Applicability of Exp. 10 to section 43(1)–Sales tax incentive for setting-up industries

Everest Industries Limited Vs JCIT (ITAT Mumbai)

The perusal of the Package Scheme of Incentive, 1993 reflect that the scheme was formulated to give incentive for setting up the industries in certain belts of Maharashtra and for the purpose of working out the amount of subsidy, though the cost of eligible investment was taken as the base, but the said subsidy was not specifically intended to meet the cost of assets. In view thereof, it could not be held that the incentive received by the assessee under the Package Scheme of 1993 in the form of subsidy was covered under provisions of Explanation 10 to section 43(1) of the Act and consequently, the subsidy amount was not to be reduced from the cost of the assets.

FULL TEXT OF THE ITAT JUDGMENT

These cross appeals are directed against the order dated 31.3.2015 passed by the learned CIT(A)-1, Thane and it relates to A.Y. 2009-10.

2. The assessee company is engaged in the business of manufacture and sale of Asbestos Cement Sheets & Accessories and pre-engineered buildings products. The Assessing Officer completed the assessment of the year under consideration by making various additions. The assessee had returned a loss of Rs  39.39 crores and it was converted into a total income of  Rs 91.73 crores by the assessing officer by making various additions. The appeal filed by the assessee before the learned CIT(A) challenging the assessment order was allowed in part. Hence, both the parties are in appeal before us.

3. We shall first take up the appeal filed by the Revenue. The solitary issue urged therein relates to assessment of sales tax incentive of ` 583.36 lakhs earned by the assessee during the year under consideration.

4. The assessee availed sales tax incentive of ` 583.36 lakhs under “New Package Scheme of Incentive 1992”. The assessee treated the same as capital The Assessing officer, however, took the view that the sales tax incentive is “revenue receipt” and accordingly assessed the same as income of the assessee. The learned CIT(A) allowed the claim of the assessee by following the decision rendered by the ITAT in assessee’s own case for A.Y. 2003-04 and also by following his own orders passed for A.Ys. 2007-08 & 2008-09. The revenue is aggrieved.

5. Learned Departmental Representative submitted that the order passed by the learned CIT(A) in A.Ys. 2007-08 & 2008-09 was challenged by the Revenue before the Tribunal and Tribunal, vide its order dated 15.9.2017 passed in ITA No. 1885 & 1886/Mum/2013, has restored the matter to the file of the Assessing Officer with certain directions. Accordingly, learned Departmental Representative submitted that this issue may be restored to the file of the Assessing Officer for examining it afresh as held by the Coordinate Bench in A.Ys. 2007-08 & 2008-09.

6. On the contrary, learned AR submitted that the Tribunal, while passing the order for A.Ys. 2007-08 & 2008-09, did not consider the order passed by it for A.Y. 2003-04. He submitted that the Tribunal has held in AY 2003-04 that the sales tax incentive received by it is a capital receipt. Further the Tribunal has restored the matter to the file of the Assessing Officer in AY 2007-08 & 2008-09 for comparing the terms and conditions of the scheme under which the assessee had availed sales tax incentive with the scheme considered by Hon’ble Bombay High Court in the case of Reliance Industries Ltd. He submitted that the Tribunal had earlier examined the sales tax incentive scheme while disposing of the appeal for A.Y. 2 003-04 and hence there is no necessity to restore the matter to the file of the Assessing Officer.

7. We have heard the rival contentions and perused the record. We noticed that the Coordinate Bench of the Tribunal has restored the issue relating to sales tax incentive to the file of the Assessing Officer in AY 2007-08 & 2008-09 with the following observations:-

“2.3. We have heard the rival submissions and perused the material before us. We find that the assessee had claimed that sales tax incentives received by it had to be treated as capital receipt in the revised return filed by it. The AO and the FAA had rejected its claim. The matter of RIL, relied upon by the assessee, has been sent back to the Hon’ble Bombay High Court by the Hon’ble Apex Court with a direction to consider the provisions of the scheme. There is no doubt about the principles governing the subsidies-if the subsidy is in the field of setting up of a business or for capital goods it has to be considered a capital receipt or same has to be taxed as revenue receipt. The said broad categorisation is applicable to all kind of subsidies. As the various schemes announced by the state government from time to time lay down different conditions for availing the incentive schemes, so, without analysing the scheme, as a whole, no final conclusion can be drawn. Considering the peculiar facts and circumstances of the case, we are of the opinion, that in the interest of justice matter should be restored back to the file of the AO for fresh adjudication. He is directed to compare the scheme deliberated upon by the Tribunal in the case of RIL and the scheme of 1993 applicable for the year under appeal. He would afford a reasonable opportunity of hearing to the assessee. First Ground of appeal is decided in favour of the assessee, in part.”

Since the order passed by the Tribunal for A.Ys. 2007-08 & 2008-09 is later one, consistent with the view taken therein, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with identical directions. The AO should also take into account the decision rendered by the Tribunal in the assessee’s own case in AY 2003-04, wherein, according to Ld A.R, it has already been decided in favour of the assessee.

8. We shall now take up the appeal filed by the assessee.

9. First issue contested by the assessee is whether the learned CIT(A) was justified in directing the Assessing Officer to reduce the amount of sales tax incentive from the Cost of asset as per Explanation 10 to section 43(1) of the T. Act for the purpose of computing depreciation.

10. We have noticed earlier that the learned CIT(A), by following the order passed by the ITAT for A.Y. 2003-04, has held that the Sales Tax incentive availed by the assessee is capital in nature. However, he held that the same has to be reduced from the cost of asset for the purpose of computing The assessee is challenging the said decision of the learned CIT(A).

11. The assessee relied upon various decisions to contend that the sales tax incentive is given for setting up industries in certain areas of Maharashtra and not to meet the “Cost of asset” as contemplated in Explanation 10 to section 43(1) of the Act. We noticed that an identical issue was considered by the Pune Bench of the Tribunal in the case of Rohit Exhaust Systems Pvt. Ltd. (ITA No. 1880/Pn/2003 dated 3 1.3.2015). For the sake of convenience, we extract below operative portion of the order passed by the Pune Bench of the Tribunal in the above said case:-

“9. We have heard the rival contentions and perused the record. The assessee during the year under consideration had received Capital Incentive Subsidy under the Package Incentive Scheme, 1993 of Government of Maharashtra for establishing industries in the backward area of Aurangabad. The assessee had claimed the said receipt to be capital in nature as the object of the subsidy was to set up units in backward areas. The said plea of the assessee has been accepted by the CIT(A), in turn, relying on the ratio laid down by Hon’ble Bombay High Court in CIT Vs. Reliance Industries Ltd. (supra), against which the Revenue is not in appeal, hence, the said proposition is accepted in the hands of the assessee. The second proposition raised by the Assessing Officer that the said subsidy is to be added as income under section 41(1) of the Act, in view of the ratio laid down by Hon’ble Bombay High Court in Nector Beverages (P) Ltd. Vs. DCIT (2004) 267 ITR 385 (Bom) has been reversed by the CIT(A) since the Hon’ble Supreme Court has reversed the decision of Hon’ble Bombay High Court in Nector Beverages (P) Ltd. Vs. DCIT (supra). The Revenue is also not in appeal against the said proposition and the same stands accepted. The third proposition proposed by the Assessing Officer was that in the alternate Explanation 10 to section 43(1) of the Act is applicable and the value of capital incentive is to be reduced from the cost of assets in respect of which the said subsidy had been received and the CIT(A) has applied the same.

10. The perusal of the Package Scheme of Incentive, 1993 placed at pages 21 to 44 reflect that the purpose of the scheme was to establish industries in the underdeveloped areas of the Maharashtra State under which the Government appointed SICOM Ltd. to act as an agent of the Government for the implementation of the scheme. Under the 1993 scheme, the procedures were framed and the entrepreneur was entitled to special capital incentive of varying percentage of the gross fixed capital investment, subject to ceiling in respect of eligible unit, provided where the entrepreneur does not opt for availing sales tax incentive under Part-III of 1993 scheme. Under the said scheme a grant of Rs. 15 lakhs was disbursed to the assessee.

11. We find that similar issue of taxability of the capital incentive received under the Package Scheme Incentive, 1993 arose before the Tribunal in ACIT Vs. M/s. Endress + Hauser Flowtec (India) Pvt. Ltd., in ITA No. 1206/PN/201 1, M/s. End ress + Hauser Flowtec (India) Pvt. Ltd., ACIT in ITA No.121 5/PN/201 1 and Cross Objection, relating to assessment year 200 7-08 and M/s. Endress + Hauser Flowtec (India) Pvt. Ltd., Vs. ACIT in ITA No.295/PN/2013, relating to assessment year 2008-09, order dated 25.02.2015 and in lead order i.e. ITA No. 1206/PN/201 1, the Tribunal considered the ratio laid down by the Mumbai Bench of the Tribunal in the case of Everest Industries Ltd. Vs. ACIT vide ITA No.814/Mum/2007 relating to assessment year 2003-04 order dated 04.12.2009, wherein it was held as under:-

“10.4 Coming to the merits of the case, the “G” bench of the Tribunal in the case of M/s Zenith Fibres Ltd (supra) had considered the incentive scheme of the Maharashtra Government of 1993 and came to a conclusion that this scheme is identical to the incentive scheme of 1979 considered by the Special Bench of the tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mu m) (SB) and concluded that the receipt in question is capital receipt.”

12. The Tribunal after considering the Scheme of 1993 observed as under:- 

“33. The contention of the learned Authorised Representative for the assessee was that 1993 scheme formulated by the Government of Maharashtra has been considered by the Mumbai Bench of the Tribunal in Everest Industries Vs. ACIT (Supra), wherein it has been held that the incentive received under the scheme was capital receipt. It has also been held by the Mumbai Bench of the Tribunal that the scheme referred to in the case of Reliance Industries Ltd., i.e. 1979 scheme was identical to the 1993 scheme. The Hon’ble Bombay High Court in the case of CIT Vs. Reliance Industries Ltd., (Supra) in the appeal filed by Revenue against the order of Special Bench of Mumbai Tribunal reported in (2004) 88 ITD 273 (SB) (Mum) have held that the subsidy received under the 1979 scheme for setting up new units in backward areas was a capital receipt. Applying the same ratio to the facts of the ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd present case, we are in conformity with the order of the CIT(A) in holding that the grant of Rs.30 lakhs received by the assessee during the year under consideration was a capital receipt and not taxable in the hands of the assessee. Further, there is no merit in invoking of the provisions of either section 41(1) or section 43(1)(b) of the Act. Thus, ground of appeal No.3 raised by the Revenue is dismissed.”

13. The issue before us is restricted to the invoking of Explanation 10 to section 43(1) of the Act, under which it is provided that where portion of cost of asset acquired by the assessee has been met directly or indirectly by the Central Government or the State Government or any Authority established under any law or by any other person, in the form of subsidy or grant or reimbursement, 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. It is further provided there under that where such subsidy or grant or reimbursement of such nature cannot be directly relatable to the asset acquired, so much of the amount which 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. In other words, in order to invoke the provisions of Explanation 10 to section 43(1)of the Act, it is necessary to establish that the subsidy was directly or indirectly utilized for meeting the cost or portion of cost of asset acquired. Where it is found that the cost for acquiring the asset was directly or indirectly met out of the subsidy, then the value of subsidy is to be reduced from the cost of the asset to re-work the depreciation on the said asset. Under the proviso, it is also provided that it is necessary to show that the subsidy had been directly or indirectly used for the acquisition of an asset. The facts of each case in this regard have to be seen to determine whether the subsidy has been granted to meet the cost of asset directly or indirectly. Similar proposition has been laid down by the Kolkata Bench of the Tribunal in DCIT Vs. Rasoi Ltd. (supra) and also by Visakhapatnam Bench of the Tribunal in Sasisri Extractions Ltd. Vs. ACIT (supra). It has been further laid down by the Tribunal in Sasisri ITA No.1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd Extractions Ltd. Vs. ACIT (supra) that even after insertion of Explanation 10 to section 43(1) of the Act, the basic principle underlying the decision of Apex Court in CIT Vs. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) still holds the field. The Tribunal has held as under:-

“10. We have carefully considered the rival submissions and perused the record. In our considered opinion, even after insertion of Expln. 10 to s. 43(1) of the Act, the basic principle underlying in the decision of the apex Court in the case of PJ. Chemicals Ltd. (supra) still holds the field. Their Lordships analysed the expression “met directly or indirectly” to come to the conclusion that only in a case where a subsidy or other grant was given to offset the cost of an asset, such payment/grant would fall within the expression ‘met’, whereas the subsidy received merely to accelerate the industrial development of the State cannot be considered as payments made specifically to meet a portion of the cost of the assets.

11. A careful perusal of ‘Target 2000’ scheme shows that the scheme was intended to accelerate industrial development of the State and the incentive was given for setting up of industries in Andhra Pradesh and for the purpose of determining the amount of subsidy to be given, cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital. Under the circumstances, we are of the view that the incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it falls outside the ken of Expln. 10 to s. 43(1) of the Act. In the light of the above discussion, we are of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the cost of the capital asset. The AO is directed accordingly.”

14. The perusal of the Package Scheme of Incentive, 1993 reflect that the scheme was formulated to give incentive for setting up the industries in certain belts of Maharashtra and for the purpose of working out the amount of subsidy, though the cost of eligible investment was taken as the base, but the said subsidy was not specifically intended to meet the cost of assets. In view thereof, it could not be held that the incentive received by the assessee under the Package Scheme of 1993 in the form of subsidy was covered under provisions of Explanation 10 to section 43(1) of the Act and consequently, the subsidy amount was not to be reduced from the cost of the assets. Accordingly, the Assessing Officer is directed not to reduce the value of the ITA No. 1880/PN/2013 Rohit Exhaust Systems Pvt. Ltd subsidy from the cost of assets while allowing depreciation on the said assets of the assessee.”

12. Consistent with the view taken in the above said case, we hold that the sales tax incentive is not required to be deducted from the cost of asset, if the same is considered as capital receipt by the AO in the set aside proceedings.

13. The second issue contested by the assessee relates to deduction respect of “Provision of leave encashment”. The assessee created a provision of ` 60 lakhs towards leave encashment and claimed the same as deduction. When the AO sought to disallow the same u/s 43B of the Act, the assessee contended that the Provision for leave encashment is not a statutory liability and hence it is not liable to be disallowed u/s. 43B of the Act. In this regard, the assessee placed its reliance on the decision rendered by Hon’ble Calcutta High Court in the case of Exide Industries Ltd (292 ITR 470). The Assessing Officer, however, disallowed the claim of the assessee on the reasoning that the decision rendered by Hon’ble Calcutta High Court in the case of Exide Industries Ltd. (292 ITR 470) holding that the provisions of section 43B(f) is unconstitutional, has since been stayed by Hon’ble Supreme Court. The learned CIT(A) also confirmed the same.

14. The Learned AR submitted that Hon’ble Cochin Bench of the ITAT has considered an identical issue in the case of Muthoot Vehicles and Asset Finance Ltd. (ITA No. 623/Coch/2013 dated 6.12.20 13), and the Tribunal has restored the matter to the file of the Assessing Officer with the direction to consider the issue afresh as per the decision that may be rendered by Hon’ble Apex Court in the case of Exide Industries Ltd.

15. We have heard learned Departmental Representative and perused the We noticed that the Cochin Bench of the Tribunal has considered an identical issue and restored the matter to the file of the Assessing Officer with following observations :- 

3. We have heard the rival contentions on this issue. We notice that this bench of Tribunal has considered an identical issue in the case of M/s Kerala Feeds Ltd (ITA No.179 & 1 80/Coch/2013) and the Tribunal, vide its order dated 27-09-2013, has set aside this issue to the file of the AO with the following observations:-

7. We have heard the rival contentions and perused the record. With regard to the claim of Provision for leave encashment, the Ld Counsel placed reliance on the decision of Honble Kerala High Court in the case of Hindustan Latex Ltd (supra) and also on the decision rendered by Honble Rajasthan High Court in the case of CIT Vs. Raj. State Bride and Construction Corporation Ltd (2012)(346 ITR 53). We notice that the Rajasthan High Court, in the above cited case, has considered the claim of deduction of Provision for leave encashment for assessment year 2000-01. However, the provisions of sec. 43B(f) was inserted into the Act by Finance Act,2001 w.e.f. 1.4.2002, which could not have been considered by Honble Rajasthan High Court. Hence, reliance placed by the assessee on the said decision may not be useful for the year under consideration.

8. We have also carefully gone through the decision rendered by the jurisdictional Kerala High Court in the case of Hindustan Latex Ltd (supra) and notice that the High Court has allowed the claim of the assessee on two grounds viz.,

(a) The Honble Kerala High Court, in para 5 of its order, has concurred with the view expressed by the Honble Calcutta High Court in the case of Exide Industries Ltd (supra) that Clause (f) of Section 43B is unconstitutional.

(b) The decision rendered by the Honble Calcutta High Court has not been challenged before the Supreme Court. (Para 5 and 8). Accordingly, the Honble Kerala High Court, by following the decision rendered by the Honble Supreme Court in the case of Berger Paints Ltd Vs. CIT (266 ITR 99), has further held that the Revenue having not challenged the correctness of the law laid down by the Calcutta High Court, it is not open to the Revenue to challenge its correctness in the case of another assessee.

9. However, we notice that the department has challenged the decision rendered by the Honble Calcutta High Court in the case of Exide Industries Ltd, by filing appeal before Honble Supreme Court and the Honble Apex Court has stayed the judgment of the Honble Calcutta High Court. In fact, the Honble Apex Court has passed two interim orders in this regard, which are detailed below:-

(a) The first order was passed on 08-09-2008 in the petition for Special Leave to Appeal (Civil) CC  12060/2008 in the case of CIT Exide Industries Ltd (from the judgment and order dated 2 7-6-2007 in APO No.301/2005 of The High Court of Calcutta). The order reads as under:-

“Upon hearing counsel the Court made the following ORDER Issue notice.

In the meantime, there shall be stay of the impugned judgment, until further orders.”

(b) The second order was passed on 08-05-2009 in the petition for Special Leave to Appeal (Civil) No(s) 2288 9/2008 (from the very same judgment of the High Court of Calcutta). The order reads as under:-

Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed.

We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns.

Thus, it is noticed that the Honble Apex Court has not only stayed the operation of the Honble Calcutta High Court in the case of Exide Industries Ltd (supra), but also observed that the assessee would, during the pendency of this Civil Appeal, pay tax as if Section 43B(f) is on the Statute Book. Though the interim orders were passed by the Honble Apex Court in the years 2008/2009, it was not brought to the notice of Honble jurisdictional High Court. We further notice that the Honble Supreme Court has modified the decision rendered in the case of Berger Paints (supra) in its subsequent decision in the case of Gangad ha ran (304 ITR 61). The operative part of the said decision reads as under:-

“In answering the reference, we hold that merely because in some cases the Revenue has not preferred appeal that does not operate as a bar for the Revenue to prefer an appeal in another case where there is just cause for doing so or it is in public interest to do so or for a pronouncement by the higher court when divergent views are expressed by the Tribunals or the High Courts.

10. We also notice that the Calcutta Bench of Tribunal has considered an identical issue in the case of S.R Batliboy & Co. in ITA No.1 598/Kol/201 1 and the Tribunal, vide its decision dated 13-03-2012, has set aside the matter to the file of the AO with the direction to consider the issue afresh as per the decision of Hon’ble Apex Court in the case of Exide Industries Ltd (supra). Accordingly, we set aside the orders of Ld CIT(A) on this issue in both the years under consideration and restore them to the file of the AO with the direction to examine the issue afresh in the light of discussions made supra.

4. Consistent with the view taken in the case of Kerala Feeds Ltd (supra), we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine this issue afresh in accordance with the decision rendered by Hon’ble Supreme Court in the case of M/s Exide Industries Ltd (supra).”

16. It can be noticed that the Hon’ble Supreme Court has held that the assessee shall pay tax on the disallowance of “Provision for leave encashment” as if sec. 43B(f) is on Statute book. Hence the addition made by the AO is required to be sustained. If the decision of Hon’ble Supreme Court comes in favour of the assessee in future, then the assessee is free to seek amendment of assessment order.

17. Next ground of appeal urged by the assessee relates to additional depreciation claimed u/s. 32(1)(iia) of the Act. The Assessing Officer noticed that the assessee, during the year under consideration, has claimed additional depreciation u/s 32(1)(iia) @ 20% of the original cost of plant and machineries that were acquired and installed during the financial years 2005-06 to 2007- 08 relevant to assessment years 2006-07 to 2008-09. The Assessing Officer, however, took the view that the additional depreciation prescribed u/s. 32(1)(iia) of the Act is an one time allowance which is allowed on the cost of new Plant and Machinery acquired and installed during the year of acquisition and installation. Accordingly he took the view that the Plant & Machineries acquired and installed in the earlier years no longer remain “New assets”, since they have already been put to use and depreciation has been allowed. Accordingly he held that the additional depreciation claimed u/s 32(1)(iia) of the Act on the Plant and machineries acquired and installed in the earlier years cannot be allowed.

18. The assessee, however, contended that provisions of section 32(1)(iia) does not provide that the additional depreciation shall be allowed only in the year in which the new plant and machinery has been acquired and installed, e., the assessee took the view that the plant and machinery purchased after 31.3.2005 shall be eligible for additional depreciation @ 20% of the actual cost every year. However, the said contention of the assessee was rejected by the Assessing Officer for the reasons discussed above and accordingly the additional depreciation of 1621.45 lakhs claimed by the assessee in respect of assets purchased and installed during the Financial Year 2005-06 to 2007-08 relevant to A.Ys. 2006-07 to 2008-09 was disallowed by the AO. The learned CIT(A) also confirmed the same and hence the assessee has filed this appeal before us.

19. The Learned AR submitted that an identical issue was considered by the Coordinate Bench in assessee’s own case in ITA No. 1971/Mum/2013 and the Tribunal has decided the issue in favour of the assessee by following the decision rendered by Hon’ble Kolkata Bench of the Tribunal in the case of Gloster Jute Mills Ltd. (ITA No. 95/Kol/20 11 dated 1.3.2017). The Learned AR submitted that provisions of section 32(1)(iia) of the Act was substituted by the Finance Act, 2005 w.e.f. 1.4.2006. In the substituted section, there is no restriction that the additional depreciation prescribed in that section is allowable only in the year of acquisition and installation.

20. He submitted that the provisions of section 32(1)(iia) of the Act was originally introduced w.e.f. 1.4.198 1 and the same omitted from 1.4.1988. The provision so introduced in 1981 specifically provided that additional depreciation shall be allowed in the year in which the Plant and machinery was installed and if it is put to use in the succeeding year, then it shall be allowed in the year in which it was first put to use. He submitted that the provisions of section 32(1)(iia) was reintroduced w.e.f. 1.4.2005 and it contained a specific provision that the additional depreciation shall be allowed to a new industrial undertaking during the previous year in which it begins to manufacture or produce any articles or things or achieved substantial expansion by way of increase in installed capacity by not less than 10%. This provision was substituted by the present provision which reads as under:-

“(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31^st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty percent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).”

The Ld A.R submitted that the provisions of sec. 32(1)(iia), before its amendment, contained specific provision that the additional depreciation shall be allowed only in the year in which the assets were acquired or put to use. However, no such restriction was placed in the new provision substituted by Finance Act, 2005 w.e.f. 1.4.2006.

21. He submitted that Hon’ble Kolkata Bench of the Tribunal, in the case of Gloster Jute Mills Ltd. (supra) has analyzed the history of the provisions of section 32(1)(iia) of the Act and has come to a conclusion that present provisions of section 32(2)(iia) of the Act, as amended by the Finance Act, 2005, does not provide any restriction that additional depreciation will be allowed only in one year. Accordingly Kolkata Bench of the Tribunal held that additional depreciation is allowable on the cost of the assets every year. He further submitted that the above said decision of Hon’ble Kolkata Bench has been followed by the Coordinate Bench in assessee’s own case. Accordingly, he submitted that, under the principles of consistency, decision of the Coordinate Bench in A.Y. 2007-08 should be followed.

22. On the contrary, the learned Departmental Representative submitted that the legislative intention was to allow additional depreciation u/s. 32(1)(iia) of the Act only in the year in which new plant and machinery is acquired and installed. He submitted that the legislative intention can be understood by considering the decisions rendered in the context of the second proviso to section 32(1) of the Act. He submitted that the second proviso to sec. 32(1) restricts the amount of depreciation allowable during the year to 50%, if the asset was put to use for a period of less than one hundred and eighty days. The assessees contended that the additional depreciation allowed u/s.32(1)(iia) of the Act, if got restricted by the second proviso, then the balance amount should be allowed in the succeeding year. The additional depreciation is allowed at 20% u/s 32(1)(iia). The second proviso to sec. 32(1) states that the depreciation shall be restricted to 50%, if the asset was put to use for less than 180 days. Accordingly, the additional shall be restricted to 10% (50% of 20%), if the asset was put to use for less than 180 days. In that kind of situation, the assessees contended that the balance amount of depreciation calculated at remaining 10% of the cost should be allowed in the succeeding year. The above said contention of the assessee has been upheld by the High Court/ Tribunal in following cases:-

• Rittal India (P) Ltd. (IT Appeal No. 268 of 2014 dated 24.11.2015) (Kar)
• M/s. Automotive Coaches & Components Ltd. (ITA No. 1789/Mds/2014 dated 12.2.206)
• Cosmo Films Ltd. (24 com189)

The Learned Departmental Representative submitted that the decisions rendered in the above cited cases clearly show that the additional depreciation prescribed u/s. 32(1)(iia) is allowable only in respect of new plant and machinery acquired and installed during the year under consideration and the same cannot be allowed every year as contended by the assessee.

23. We have heard rival contentions on this issue and perused the record. We notice that the co-ordinate bench of Tribunal has followed the decision rendered by the Kolkatta bench of ITAT in the case of Gloster Jute Mills (supra) and has taken the view in the assessee’s own case that the additional depreciation allowed u/s 32(1)(iia) is available to the assessee every year. On the contrary, the contention of the revenue is that the additional depreciation u/s 32(1)(iia) is allowed in respect of “new” machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31^st day of March, 2005. The case of the revenue is that a machinery can be a “new one”, only in the year of acquisition and it shall become old (and not new) in the succeeding years. The contention of the revenue is that the old provisions of sec. 32(1)(iia) contained several conditions for allowing additional depreciation and hence the words “during the previous year” was considered necessary. However, with effect from 1.4.2005, those major conditions have been omitted and hence there was no necessity to include the words “during the previous year” in the section and the word “New” was adequate indication that the additional depreciation was to be allowed only in the year in which the machinery or plant was acquired and installed.

24. We notice that the Kolkatta bench of Tribunal has taken the view in favour of the assessee, on plain reading of the provisions of sec. 32(1)(iia) vis-à-vis old provisions, by holding that the additional depreciation prescribed u/s 32(1)(iia) of the Act is allowable every year. At this juncture, we feel it necessary to refer to the provisions of sec. 32(1) of the Act which prescribes the conditions for allowing normal depreciation, viz.,

(a) the asset should be owned by the assessee wholly or partly and

(b) it should be used for the purposes of the business or profession.

The question of “user of the asset” came to be considered after introduction of “Block concept of allowing depreciation”, i.e., whether the assessee is required to prove that the assets were used in that year. The Hyderabad bench of Tribunal in the case of Coromandal Bio Tech Industries (I) Ltd. in ITA Nos. 287 to 289/Hyd/2007 & 1512/Hyd/08, vide order dated 30/03/2012, examined this issue and by placing reliance on the decision rendered by the same Bench in the case of Natco Exports Vs. DCIT, 86 ITD 445 (Hyd.), held as follows:

“16. The condition/requirement of section of word ‘used for the purpose of business’ as provided in section 32(1) of the Act for the concept of depreciation on block of assets can be summarised, that use of individual asset for the purpose of business can be examined only in the first year the asset is purchased. In subsequent years when use of block of assets is to be examined, existence of individual asset in block of assets itself amounts to use for the purpose of business. This view is fully supported by various provisions of the Act which were amended consequent to the scheme of depreciation on block of assets including to the proviso to section 32 of the Act. The said proviso to section 32 requires that where an asset is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eight days in that previous year, the deduction under this sub section in respect of such asset shall be restricted to fifty percent of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (iia) as the case may be. When an asset purchased has satisfied the above condition in the year of purchase that asset will be included in the respective block of asset, depreciation for that year will be calculated on written down value in accordance with section 43(6) of the Act by the increasing opening WDV by the actual cost of any asset falling within that block, acquired during the previous year. Once an asset is included in the block of assets it remains in block for its entire life.

After introduction of “Block concept of allowing depreciation, it is fairly settled that the individual asset shall loose its identity and would remain part of block of assets for its entire life. In that view of the matter, it was held that the “user test” is required to be examined only in the year in which the asset was purchased. Identical view has been expressed in the following cases also:-

1. Induotherm (India) Ltd. V DCIT 2000(73 ITD 329)(Anmedabad).

2. The Joint CIT V Citicorp Overseas Softwares Ltd. (2004)(085 TTJ 0087) Mumbai Tribunal.

3. Parikh Engineering and Body Building Co. Ltd Vs. ACIT (1999)(69 ITD 207) (PATNA)

25. The above said decisions bring out the proposition that the individual asset would loose its identity, once it enters into a block. In our view, we may apply this proposition to the issue under consideration. The additional depreciation prescribed u/s 32(1)(iia) of the Act is allowed on the cost of asset when its identity is known. When the asset enters into a block, it looses its identity, meaning thereby, the question of allowing additional depreciation on the “cost of assets” should not arise. It is a well settled proposition that the aggregate amount of depreciation allowable during the life of asset cannot exceed the cost of asset. The concept of “Block of asset” was introduced in order to overcome the difficulty of maintaining and arriving at the WDV of individual assets. The claim of the assessee that it is entitled for additional depreciation every year would necessitate maintaining separate record for each of the asset, which also go against the Block concept of allowing depreciation. If the legislature intended that the additional depreciation should be allowed every year, which go against the block concept of allowing depreciation, then the legislature would have made its intention clear by inserting suitable provisions. Hence there appears to be merit in the contentions of the revenue that the word “new” used in sec. 32(1)(iia) would make it clear that the additional depreciation is allowable only once in the year in which the machinery or plant is acquired and installed.

26. The various decisions relied upon by the Ld D.R, in our view, bring out the intention of the legislature that the additional depreciation prescribed u/s 32(1)(iia) is allowed only once, i.e., in the year in which machinery or plant is acquired and installed. Since the provisions of sec. 32(1)(iia) allowed a right to the assessee to claim additional depreciation, it was held in those decisions that the restriction placed under second proviso in allowing only 50% of the depreciation amount should not take away the right accrued to the assessee and accordingly it was held that the assessee is entitled to claim balance amount of additional depreciation in the succeeding year.

27. We notice that the amendment brought into sec. 32 by the Finance Act 2015 by inserting third proviso w.e.f. 1.4.2016 also supports our view. The newly inserted proviso reads as under:-

Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset:

The memorandum explaining Finance bill, 2015 has explained the purpose of the insertion of above said provisions as under:-

“To encourage investment in plant or machinery by the manufacturing and power sector, additional depreciation of 20% of the cost of new plant or machinery acquired and installed is allowed under the existing provisions of section 32(1)(iia) of the Act over and above the general depreciation allowance. On the lines of allowability of general depreciation allowance, the second proviso to section 32(1) inter alia provides that the additional depreciation would be restricted to 50% when the new plant or machinery acquired and installed by the assessee, is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in the previous year. Non-availability of full 100% of additional depreciation for acquisition and installation of new plant or machinery in the second half of the year may motivate the assessee to defer such investment to the next year for availing full 100% of additional depreciation in the next year.

To remove the discrimination in the matter of allowing additional depreciation on plant or machinery used for less than 180 days and used for 180 days or more, it is proposed to provide that the balance 50% of the additional depreciation on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.”

28. By insertion of the above said proviso in sec. 32 though Finance Act 2015 w. e.f. 1.4.2016, the parliament has approved the view taken by the Tribunal/Courts in respect of additional depreciation allowable u/s 32(1)(iia) of the Act. This provision also makes it very clear that the additional depreciation is allowed only once.

29. We notice that the Kolkatta bench of Tribunal did not consider the third proviso inserted by Finance Act, 2015. Since the legislative intent in inserting sec.32(1)(iia) has been made clear by the third proviso inserted in sec. 32(1) by Finance Act 2015, we are unable to follow the view expressed by the Kolkatta bench of Tribunal in the case of Gloster Jute Mills (supra), which was in turn followed in the assessee’s own case. Since the decision rendered by Ld CIT(A) on this issue is in accordance with the legislative intent discussed above, we affirm the same. Accordingly this issue is decided against the assessee.

30. The next issue contested by the assessee relates to disallowance of foreign exchange fluctuation loss arising on currency swap/derivative The Assessing Officer noticed that the assessee has swapped the foreign currency and valued the same as on the balance sheet date, which has resulted in a loss. The AO held that the loss so claimed by the assessee is “mark to market loss” and not actual loss. Accordingly, he disallowed the loss treating the same as notional in nature. The learned CIT(A) also confirmed the same.

31. The Learned AR submitted that the assessee had entered into currency swap transactions with two authorized dealers and swapped US$ against Japanese yen in order to safeguard against risk of foreign exchange The Learned AR further submitted that the assessee has entered into these transactions for the purpose of reducing cost of borrowings and hence it is a commercial decision taken in the course of carrying on business. He further submitted that the identical issue has been considered by the Tribunal in assessee’s own case in A.Y. 2008-09 in ITA No. 1886/Mum/2013 and the Tribunal has decided the same in favour of the assessee.

32. On the contrary, learned Departmental Representative placed reliance on the decision rendered by Delhi Bench of the ITAT in the case of M/s. Bechtel India Pvt. Ltd. (ITA No. 1224/Del/2017 dated 29.5.2017) and submitted that the notional loss cannot be allowed as deduction.

33. We have heard rival contentions on this issue and perused the record. We have gone through the order passed by Delhi bench of Tribunal in the case of M/s Bechtel India P Ltd (supra). The Tribunal, in the above said case, dealt with the case of fluctuation in the foreign exchange forward contracts booked by the assessee to safeguard against the foreign exchange fluctuations in respect of export receivables. Since the forward contracts are supported by underlying receivables, the Tribunal has taken the view that the assessee is immune from any fluctuation in the foreign exchange rates. Accordingly, the Tribunal has taken the view that once there is no liability or benefit on the settlement date, then there is no possibility of any liability or benefit to the assessee on the balance sheet date also.

34. In the instant case, we notice that the tax authorities have taken the view that the “mark to market loss” booked by the assessee is a notional loss. Other than these observations, they have not brought any other facts on record. Hence, in the absence of relevant facts, we are unable to decide as to whether the decision rendered in the case Bechtel India P Ltd (supra) is applicable to the present case or not. In any case, we notice that an identical issue has been decided in favour of the assessee by the co-ordinate bench in AY 2008-09 in ITA No.1972/Mum/2013, vide its order dated 15-09-20 17. The relevant observations made by the co-ordinate bench are extracted below, for the sake of convenience:-

“18.3. We have heard the rival submissions and perused the material before us. During the year under consideration the assessee had accounted for foreign exchange loss of Rs.350.18 lakhs, that it was net of foreign exchange gain, that the loss mainly comprised of swap loss of Rs. 493.50 lakhs, that the assessee was consistently booking loss or gain on Foreign exchange on the basis of the foreign exchange rate as on the last date of particular year. In the subsequent year i.e. AY 2011-12 when the assessee had shown surplus the AO had taxed the same. In our opinion the AO should follow uniform policy for taxing or not taxing the foreign exchange loss/gains. If gains are to be taxed of a particular transaction the losses arising out of same cannot be denied to the assessee. The AO/FAA has not commented upon the fact that assessee was following AS-11. Considering the above, we are of the opinion that FAA was not justified in confirming the order of the AO. Ground No.3 is decided in favour of the assessee.”

35. Accordingly, following the decision rendered by the co-ordinate bench in the assessee’s own case, we reverse the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim of the assessee.

36. The next issue contested by the assessee relates to taxability of excise duty exemption of Rs 1452.06 lakhs claimed by the assessee. The assessee-company has set up manufacturing units at Village Lakesari, Roorkee, Uttaranchal, which falls in a specified backward area. As per notification No. 50 of 2003, the assessee-company is entitled to exemption from payment of excise duty. The assessee submitted that the excise incentive was granted for setting up of undertaking in a notified backward area, i.e., for promotion of industries in backward areas. Accordingly the assessee claimed that the said incentive is capital in nature. The assessee in this regard placed reliance on the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Ponni Sugars & Chemicals Ltd. (2008) 306 ITR 392. The AO, however, did not accept with the contentions of the assessee. He took the view that excise incentive claimed by the assessee is similar to sales tax incentive and accordingly held that the same is revenue receipt. Accordingly, the AO assessed the above said amount of Rs 1452.06 lakhs as income of the assessee.

37. The learned CIT(A) noticed that the assessee did not collect excise duty separately in the sales bills, but it was embedded in the value of total sales consideration. Since the excise duty incentive has been received after commencement of commercial production, the learned CIT(A) held that the nature of receipt is revenue in nature and liable for taxation. He also held that source of subsidy is excise duty which is collected from the customers against sales of goods and on this count also, it is revenue in nature. The learned CIT(A) placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (228 ITR 253), wherein Hon’ble Supreme Court held that nature of receipt, whether capital or revenue, will have to be determined having regard to the purpose for which subsidy is given. If the purpose is to help the assessee to set up its business or to complete a project monies must be treated as having been received from capital purpose. But if the monies are given to the assessee for carrying on the business operations and the monies are given only after and conditional upon commencement of production, such subsidy must be treated as assistance for the purpose of trade.

38. The learned CIT(A) further held that the assessee could not take support of the decision rendered by Hon’ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra). The learned CIT(A) observed that in the case of Ponni Sugars & Chemicals Ltd. (supra), incentive/subsidy was provided under a scheme framed exclusively for enabling repayment of loan borrowed from the public financial institution for acquiring fixed assets, whereas in the instant case no such purpose was shown. Accordingly, the learned CIT(A) upheld the view taken by the Assessing Officer that excise incentive received by the assessee is revenue in nature.

39. The learned CIT(A) further held that if the contention of the assessee that excise duty incentive is “capital receipt”, is accepted then, said amount is liable to be deducted from the actual cost of asset as per Explanation 10 to section 43 of the Act for the purpose of computing depreciation. The assessee is aggrieved by the decision so rendered by the learned CIT(A).

40. The Learned AR submitted that excise duty incentive was granted to the assessee in order to promote industrialization of backward area of Uttaranchal and also for the purpose of generation of employment and utilisation of local resources. Accordingly, learned AR contended that the incentive received by the assessee is capital in nature. He further submitted that Hon’ble J&K High Court has considered an identical issue in the case of Shree Balaji Alloys Vs. CIT (2011) (198 Taxman 122), wherein the Hon’ble High Court considered the decision rendered by Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) and also analysed Office Memorandum behind granting of excise incentive. The Hon’ble J & K High Court held that the excise incentive received by the assessee before it, is capital in nature. He submitted that the Hon’ble Supreme Court has also dismissed the appeal filed by the Revenue challenging the decision so rendered by Hon’ble J&K High Court in the case of Shree Balaji Alloys, vide Civil Appeal No. 1006 1of 2011 dated 19.4.20 16. The Learned AR further submitted that Hon’ble Jurisdictional Bombay High Court has also considered an identical issue in the case of CIT Vs. Harinagar Sugar Mills Ltd. (ITA No. 1132 of 2014 dated 4.1.2017) and held that the excise duty reimbursement received by the assessee is capital receipt and not chargeable to tax. Learned AR also placed reliance on various other case laws in this regard. Learned AR also furnished a chart comparing the “”Excise incentive scheme” framed for Jammu & Kashmir Government and Uttaranchal Government. The Learned AR submitted that the objectives of both the schemes are identical in nature and hence decision rendered by Hon’ble J&K High Court in the case of Shree Balaji Alloys (supra) should be followed in the instant case.

41. On the contrary, the learned Departmental Representative submitted that the tax authorities have not analyzed the terms and conditions of the scheme of reimbursement of excise duty and hence the matter may be restored to the file of the Assessing Officer.

42. We have heard the rival contentions and perused the record. We find merit in the submissions made by learned Departmental Representative. From the orders passed by the tax authorities, we noticed that they have not analysed the terms and conditions of Excise incentive scheme. Before us, the assessee has furnished a chart comparing various Clauses of excise incentive scheme floated for J&K Government and Uttaranchal Government. We feel that the same requires examination at the end of the AO. Accordingly, we are of the view that this issue requires fresh consideration at the end of the Assessing Officer by duly considering term and conditions of Excise incentive Accordingly, we set aside the order passed by the learned CIT(A) and restore the same to the file of the Assessing Officer with the direction to examine this issue afresh by duly considering the terms and conditions of the Excise incentive scheme and information and explanations that may be furnished by the assessee in this regard.

43. The learned CIT(A) has further observed that if Excise incentive received by the assessee is considered as capital in nature, the same would go to reduce the Cost of assets as per Explanation 10 to section 43 of the Act for the purpose of allowing depreciation. We have earlier noticed that the learned CIT(A) has made similar observations in respect of sales tax incentive scheme and we have dealt with the same in earlier paragraphs of this order. Since, the issue relating to determining the nature of receipt of Excise incentive has been restored to the file of the Assessing Officer, we restore this issue also to the file of the Assessing Officer with the direction to decide the same in the light of discussions made by us in earlier paragraph in respect of sales tax incentive.

44. Next issue urged by the assessee relates to disallowance of foreign exchange fluctuation loss arising on account of restatement of loan taken for the business purposes. In the preceding year the assessee had availed loan of US$ 12 million for the purpose of business. As at the end of the year under consideration, the assessee restated the loan on the basis of exchange rate prevailing on the balance sheet date, which has resulted in a loss of ` 1341.01 It is pertinent to note that, in the books of account, the assessee capitalized loss to the extent of ` 1235.43 lakhs and balance loss of ` 105.57 lakhs was transferred to the account titled as FCMITDA (Foreign Currency Monetary Item Translation Difference Account). In this connection, we notice that the assessee has followed the Notification issued by Ministry of Corporate Affairs (Notification F.No. 17/33/2008/CL-V – GSR 225(E) dated 3 1.3.2009) by inserting Paragraph 46 to Accounting Standard -11 relating to “The effects of changes in foreign exchange rates”. The said paragraph 46 reads as under:-

“46. In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before 31^st March 2011, at the option of the enterprise (such option to be irrevocable and to be exercised retrospectively for such accounting period, from the date this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired whichever is later and applied to all such foreign currency monetary items) exchange difference arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset can be added to or deducted from the cost of the asset and shall be depreciated  over the balance life of the asset and in other cases, can be accumulated  in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long term asset/liability but not beyond 31^st March 2011….”

In accordance with the AS-11, as modified by the above said notification, the assessee capitalized a sum of Rs. 1235.43 lakhs in assets account. The baance amount of Rs. 105.57 lakhs transferred to FCMITDA was proposed to amortized over a period of three years. Accordingly the sum of ` 34.13 lakhs was amortized during the year under consideration.

45. However, for the purpose of income tax, the assessee claimed entire loss of ` 1341.01 lakhs as deduction treating the same as business loss. The Assessing Officer did not accept the claim of the assessee, since the assessee itself has capitalized major part of the loss in the books of accounts. Accordingly the Assessing Officer disallowed the claim of loss, but allowed depreciation thereon. The Assessing Officer also allowed a sum of ` 34.13 lakhs written off by the assessee in the books of account. The learned CIT(A) confirmed the addition so made by the Assessing Officer on the reasoning that the foreign exchange loss determined by the assessee is notional in nature and cannot be considered as actual business loss.

46. The Learned AR submitted that the Ministry of Company Affairs has issued the above said Notification, as per which option was given to the assessee to capitalize foreign exchange gain/loss, if foreign currency loans have been utilised for acquisition of depreciable assets and in other cases to transfer the same to FCMITDA account in the Balance sheet, which can be amortized over a certain period. Accordingly, the assessee by following the MCA Notification, capitalized a sum of Rs 1235.43 lakhs and transferred the sum of Rs 105.57 lakhs to FCMITDA account for amortizing the same over a period of three years. He submitted that the accounting entries made cannot determine taxability of item of income or deductibility of item of expenditure as held by Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT (116 ITR 1) and Kedarnath Jute Manufacturing Co. Ltd. Vs. CIT (82 ITR 363). The Learned AR further submitted that the assessee has used foreign currency loan for the purpose of business in acquiring fixed assets in India and also for other purposes. Hence, foreign exchange fluctuation loss has arisen in course of carrying on the business and the same is allowable u/s. 37(1) of the Act. Learned AR further submitted that Hon’ble Supreme Court has held in the case of CIT Vs. Tata Iron & Steel Co. Ltd. (231 ITR 285) that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Hence events happening subsequent to acquisition of asset cannot change the price paid for it. Accordingly, learned AR contended that fluctuation in foreign currency rate while repaying installments of foreign loan raised to acquire asset cannot be alter actual cost of asset.

47. Learned AR further submitted that the assessee has recognized loss arising on account of foreign exchange fluctuation as per Accounting Standard 11, as per which said loss is an accrued and subsisting liability and not a contingent or hypothetical liability. Accordingly he submitted that the Ld CIT(A) was not correct in law in holding that it is a notional loss. The Learned AR also placed reliance on the decision rendered by Pune Bench of the ITAT in the case of Cooper Corporation P. Ltd. (159 ITR 165), wherein it was held that the foreign exchange fluctuation loss arising on account of reinstatement of loan is allowable as deduction.

48. On the contrary, learned Departmental Representative submitted that the assessee has availed loan for purchasing asset and hence loan should be considered as availed for capital account purpose. Hence, foreign exchange fluctuation, if any, will go to increase/reduce the cost of asset as per provisions of section 43A of the Act. He submitted that the decision rendered by Hon’ble Supreme Court in the case of Tata Iron & Steel Ltd. (supra) related to the assessment year 1960-61 and 1961-62 and hence the same cannot be followed after insertion of provisions of section 43A of the Act. Learned Departmental Representative also placed reliance on the decision rendered by the Bangalore Bench of the ITAT in the case of Bangalore International Airport Ltd. (ITA No. 510/Bang/2014 dated 27.9.2016), wherein it was held that adjustment on account of foreign exchange rate fluctuation is required to be made to actual cost.

49. We have heard rival contentions and perused the record. We notice that the Ld CIT(A) has confirmed the disallowance by taking the view that the foreign exchange valuation loss is a notional loss and not actual business loss. The view so taken by Ld CIT(A) is apparently not in accordance with the decision rendered by Hon’ble Supreme Court in the case of Woodward Governor India P Ltd (2009)(312 ITR 254)(SC), wherein the Hon’ble Supreme Court has expressed the view that the valuation is a part of accounting system and that the loss suffered by the assessee on account of exchange difference (on revenue account) as on the date of balance sheet is an item of expenditure u/s 37(1) of the Act.

50. It is also pertinent to extract below the observations made by the Hon’ble Supreme Court in this regard in the above cited case:-

“In the case of Sutlej Cotton Mills Ltd. v. CIT reported in 116 ITR 1 this Court has observed as under:

“The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.”

(emphasis supplied)

21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation.”

The Hon’ble Supreme Court has made a distinction between the circulating capital/ trading asset and Fixed capital/capital asset. While the loss arising on revaluation of foreign currency held in the former category is a trading loss and the loss arising on revaluation of foreign currency held in later category is a capital loss.

51. The Hon’ble Bombay High Court had an occasion to examine an identical issue in the case of CIT Vs. V.S. Dempo and Co. P Ltd (206 ITR 291) and the Hon’ble Bombay High Court has laid down following principles:-

“15. The propositions that emerge from the above discussions may be summed up as follows :

(i) A loss arising in the process of conversion of foreign currency which is part of the trading asset of the assessee is a trading loss as any other

(ii) In determining the true nature and character of the loss, the cause which occasions the loss is immaterial; what is material is whether the loss has occurred in the course of carrying on the business or is incidental to it.

(iii) If there is loss in a trading asset, it would be a trading loss, whatever be its cause because it would be a loss in the course of carrying on the business,

(iv) Loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not.

(v) Loss resulting from depreciation of the foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss.

(vi) For determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained. Even if the foreign currency was intended or had originally been utilised for acquisition of fixed asset, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss.

(vii) The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.”

52. The Hon’ble Supreme Court has also observed in the case of Woodward Governor India P Ltd (supra) that the profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard (paragraph 16). Hence the Hon’ble Supreme Court analysed various clauses of AS-11 and finally upheld the view taken by the assessee, in the case before Hon’ble Supreme Court, that the foreign exchange fluctuation arising on valuation as on the date of balance sheet is required to be adjusted to the value of assets u/s 43A of the Act.

53. The Ld D.R took the support of sec. 43A of the Act and accordingly supported the action of the AO in adjusting the foreign exchange loss to the value of assets. However, a perusal of the provisions of sec. 43A would show that the said section shall have application only in a case where any asset is acquired in any previous year from a country outside India for the purposes of his business or profession. If the assets were acquired in India, in our view, the provisions of sec. 43A shall not have application.

54. In the instant case, it is not clear as to whether the foreign currency loan availed by the assessee was used to acquire any asset from a country outside India. Hence to decide about the applicability or otherwise of provisions of sec. 43A, the details of purchase of assets are required. However, we notice that the assessee has taken a plea before Ld CIT(A) that it has not used the foreign currency loan for acquiring assets from a country outside India. However this submission of the assessee has not been examined by the tax authorities. Upon verification, if it is found to be correct, then the provisions of sec. 43A shall not be applicable to the assessee.

55. We have noticed earlier that the Hon’ble Supreme Court has held that the profits and gains are required to be computed in accordance with the relevant accounting standard. We have also noticed that the loss arising on valuation of foreign exchange can either be on revenue account or on capital account, depending upon the fact of the case, i.e., whether the loan has been used as circulating capital or as fixed capital. The Hon’ble Bombay High Court has held in the case of V.S.Dempo & Co. P Ltd (supra) that for determining whether devaluation loss is revenue loss or capital loss what is relevant is the utilisation of the amount at the time of devaluation and not the object for which the loan had been obtained, i.e., if the foreign currency loan was obtained to hold it a fixed capital and later on it was converted into circulating capital, then the valuation loss shall be considered as on revenue account. These principles, in our view, would govern the nature of treatment to be accorded to the loss arising on account of restatement of foreign currency

56. In the instant case, the nature of foreign currency loan availed by the assessee; whether it was held as fixed capital or circulating capital etc., have not been examined or brought on record. The assessee has simply taken the plea that the foreign currency loan has been used for the purpose of business and hence the loss arising its revaluation is allowable. In our view, it may be difficult to accept the said proposition of the assessee without examining the nature of loan and its utilisation.

57. Further we notice that the assessee has capitalised a sum of Rs. 1235.43 lakhs by following paragraph 46 of the Accounting Standard-11 inserted by the Ministry of Corporate Affairs under the Companies (Accounting Standards) Rules, 2006. The accounting standards, as we have seen earlier, are relevant to determine the profits and gains of business. Hence, this aspect would also require consideration.

58. The Ld A.R took support from the decision rendered by Hon’ble Pune bench in the case of Cooper Corporation (P) Ltd (20 16)(69 com244) to support the claim of loss. However, following observations made by the Pune bench of Tribunal would show that the facts prevailing there is different:-

“10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. (supra) relied upon by the Ld. Departmental Representative is of no assistance to the Revenue. The Hon’ble Supreme Court therein stated the principle of law that where any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading loss if the foreign currency held by the assessee on revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The aforesaid principle of law is required to be applied to the facts of case to determine whether the foreign currency is held by the assessee on revenue account or as a part of circulating capital. In the present case, fluctuation loss inflicted upon the assessee bears no nexus or relation to the acquisition to the assets. The action of the assessee is tied up to its underlying objective i.e. saving in interest costs, hedging its revenue receipts etc. which are undoubtedly on revenue account. Thus, the loss generated in impugned action bears the character of revenue expenditure.”

It can be noticed that the decision in the above said case has been rendered by Pune bench of Tribunal on the basis of facts prevailing in that case. Hence, we are of the view that the assessee cannot take support from the said decision.

58. Thus, we notice that the facts relating to the foreign currency loan of USD 12 million availed by the assessee have to be examined in the light of principles discussed in the preceding paragraphs in order to arrive at a fair and just conclusion of the matter. We notice that neither the assessee nor the tax authorities have brought relevant facts on record. In the absence of the same, it will not be possible for us to apply the legal principles discussed above. Under these set of facts, we are of the view that this issue requires fresh examination at the end of the assessing officer. Accordingly we restore this issue to the file of the assessing officer with the direction to examine the same afresh by duly analysing the nature of loan, manner of its utilisation, the present position of loan etc., in the light of legal principles discussed above. After affording adequate opportunity of being heard to the assessee, the AO may take appropriate decision in accordance with the law.

59. The next issue contested by the assessee relates to the claim for deduction of “Education cess” of Rs.4,3 1,480/- as part of income tax, dividend distribution tax and fringe benefit tax. The AO disallowed the claim by holding that education cess is part of income tax and is covered by the provisions of sec. 40(a)(ii), 40(a)(ic) and sec. 115O(5) of the Income tax Act. The Ld CIT(A) also confirmed the same.

60. The Ld A.R submitted that the “education cess” is always not treated as part of income tax and hence the same is not required to be disallowed in terms of se. 40(a)(ii), 40(a)(ic) and sec. 115O(5) of the Act. He submitted that the CBDT has issued instructions from time to time fixing monetary limits for preferring appeal before ITAT, HC & SC. He submitted that the definition of “tax effect” mentioned in those instructions, nowhere mentions that tax shall include surcharge or cess. He submitted that the Mumbai bench of ITAT has held in the case of ITO Vs. Ushma ketan Morakhia (ITA No.3357/Mum/2016 dated 02-08-2017) and also in other cases has clarified this legal position. He submitted that the term “tax” has been defined in sec.2(43) of the Act and it has been defined to include only income tax, super tax and fringe benefit tax.

Since there is conscious omission to include surcharge and education cess, the Ld A.R contended that they cannot be considered to be part of “tax”. He further submitted that the provisions of sec. 10(4) of the I.T.Act, 1922, which is pari material with sec. 40(a)(ii) of the I T Act, 1961, included “Cess” as part of item to be disallowed. However, the provisions of sec. 40(a)(ii) does not include the term “Cess”. The CBDT has clarified the position, vide its Circular No.91/58/66-IT(19) dated 18.05.1967 that only income tax is to be disallowed u/s 40(a)(ii) of the Act.

61. On the contrary, the Ld D.R submitted that the “Education cess” is an additional surcharge collected by increasing the amount of income tax and hence it is part of income tax only. In support of the same, the Ld D.R placed reliance on the decision rendered by Hon’ble Calcutta High Court in the case of Srei Infrastructure Finance Ltd Cs.DCIT (201 6)(72 com239), wherein it was observed by Hon’ble Calcutta High Court that the provisions of Finance Act speak that the income tax is being increased by the amount of surcharge and cess. Accordingly it was held that the surcharge/cess is not anything other than income tax. He submitted that the Kolkatta bench of ITAT has also held in the case of DIC Asia Pacific Pte Ltd Vs. Asst. DIT (2012)(22 taxmann.com 310) and also in the case of DDIT Vs. BOC Group Ltd (2015)(64 taxmann.com 386) has held that the Education cess is nothing but additional surcharge levied to increase the amount of income tax. Accordingly the Ld D.R submitted that the “Education cess” cannot take an independent form distinct from income tax, as contended by Ld A.R.

62. We heard the rival contentions on this issue and perused the record. We notice that the education cess was introduced in India by the Finance Act, 2004 and sec. 2(11) of the Finance Act described it as under:-

“(11) The amount of income tax as specified in sub sections (4) to (10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the “Education Cess on income-tax”, so as to fulfill the commitment of the Government to provide and finance universalized quality basic education, calculated at the rate of two percent of such income tax and surcharge.”

The character of “surcharge and education cess” was examined by Hon’ble Calcutta High Court in the case of Srei Infrastructure Finance Ltd (supra) and has held that both surcharge and Education Cess are part of income tax, though payable in addition to the income tax. The Hon’ble Calcutta High Court also observed that the various provisions of Finance Act speak about income tax being increased by the amount of surcharge and cess. Accordingly it was held that the surcharge and education cess is not anything other than income tax.

63. The CBDT circular, relied upon by the assessee, only explains the difference between the provisions of Income tax Act, 1922 and 1961. It does not clarify the nature of “Education cess” levied under Finance Act. The nature of “Cess” mentioned in 1922 Act is also not explained. Since the education cess has been levied under Finance Act as an item to increase income tax and since it has been held to be part of “income tax” by Hon’ble Calcutta High Court, we are of the view that there is no merit in the contentions of the Accordingly we reject this ground of the assessee.

64. The next issue urged by the assessee relates to the disallowance of various expenses u/s 69C of the Act. During the course of assessment proceedings, the AO asked the assessee to furnish party wise details of all major expenses and also party wise details of sundry debtors and sundry On submission of details, the AO issued notices u/s 133(6) of the Act to more than 500 parties seeking details of transactions entered by them with the assessee. Out of the above, some of the parties did not respond to the notices, some notices were returned un-served. Further in some cases, there were positive/negative differences. Hence the AO disallowed a sum of Rs.99,96,84,722/- as detailed below:-

65. Before Ld CIT(A), the assessee furnished further details in the form of additional evidences. Accordingly the Ld CIT(A) called for a remand report from the AO from time to time. Based on the remand reports, the Ld CIT(A) granted relief to the extent of Rs.9626.9 1 lakhs and confirmed the balance addition of Rs.3 69.93 lakhs.

66. The Ld A.R submitted that the assessee has also obtained confirmation letters from parties for an aggregating to Rs. 169.95 lakhs, but the addition of 169.95 lakhs was confirmed only for the reason that there was positive/negative differences in the confirmation. He submitted that the differences, if any, is a matter of reconciliation and hence, on that count, the Ld CIT(A) should not have confirmed the addition. With regard to the remaining amounts, the Ld A.R submitted that the assessee has furnished primary evidences, but could not obtain confirmation letters from them for reasons beyond the control of the assessee.

67. On the contrary, the Ld D.R submitted that this addition is based on facts and accordingly contended that the findings given by Ld CIT(A) does not call for any interference.

68. We have heard rival contentions on this issue and perused the record. We noticed that the AO had made disallowance of Rs.9996.84 lakhs for want of confirmation letters and differences in the balances. However, in the remand proceedings, the AO has accepted that the disallowance to the extent of Rs.9626.91 lakhs is not called for. Hence the Ld CIT(A) has sustained the balance addition of Rs.369.93 lakhs. The contention of the assessee is that it has furnished the primary evidences to the AO and it could furnish confirmation letters from numerous parties, wherever it could be collected. It could not obtain confirmation letters from certain parties, since they have closed the business, which is beyond the control of the assessee. The Ld A.R submitted that the addition of Rs.369.93 lakhs sustained by the Ld CIT(A) includes transactions amounting to Rs. 169.95 lakhs, for which the assessee had already furnished confirmation letters. However, the said amount of Rs. 169.95 lakhs was sustained only for the reason that there were certain differences. He submitted that the addition of Rs. 169.95 lakhs should be deleted, since the differences are subject matter of reconciliation.

69. There should not be any doubt that the primary responsibility to prove the genuineness of expenditure claim is placed upon the assessee. In the instant case, it is the contention of the assessee that it has proved the genuineness of expenditure by furnishing the primary details available with it. However, the AO has further probed the claim by sending notices u/s 133(6) of the Act to various parties and it so happened that certain notices were returned unserved; certain parties did not respond and in some cases, there were differences in the transactions. Though the AO has made an addition of 9996.84 lakhs, the assessee could convince the AO during remand proceedings by furnishing evidences in the form of confirmations to the extent of Rs.9626.9 1 lakhs. Hence the Ld CIT(A) has deleted the addition to the extent of Rs.9626.9 1 lakhs. These facts would show that the assessee has furnished the details relating to various expenses to the satisfaction of the assessing officer in majority of the cases.

70. With regard to the addition of Rs.369.93 lakhs sustained by the Ld CIT(A), the assessee could furnish confirmation letters to the extent of Rs. 169.95 lakhs and could not furnish the confirmation letters for the remaining amount. The addition of Rs. 169.95 lakhs was sustained by the Ld CIT(A), since the assessee could not explain the difference. It is the case of the assessee that it could not trace certain parties and hence it was beyond its control to obtain confirmation letters from them for the remaining amounts. Since the assessee has proved majority of expenses and since the assessee has furnished primary details for all the expenditure, we are of the view that the disallowance of entire amount of Rs.369.93 lakhs may not be warranted under these set of facts. However, since there is failure on the part of the assessee to reconcile the difference and to obtain confirmation letters from certain parties, we are of the view that a part of expenditure may be disallowed to take care of revenue leakages, if any. Accordingly we sustain disallowance of 20% of Rs.369.93 lakhs and the same, in our view, would put this issue to rest. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to sustain disallowance to the extent of 20% of Rs.369.93 lakhs.

71. The last issue contested by the assessee relates to the claim of the assessee to exclude Sales tax incentive of Rs.583.36 lakhs and Excise incentive of Rs. 1452.06 lakhs from book profit computed u/s 1 15JB of the Act. While computing book profit u/s 1 15JB of the Act, the assessee excluded both the above items from Net Profit on the reasoning that they are capital receipts. The AO did not make any adjustment in the assessment order, meaning thereby, he accepted the plea of the assessee. However, the Ld CIT(A) issued notice of enhancement and added both the items to book profit with the reasoning that both the items as revenue in nature. The Ld CIT(A) further held that these items have to be included in Book Profits, even if they are treated as capital receipts, since they have not been specifically excluded in Explanation 1 to sec. 11 5JB of the Act.

72. The Ld A.R submitted that both the receipts are capital receipts and hence they shall not be included in book profits as held by Jaipur bench of ITAT in the case of ACIT Vs. Shree Cement Ltd (ITA No.614, 615 & 635/Jp/2010 dated 09-09-2011). He submitted that the Hon’ble Bombay High Court has also held in the case of CIT Vs. Harinagar Sugar Mills Ltd (ITA No.1132 of 2014 dated 04-01-2017) that the excise duty reimbursement shall be excluded while computing income under MAT provisions based on the reasoning that subsidy in question is a capital receipt not chargeable to tax under MAT provisions. He further submitted that the Mumbai bench of ITAT has held in the case of Shivalik Venture (P) Ltd Vs. DCIT (2015)(173 TTJ 238) that an item of receipt which does not fall under the definition of ‘income’ as given in sec. 2(24) cannot be included in computation of book profit u/s 1 15JB of the Act even if it is credited to Profit and Loss account. The Ld A.R also placed his reliance on host of other case laws.

73. On the contrary, the Ld D.R submitted that the provisions of sec. 1 15JB are a complete code by itself and it does not provide for exclusion of the items credited to Profit and Loss account. Accordingly he submitted that no adjustment other than the ones mentioned in sec. 1 15JB is permissible. In this regard, the Ld D.R placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Apollo Tyres Ltd (255 ITR 273).

74. We have heard rival contentions on this issue and perused the record. In the earlier paragraphs, we have restored the issue relating to both Sales tax incentive and Excise incentive to the file of the AO with the direction to examine the relevant Schemes and then decide about their nature, i.e., whether they are capital in nature or revenue in nature. Hence we are of the view that these issues relating to 115JB also required to be set aside to the file of the assessing officer, since the decision taken by the AO in the set aside proceedings on the original issues will have bearing on these issues. Accordingly we set aside the orders passed by Ld CIT(A) on these two issues and restore them to the file of the assessing officer for examining them afresh in the light of decisions taken by him on the original issues. While adjudicating these issues, the AO should also consider various case laws relied upon by the assessee. After affording adequate opportunity of being heard, the AO may take appropriate decision in accordance with the law.

75. In the result, the appeal of the revenue is treated as allowed and the appeal of the assessee is treated as partly allowed.

Order has been pronounced in the Court on 31.1.2018.