Depreciation on capitalization of foreign gain/loss not allowed as it does not satisfy Section 43A

By | December 10, 2015


Commissioner of Income-tax, Kolkata-III


ITC Ltd.


IT APPEAL NO. 426 OF 2006

MAY  7, 2015

R.N. Bandyopadhyay and A.G. Gutgutia, Advocates for the Appellant. J.P. Khaitan, Sr. Adv., Mrs. Nilanjan Pal (Banerjee) and A. Gupta, Advocates for the Respondent.


1. The appeal arises out of a judgement and order dated 30th June, 2006 passed by the learned Income Tax Appellate Tribunal pertaining to the assessment year 2002-2003. The revenue has come up in appeal. The following questions were formulated at the time of admission of the appeal:—

“1. Whether on the facts and in the circumstances of the case the learned Tribunal has erred by allowing deduction under Section 80IA to the extent of Rs.44,71,14,992/- when the fundamental requirements to quality for claim of deduction under Section 80IA is deficient in this case as the power generation unit is only the extension of existing business of the assessee and there was no business activity on the part of the undertaking (power generation) because the product (power) being generated by the plant was transferred to its own industrial units and was not sold at the market rate to the assessee?”
2. Whether on the facts and in the circumstances of the case the learned Tribunal has erred in deleting the addition of Rs.12,40,533/- on account of depreciation on capitalization of foreign gain/loss when the intermediate fluctuation in the rates of foreign exchange does not necessarily enhance the actual cost of the depreciable assets and the stand taken by the Department on this matter has always been that any increase in the cost of assets due to any intermediate cost of rates of foreign currency shall not be entitled for depreciation as in such cases no real and tangible increase in the cost of assets take place ?
3. Whether on the facts and in the circumstances of the case the learned Tribunal has erred in deleting the addition of Rs.21,88,113/- on account of depreciation on forklift trucks by allowing depreciation @100/- without appreciating the fact that the said trucks are not energy saving devices and do not fall within the meaning of item No.III(xiii)(o) of Appendix I of Income Tax Rules 1962 ?
4. Whether on the facts and in the circumstances of the case the learned Tribunal has erred in deleting addition of Rs.25,26,811/- made on account of advances written off by treating it as revenue in nature when the figure included deposits made with government bodies, advances to various employees, refund claim with Excise Authorities, etc. which are not strictly in the nature of debit and nor have the same ever been offered for taxation in earlier years meaning thereby these advances are not part of taxable income ?”

2. The facts and circumstances pertaining to the question no.2 appearing from the submissions advanced before the CIT (Appeals) on behalf of the assessee are as follows:—

” There have been no provisions made for forex fluctuations. The entire amount of forex fluctuation of Rs.49,62,133/- was on account of actual expenditure on account of cancellation/booking of foreign exchange covers, during the year. Extract of the assessment submission enclosed – Annexure 32, File No.1, Page Nos.307.

This was certified by the auditors in the Tax Audit Report. Therefore, there is absolutely no income tax issue since this has not been claimed as revenue expenditure but has actually been capitalized in accordance with section 43A and only depreciation has been claimed”

3. It would, therefore, appear from the submissions advanced by the assessee himself that the claim could not have come within the fourcorner of Section 43A. Therefore, the claim for depreciation was altogether bad and illegal. The assessee did not incur any loss arising out of fluctuations in the exchange price. The assessee, on the contrary, claims to have incurred the expenditure of a sum of Rs.49,62,133/- because it had got to get rid of the forward contracts which it had entered into for the purpose of protecting itself from the fluctuations of the foreign exchange.

4. Therefore, the assessee might have claimed it as an expenditure which could have been considered in accordance with law. But there was no case for any claim being put forward on account of depreciation.

5. For the aforesaid reasons, the question no.2 is answered in the affirmative and in favour of the revenue. The issue shall now go back to the assessing officer. He shall consider the question, if the assessee wants to press the same, in accordance with law.

6. In so far as the question no.3 is concerned, it appears that electrically operated vehicles including battery power or fuel cell powered vehicles are entitled to 100% depreciation under Appendix I, Part-A, Item III(3)(xiii)(o) of the Income Tax Rules, 1962. Therefore, the question is answered in the negative and against the revenue.

7. In so far as the question no.4 is concerned, reference may be made to the views expressed by the CIT (Appeal) which include, inter alia, as follows:—

” The appellant company during the course of appellate proceedings has contended that the claim is off revenue nature and was allowable u/s.28/37 (1) of the Income Tax Act 1961. The appellant has strongly relied upon the decision of the Hon’ble I.T.A.T. for the assessment year 1991-92 in the appellant’s own case wherein the Ld. ITAT relying upon the judgement of the Hon’ble Supreme Court in the case of CIT v. Mysore Sugar Co. Ltd.(46 ITR 649 ) held that the write off of trade advances were allowable deduction u/s.28 of the Income Tax Act 1961 since such expenses were incurred in the normal course of business. The details of amount written off have been examined and it is observed that all the advances (now) written off by the appellant company were incidental to the business of the appellant and any loss due to non recovery should be allowable as deduction for the computation of profits and gains of business. Accordingly, the disallowance/addition of Rs.25,26,811/- made by the Assessing Officer is deleted. This ground of appeal is allowed. ”

8. The learned Tribunal approved the findings without any independent discussions on the subject. Therefore, the finding of fact that the advances written off were incidental to the business of the appellant has remained unshaken.

9. The C.I.T (A) in allowing the claim for deduction of the amount which had been written off, relied on a judgment in the case of CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC) wherein their Lordships held that:—

” ……but the general scheme of the section is that profits or gains must be calculated after deducting outgoings reasonably attributable as business expenditure but so as not to deduct any portion of an expenditure of a capital nature. If an expenditure comes within any of the enumerated classes of allowances, the case can be considered under the appropriate class; but there may be an expenditure which, though not exactly covered by any of the enumerated classes, may have to be considered in finding out the true assessable profits or gains. This was laid down by the Privy Council in Commissioner of Income-tax v. Chitnavis, and has been accepted by this court. In other words, section 10(2) does not deal exhaustively with the deductions, which must be made to arrive at the true profits and gains.

To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are: for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses. ”

10. Therefore, the question for consideration was, whether the money advanced by the assessee which was written off was or had the character of the revenue expenditure or a capital expenditure? If it had a character of the capital expenditure, then the writing off of the same would not entitle the assessee to claim any deduction. If, on the contrary, it had the character of a revenue expenditure the writing off certainly shall entitle the assessee to claim the deduction.

11. Mr. Bandhyopadhya, learned advocate, appearing for the revenue submitted that the judgment in the case of Mysore Sugar Co. Ltd. (supra) has no manner of application because the money in that case was advanced for the purpose of purchasing raw material but in the case before us the advances were not for the purpose of purchasing raw material. The fact that the advances were made for purchasing the raw material made it an expenditure of a revenue character and, therefore, that was deductible. In the case before us the finding of fact is that the expenditure was incidental to the business. Therefore, the expenditure partook the character of revenue expenditure which is allowable deduction.

12. The question is, therefore answered in the negative and against the revenue.

13. The second, third and fourth questions have thus been dealt with by us.

14. As regards the first question, Mr. Khaitan, learned Senior Advocate wanted to file a written notes of submissions. We have, therefore, reserved our judgment on the first question, which we propose to deliver soon after the note by Mr. Khaitan and counter note, if any, by the learned advocate for the revenue are filed. Such note and counter note, if any, have to be filed on or before the first working day after the summer vacation.

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