According to Section 43A, capital expenditures include additional amounts paid as a result of fluctuations
Fact and issue of the case
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
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.
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).
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:-
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.
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.
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
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.
Observation of the court
I have gone through the order of the AO and submission made by the ld.AR. As submitted by the Assessee the sum of Rs.4.04 Crores represents the prorate premium payable to the Banks on account of the forward contracts taken to cover the exchange risk in respect of foreign currency liability under various heads. However the fact remains that the foreign currency loans were taken for capital expenditure purpose therefore the provisions of sec 43A are clearly applicable to the amount claimed by the Assessee.
Hence the AO has rightly disallowed sum Rs.4,04,25,325/- under sec 43A of the Act. Assessee’s appeal on this issue is accordingly dismissed.
Aggrieved, assessee came in appeal before the Tribunal.
We have heard rival contentions and gone through facts and circumstances of the case. Before us, the argument of the assessee was that this expenditure was claimed on account of forward premium relating to forward contracts in respect of foreign currency loans availed for the purpose of working capital and acquired assets in India and claimed expenditure of Rs.4.04 crores. The contention of the assessee that this liability has actually been incurred and has become payable to banks in respect of foreign contracts entered with banks and this amount does not represent liability on account of restatement as on the previous year. Its plea was that since the foreign currency loan was not for acquiring any specific asset from country outside India and the exchange loans arose only on account of premium paid on forward contracts and hence, it should not be treated as capital expenditure rather it is revenue expenditure. We do not agree with the contention of the assessee for the reason 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. Similarly, the Hon’ble High Court of Madras in the case of CIT vs. South India Viscose Ltd., [1998] 229 ITR 203 held a similar view that the amount paid as difference in exchange value resulting in higher installment paid due to exchange fluctuation in respect of loans taken from foreign banks for purchase of machinery, is capital in nature. 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.
In the result, the appeals filed by the Revenue in ITA No.940/CHNY/2017 and assessee in ITA No.896/CHNY/2017 are dismissed and the appeal filed by the assessee in ITA No.895/CHNY/2017 is partly allowed for statistical purposes.
Order pronounced in the open court on 17th May, 2023 at Chennai.
Observation of the court
Conclusion
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from here
ACIT-Vs-Tamilnadu-Newsprint-and-Papers-Ltd-ITAT-Chennai-2
