ACIT Vs Tamilnadu Newsprint and Papers Ltd (ITAT Chennai)
ITAT Chennai Held that the provisions of section 43A of the Act specifically provides that the amount of increase or decrease in the liability due to fluctuation in exchange rate should be adjusted against the actual cost of the capital expenditure or the cost of acquisition of capital asset.
Facts- The assessee filed its return of income for the relevant assessment year 2009-10 on 29.09.2009 and assessment was completed u/s.143(3) of the Act by the AO vide order dated 31.12.2011 after making some additions. Subsequently, the PCIT issued show-cause notice u/s.263 of the Act dated 28.10.20 13 as to why the forward premium claimed on foreign exchange fluctuation as capital receipt be not treated as revenue receipt. The PCIT passed the revision order directing the AO to verify the assessee’s claim of notional income with reference to annual accounts and verify the nature of forward transactions (hedging transactions) as to whether the assessee has debited the amount crystallized into profit and loss account.
The CIT(A) also confirmed the action of the AO by holding that the provisions of section 43A of the Act are clearly applicable to the facts of the case of the assessee and hence, foreign exchange loan taken were for the purpose of capital expenditure and therefore forward premium paid by assessee is capital expenditure. Being aggrieved, the present appeal is filed.
Conclusion- Held that the provisions of section 43A of the Act specifically provides that the amount of increase or decrease in the liability due to fluctuation in exchange rate should be adjusted against the actual cost of the capital expenditure or the cost of acquisition of capital asset. When the terms of Section 43A of the Act are fulfilled, it is mandatory to take the actual cost, capital expenditure or the cost of acquisition at a higher or lower figure for the purposes of depreciation allowance irrespective of whatever might have been the position de hors the provision. This provision has been interpreted by the Hon’ble High Court of Madras in the case of CIT vs. Elgi Rubber Products Ltd., [1996] 219 ITR 109, wherein it has been held that having regard to the provisions of section 43A of the Act, the additional amount paid to the ICICI due to fluctuation in exchange rate was capital in nature and not revenue.
In view of the above, we are of the view that the AO and CIT(A) has rightly disallowed the expenditure claimed by assessee and we affirm the same. Therefore, the appeal of the assessee is dismissed.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
The cross appeals by the Revenue and assessee in ITA Nos. 940/CHNY/2017 & 895/CHNY/2017 are arising out of the order of the Commissioner of Income Tax (Appeals)-13, Chennai in ITA No.1228/CIT(A)-11/AY 2009-10 dated 27.01.2017. The assessment was framed by the JCIT, Company Range-III, Chennai u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the assessment year 2009-10, vide order dated 30.12.2011.
Revenue’s Appeal in ITA No.940/CHNY/2017
2. The only issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of 50% of additional depreciation made by the AO on the basis that new machineries were purchased and installed in financial year 2007-08 pertaining to assessment year 2008-09. For this, Revenue has raised many argumentative grounds, which we will deal with while adjudicating the issue.
3. Brief facts are that the assessee company is a domestic company, in which public are substantially interested and engaged in the manufacture of newsprint, printing and writing paper and generation of power. The AO during the course of assessment proceedings noted that the assessee claimed additional depreciation of Rs.13,15,54,279/- pertaining to assessment year 2008-09. The AO noted that the assessee claimed that some of the plant and machineries were installed more than 180 days in assessment year 2008-09 on which the assessee claimed depreciation only @ 10% and hence, balance 10% depreciation was claimed during the current assessment year. The AO going through the provisions of section 32(1)(iia) of the Act noted that the above depreciable assets which were installed less than 180 days are only eligible for 50% depreciation during the relevant assessment year and no further depreciation is allowable in any assessment year. According to him there is no ambiguity in the provisions and therefore additional depreciation was denied to the assessee. Aggrieved, assessee preferred appeal before CIT(A).
4. The CIT(A) following the decisions of ITAT, Chennai Bench in the case of Automotive Coaches & Components Ltd., vs. DCIT in ITA No.1789/Mds/2014 and Hon’ble Karnataka High Court in the case Rittal India Pvt. Ltd., [2016] 66 taxmann.com (4) (Kar) allowed the claim of assessee. The CIT(A) reproduced the observations of Hon’ble Karnataka High Court as under:-
“7. Clause (iia) of Section 32(1) of the Act, as it now stands, was substituted by the Finance Act, 2005, applicable with effect from 01.04.2006. Prior to that, a proviso to the said Clause was there, which provided for the benefit to be given only to a new industrial undertaking, or only where a new industrial undertaking begins to manufacture or produce during any year previous to the relevant assessment year.
8. The aforesaid two conditions, i.e., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been down away by substituting clause (iia) with effect from 01.04.2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purpose of business. The proviso to Clause (ii) of the said Section makes it clear that only 50% of the 20% would be allowable, if the new plant and machinery so acquired is put to use for less than 180 days in a financial year. However, if nowhere restricts that the balance 10% would not be allowed to be claimed by the assessee in the next assessment year.
9. The language used in Clause (iia) of the said Section clearly provides that “a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under Clause (ii)”. The word “shall” used in the said Clause is very significant. The benefit which is to be granted is 20% additional depreciation. By virtue of the proviso referred to above, only 10% can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10% additional deduction can be availed in the subsequent assessment year, otherwise the very purpose of insertion of Clause (iia) would be defeated because it provides for 20% deduction which shall be allowed
10. It has been consistently held by this Court, as well as the Apex Court, that beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one assessment year, if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the 11 I.T.A. No.1789/Mds/14 benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held, that additional depreciation allowed under Section 32(1)(iia) of the Act is a one time benefit to encourage industrialization, and provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting additional allowance. We are in full agreement with such observations made by the Tribunal.”
Finally, the CIT(A) allowed the claim of additional depreciation of 10% and allowed the claim of assessee. Aggrieved, now Revenue is in appeal before us.
5. After hearing both the sides and going through the facts of the case, it is clear that only dispute is as regards to additional depreciation claimed by assessee u/s.32(1)(iia) of the Act, which was substituted w.e.f. 01.04.2006. No contrary decision was given during the hearing and the issue seems covered by the decision of Hon’ble Karnataka High Court in the case of Rittal India Pvt. Ltd., supra and hence, we dismiss this issue of Revenue’s appeal. The appeal of the Revenue is dismissed.
Assessee’s Appeal in ITA No.895/CHNY/2017
6. The first issue in this appeal of assessee is as regards to the order of CIT(A) confirming the addition made by AO of notional exchange gain of Rs.13,97,10,757/- on reinstatement of foreign currency loan treating the same as revenue income as against claimed by assessee as capital in nature. For this, assessee has raised many argumentative grounds, which we will deal with while adjudicating the issue.
7. Briefly stated facts are that, the assessee claimed a sum of Rs.13,97,10,757/- being amount as notional exchange gain on reinstatement of foreign currency loan as capital receipt and recorded the same to the profit & loss account. The assessee claimed that the foreign currency loan has been reinstated as on 31.03.2009 as per prevailing foreign exchange rates and accordingly the gain on the same has been credited to the profit & loss account. The assessee before AO explained that the above reinstatement of foreign currency loan given raise to foreign currency gain was on account of reinstatement of foreign currency loan which was taken for Mill Development Plan. The AO has not accepted the plea of the assessee for the reason that the assessee following Mercantile System of Accounting and therefore as per Accounting Standary-11, any gain or loss on foreign exchange has to be debited and credited to the profit & loss account. He also noted that this gain is not related to any part of the fixed assets. Therefore following the decision of Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd., 179 Taxman 326 treated the entire sum of foreign exchange gain as revenue receipt and added to the returned income of the assessee. Aggrieved, assessee preferred appeal before CIT(A).
8. The CIT(A) after detailed discussion noted that though the assessee claimed that the gain is related to expansion project, however it is not able to prove with evidence that the same is relatable to fixed assets. Therefore, the CIT(A) also following the decision of Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd., supra, noted that in case there is a gain, the assessee is required to offer the same as income and if there is a loss, the assessee can claim unrealized loss as expenses. Therefore, the CIT(A) also treated the same as income of the assessee and for this, he observed as under:-
I have carefully considered the facts of the case, the AO’s finding given in the assessment order and the appellant’s submissions made during the appeal proceedings, The assessee is following mercantile method of accounting and as per the Accounting Standard -11, whether any gain or loss on foreign exchange is to be credited or debited to the Profit & loss A/c. Moreover, though the assessee has claimed that the gain is related to expansion project, however he is not able to prove with evidences that the same is relatable to the fixed assets. Therefore, the assessee is required to follow up the treatment and accordingly required to offer the same as income. The assessee had not done so. Therefore, relying on the Apex Court decision Woodward Governor India Pvt. Ltd., 179 Taxman 326, the Hon’ble Supreme Court held that the accounting and giving of treatment as per Accounting Standard Level-11, if assessee claims unrealised loss as expenses and unrealized gains as income, then “as profits for income tax purpose are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by the legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to the fall in the price below cost is allowed even though such loss has not been realised. Therefore, the foreign exchange gain accruing to the assessee is requires to be treated as income of the assessee. Accordingly, the AO adding sum of Rs. 13,97,10,757/- as foreign exchange gain to the total income is confirmed. The ground of appeal on this issue is accordingly dismissed.
Aggrieved, now assessee is in appeal before us.
9. Now, the ld.counsel for the assessee filed detailed note before us, wherein it was claimed that the company embarked upon an expansion project i.e., Mill Development Plan (MDP) involving a capital outlay of Rs.619 crores for increasing pulp and paper production capacities. The MDP project cost was financed by foreign currency, rupee loans and internal accruals and for this, the assessee gave details as under:-
