IT : Benefit of cessation of liability to repay a loan liability to purchase a capital asset is not taxable under either section 41(1) or section 28(iv)
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[2012] 26 taxmann.com 333 (Bom.)
HIGH COURT OF BOMBAY
Commissioner of Income-tax-3
v.
Xylon Holdings (P.) Ltd.*
S.J. VAZIFDAR AND M.S. SANKLECHA, JJ.
IT APPEAL NO. 3704 OF 2010 †
SEPTEMBER 13, 2012
Section 41(1) of the Income -tax Act, 1961 - Remission or cessation of trading liability - Repayment of loan - Assessment year 2004-05 - Whether cessation of liability to repay a loan taken to purchase a capital asset does not result in a revenue receipt and it is not taxable under section 41(1) - Held, yes [Para 8 & 9] [In favour of assessee]
Section 28(iv) of the Income-tax Act, 1961 - Business income - Value of benefit arising from exercise of business or profession - Whether cessation of liability to repay a loan taken to purchase a capital asset does not result in a revenue receipt and it is not taxable under section 28(iv) - Held, yes [Para 8 & 9] [In favour of assessee]
FACTS
Facts
• The assessee's liability to pay a loan taken towards the purchase of a car was taken over by the holding company. However, motor car continued to be a part of the assets of assessee and depreciation thereon was also claimed by it.
• The Assessing Officer added back said amount to the income of the assessee being taxable under section 41(1).
• The Commissioner (Appeals) deleted the addition.
• The Tribunal held that the cessation of liability to repay a loan taken to purchase a capital asset did not result in a revenue receipt and it was not taxable under section 41 (1) as said expenditure was not incurred in earlier years.
Arguments of revenue
• The loan amount written off would be taxable under section 28(iv) as a benefit arising from business.
Arguments of assessee
• The said issue was covered by the decision of the High Court in the case of Mahindra & Mahindra Ltd.v. CIT [2003] 261 ITR 501/ 128 Taxman 394. Section 28(iv) would not apply to any benefit received in cash or money.
Issue Involved
• Whether the benefit of cessation of liability to repay a loan is not taxable under section 41(1)?
HELD
• The issue arising in this case stand covered by the decision of the High Court in the matter of Mahindra & Mahindra Ltd. (supra). The alternative submission that the amount of loan written off would be taxable under section 28(iv) also came up for consideration before the Court and it was held that section 28(iv) would apply only when a benefit or perquisite is received in kind and has no application where benefit is received in cash or money. [Para 8]
• In view of above, no substantial question of law arose for consideration. [Para 9]
CASE REVIEW
Mahindra &Mahindra Ltd. v. CIT [2003] 261 ITR 501 / 128 Taxman 394 (Bom.) (para 5), Solid Containers Ltd. v. Dy. CIT [2009] 308 ITR 417 / 178 Taxman 192 (Bom.) (para 6) and CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 / 88 Taxman 429 (SC) (para 8).
Vimal Gupta for the Appellant. Percy Pardiwalla, Divesh Chawla and Ativ Patel for the Respondent.
JUDGMENT
M.S. Sanklecha, J. - This appeal by the revenue under Section 260A of the Income Tax Act ("the Act") is filed against the order dated 13/8/2009 of the Income Tax Appellate Tribunal ("the Tribunal") in ITA No.3323/Mum./2008 relating to assessment year 2004-05.
2. Being aggrieved, the revenue has formulated the following questions of law for consideration of this Court.
(a) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the benefit of cessation of liability to repay a loan liability is not taxable u/s. 41(1) of the Income Tax Act?
(b) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the benefit of cessation of liability to repay a loan liability is not taxable u/s. 28(iv) of the Income Tax Act?
3. On 31/10/2004, the respondent-assessee filed its return of income for the assessment year 2004-05 declaring a total income of Rs.98.23 lacs. During the course of assessment proceedings it was found that the respondent-assessee had entered into an agreement with its holding company one M/s. Vossloh Schwave (India) Private Ltd. (holding company) by virtue of which the liability to pay a loan of Rs. 29.17 lacs taken towards the purchase of a car was taken over by the holding company. The motor car for which the loan was taken continued to be a part of the schedule of assets of the respondent-assessee and depreciation thereon was also claimed. The Assessing officer by an order dated 22/12/2006 under Section 143(3) of the Act added back an amount of Rs. 29.17 lacs to the income of the respondent-assessee as being taxable under Section 41(1) of the Act.
4. The Commissioner of Income Tax (Appeals) by an order dated 31/10/2008 allowed the respondent-assessee's appeal. The Commissioner of Income Tax (Appeals) held that the liability to repay a loan taken towards the purchase of a motor car which had ceased cannot be subjected to tax. This is for the reason that the extinguishment of the loan which was taken for the purchase of a capital asset like a motor car is not a revenue receipt. Hence, the same is not taxable.
5. The appeal by the revenue to the Tribunal on the aforesaid issue was dismissed by an order dated 13/8/2009. The Tribunal held that the cessation of liability to repay a loan taken to purchase a capital asset does not result in a revenue receipt. Further, the amount of Rs. 29.17 lacs was not taxable under Section 41(1) of the Act as the same was not an expenditure incurred in the earlier years. The issue according to the Tribunal was covered in favour of the respondent-assessee by a decision of this Court in the matter of Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501 / 128 Taxman 394 . Consequently, the Tribunal held that amount of Rs. 29.17 lacs is not taxable either under Section 41(1) or 28(iv) of the Act.
6. In support of the appeal, Mr. Vimal Gupta, the learned Counsel for the revenue contends that the decision in the matter of Mahindra & Mahindra Ltd. (supra) would not be applicable in view of the subsequent decision of this Court in the matter of Solid Containers Ltd. v. Dy. CIT [2009] 308 ITR 417/ 178 Taxman 192. In the above case, this Court has distinguished the decision rendered in the matter of Mahindra & Mahindra Ltd. (supra) and held that waiver of loan taken for trading activity would become the assessee's income and be subject to tax. Alternatively, Mr. Gupta submits that the loan amount written off would be taxable under Section 28(iv) of the Act as a benefit arising from business.
7. As against the above, Mr. Pardiwalla, Counsel for the respondent-assessee submits that the issue arising in this appeal would stand covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra). According to him, the decision of this Court in the matter of Solid Containers Ltd. (supra) is not applicable as in that case the loan was taken for business purposes and not for purchase of a capital asset as in this case. So far as the alternative submission is concerned, Mr. Pardiwalla submits that Section 28(iv) of the Act would not apply to any benefit received in cash or money as in this case. This issue according to Mr. Pardiwalla is also covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra).Therefore, he submits that the appeal should not be entertained.
8. We have considered the submissions. The issue arising in this case stand covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra ). The decision of this court in the matter of Solid Containers Ltd. (supra) is on completely different facts and inapplicable to this case. In the matter of Solid Containers Ltd. (supra ) the assessee therein had taken a loan for business purpose. In view of the consent terms arrived at, the amount of loan taken was waived by the lender. The case of the assessee therein was that the loan was a capital receipt and has not been claimed as deduction from the taxable income in the earlier years and would not come within the purview of Section 41(1) of the Act. However, this Court by placing reliance upon the decision of the Apex Court in the matter of CIT v. T.V. Sundaram Iyengar & Sons Ltd. [1996] 222 ITR 344 / 88 Taxman 429 held that the loan was received by the assessee for carrying on its business and therefore, not a loan taken for the purchase of capital assets. Consequently, the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra) was distinguished as in the said case the loan was taken for the purchase of capital assets and not for trading activities as in the case of Solid Containers Ltd. (supra). In view of the above, the decision of this Court in the matter of Solid Containers Ltd. (supra) will have no application to the facts of the present case and the matter stands covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. ( supra). The alternative submission that the amount of loan written off would be taxable under Section 28(iv) of the Act also came up for consideration before this Court in the matter of Mahindra & Mahindra Ltd. ( supra) and it was held therein that Section 28(iv) of the Act would apply only when a benefit or perquisite is received in kind and has no application where benefit is received in cash or money.
9. In view of the issue arising in this appeal being covered by the decision of this Court in the matter of Mahindra & Mahindra Ltd. (supra), no substantial question of law arises and both the questions are dismissed.
10. The appeal is dismissed. No order as to costs.
IT : Where an assessee purchases an asset by taking a loan from a related concern and claims depreciation thereupon and where subsequently such loan was waived and assessee treats such waiver as capital receipt not chargeable to tax and continues to claim depreciation on such asset, revenue cannot do anything to deny claim of depreciation as law has a lacuna in that regard
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[2012] 28 taxmann.com 82 (Bangalore - Trib.)
IN THE ITAT BANGALORE BENCH 'B'
Akzo Nobel Coatings India (P.) Ltd.
v.
Deputy Commissioner of Income-tax, LTU, Bangalore*
N.V. VASUDEVAN, JUDICIAL MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER
IT Appeal Nos. 751 to 755, 771 to 773, 1131 & 1164 (Bang.) of 2010
And 349 (Bang.) of 2011
[Assessment years 2001-02 to 2007-08]
SEPTEMBER 14, 2012
Section 43(6), read with sections 32 and 43(1), of the Income-tax Act, 1961 - Written down value - Assessment years 2001-02 to 2007-08 - Assessee purchased plant and machinery in 1996 at a price of Rs. 13.48 crore for which it took loan of same amount from a group concern - 'Actual cost' was shown in books and depreciation was claimed - In 2000 parent company waived loan and such waiver was shown as a capital receipt in balance sheet; however assessee did not make any adjustment in its books recognising writing off of amount payable for purchase of plant and machinery and continued to claim depreciation which was being allowed till 2004-05 when Assessing Officer came to know about waiver of loan - Consequently, Assessing Officer re-opened assessment for assessment years 2001-02 to 2003-04 and re-worked w.d.v. by reducing it to extent of waived loan invoking provisions of section 43(6)(c) - Whether since there was no sale or discarding or demolishing or destruction of any assets comprising in block of assets during previous year, provisions of section 43(6)(c)(i)(B) could not have been invoked on ground of waiver of loan - Held, yes - Whether further since concept of 'actual cost' as defined under section 43(1) is applicable only in year of purchase of assets, actual cost of Rs. 13.48 crore recorded in 1997-98 could not have been disturbed in 2001-02 - Held, yes - Whether in that regard there was a lacuna in law inasmuch as on one hand assessee got waiver of monies payable on purchase of machinery and claimed such receipt to be not taxable in view of it being capital receipt and on other hand assessee claimed depreciation on value of machinery for which it did not incur any cost - Held, yes - Whether, therefore, under law revenue had no remedy and, therefore, disallowance of depreciation could not be sustained - Held, yes [Para 22] [Partly in favour of assessee]
Circulars & Notifications : Circular No. 469, dated 23-9-1986 and Circular No. 772, dated 23-12-1998
FACTS
Facts
• The assessee was a manufacturer and trader of polymer based industrial paints and sealant products. It was a 100 per cent subsidiary of a Dutch group of companies Courtaulds.
• It acquired plant and machinery for one of its plants in April, 1996 for which funds were arranged by one of the group companies viz., CEL, UK.
• Assessee, therefore, was liable for payment for purchase of plant and machinery to CEL, UK.
• Later on the Courtaulds group, including assessee and CEL, UK was acquired by the Akzo group. Due to certain business exigencies the liability of assessee towards CEL, UK for purchase of plant and machinery was waived in April 2000. Due to such waiver, the assessee became the beneficiary of the waiver of loan to the extent of Rs. 13.48 crore.
• The assessee, however, at the time when machinery was purchased recorded the actual cost at Rs. 13.48 crore in its books of account; and duly claimed depreciation right from the assessment year 1997-98 up to assessment year 2000-01, when the loan was waived.
• The assessee was allowed depreciation in the assessment proceedings. For the assessment year, 2001-02 the return was processed under section 143(1)(a), allowing the claimed depreciation.
• The fact with regard to the waiver of loan came to the knowledge of the Assessing Officer in the course of assessment proceedings for the assessment year 2004-05. The Assessing Officer formed an opinion that on the waiver of loan by the parent company the written down value (w.d.v) of the plant and machinery had to be reworked by reducing from the opening w.d.v. the amount of the waived loan ,i.e., Rs. 13.48 crore.
• Consequently, a notice under section 148 was issued by the Assessing Officer for reopening the assessment.
• The Assessing Officer reworked the w.d.v. by reducing from the opening w.d.v. the amount of waived loan and calculated the depreciation on such reduced w.d.v. for the assessment years 2001-02 to 2003-04.
• On appeal, the Commissioner (Appeals) held that the entire waiver of the loan could not be reduced from the w.d.v. of the block of assets; that depreciation allowance already allowed from the date of purchase of plant and machinery till assessment year 2000-01 should alone be reduced from the opening w.d.v. as on 1-4-2001.
• Being aggrieved by the order of the Commissioner (Appeals), both the assessee and the revenue preferred instant appeals.
Assessee's contentions
• The Assessing Officer's action in reducing the amount of loan waived could not be said to be falling within the expression 'sold, discarded, demolished or destroyed' used in section 43(6)(c), which defines the term 'written down value'; consequently the w.d.v. could not be disturbed by the Assessing Officer.
• Explanation 10 to section 43(1) would not apply to the instant case because the amount waived by the parent company could not be said to be the cost of the asset met directly or indirectly by any authority in the form of 'subsidy or grant or reimbursement'.
HELD
Factual recapitulation
• It is not in dispute that in April, 1996 when the machinery was purchased, the actual cost was recorded in the books of account including the monies payable to the supplier of machineries. Even today the assessee has not made any adjustment in its books of account recognizing the writing off of amounts payable for purchase of machineries. The benefit as a result of waiver of the loan was shown in the books of account of the assessee in the balance sheet as a capital receipt not chargeable to tax. The above claim of the Assessee has also been accepted by the revenue. [Para 15]
Rationale and purpose behind concept of 'block of assets'
• The rationale and purpose for which the concept of block asset was introduced is that once the various assets are clubbed together and become block asset within the meaning of section 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned. The merger of various assets into the block asset can be altered only when the eventuality contained in clause (c) of section 43(6) takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the 'block asset'.
• It is thus clear from the aforesaid provisions that the only way by which the written down value on which depreciation is to be allowed as per the provisions of section 32(1)(ii) can be altered is as per the situation referred to in section 43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus, the recourse by the revenue to those provisions on the facts and circumstances of the instant case, it is held, cannot be sustained. [Para 19]
• The issue is than examined from the provisions of section 43(1) and Explanation 10 thereto. [Para 20]
Waiver of loan cannot fall within scope of any of expressions 'subsidy or reimbursement' used in Explanation 10 to section 43(1)
• The provisions of Explanation 10 will apply only when there is a subsidy or grant or reimbursement. In the instant case, there was no such subsidy or grant or reimbursement. There was only a waiver of the amounts due for purchase of machinery which cannot fall within the scope of any of the expressions used in Explanation 10. Even otherwise section 43(1) is applicable only in the year of purchase of machinery and in the instant case the purchase of the machinery in question was not in AY 01-02. Therefore, the actual cost which has already been recognized in the books in the Assessment year prior to assessment year 2001-02 cannot be disturbed in Assessment year 2001-02.
There is a lacuna in law
• In this regard there is a lacuna in the law and it is for the legislature to provide appropriate safeguards in this regard. It is true that the assessee on the one hand gets the waiver of monies payable on purchase of machinery and claims such receipt as not taxable because it is capital receipt. On the other hand the assessee claims depreciation on the value of the machinery for which it did not incur any cost. Thus, the assessee stand to benefit both ways. As per the law as it prevails as on date, it is held that the revenue is without any remedy. The only way that the revenue can remedy the situation is that it has to reopen the assessment for the year in which the asset was acquired and fall back on the provisions of section 43(1) which says that actual cost means the actual cost of the assets to the assessee. Even this can be done only after the waiver of the loan which was used to acquire machinery. By that time if the assessments for that assessment year gets barred by time, the revenue is without any remedy. Even the provisions of section 155 do not provide for any remedy to the revenue in this regard. [Para 22]
• The Assessing Officer has made a reference to the provisions of section 43(6)(b). It is held that these provisions were not applicable to the instant case. The applicable provisions to the instant case are section 43(6)(c). [Para 23]
• It is held that the disallowance of depreciation cannot be sustained. The Commissioner (Appeals), it is held, ought to have deleted the disallowance of depreciation in full. Accordingly, the relevant grounds of appeal raised by the assessee, are allowed. [Para 25]
CASES REFERRED TO
CIT v. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285/98 Taxman 459 (SC) (para 10) and CIT v.Cochin Co. (P.) Ltd. [1990] 184 ITR 230/52 Taxman 178 (Ker.) (para 10).
Kaushik Mukherjee for the Appellant. Farahat Hussain Qureshi for the Respondent.
ORDER
Per Bench - These are seven appeals by the assessee and four appeals by the Revenue against different orders of the CIT(Appeals), LTU, Bangalore.
2. The issues raised by the assessee and revenue in different assessment years are stated in the chart given below:-
| Assessee's Appeal No. &AY | 751/10 2001-02 | 752/10 2002- 03 | 753/10 2003- 04 | 754/10 2004-05 | 755/10 2005- 06 | 1131/10 2006- 07 | 349/11 2007- 08 |
| Proceedings under section | 147/148 | 147/148 | 147/148 | 155(4) | 143(3) | 143(3) | 143(3) |
| Issues | Ground No. | Ground No. | Ground No. | Ground No. | Ground No. | Ground No. | Ground No. |
| Validity of the order passed by the CIT(A) to the extent against the assessee | 1 | 1 | 1 | 1 | 1 | 1 | 1 |
| Validity of reassessment Proceedings | 2 | 2 | 2 | - | - | - | - |
| Validity of proceedings u/s. 155(4) | - | - | - | 2 | - | - | - |
| Reduction of:- Waiver of loan amount from WDV, Depreciation allowance, Carryforward of unabsorbed depreciation | 3(a,b&c) | 3(a,b,c &d) | 3(a,b,c &d) | 3(a,b&c) | 2(a,b&c) | 1(a,b,c &d) | 2 to 8 |
| Not setting off brought forward business loss first against total income and setting off of unabsorbed depreciation first. | - | - | - | - | - | - | 9 |
| Revenue's Appeal No. &AY | 771/10 2001-02 | 772/10 2002-03 | 773/10 2003-04 | 2004-05 | 2005-06 | 1164/10 2006-07 |
| Proceedings under section | 147/148 | 147/148 | 147/148 | 155(4) | 143(3) | 143(3) |
| Issues | Ground No. | Ground No. | Ground No. | Appeal not filed by the Deptt. | Ground No. | |
| Reduction of:- Waiver of loan amount from WDV, Depreciation allowance, Carryforward of unabsorbed depreciation | 1,2,3,4,5 | 1,2,3,4,5 | 1,2,3,4,5 | 1,2,3,4,5 | ||
| Reliance on case laws placed by the AO | 6,7 | 6,7 | 6,7 | - | ||
3. The material facts necessary for adjudication of these appeals are as follows:
The assessee is a manufacturer and trader of polymer based industrial paints and sealant products. It was incorporated on 13.05.1994 as a 100% subsidiary of Courtaulds Holding BV, Netherlands. The assessee, for the purpose of establishing manufacturing facilities at Hoskote plant, Bangalore, wanted to import machineries. The assessee made an application to RBI for opening foreign currency account outside India. RBI imposed a condition that the assessee should obtain bank guarantee from various suppliers for 1/3rd advance payment for the purchase of machinery. This was not feasible for the assessee. The assessee had appointed another group entity viz., Courtaulds Engineering Ltd. UK ("CEL, UK") as engineering contractors to design, engineer and carry out the project management of building the factory for the assessee. Since getting enough bank guarantees from the suppliers was not possible, the assessee sought assistance from CEL, UK. CEL, UK funded the first instalment of advance payments and the equipments were imported and installed at Hoskote plant. This happened in April, 1996.
4. In the F.Y. 1997-98, the Akzo Nobel group acquired Courtaulds group worldwide including the assessee. In the mean time, the suppliers of the machinery started insisting on the balance payment. Since the assessee could not obtain the RBI approval, CEL, UK paid the monies to suppliers of plant & machinery. Thus the funds for supply of machinery which were originally payable by the assessee to the suppliers of machinery became payable the assessee to CEL, UK. The assessee applied for permission to RBI for making remittances to CEL, UK. This was in July, 1998.
5. On 04.01.1999, the assessee was renamed as Akzo Nobel Coatings India Pvt. Ltd. As already stated, Akzo Nobel group acquired Courtaulds group worldwide including the assessee. Consequently the amount due by the assessee to CEL, UK was transferred to another company viz., International Coatings Ltd. Thereafter, the debt assigned to International Coatings Ltd. was transferred Akzo International BV, Netherlands, which was pursuant to the change in the holding company.
6. As a part of the business restructuring and because of the absence of RBI approval for making remittances of monies due for supply of machinery and taking note of the business exigency, Akzo International BV decided to waive the money payable in respect of in respect of supply of machineries to the assessee. Thus, the assessee was the beneficiary of the waiver of loan to the extent of Rs. 13,48,09,000. This waiver of the loan was in April, 2000.
7. In respect of the plant & machinery which was purchased by the assessee for which the assessee did not make payments and the amount outstanding for such purchases were made by the parent company and ultimately waived by the parent company, the assessee claimed depreciation right from the A.Y. 1997-98 upto A.Y. 2000-01. It is important to mention that the Assessee considered the actual cost of the machinery at that point of time i.e., in AY 97-98 as the monies payable to the supplier of machineries viz., Rs.13,48,09,000. The assessee was allowed depreciation in the assessment proceedings. In the A.Y. 2001-02, the original return was processed u/s. 143(1) of the Act. This assessment was however reopened by the AO by issuing notice u/s. 148 of the Act. The facts with regard to the waiver of the loan payable for acquiring the machineries came to the knowledge of the AO in the course of assessment proceedings for AY 04-05. According to the AO, on the waiver of loan by the parent company, the Written Down Value ("WDV") of the plant & machinery had to be reworked by reducing from the opening WDV the amount of loan which had been waived by the parent company viz., a sum of Rs. 13,48,09,000. The AO accordingly worked out the depreciation allowable on plant & machinery by reducing the WDV on which depreciation had to be allowed for AY 01-02. Similarly in A.Y. 2002-03, and 03-04, depreciation was reworked by making adjustments to the WDV in proceedings u/s. 148 of the Act. In A.Y. 2004-05 to 2007-08, in the assessment proceedings u/s. 143(3) of the Act, the AO reduced the depreciation consequent to adjustment of the opening WDV which was made in A.Y. 2001-02.
8. On appeal by the assessee, the ld. CIT(Appeals) was of the view that the entire waiver of the loan cannot be reduced from the WDV of the block of assets. He held that depreciation allowance already allowed from the date of purchase of plant & machinery till A.Y. 2000-01 should alone be reduced from the opening WDV as on 01.04.2001. The relevant findings of the CIT(A) in this regard were as follows:-
"4.5 I have considered the appellant's submission put forth above. The appellant contends that the fact that Akzo group funded the appellant in acquiring the assets shows that the transaction is a loan transaction. When a person avails a loan, it has to be repaid in accordance with the terms and conditions prescribed for the purpose. If the loan is utilised for acquiring any assets, it cannot be termed as meeting of a portion of the cost of any asset. Loan is availed as a source of finance while the depreciation is allowed on the actual user of the asset. Therefore, availing of loan and claim of depreciation are two distinct things, which cannot be clubbed together. This issue has been discussed in detail by the AO at paras 5.1 to 5.7 of the assessment order, which have been summarised in para 4.1 of this order supra. As discussed in the preceding paras, the appellant had acquired the machinery from its sister concern between 1994-95 and 1996-97 and the cost of machinery was Rs. 13,48,09,000/-. Since the RBI did not grant permission for remittance of the cost in foreign exchange to the foreign company, the seller waived the liability during the FY 2000-01. Consequent to the waiver, the appellant company credited the aforesaid amount in the Capital Reserve Account and reduced the sundry creditors balance in its books of account. This fact implies cessation of liability on account of the cost of the assets and cannot be construed as waiver of loan. Thus, there is no merit in the appellant's contention. Hence, it is not tenable.
4.6 The appellant has also made the following submissions:
2.7.7 Without prejudice to our aforesaid submissions, the Appellant further objects to the method of determination of written down value of assets. In these calculations, entire cost of the imported asset has been reduced and not the value arrived net of depreciation. As the Hon'ble CIT (A) may notice, what opening written down value represents are the written down value of the assets and not the original cost of the asset. Hence, if at all anything is to be reduced, then it shall be written down value of underlying assets and not the original cost of the asset itself. If original cost of asset purchased during FY 1994-95 to FY 1996-97 is reduced from the written down value of assets for the assessment year 2001-02, that would amount to incorrect value of assets for the purpose of depreciation and the depreciation so calculated will not be in accordance with the provisions of section 32 of the Act.
2.7.8. Hence, without prejudice to our other submissions, the Appellant submits that, if at all any value is to be reduced it has to be only with reference to value which is arrived net of depreciation."
4.7 There is force in the appellant's submissions put forth above. The fact remains that the original cost of assets purchased during the FY 1994-95 to 1996-97 was reduced from the WDV of assets for the AY 2001-02. Further, it is contended that it is not open to the AO to make adjust of cost of assets of earlier years in a subsequent year. The provisions of section 43(6) do not envisage reduction of cost of assets in the guise of depreciation and disallowance of depreciation already claimed. The depreciation claimed on imported machinery at Rs. 13,48,08,881/- is worked out as under:
| Asst. Year | Depreciation (Rs.) | |||
| Cost of acquisition | 13,48,0881 | |||
| 1997-98 | 2,60,81,052 | |||
| 1998-99 | 2,52,96,992 | |||
| 1999-2000 | 2,03,20,420 | |||
| 2000-01 | 1,57,77,604 | 8,74,76,068 | ||
| WDV as on 1/4/2000 | 4,73,32,813 |
(i) If at all depreciation is disallowance, it is on the WDV of Rs. 4,73,32,83/- during the previous years relevant to the AY 2001-02 to AY 2003-04. Therefore, the AO is directed to recalculate the depreciation and allow the same accordingly."
(Emphasis supplied).
9. Aggrieved by the relief granted by the CIT(A), the revenue has preferred appeals for AYs 2001-02 to 2003-04 & 2006-07. Aggrieved by the orders of the CIT(A) in not accepting the claim of the assessee in full, the assessee has filed appeals before the Tribunal for the AYs 2001-02 to 2007-08.
10. We have heard the rival submissions. The ld. counsel for the assessee submitted that u/s. 32(1) of the Income Tax Act, 1961 (the Act), in respect of block of assets, deprecation has to be allowed on the WDV at such percentage as may be prescribed. It was brought to our notice that the term 'written down value' has been defined under the provisions of section 43(6)(c) of the Act. It was his submission that the 'written down value' means written down value as on the beginning of the previous year and as adjusted by the increase in the actual cost of any asset falling within that block acquired during the previous year and by increasing the monies payable in respect of any asset falling with that block which is sold or discarded or demolished or destroyed during the previous year. It was the submission that the AO's action in reducing the amount of loan waived by the supplier of machinery cannot be said to be falling within the expression "sold, discarded, demolished, or destroyed". It was his submission that consequently the WDV cannot be disturbed by the AO. Further reference was also made by the ld. counsel for the assessee to the decision of the Hon'ble Supreme Court in the case of CIT v. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285/98 Taxman 459, wherein the Hon'ble Supreme Court held that the manner of repayment of loan availed by an assessee for the purchase of an asset on which depreciation is claimed, cannot have any impact on allowing depreciation on such assets. Reference was also made to the decision of the Hon'ble Kerala High Court in the case of CIT v. Cochin Co. (P.) Ltd. [1990] 184 ITR 230/52 Taxman 178 for identical proposition.
11. Further submissions were made on the concept of block of assets and as to how once an asset enters the block of assets, it becomes part of block of assets and becomes part of the WDV and that the WDV can change only on instances set out in section 43(6)(c) of the Act. It was also submitted that Explanation 10 to section 43(1) will not apply to the present case because the amount waived by the parent company cannot be said to be cost of the asset met directly or indirectly by any authority in the form of "subsidy or grant or reimbursement".
12. The ld. DR reiterated the stand of the revenue as reflected in the orders of the lower authorities. His submission was that the ld. CIT(A) erred in giving partial relief to the assessee and that the order of the AO in this regard should be restored.
13. The parties also made submissions with regard to validity of initiation of reassessment proceedings. On this issue which arises for consideration only in AYs 2001-02 to 2003-04, the CIT(A) had given his decision as follows:-
"3.6 I have carefully considered the appellant's submissions and perused the assessment orders. In this context, it would he relevant to mention Explanation 2 to section 147 of the Act, which reads as under:
"Explanation 2 - For the purposes of this section, the following shall also deemed to be cases where income chargeable to tax has escaped assessment, namely:-
(a) where no return of income has been furnished by the assessee although his total income or total income of any other person in respect of which he is assessable under this Act exceeded the maximum amount which is not chargeable to income tax;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing officer that he assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) where an assessment has been made, but-
(i) income chargeable to tax has been underassessed; or
(ii) such income has been assessed at too low a rate; or
(iii) such income has been made the subject of excessive relief under this Act; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed."
3.7 In the instant case, clause (b) of Explanation 2 to section 147 of the Act is applicable as in the return of income furnished the appellant has claimed excessive allowance on account of depreciation. The apex court in the case of ACIT v. Rajesh Jhavery Stock Brokers P. Ltd. reported in [2007] 291 ITR 500 after considering various decisions rendered by it in the past, construed the words 'reason to believe' in section 147 of the Act and held that, if the AO has cause or justification to know or suppose that any income has escaped assessment, then it could be said that the AO had reason to believe that the income chargeable to tax has escaped assessment. The apex court further held that the expression 'reason to believe' in section 147 of the Act cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The apex court further held that, at the stage of issue of notice u/s 148 of the Act, the only question to be considered is, whether there was relevant material on which a reasonable person could have formed a requisite belief and not whether the materials would conclusively prove escapement of income.
'16. Section 147 authorises and permits the Assessing officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the Assessing officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not the established fact or escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief whether the materials would conclusively prove the escapement is not the concern at that stage. This is also because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction [see ITO v Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v ITO [[1999] 236 34(SC)].
17. The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution, under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly, the Assessing officer must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and, secondly, he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words, if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the provision to section 147. The case at hand is covered by the main provision and not the proviso.
18. So long the ingredients of section are fulfilled, the Assessing officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued."
(i) Applying the ratio laid down by the apex court in the aforesaid case, it has to be seen in the present case whether the AO had any cause or justification to form a reasonable belief that income chargeable to tax has escaped assessment.
3.8 It is observed that the appellant furnished its returns of income as indicated at page 2 supra. The returns were processed u/s 143(1) and subsequently no orders u/s 143(3) were passed. As such, the AO had no occasion to scrutinise the correctness of the loss, deduction, allowance or relief claimed in the returns of income. During the course of the assessment proceedings for the AY 2004- 05, the AO noticed that the appellant imported certain machinery from Akzo Nobel International, the sister concern of the appellant, during the FY 1994-95 to 1996-97 worth Rs. 13,48,09,000/-. The payment to the sister concern could not be made as the RBI did not grant permission for the same as it involved release of foreign exchange. Consequently, the foreign company i.e. the seller, waived the liability of Rs. 13,48,09,000/-during the FY 2000-01. The waived amount of Rs. 13,48,09,000/-was credited to the Capital Reserve Account, which reduced the sundry creditors in the appellants books. No adjustment has been made to the WDV of the concerned assets on account of waiver either prior to or in the financial year 2000-01. Observing thus, the AO held that the amount of purchase price of the asset waived by the seller is not cost to the appellant and consequently it was not eligible for depreciation allowance u/s 32 of the Act in respect of this asset. This being the reason, the AO initiated proceedings u/s 147 of the Act and, in my considered opinion, the proceedings so initiated are valid.
3.9 It also transpires that notice u/s 148 was issued on 1/2/2007 with the prior approval of the Addl. CIT as required u/s 51(2) of the Act. Thus, the notice has been issued within the time limit i.e before the expiry of six years from the end of the AY 2001-02. Thus, the objections in this regard are not tenable. The appeal in this ground fails."
14. The ld. counsel for the assessee reiterated the submissions as were made before the CIT(A) on validity of initiation of reassessment proceedings. The ld. DR relied on the orders of the CIT(A) in so far as it concerns validity of initiation of reassessment proceedings. We will consider the issue with regard to validity of initiation of reassessment proceedings a little later. We will first deal with the issue regarding reduction of WDV of the Block of assets and consequent disallowance of depreciation claim.
15. We have considered the rival submissions on the above issue. The facts are not in dispute. The assessee acquired plant & machinery for its Hoskote plant in April, 1996. The assessee did not make any payments for the purchase of plant & machinery, ultimately the CEL, UK, one of the group company made payments of the machinery to the suppliers. The assessee thereafter recognized this liability for payment for purchase of machinery as payable to CEL, UK. Later on, CEL, UK was taken over by Akzo International BV. Akzo International BV waived repayment of monies due on purchase of machinery. It is not in dispute that in April, 1996 when the machinery was purchased, the actual cost was recorded in the books of account including the monies payable to the supplier of machineries. Even today the Assessee has not made any adjustment in its books of accounts recognizing the write of amounts payable for purchase of machineries. The benefit as a result of waiver of the loan was shown in the books of accounts of the Assessee in the balance sheet as a capital receipt not chargeable to tax. The above claim of the Assessee has also been accepted by the Revenue. The assessee has claimed depreciation of those machineries from the A.Y. 1997-98. In April, 2000, Akzo International BV, the parent company waived the amounts payable by the assessee for purchase of machineries. This fact came to the knowledge of the AO in the course of assessment proceedings for the AY 2004-05. Thereafter action was initiated u/s. 148 to reduce the WDV of the relevant block of assets and withdraw the depreciation already granted to the assessee in the past. Such action was initiated only from A.Y. 2001-02 to 2006-07. A notice u/s. 148 for AY 2001-02 was issued by the AO on 01.02.2007. This is probably because the AO could not reopen the earlier assessment years as they could not be reopened in view of the limitation of time laid down in section 149 of the Act. The question now to be decided by the Tribunal is as to whether the action of the revenue could be justified. The relevant provisions of law in this regard have to be seen. The concept of "block of assets" was introduced with effect from 01.04.1988. Section 32 (1) of the Income Tax Act, 1961 (the Act) reads as follows:
"32. (1) In respect of depreciation of -
(i) building, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial right of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned wholly or partly, by the assesses and used for the purposes of the business or profession, the following deductions shall be allowed -
(i) ..........
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed."
16. Section 43(6) of the Act defines the expression "Written Down Value" and it reads as under:-
(6) "written down value" means -
| ** | ** | ** |
(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
17. The term "block of assets" is defined in Section 2(11) of the Act as under: -
"2(11) "block of assets" means a group of assets falling within a class of assets comprising —
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed;"
18. Prior to the introduction of new concept of block of assets with effect from 01.04.1988, depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block assets and allowability of depreciation on such a block. The rationale behind such a provision is contained in Circular No.469 dated 23.09.1986 issued by the Central Board of Direct Taxes (CBDT). After referring to the Budget Speech of the Finance Minister wherein reference was made to the proposal to introduce a system of allowing depreciation in respect of block of assets instead of the present system of depreciation on individual assets at paragraph 6.3, the Board stated as follows:
"As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregate has to be the record keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act, necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump-sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets namely, building, machinery, plant and machinery."
19. The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT's Circular dated 23.09.1988 is that once the various assets are clubbed together and become 'block asset' within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset in so far as calculation of depreciation is concerned. The merger of various assets into the block asset can be altered only when the eventuality contained in clause (c) of s. 43(6) takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the 'block asset'. It is thus clear from the aforesaid provisions that the only way by which the written down value on which depreciation is to be allowed as per the provisions of Sec.32(1) (ii) can be altered is as per the situation referred to in Sec.43(6)(c)(i) A and B. Neither was there purchase of the relevant assets during the previous year nor was there sale, discarding or demolishing or destruction of those assets during the previous year. Thus the recourse by the revenue to those provisions on the facts and circumstances of the present case, in our view, cannot be sustained.
20. We shall examine the issue from the provisions of Sec.43(1) of the Act and Explanation 10 thereto also. Section 43(1) of the Act is reproduced hereunder: -
"(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:"
By the Finance (2) Act, 1998, Explanation 10 to Section 43(1) was inserted with effect from 1.4.1999. It reads as under:
"Explanation 10 - Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly 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), 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 were 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."
21. The aforesaid Explanation was explained by the Board in Circular No.772 dated 23.12.1998 [reported in (1999) 235 ITR (St.)35]. The relevant part of the Circular is reproduced below:
"22.2 Explanation 10 provides that where a portion of the cost of an asset acquired by the assessee has been net 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. 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 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 so received, shall not be included in the actual cost of the asset to the assessee. The amendment made through Explanation 10 will take effect from 1st April, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years."
22. Even the aforesaid provisions of Expln. 10 will apply only when there is a subsidy or grant or reimbursement. In the present case there was no such subsidy or grant or reimbursement. There was only a waiver of the amounts due for purchase of machinery which cannot fall within the scope of any of the aforesaid expressions used in Expln.10. Even otherwise Sec 43(1) is applicable only in the year of purchase of machinery and in the present case the purchase of the machinery in question was not in AY 01-02. Therefore the actual cost which has already been recognised in the books in the AY prior to AY 01-02 cannot be disturbed in AY 01-02. In this regard there is a lacuna in the law and it is for the legislature to provide appropriate safeguards in this regard. It is true that the Assessee on the one hand gets the waiver of monies payable on purchase of machinery and claims such receipt as not taxable because it is capital receipt. On the other hand the Assessee claims depreciation on the value of the machinery for which it did not incur any cost. Thus the Assessees stand to benefit both ways. As per the law as it prevails as on date, we are of the view that the revenue is without any remedy. The only way that the revenue can remedy the situation is that it has to reopen the assessment for the year in which the asset was acquired and fall back on the provisions of Sec. 43(1) of the Act which says that actual cost means the actual cost of the assets to the assessee. Even this can be done only when after the waiver of the loan which was used to acquire machinery. By that time if the assessments for that AY gets barred by time, the revenue is without any remedy. Even the provisions of Sec. 155 do not provide for any remedy to the revenue in this regard.
23. The AO has made a reference to the provisions of section 43(6)(b) of the Act. In our opinion, these provisions were not applicable to the present case. The applicable provisions to the present case are section 43(6)(c) of the Act. It is also noticed that the Hon'ble Supreme Court in the case of Tata Iron & Steel Co. Ltd. (supra) has taken a view that repayment of loan borrowed by an assessee for the purpose of acquiring asset has no relevance to the cost of assets on which depreciation has to be allowed. Similar view was also expressed by the Hon'ble Kerala High Court in the case of Cochin Co. (P.) Ltd.'s case (supra), as already stated, as follows:-
"WDV as at the beginning of the preceding year as well as the depreciation actually allowed in that year have reached finality and cannot be changed in the assessment year under appeal. They could have been changed only if the assessment of that or earlier years could be re-opened. Such an action was barred by limitation.
Further, as per section 43(6)(c)(ii) & (i), the only adjustments permitted in the WDV of the block with reference to the year in which depreciation is to be allowed are (a) addition actual cost of asset acquired during the year and (b) reduction of monies receivable on sale, discarding, demolition or destruction of the assets and its scrap value."
24. As far as the validity of initiation of reassessment proceedings are concerned, we find that there were no assessments u/s. 143(3) of the Act and only an intimation had been issued. In the circumstances, we have to view that the ld. CIT(Appeals) was right in coming to the conclusion that the reopening of assessment u/s. 148 was valid. We therefore uphold the order of the ld. CIT(A) on the issue of validity of initiation of reassessment proceedings u/s. 148 of the Act.
25. On the merits of the addition made by the AO in all the assessment years, we are of the view that the disallowance of depreciation cannot be sustained. The CIT(A), in our view, ought to have deleted the disallowance of depreciation in full. We hold accordingly and allow the relevant grounds of appeal of the assessee.
26. The only other ground that remains for consideration in AYs 2007-08 is ground No.8 i.e., in ITA No.349/B/11. The same reads as follows:
"8. The learned Commissioner erred in not appreciating the appellant's contentions with respect to Assessing Officer's action of setting off the unabsorbed depreciation against the total income without giving effect to the brought forward business loss reported in the return of income of earlier years."
On the above issue raised in Gr.No.8, we find that the ld. CIT(A) has directed the AO to verify the records and allow the claim of the assessee. The CIT(A) has directed that the carry forward business loss should be first set off and thereafter the unabsorbed depreciation has to be set off. Section 72 of the Act gives priority in the matter of setting off of carry forward business loss and depreciation, and it lays down that carry forward business loss has to be set off against business income for that assessment year. Section 32(2) of the Act provides for set off of unabsorbed depreciation. Those provisions are subject to provisions of section 72(2) of the Act. Section 72(2) provides that set off has to be first given for carry forward business loss. It is thus clear that the claim of the assessee that priority of set off should be brought forward business loss and thereafter unabsorbed depreciation is found to be correct. The AO is accordingly directed to verify and give effect, keeping in mind the observations referred to above.
27. In the result, the appeals of the assessee are partly allowed and the appeals of the revenue are dismissed.
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