Recently, the Delhi High Court (High Court) in the case of CIT v. Whirlpool of India Ltd. (ITA No. 1154 of 2009) (Judgement date: 24 January 2011 Assessment Year 1996-97) held that additional provision for warranty made was not contingent liability

What is the Budget? Why is it so important? Why does it affect all of us? And, above all, how does one interpret the budgetary lingo flying around? Union Budget is the annual report of India as a country. It contains the government of India’s revenue and expenditure for the end of a particular fiscal year, which runs from April 1 to March 31.

CASE LAW DETAILS Decided by: ITAT, MUMBAI BENCH `C’, MUMBAI,  In The case of: ITO v. Pritam Juice,  Appeal No.: ITA No. 6096/Mum/06 , Decided on: September 30, 2009 RELEVANT PARAGRAPH 10. We have heard the rival submission and perused the relevant material on record in the light of precedents relied upon. The factual position [...]

The Taxpayer incurred interest expenditure on the funds borrowed for investing in shares of a company, with a view to acquire controlling interest. The ITAT held that the interest expenditure incurred is not allowable under Section 57(iii)(Section) of the Indian Tax Law (ITL), since it is not incurred ‘wholly and exclusively’ for the purpose of earning dividend income.

This article summarizes a recent ruling of the Delhi Income Tax Appellate Tribunal (ITAT) in the case of M/s ONGC Videsh Ltd. (Taxpayer) [2009-TIOL-758-ITAT-DEL] on the issue of allowability of depreciation on participatory right to carry out the hydrocarbon operations, acquired by the Taxpayer, pursuant to a Production Sharing Arrangement (PSA). The ITAT held that the participatory right acquired by the Taxpayer was in the nature of asset, in the form of ‘license’ i.e. license to have an access and to carry out exploration, development and production of hydrocarbon operations. Considering this, it was held that the participatory right is eligible for depreciation under the provisions of the Indian Tax Law (ITL).

It is not possible to accept the contention of the learned counsel for the Revenue that unless a particular asset is used for the purpose of business or provision, depreciation is not allowed. No doubt, as per Section 32(1) of the Act, in order to be entitled to claim depreciation, the asset is to be owned by the assessee and it is also to be used for the purpose of business or profession. However, the expression “used for the purpose of business” when applied to block asset would mean use of block asset and not any specific building machinery, plant or furniture in the said block asset as individual assets have lost their identity after becoming inseparable part of the block asset. That is the only manner in which various provisions can be harmonized.

It is quite common for the Revenue to treat such expenditure as capital in nature and administer depreciation allowance, only. An assessee would always put forth his argument that such replacement cost is only to maintain the existing level of efficiency of his manufacturing facility and would not result in any increase in its production capacity, thereby claiming it to be revenue in nature. In this context, it is quite pertinent to examine the current judicial thinking on this issue.

M/s. Sri Mangayarkarasi Mills (P) Ltd. (“assessee/SMMP Ltd.”), engaged in the manufacture and sale of cotton yarn, incurred expenditure on replacement of machinery. While on one hand, SMMP Ltd. capitalized the said expenditure in its books of account and in its return of income, on the other, the same was claimed as revenue expenditure on the basis that such expenditure was merely incurred on replacement of spare parts in the spinning mill system.

Secure Meters Ltd. („the assessee?) is engaged in the business of manufacture of energy meters. The Assessing Officer (AO) inter-alia disallowed expenses on the issue of convertible debentures on the basis that it was capital in nature. This was confirmed by the Commissioner of Income Tax (Appeals). On further appeal, the Income Tax Appellate Tribunal („Tribunal?), however, held that the expenses on issue of debentures was allowable as a revenue expenditure. Aggrieved by the decision of the Tribunal, the Revenue filed an appeal before the Rajasthan High Court.

The ITAT dismissed the appeal of the Revenue and the assessee by holding that the discount on stock options was notional in nature and was not deductible either in the year of grant or in the year when the option is exercised by the employees. In reaching the conclusion, the main consideration by the ITAT was the argument that the difference between market price and grant price is only a notional expenditure. Where ESOPs are granted by overseas parent companies and the difference between market price and grant price is charged to the Indian subsidiary, the allowability of expenditure would require further evaluation.