel as well as direct loans from Government of India for the purpose of acquiring plant & machinery and otherwise modernizing its operation. During the previous year relevant to assessment year 2000-01, the Government of India waived its SDF loan to the extent of Rs.5,073 crores and also the direct loan of Rs.381 crores, vide its letter dated 18.2.2000. The assessee had in turn advanced loans to IISCO, a private sector steel company taken over by the Government of India and made a wholly owned subsidiary of the assessee company. After netting the amount of loans taken from Government of India and SDF against the amount of loans advanced to IISCO, the balance amount of Rs.3001 crores was utilized by the assessee company to write down the cost of its fixed assets. The Assessing Officer took a view that this net amount of Rs.3001 crores represented a part of the cost of assets met by Government of India on behalf of the assessee. According, the Assessing Officer allowed the depreciation on the assets after downward revaluation of such assets by the said amount of Rs.3001 crores.
Learned AR submitted that the depreciation under the Income-tax Act is an allowable only on the WDV of the assets forming part of the gross block. Whether the assessee revalued the assets upward or downward is immaterial for the purpose of depreciation under the Income-tax Act. If the value of asset is enhanced higher quantum of depreciation would not be allowed to the assessee. Similarly, if the value of assets is 4 ITA No.1710/Del/2009 reduced then also the lower quantum of depreciation should not be brought down. The depreciation should be allowed as per the WDV according to the books maintained by the assessee for income-tax purposes only. He also pleaded that the amount of loan was not waived with intention of reducing the cost of assets or subsidizing the cost of assets in any manner. This loan was waived to reduce the debt liability of the assessee company, which was under huge debt burden during the relevant period.
3. On the other hand, the learned DR relied on the order of authorities below.
4. The CIT (A) decided the issue as under :-
"I have considered the submissions of the Ld. AR and the facts of the case. This issue has been examined in great detail by my Ld. predecessor in appeal No.8/03-04 for AY 2000-01 & AY 2001-02. The matter has been discussed at length and after a reference to the provisions of Explanation 10 to Sec. 43(1), it has been held that the cost of assets to the assessee has been directly or indirectly met by the Government to the extent of Rs.3001 crores. Following the rationale of my ld. predecessors in AY 2000-01 & 2001-02 and in my own order dated 17/01/2008 for AY 2002-03, the action of the AO is upheld and this ground of appeal thus fails."
5. After hearing both the sides, we find that this issue has been decided against the assessee by ITAT, 'D' Bench while deciding ITA Nos.2782/Del/2004 & Others vide order dated 25.6.2009 has decided the issue by as under :-
"2. The first issue for consideration, which is common in all the three appeals, relates to reduction in depreciation by reducing loan waived by the Govt. of India from cost of assets. The facts of the case stated in brief are that the assessee company is a public sector company, with majority shares held by the Govt. of India followed by the financial institutions. During the financial year relevant to assessment year 2000-01, Govt. of India has waived off a loan of Rs.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 Rs.5,073 crores and also its own loan of Rs.381 crores on 18/02/2000. The assessee company accordingly wrote back SDF loans of Rs.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.5 ITA No.1710/Del/2009
3. It was also submitted that the assessee had advanced loan of Rs.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 Rs.381 crores. The assessee further waived / wrote off SDF loans of Rs.2,073 crores due from Scope. This loan consisted of Rs.1,566 crores as principal and Rs.506 crores as interest. The assessee company did not claim as a revenue expenditure in spite of the fact that SAIL and Scope, its subsidiaries were in the same line of business.
4. The assessee company reduced WDV of its fixed assets by the balance of loan of Rs.3,001 crores i.e. [Rs.5,073 minus Rs.2,072]. The assessing officer further noted that out of loan of Rs.2,072 crores advanced by the Govt. to Scope through the assessee company, the assessee had charged interest of Rs.506 crores on outstanding loan amount, which has been duly credited in the profit and loss account and balance amount of Rs.1,566 crores was only waived off. This accrued interest included in the loan waived off had been accounted for as income by the assessee in respective assessment years. The assessing officer further noted that although the assessee has reduced the WDV of fixed assets by an amount of Rs.2,578.15 crores out of the loan waived amount, but it has claimed depreciation on original WDV of the assets without taking into account the reduction in the value.
5. The assessing officer from the reply filed by the assessee had noted that the loans were given to the assessee by the Govt. of India at various stages for modernization, rehabilitation, research etc. In response to a query raised by the assessing officer as to why depreciation should not be allowed on the reduced WDV it was explained that the waiver of loan by the Govt. of India was not for meeting the cost of assets already acquired and capitalized in the past. The waiver of loan would not amount to subsidy for meeting the cost of assets in terms of sections 32 and 43 of the I. T. Act. The assessee was thus entitled to claim depreciation on the original WDV of the assets before reduction. This contention of the assessee was not accepted by the assessing officer on the ground that IDBI in its report on financial restructuring of the assessee company had specifically mentioned that there was a cost over-run of nearly Rs.3,800 crores in modernization programme of DSP, RSP and BSL, sizable part of which was on account of interest capitalization. There was thus inflation in the value of assets on account of accretion in the capitalized interest without corresponding increase in the generation of income. The report has also 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 6 ITA No.1710/Del/2009 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 Rs.6,40,62,069/- was made on this account.
6. On appeal before CIT (A) it was submitted that the assessee was incurring heavy losses and the Govt. of India decided to waive loans of Rs.5,073 crores outstanding out of various SDF loans given to the assessee much earlier and other similar loans of Rs.381 crores. The assessee in turn waived a loan of Rs.2,453 crores given to Scope. Consequently, the assessee was left with capital reserve of Rs.3,001 crores [Rs.5,073 + Rs.381 ─ Rs.2,453], which was not available for distribution of dividends or profits. The total value of assets shown in the accounts of the company was suitably modified downwards in order to depict a realistic position. Since the loan was a capital receipt, the waiver of loan by the Govt. of India was claimed as not taxable and similarly the loan amount to Scope waived by the assessee was added back as non-tax deductible expense or expenses in capital field. The ld. AR of the assessee thus had contended that it was well- settled that the depreciation was allowable on actual cost of WDV of assets. In case of up-ward valuation of assets, the same is ignored and no extra depreciation is allowed under the Act. The converse also holds good. The ld. AR of the assessee further submitted that the assessing officer had treated the revaluation of the assets by reduction in their value as if an amount was received by an assessee for meeting the cost of assets and had allowed depreciation only on such reduced WDV on assets. While doing so, the assessing officer had not brought any material on record to substantiate its finding. Referring to the definition of the word 'actual cost' referred to in section 43(1) of the Act, the ld. AR of the assessee submitted that such actual cost is to be reduced by the portion of the cost as had been met directly or indirectly by any authority. The loans and advances resulted in debt and such debt would retain the same character whether the borrower had utilized debt for such purposes or otherwise. The lender of the money does not become the owner of the asset in case the loan is utilized for acquiring of an asset. The ld. AR of the assessee further pointed out that section 43(1) of the Act had used the phrase "as has been met". Therefore, for the purposes of reduction in cost of acquisition the other person must have met the cost of the asset. The rights of the lender are limited to the extent of transaction that has actually accrued between him and the creditor. 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 7 ITA No.1710/Del/2009 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 24th December, 1991 of the Govt. of India, Department of Steel, that these grants were sanctioned as reimbursement of payments by Scope, was subsidy to assessee for major modernization of its plants. The perusal of other sanction letters of the Govt. of India releasing funds from Steel Development Fund to assessee clearly showed that these funds were granted to the assessee on capital account for modernization of its various plants such as, additions, modifications / replacement in 4 Metric Tonne expansion in Bokaro Steel Plant and for Captic Power Plant for Rourkela Steel Plant. The funds were similarly released through various letters for up-gradation, additions, replacement and modernization of Bhilai, Rourkela and Durgapur Steel Plants. Consequent to these capital loans, the assessee company carried out its modernization programme and major additions, modifications / replacements were made in its capital assets. On such capitalization the assessee has been claiming depreciation regularly in the past. The amount of loan and reimbursement of payments by Govt. of India were directly identifiable with acquisition of capital assets by the assessee in its modernization and re-structuring process. In terms of Explanation (10) to section 43(1) of the Act, the loans, grants by the Govt. of India, constituted part of the actual cost of the assets directly or indirectly met by the Central Government. Once the amount of capital loan has been waived by the Govt. it naturally followed the cost of assets to the assessee got reduced by the amount of waiver of loan and there was a remission of the liability to that extent. He placed reliance on the decision of Hon'ble Gujarat High Court in the case of CIT Vs. Hides & Leather Products P. Ltd. 101 ITR 61 (Guj.) for the proposition that on cessation of the liability, the actual cost of assets have to be reduced by such liability. He further noted that the recommendations of IDBI in their report on financial re-structuring of the assessee company also supported his view.
Therefore, the assessee in its books of accounts had rightly reduced the WDV of its assets and charged depreciation on the same. Consequently, there was no reason for the assessee to make a claim of depreciation on the increased value of the WDV of the assets in view of the express provisions of law contained in section 43(1) read with Explanation (10) and 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 & 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 8 ITA No.1710/Del/2009 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 purchase are two different transactions. Similarly the loan and subsidy are two different things. The loan was given by the Central Govt. for modernization of the plant of the assessee company and the same was used for purchase of assets. The waiver of loan on subsequent date will not, therefore, affect the cost of assets. He further submitted that the assessee was not given subsidy at the time when the re-structuring was done. Explanation (10) to section 43(1) of the Act is applicable where assessee gets subsidy or grant or the money is reimbursed. The loan cannot be taken as subsidy or grant or reimbursement of the cost of acquisition. Therefore, waiver of the loan subsequently will have no affect on cost of the asset. He placed reliance on the decision of Hon'ble Supreme Court in the case of CIT Vs. Tata Iron & Steel Company Ltd. 231 ITR 285 (SC) for the proposition that waiver of loan will not alter the cost of the assets. He further submitted that section 43(6) of the Act defines the term 'WDV' and same has to be taken as prescribed under the section. Therefore, the waiver of loan cannot be taken into account for the purpose of determination of the written down value of the asset u/s 43(6)(c) of the Act and Explanation (10) to section 43(1) has no relevance. The ld. AR of the assessee further submitted that the waiver of loan is cancellation of contractual liability. Therefore, it does not amount to re-imbursement. He placed reliance on the decision of Hon'ble Kerala High Court in the case of CIT Vs. Cochin & Company Pvt. Ltd. 184 ITR 230 (Ker.) for the proposition that part of the loan written off subsequently will not amount to meeting the cost of the machinery by another person and, therefore, the actual cost of the machinery could not be reduced. In view of the above, it has been submitted that provisions of Explanation (10) are not applicable to the facts of the assessee's case as it is neither subsidy nor grant or reimbursement of the cost of assets.
10. On the other hand, the ld. [CIT] - DR submitted that the loan was given by the Government to meet the cost of capital assets. The amount was outstanding together with interest in the books of the assessee. IDBI was appointed to identify the troubles faced by the assessee. IDBI in its report had suggested that the value of assets were unduly inflated/ over stated by the amount of 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 9 ITA No.1710/Del/2009 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 that ITAT, Mumbai 'A'-Bench in the case of ACIT Vs. Jagdish C. Seth (2006)101 ITD 360 (Mumbai) held that where assets were not used for the purpose of business, the value of block of assets was to be reduced by the cost of such assets and on the balance depreciation was allowable. Therefore, it was not correct on the part of the assessee that once a particular asset becomes part of the asset its value could not be disturbed and the assessee will be entitled for allowance of deduction under section 32 on all machineries constituting the part of block of assets.
11.1 We have heard both the parties and gone through the relevant material placed on record. In this case the Government of India had advanced loan from Steel Development Fund for modernisation of various plants of the assessee. The assessee had utilised those loans in acquisition of plant and machinery. The assessee had not paid the said loan including interest thereon to Government of India. The assessee had been crediting the interest account of the Government. The assessing officer had recorded a finding that IDBI in its report on financial restructuring of the assessee company had specifically mentioned that there was a cost over-run of nearly Rs.3,800 crores in modernization programme of DSP, RSP and BSL, sizable part of which was on account of interest capitalization. Subsequently the principle amount of loans and interest capitalised thereon had been waived off by the central Government.
11.2 Section 43(1) of the Act defines expression 'actual cost' of an asset which reads as follows:
"43. In sections 28 to 41 and in this section, unless the context otherwise requires--
(1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:"
In sections 28 to 41 and in section 43, and it may be pointed out that this group of sections deals with computation of income under the head 'profits and gains of business or profession' and also with questions of depreciation allowance. For the purposes of computation of depreciation allowance u/s 32 determination of the actual cost of the asset is the first step. The expression "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, 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 10 ITA No.1710/Del/2009 account and the actual cost has to be reduced by such contributions even if they have proceeded from any other person or authority.
11.2 In CIT Vs. Hides & 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 Rs. 30,572 being the price of machinery, debited the amount in the account of the foreign supplier and credited the same amount in the capital reserve account. On the question whether the assessee was entitled to depreciation on the actual cost computed at Rs. 30,572 for the assessment years 1961-62 to 1965-66. The Hon'ble High Court held that, "... in view of the fact that the foreign supplier had not recovered the amount of Rs. 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation of this liability. The Act of 1922 applied to the assessment year 1961-62, and as the foreign supplier was neither Government nor public nor local authority, though there was cessation of liability the assessee was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessment year 1961- 62 on the basis that the cost to it of the machinery was Rs. 30,572. The Act of 1961 applied to the assessment years 1962-63 to 1964-65 and under section 43(7) of the Act, since there was cessation of liability, the actual cost of the machinery to the assessees for these assessment years should be reduced by Rs. 30,572."
Thus, where it was found that where there was cessation of liability in respect of the cost price of machineries particularly in the light of omission of supplier of the machineries to take legal action against the assessee, it was held that the actual cost of the machinery should be reduced by the amount of cessation of the liability.
11.3 In case of Ravi Leathers P. Ltd. Vs. CIT 240 ITR 702 (Mad.) it has been held that the grant which was converted from an interest free loan originally given by the foreign company to the assessee, had to be reduced as per section 43(1) of the Act from the actual cost in the hands of assessee of the machinery for the purposes of calculating depreciation and investment allowance. In the case of CIT Vs. Karnataka Power Corporation 247 ITR 268 it has been held that interest receives an hire charges from contractors are capital receipts which will go to reduce capital cost. In CIT Vs. S. Sudhakar 247 ITR 747 (Mad.) it has been held 11 ITA No.1710/Del/2009 that the assessee was entitled to depreciation only on the value of buses and not on the amount representing the route permit.
11.4 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 their life time even though their written down value had become zero. The assets on which the depreciation was claimed were consumer durables like TV, VCR, Refrigerators and Scooters etc., and therefore there was no question of those assets being put to any commercial use by the assessee. On these findings the assessing authority concluded that the transactions entered into by the assessee with its customers were in fact not leasing transactions inasmuch as the goods were never returned to the assessee at the end of the lease period. The Assessing Officer, therefore, declined to allow depreciation on the assets. The assessee being aggrieved by the order of the assessing authority filed appeal before the Commissioner (Appeals). On appeal both the Commissioner (Appeals) and the Tribunal concurred with the view taken by the assessing authority and dismissed the appeal.
On reference the Hon'ble Karnataka High Court has held that the assessee immediately after incurring the expenditure on the cost of the goods, debits the respective customer in respect of the entire cost in its books and the costs of goods incurred by the assessee became recoupable by it from its customers. The assessee follows mercantile system of accountancy. The assessee gets reimbursed by the customer in respect of the cost of the goods incurred by it although the actual payment may take sometime under the deferred payment scheme. Actual cost as defined under section 43(1) means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. As the assessee in its books of account debits the cost of the goods in the account of the customer and the customer becomes indebted to the extent of entire cost along with interest, the actual cost of the assets in the hands of the assessee becomes nil immediately on purchase of the goods. It goes without saying that depreciation cannot be allowed on assets for which the actual cost is nil.
12 ITA No.1710/Del/200912. If the facts of the case of the assessee are examined in the light of decision of Hon'ble Gujarat High Court in the case of CIT Vs. Hides & Leather Products Pvt. Ltd. (supra) and other High Courts one may find that on waiver of loan by the Central Government the liability of assessee had ceased to exist in the year under consideration. The loan 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 & Leather Products Pvt. Ltd. (supra) was questioned before Hon'ble Supreme Court in the case of in case of Saharanpur Electric Supply Co Ltd V 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 &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 v. U.P. Hotel-Restaurant Ltd. [1980] 123 ITR 626 (All.) and Kilkotagiri Tea & Coffee Estate Ltd. v. CIT [1978] 113 ITR 729 (Ker.) decided in the context of depreciation allowance and CIT v. Mithlesh Kumari [1973] 92 ITR 9 (Delhi) and Addl. CIT v. KS. Gupta [1979] 119 ITR 372 (AP) decided in the context of the allied concept of 'cost of acquisition' for purposes of capital gains.
These apart, there are clearly situations in which the actual cost does get altered prospectively and not retrospectively. One such instance is where the cost of an asset increases or decreases on account of fluctuation in the value of the currency. .........."
Therefore, in view of decision of Hon'ble Supreme Court the actual cost may change prospectively as in the cases falling u/s 43A of Act. Thus on waiver of loan by the Central Government would amount to meeting the cost of assets directly or indirectly on behalf of assessee in the year under consideration. Therefore the cost of assets has to be reduced by the amount of loan waived off during the year under consideration for the purposes of allowance of depreciation u/s 32 of the Act.
13. Now we examine the contention of ld Senior counsel for the assessee as to whether written down value of assets determined u/s 43(6)(c) can be can be disturbed in subsequent assessment year. The expression "written down value"
has been defined u/s section 43(6) and means as under:13 ITA No.1710/Del/2009
" (6) Written down value means-
(a) in the case of assets acquired in the previous year, the actual cost to the assessee;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force:
Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, "depreciation actually allowed" shall not include depreciation allowed under sub- clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi);]
(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 depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;]
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).
In order to ascertain the written down value of a particular block of asset in any assessment year the actual cost of the assets both acquired during the year under 14 ITA No.1710/Del/2009 consideration and earlier years have to be ascertained. While ascertaining the actual costs of each asset the portion of cost of the asset as has been met directly or indirectly by any other person or authority shall be reduced from the cost of such assets. The depreciation which have been actually allowed in the past whether such depreciations have been granted in the past under the Act of 1961 or under the Act of 1922 have to be deducted from the actual cost of assets. The aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year will be further adjusted under section 43(6)(c) by way of increase by the actual costs of assets acquired; or reduced on account of assets sold or discarded or demolished; or decrease in case of slump sale by the actual cost of the asset falling within that block as reduced by depreciation allowed/allowable to the extent such decrease does not exceed the written down value. In view of statutory provisions of section 43(6)(c), the written down value of assets has to be determined taking into account the actual cost of the assets which may change due to (i) meeting the cost of the asset by any other person; or (ii) increase/decrease in cost subsequently due to foreign exchange fluctuation; or (iii) for other reasons. We, therefore, hold that the actual cost of the asset is not permanent as determined in the year of acquisition. It is liable to change in subsequent year if the circumstances of the case so warrant.
14. Hon'ble Supreme Court in the case Saharanpur Electric Supply Co Ltd V 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 or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to previous year of acquisition. Where subsequent information, factual or legal, reveals that the actual cost determined originally was wrong, there can be no doubt that the original figure of actual cost has to be altered, if need be, and, if possible, by re-opening earlier assessment and, if that be not possible, at least for the future.15 ITA No.1710/Del/2009
It is not correct to say that, when an assessee acquires an asset, he acquires a right to obtain depreciation thereon equal to the actual cost of the asset as originally determined for tax purposes. The effect of clause (c) to proviso 10(2)(vi) of the 1922 Act and section 34(2) of the 1961 Act is only that while allowing depreciation in respect of any asset, the assessing officer should be careful to see that the aggregate of the depreciation allowed to the assessee in respect of that asset does not exceed the actual cost of the asset. In other words, as and when the provision is applied for each and every assessment year and the depreciation on any asset is calculated, it should be ensured that the depreciation allowed does not exceed the actual cost of the asset. In other words, as and when the provision is applied for each and every assessment year and the depreciation on any asset is calculated, it should be ensured that the depreciation allowed does not exceed the actual cost of the asset. In other words, the actual cost referred to is not the actual cost determined at the time of acquisition. The effect of the proviso is not to produce a negative written down value, but only to preclude further grant of depreciation on the asset in future. Read thus as a limitation on the maximum amount of depreciation that an assessee can claim in respect of a particular asset, there is no question of arriving at a negative written down value.
There is no doubt or ambiguity about section 43(6). It is clear and explicit that the actual cost has to be determined in each assessment year, even of assets acquired before the commencement of the previous year relevant to the assessment year. It does not create any injustice or hardship; on the contrary, it is only reasonable and just. Where a person purchases an asset it may be correct to say that the cost of the asset does not change because the 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 restrict the definition in section 43(1) to assets acquired in previous year."
Thus from the decision of Hon'ble Supreme Court it is clear that 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 irrespective of fact that the actual cost of the asset had already been determined in one or more earlier years. The section does not say that the computation of the actual cost of 16 ITA No.1710/Del/2009 the asset has to be based only on the facts or law as they stood at the time of acquisition of the asset and as could have been taken into account for the assessment year relevant to previous year of acquisition. 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. Thus our view for computation of written down value of block of assets as expressed in paragraph 13 above is supported by the decision of Hon'ble Supreme Court in the case of Saharanpur Electric Supply Co Ltd (supra). Therefore, we do not find any merits in the arguments advanced by the ld counsel for the assessee that once written down value of particular block assets is determined it cannot be disturbed.
15. On the question whether subsidy reduces the actual cost or not, there existed divergent views, one view was that, as provided under section 43(1) the subsidy given by the Government is to be deducted in the computation of actual cost, if such subsidy is in relation to the purchase of the machinery etc. This view is supported by the Departmental Circular No. 190 dated 1st March, 1976. In that view of the matter the subsidy of 15 per cent allowed on the cost of the machinery, plant and building has been held to reduce the actual cost [CIT Vs. Jindal Bros. Rice Mills 179 ITR 470 (P & H)]. The controversy was set at rest by the Hon'ble Supreme Court in CIT Vs. P. J. Chemicals Ltd. 210 ITR 830 (SC) wherein the decisions in the case of CIT Vs. Janak Tubes Pvt. Ltd. 179 ITR 536 (P&H); and CIT Vs. Jindal Bros. Rice Mills 179 ITR 470 (P & H) have been reversed by holding that where Govt. subsidy is an incentive not 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 is so received, shall not be included in the actual cost of the asset to the assessee.] 17 ITA No.1710/Del/2009 The object of insertion of Explanation 10 by the Finance Act (No.2), 1998 with effect from 1/04/1999 has been clarified by the Departmental Circular No. 772 dated 23rd December, 1998 as under :-
" 22.2 Explanation 10 provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or 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), than 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. Cost incurred / payable by the assessee alone could be the basis for any tax allowance. This explanation further provides that where such subsidy or grant for 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 for 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 is so received, shall not be included in the actual cost of the asset to the assessee. "
16.1 The newly inserted Explanation 10 to section 43(1) by the Finance Act (No. 2), 1998 enacts a special provision operative for and assessment year 1999-
2000 with regard to subsidy or grant or reimbursement. In view of the specific statutory provisions enacted in explanation 10 the decisions under the heading 'subsidy' are relevant upto and including assessment year 1998-99. For and from assessment year 1999-2000, the matter in regard to subsidy etc. has to be governed by the provisions of Explanation 10. The decision of Hon'ble Supreme Court in the case of CIT Vs. Tata Iron & Steel Co. Ltd. 231 ITR 285 (SC) relied upon by the ld counsel for the assessee relates to a period prior to enactment of section 43A. In this case it has been held that the manner of repayment of loan cannot affect the cost of assets acquired by the assessee. What is the actual cost depends on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee. But even if the assessee did not repay the loan will not alter the 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 & 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 asset, the amount by which the liability is so increased or reduced during the 18 ITA No.1710/Del/2009 previous year shall be added to or as the case may be deducted from, the actual cost of asset as defined in clause (1) of section 43 etc. 16.2 Explanation 10 to section 43(1) has been inserted w.e.f. 01.04.1999. As per the provisions of Explanation 10 where a portion of cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or State Government or any authority established any law or by any other person in form of a subsidy or a grant or reimbursement (by whatever name called), then so much of the cost as is relatable to such subsidy or grant of reimbursement shall not be included in the actual cost of the asset of the assessee. In the case before us the Central Government has waived off the loan given to the assessee for acquiring of the assets. The waiver of loan therefore would be in nature of a subsidy or a grant. Under the provisions of Explanation 10 the amount of loan waived by the Central Government has to be reduced in order to find out actual cost of the asset for the purpose of allowance of depreciation u/s 32A of the Act. Therefore, the decision of Hon'ble Supreme Court in the case of Tata Iron and Steel Company Ltd. would not be applicable to the facts of the assessee's case. The other decision relied upon by the assessee is in the case of CIT v/s Cochin Co. P. Ltd. (Supra). This decision relates to AY 1075-76. After insertion of Explanation 10 to section 43(1) the waiver of loan granted by the Central Government will be governed by the statutory provisions of the Explanation and hence the decision of Hon'ble Kerala High Court in the case of Cochin Co. P. Ltd (supra) will also be not applicable to the case before us.
17. In the case before us the Government of India has given loans to meet the cost of modernisation of various steel plants of the assessee. The assessee did not pay interest and principal amount over the period of several years. In the year under consideration the Government of India took a decision to waive off the loan amount together with interest. This waiver of loan by the Government of India results into cessation of liability towards payment of loan. The waiver of loan is thus in nature of grants from the Government for the purposes meeting the costs of assets for the purposes of modernisation 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."
19 ITA No.1710/Del/2009Since this issue is the same which has been decided by ITAT against the assessee, respectfully following the same, we dismiss ground nos.1.1 & 1.2 of the assessee's appeal.
GROUND NOS.2.1 & 2.2
6. Ground Nos.2.1 & 2.2 related to the expenditure incurred on account of removal of overburden of mines. The Department treated these expenses as deferred revenue expenditure and held to be allowable spread over in five years by holding that benefit of expenditure would be enjoyed by the assessee over the period of time as the assessee would continue to enjoy the benefits over a long period. The CIT (A) has decided the issue against the assessee by holding as under :
" I have considered the submissions of the ld.AR and the facts of the case. I find that this issue has been agitated since AY 2000-01. My Ld. predecessor has decided this issue against the appellant vide order dated 26.3.04 for AY 2000-01, Assessee's appeal is pending before the ITAT. This issue was also decided by myself against the assessee in AY 2002-03 vide order dated 17.01.2008. The facts remain the same this year also. According, following the rationale of my ld. Predecessor it is held that the A.O. was justified in making the disallowance.
However, there is merit in the alternate prayer of the assessee. The A.O. has himself observed in the assessment order that the expenditure incurred on removal of overburden is to be spread over and allowed in five years. According, the A.O. is directed to allow 1/5th of the expenditure pertaining to removal of overburden in respect of AY 2000-01, 2001-02 & 2002-03 amounting to Rs.815.40 lakhs in this year as a consequential relief."
6.1 While pleading on behalf of the assessee, learned AR submitted that this issue is covered by the decision of the ITAT, 'D' Bench in ITA No.2782/Del/2004 & others dated 25.6.2009 (cited supra). Ld. DR relied on the order of authorities below but he was not having any contrary view to the fact that this issue is covered in favour of the assessee by the decision of the ITAT, cited supra.
20 ITA No.1710/Del/20097. After hearing both the sides, we find that the ITAT in its decision (cited supra) has decided the issue in favour of the assessee by holding as under :-
"21. We have heard both the parties and gone through the material available on record. The assessing officer in assessment years 1993-94 and 1994-95 has allowed the claim of the assessee in respect of expenses on VRS, cost on reduction studies, development expenses and removal of over-burden in the year in which expenditure was incurred though the assessee treated the expenses as deferred revenue expenditure. Section 35-DDA was inserted in the statute by Finance Act, 2001 with effect from 1/04/2001. Therefore, the provisions of section 35-DDA of the Act can not be applied for the expenditure incurred in assessment year 2000--01. ITAT, Jodhpur Bench, in the case of P. I. Industries (supra) has held that the provisions of section 35-DDA were not retrospective in nature. Hon'ble Madras High Court in the case of CIT Vs. Sympson & Company (supra) has held that when payment is made for purpose of retrenchment of workers, it was for the purpose of reducing the staff and to bring about a reduction in the wage bill as well. Therefore, these were matters of management pertaining to business considerations and expediency and the expenditure incurred by the assessee in this regard was for the purpose of business and also with a view to maintain good relationship with the labour. That expenditure had to be considered as having been laid out wholly and exclusively for the purposes of assessee. Therefore, the sum paid under voluntary retirement scheme was deductible. In our considered view, the expenditure in respect of voluntary retirement scheme, cost reduction 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."
In this decision, the expenditure incurred for the removal of overburden of mines has been allowed as a revenue expenditure. Therefore, respectfully following the same, we allow this ground of appeal of the assessee.
GROUND NOS.3.1 & 3.2
8. In Ground Nos.3.1 & 3.2, the issue involved is treating the liability on account of "Employees benefit Scheme" as deferred revenue expenditure and allowing only 20% of it. This is covered against the assessee by the decision of ITAT in ITA 21 ITA No.1710/Del/2009 No.2782/Del/2004 & others dated 25.6.2009 in para no.39. The issue had been decided as under :-
"39. We have heard both the parties. Under the employees benefit scheme, the assessee is claiming expenditure in respect of balance service to be rendered by the employee in a case if he dies in an accident or becomes incapacitated. The assessee has claimed the expenditure on the ground that normal date of retirement of the employee was known at the date of accident and the last salary drawn was also known. Therefore, the liability was ascertainable. The assessee placed reliance on the decision of Hon'ble Supreme Court in the case of Bharat Earthmovers 245 ITR 428 (SC). It has also been submitted that C & A G has raised objections for not treating the amount in full as revenue expenditure. There are two important aspects of employees benefit scheme i.e. (i) the date of accident resulting in loss of life or limb; (ii) the last salary drawn by the employee involved in the accident. On the basis of these two parameters the amount payable to the assessee is determined and accordingly the assessee provided in its accounts the liability on the basis of actuarial method of valuation. 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."
Respectfully following the coordinate Bench of the ITAT (cited supra), we dismiss grounds no.3.1 & 3.2 of appeal taken by the assessee.
GROUND NOS.4.1 & 4.2
9. In ground nos.4.1 & 4.2, the issue is regarding disallowance u/s 43B of Income-
tax Act, provident fund dues of Rs.5582.97 lacs deposited beyond due date but before the due date for filing the return. At the time of hearing, learned AR for the assessee 22 ITA No.1710/Del/2009 submitted that grounds raised in Nos.4.1 & 4.2 are covered in favour of the assessee by the court decisions including the judgment of Hon'ble Supreme Court in CIT vs. Vinay Cement Ltd. 313 ITR (St.) 1.
10. After hearing both the sides and going through the case laws, we find that these grounds are covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of CIT vs. Vinay Cement Ltd., SLP (C) No.4619 of 2007 and Hon'ble Supreme Court held as under :
"7.3.2007 : Their Lordships S.H. Kapadia and P.K. Balasubramanyan JJ. Dismissed the Department's special leave petition against the judgment dated June 26, 2006 of the Gauhati High Court in I.T.A. Nos.2 of 2005 and 56 and 80 of 2003 reported in 284 ITR 619 whereby the High Court held that the contributions made towards provident fund, etc., after the close of the accounting period but before the due date of filing of the return of income for the assessment year 1992-93 were entitled to relief under section 43B (b) of the Income-tax Act, 1961. The Supreme Court while dismissing the special leave petition observed that these were cases concerning the law as it stood prior to the amendment of section 43B and that in the circumstances the assessee was entitled to claim the benefit in section 43B for that period particularly in view of the fact that it had contributed to provident fund before filing the return."
This issue is also covered in favour of the assessee by the judgment of Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Limited 319 ITR 306 (SC) where the Hon'ble Supreme Court held as under :-
" The omission of the second proviso to section 43B of the Income- tax Act, 1961, by the Finance Act, 2003, operated, retrospectively, with effect from April 1, 1988 and not prospectively from April 1, 2004.
Earlier under the second proviso to section 43B as amended by the Finance Act, 1989, assessees were entitled to deduction only if the contribution stood credited on or before the due date given in the Provident Funds Act. This created further difficulties and on a representation made to the Finance Ministry one more amendment was made by the Finance Act, 2003. Though this amendment was made applicable with effect from April 1, 2004, the amendment was curative in nature and applied retrospectively with effect from April 1, 1988.23 ITA No.1710/Del/2009
When a proviso in a section is inserted to remedy unintended consequences and to make the section workable, the proviso which supplies an obvious omission therein is required to be read retrospectively in operation, particularly to give effect to the section as a whole."
Respectfully following the same, we allow these grounds of the assessee's appeal.
GROUND NO.5
11. Ground No.5 is related to the expenses of non-convertible bonds. At the outset, it was mentioned that this issue is also covered in favour of the assessee by the decision of ITAT in ITA No.2782/Del/2008 dated 25.6.2009. The ITAT in the said decision observed as under :-
"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, at the time of assessment, has however, agreed that in case the expenditure was to be treated as capital expenditure, then 1/10th should be allowed as per the provisions of section 35-D of the Act. The assessing officer accepted the submissions made by the assessee and allowed 1/10th of the expenses in the year under consideration and the balance was added in the income of the assessee.
27. On appeal the ld. CIT (Appeals) relying on the order for assessment year 1998-99 upheld the order passed by the assessing officer. While upholding the order he held that the expenditure was to be amortized under section 35-D of the Act.
28. Before us the ld. AR of the assessee submitted that this issue is covered in favour of the assessee by order of the ITAT for assessment year 1998-99. It has been held that provisions of section 35-D of the Act were not applicable to the facts of the assessee's case. On the other hand Ld Sr. DR supported the order of CIT(A).24 ITA No.1710/Del/2009
29. We have heard both the parties and gone through the material available on record. ITAT while allowing the claim of the assessee in para 11 of order dated 28th November, 2008 held as under :-
" 11. It was an assessee's continuing liability which stretched to a period of 12 years (in that case) that the proportionate liability was disallowed. In the present case, that the expenses incurred for the issue of the bonds are not in the nature of liability in the nature of the discount on the debentures. It stands on a different footing. The routine expenditure is incurred and there is no continuing liability in such expenditure. When debentures are issued, whether at a discount or not, there would be expenditure and the Supreme Court in the case of Madras Industrial & Investment Corporation Ltd. had dealt with the issue of the discount on the debentures and not on the issue of the routine expenses in relation to issue of the debentures/bonds. That being so, we are of the view that the decision of the Supreme Court in the case of India Cement Ltd would apply and as the expenditure has been incurred during the relevant assessment year in relation to the issue of the bond itself such expenditure is liable to be allowed as a revenue expenditure and we direct so. This is also in accordance with the decision of jurisdictional High Court in Thirani Chemical (supra) and the Board's circular dated 19.3.1971 which are though for allowances of expenditure incurred vis-à-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."
Since the issue is squarely covered by the decision of ITAT in favour of the assessee, respectfully following the same, we direct the Assessing Officer to allow the assessee's claim in relation to the issue of bonus as claimed.
GROUND NOS.6.1 & 6.2
12. Ground Nos.6.1 & 6.2 read as under :-
6.1 Both the authorities below have erred in disallowing Rs.1,248 lacs or 8.00% out of the interest at 8.75% payable to KFW Germany.
6.2 Without prejudice to the foregoing they should have allowed the expenses incurred [Rs.2,841 + 1,593 lacs] which have been set-off towards the subsidies of 8% received from KFW, Germany in this and earlier years.25 ITA No.1710/Del/2009
12.1 The CIT(A) decided the issue as under :
" I have considered the submissions of the Ld. AR and the facts of the case. I find that the identical issue was considered by my Ld predecessor in the appeal for AY 1998-99. vide order dated 5.2.04, it was held that the appellant would be entitled for the deduction on account of interest on foreign currency loan only to the extent that it had been remitted. The same decision of CIT (A) was followed in subsequent years including the latest decided year AY 2002-03 vide my order dated17/1/2008.
The matter has not been disposed by ITAT. Therefore following the decision from 1998-99 to 2002 to 2003, this ground of appeal is decided against the appellant.
However, the appellant company has raised an alternate ground in this year that the foreign exchange fluctuation reserve-"created by debit to P&L A/c of this year and the earlier years but not allowed as a deduction in computation of Taxable Income may be considered for allowance in this year as the foreign exchange fluctuation met in this year on account of actual fluctuation.
It is correct that in accordance to the provision of Sec.43A when the assessee has to discharge additional liability in rupee terms for repayment of foreign exchange loan then the assessee is eligible to enhance the cost of asset to that extent and claim depreciation on it.
However the learned A.O. has not discussed about it in his order. Therefore, the A.O. is directed to examine the issue and allow consequential depreciation on it in accordance to law. If necessary the assessee may be given an opportunity of being heard."
12.2 At the outset, it was mentioned that Ground Nos.6.1 & 6.2 is also covered in favour of the assessee by the decision of ITAT, cited supra, where the ITAT held as under :-
"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 26 ITA No.1710/Del/2009 loan and out of the balance 8 per cent interest, 4 per cent was kept in PCE reserve for purchase of pollution control equipment and the remaining 4 per cent was kept in foreign exchange fluctuation reserve for making the future fluctuations in the exchange rate. Since these reserve were kept for appropriation, they did not effect the taxation in any manner. Accordingly the assessing officer disallowed 8 per cent of interest. On appeal, the ld. CIT (Appeals) upheld the order of the assessing officer following his order for assessment year 1998-99. He held that only 0.75 per cent has been remitted and, therefore, the assessee will be entitled for deduction on account of interest on foreign currency loan to the extent it has been remitted.
23. Before us the ld. AR of the assessee submitted that ITAT, Delhi Bench 'H' in ITA. No. 1927 (Del) of 2004 for assessment year 1998-99 order dated 28/11/2008 has deleted the addition. Therefore, it has been pleaded that the issue is squarely covered by the decision of the ITAT. On the other hand, the ld. Sr. DR supported the order of the ld. CIT (Appeals).
24. We have heard both the parties. We have gone through the order of the ITAT in assessee's own case. We find that ITAT vide order dated 28th November, 2008 directed the assessing officer to allow the claim of interest liability at the rate of 8.75 per cent as claimed. While directing the assessing officer, ITAT held as under :-
" 16. We have heard the parties and considered the rival submissions. The assessee has taken a loan from M/s.KFW, Germany. As per the conditions of the loan agreement the goods and services to be financed from the loan shall be provided by the firms that are domiciled in the Federal Republic of Germany and conducted their significant portion of their business. This is evident from article 1.2 of the loan agreement. Article 3.2 (a) of the loan agreement provides for liability on account of the interest @ 8.75 % p.a. It reads as under :
"3.2 a) The borrower shall pay interest on Portion I of the Loan at a rate of 8.75% p.a. Of this interest rate the borrower shall pay 0.75 percent p.a. in Deutsche Mark to the account of KFW specified in Article 3.12. Of the balance of 8.0% p.a. 4.0% p.a. shall be allocated to provisions to be used exclusively to cover exchange rate losses incurred in connection with this Loan while the remaining 4.0% shall be used for Pollution 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.27 ITA No.1710/Del/2009
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 agreement of loan nor has the revenue been able to point out any specific article or any specific action which has resulted in the waiver of the liability of the assessee in regard to the interest as specified in Article 3.2 (a). Further, the statement of provision created for exchange loss and utilization thereof show that during the relevant assessment year 1998-99 show the opening balance of the provision was 17.3.06 which tallied with the schedule to the balance sheet and P&L account in clause 1.15 (Provision) the additions during the year was 12.59 and what was utilized during the year was 29.95 thereby the balance at the year end was "nil". The assessee has not made any claim on account of the foreign exchange fluctuation loss either in profit & loss account or in the assessment proceedings of this year and subsequent years. The chart in regard to the expenses incurred in relation to the Pollution Control and Environmental Management Schemes also shows that the assessee has not claimed any depreciation on the same. That being so, we are of the view that the liability of interest as per the loan agreement is absolute and the assessee has rightly claimed the expenses of the interest. It cannot be reduced by the provision for the foreign currency loss. The action of the assessee in allocating 4% out of the 8.75% towards provision for the use exclusively to cover the exchange rate loss has also been complied with. Similarly, the balance 4% has also been used for the Pollution Control Environmental Management Schemes cannot reduce the liability of the assessee. It was used as per stipulation in the loan agreement. Both are conditions subsequent and do not affect the liability to payment @ 8.75% fixed as per the agreement. The liability having been incurred, the same was liable to be allowed as revenue expenditure. It is only as per the subsidiary condition of the agreement that the method of disbursement of the interest liability has been complied with by the assessee and this would not mean that there is any remission of the liability nor can it be said that the remission on the part of the lender KFW. This being so, the finding of the ld. CIT(A) and the AO on this issue are reversed and the AO is directed to allow the claim of interest liability at 8.75 % as claimed. "
25. Since the issue is squarely covered by the decision of the ITAT in assessee's own case in assessment year 1998-99 and no new facts have 28 ITA No.1710/Del/2009 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."
13. After hearing both the sides and going through the decision of the ITAT (supra), we find that these grounds are squarely covered in favour of the assessee and according allow these grounds of the assessee.
GROUND NOS.7.1 & 7.2
14. In these grounds, the issue involved is regarding depreciation on mining rights.
The CIT (A) has decided the issue as under :-
" I have considered the submission of the AR and the facts of the case.
The change in law on depreciation on intangible asset has been brought in form 1/4/1999 but the assessee has raised the ground for 1st time in AY 2002-03.
The claim was rejected by the A.O. by stating that the "Mining Right" have not been specifically enumerated in the Section as "in Intangible assets" in section 32(1)(iii) of Income tax Act and it was confirmed by me in AY 2002-03 vide order dated 17/1/2008."
15. This issue has been also considered by ITAT in ITA No.1013/Del/2008 for assessment year 2002-03. While deciding this issue in ITA No.1013/Del/2008, the ITAT observed as under :-
"45. The last issue for consideration relates to depreciation on mining rights. During the course of assessment proceedings the assessing officer noted that the assessee in the computation of income had itself added back an amount of Rs.98.44 lakhs representing depreciation on mining rights treating it as disallowable claim. The claim of allowability in earlier years was not pressed before the appellate authority. However, during the course of assessment proceedings for assessment year under consideration, the assessee claimed the depreciation on mining rights. The assessing officer rejected the claim of the assessee on the ground that the mining rights have not even enumerated amounts the list of eligible intangible assets.29 ITA No.1710/Del/2009
46. On appeal the ld. CIT (Appeals) observed that change in law on depreciation on intangible assets has been brought in the statutes from 1/04/1999 and the assessee has raised the ground for the first time before the ld. 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 & 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 and, therefore, the claim for depreciation is not allowable.
48. We have heard both the parties. Depreciation on intangible assets has been provided in the statute with effect from 1/04/1999 on assets acquired after 1/04/1998. The dates on which the mining rights were acquired is not available on record. Neither the ld. CIT (Appeals) nor the assessing officer has gone through the date of acquisition of mining rights. The ld. AR of the assessee, during the course of hearing, submitted that for earlier years rectifications petitions are pending before the ld. CIT (Appeals). The issue whether mining rights are intangible assets has neither been examined by the assessing officer nor by the ld. CIT (Appeals). We are, therefore, of the considered view that this matter should be restored to the file of the assessing officer with the directions to verify the date of acquisition of mining rights and examine the case whether the mining rights are covered under intangible assets, as specified in old Appendix 1 applicable for assessment year 1988-89 to 2002-03. As regards the alternative claim of the assessee as revenue expenditure, this issue has also not been examined by either of the authorities. We, therefore, set aside the matter to the file of the assessing officer with a direction to examine the claim of the assessee whether expenditure incurred on acquisition of mining rights is revenue expenditure or capital in nature."
Both sides agreed that issue may be restored to Assessing Officer. Since the CIT (A) has decided the issue on the basis of decision of the ITAT in ITA No.1013/Del/2008 for 30 ITA No.1710/Del/2009 assessment year 2002-03, the ITAT had set aside the issue to the file of Assessing Officer with the direction to examine the claim of the assessee, hence we also set aside this issue to the file of Assessing Officer for re-examination.
16. Ground Nos.8 & 9 are general in nature and do not require any adjudication.
17. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in open court on the 23rd day of July 2010.
Sd/- sd/-
(RAJPAL YADAV) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : the 23rd day of July, 2010
TS
Copy forwarded to :
1. The Appellant
2. The Respondent
3. CIT
4. CIT(A)-XII, New Delhi.
5. DR, ITAT.
Asstt.Registrar
ITAT, New Delhi.