THE COMMR. OF INCOME TAX vs. M/S NATIONAL HYDRO ELECTRIC POWER CORP.

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ITA/274/2006HC Punjab & HaryanaPHHC01074970200617 December 2010Author: MR. JUSTICE AJAY KUMAR MITTAL,MR. JUSTICE ADARSH KUMAR GOEL3 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the ITAT's decision was in consonance with the Supreme Court's rulings in Commissioner of Income-Tax v. Woodward Governor India P. Ltd. and Oil and Natural Gas Corporation Ltd. v. Commissioner of Income-Tax. Following the principle laid down in CIT v. Arvind Mills Ltd., the Court affirmed that any increase or decrease in the liability for repayment of a foreign loan, arising from fluctuations in the exchange rate, should be accounted for to modify the actual cost of the asset in the year such fluctuation occurs. This adjustment is to be made irrespective of the date of actual payment in foreign currency. Therefore, the disallowance made by the AO was not justified. The substantial question of law was answered against the revenue.

What were the facts?

The Revenue (Commissioner of Income Tax) appealed against an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 1998-99. The ITAT had affirmed the decision of the CIT(A) who deleted a disallowance of Rs. 585.75 lacs made by the Assessing Officer (AO). The disallowance pertained to depreciation claimed by the assessee (M/s National Hydroelectric Power) on the capitalized effect of foreign exchange rate fluctuations on an outstanding liability. The AO had disallowed this depreciation on the grounds that no amount was actually paid during the year. The CIT(A) allowed the assessee's plea, stating that the change in asset value due to foreign currency fluctuation is not a contingent liability and that the assessee follows the mercantile system of accounting and relevant accounting standards. The Chamera project was operational, and its assets were in use.

What were the issues?

1. Whether the Hon'ble ITAT erred in law by confirming the CIT(A)'s deletion of the disallowance of depreciation of Rs. 585.75 lacs claimed by the assessee on the capitalization of the effect of foreign exchange rate fluctuation on an outstanding liability, despite no actual payment being made during the year, turning on Section 32 of the Income Tax Act, 1961. Assessee's Contention: The assessee argued that the change in the value of an asset due to foreign currency fluctuation is not a contingent liability. They follow the mercantile system of accounting and relevant accounting standards. The project assets were in use. Revenue's Contention: The revenue argued that depreciation should not be allowed on the capitalized effect of foreign exchange fluctuations if no amount was actually paid during the year.

Which sections of the Income-tax Act were involved?

Section 32,Section 260A

AI-generated summary — verify with the full judgment below

-1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision: 17.12.2010 The Commissioner of Income Tax ....Appellant. Versus M/s National Hydroelectric Power ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Advocate for the appellant. Mr. Piyush Kaushik, Advocate for the respondent. ADARSH KUMAR GOEL, J.

1.

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 against the order of Income Tax Appellate Tribunal, Delhi Bench 'F' passed in ITA No. 1496/Delh/2003 dated 27.10.2004 for the assessment year 1998-99, claiming following substantial question of law:- “Whether Hon'ble ITAT has erred in law in confirming the order of the CIT (A) in deleting the disallowance of depreciation of Rs.585.75 lacs claimed by the assessee on capitalization of the effect of the fluctuation in the rate of foreign exchange on the outstanding liability, though no amount was actually -2- paid during the year?”

2.

The Assessing Officer partly disallowed the claim for depreciation calculated on the basis of increased value of the assets of the assessee on account of fluctuation of foreign exchange rates. On appeal, the CIT(A) upheld the plea of the assessee as follows:- “4.3 From the above judgment of the Special Bench of Delhi, ITAT, it is clear that change in the value of asset because of fluctuation in foreign currency is not a contingent liability. The appellant company is following mercantile system of accounting and following the accounting standard issued by ICAJ. The Chamera project has already started the operation and the assets of the project are in use. Therefore, keeping the aforesaid facts and the legal position as enunciated by Delhi ITAT (Special Bench) the AO was not justified in disallowing the claim of the appellant and accordingly the disallowance of Rs.585.75 lacs made by the AO is hereby deleted. The appellant succeeds on this ground.” The Tribunal affirmed the said finding.

3.

We have heard learned counsel for the parties.

4.

Learned counsel for the revenue does not dispute that the view taken by the Tribunal is in consonance with the view taken by the Hon'ble Supreme Court in Commissioner of Income-Tax v. Woodward Governor India P. Ltd. [2009] 312 ITR 254(SC) and Oil and Natural Gas Corporation Ltd. v. Commissioner of Income-Tax -3- [2010] 322 ITR 180 (SC). Following earlier judgment in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 (SC), it was held that increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange. This has to be done irrespective of the date of actual payment in foreign currency.

5.

In view of above, the question claimed on behalf of the revenue is answered against the revenue.

6.

The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE December 17, 2010 (AJAY KUMAR MITTAL) gbs JUDGE

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