THE COMMISSIONER OF INCOME TAX vs. APPOLLO TYRES LTD.

Facts

The Revenue filed an appeal before the High Court of Kerala against an order of the Income Tax Appellate Tribunal (ITAT). The assessee, Appollo Tyres Ltd., had filed its return for assessment year 1994-95. The Assessing Officer treated certain expenses as capital in nature. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal. Both the assessee and the Revenue filed appeals before the ITAT. The ITAT, in its order dated 28.03.2008, remanded the matter to the Assessing Officer for reconsideration regarding the applicability of Section 35D of the Income Tax Act, 1961, after observing that the expenditure was capital in nature but its eligibility under Section 35D had not been examined. The Revenue's appeal to the High Court challenged this remand order.

Held

The High Court held that the issue concerning the applicability of Section 43A was settled in favour of the assessee by the Supreme Court in Oil & Natural Gas Corporation Ltd. Vs. The Commissioner of Income Tax, Dehradun. Regarding the issue of Section 35D, the Court noted that the ITAT had not arrived at any finding on merit but had made an 'open remand' to the Assessing Officer. The Court found that no prejudice was caused to the Revenue as they could raise all relevant contentions, including questions of law, before the Assessing Officer. Since the ITAT had not rendered a finding on the applicability of Section 35D, the Court concluded that the appeal did not involve any 'substantial question of law' warranting interference under Section 260A of the Income Tax Act. The appeal was accordingly dismissed.

Key Issues

1. Whether, on the facts and in the circumstances of the case and also in view of the fact that some of the projects have not started even during the relevant previous year, the ITAT is right in law in directing the Assessing Officer to consider the capital expenditure under Section 35D(1) and (2) of the Income Tax Act, 1961? a. The Revenue argued that Section 35D is not attracted as the assessee had abandoned the project, making further consideration futile. They contended that Section 35D is only applicable in connection with business, which they claimed was not the case here. 2. Whether, on the facts and in the circumstances of the case and in the absence of the ground with reference to issue of fluctuation in currency rate being raised before the Commissioner of Income Tax (Appeals), the Tribunal is justified in accepting and acting upon the ground raised before it and also in considering the issue of fluctuation in the value of foreign currency on merit? a. The Revenue argued that the ITAT was not justified in allowing depreciation on an imaginary amount based on currency fluctuation without actual payment, and that this was against the provisions of the Income Tax Act, specifically Section 43A. b. The Revenue contended that the Tribunal's order was against law in light of the wording "for making the payment towards the whole or part of the cost of the asset" in Section 43A.