sec. 41(1) No tax on depreciation claim if capital loan is waived off by lender

IN THE ITAT BANGALORE BENCH ‘B’

Akzo Nobel Coatings India (P.) Ltd.

Versus

Deputy Commissioner of Income-tax

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

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:-

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: