THE COMMISSIONER OF INCOME TAX, COCHIN vs. COCHIN SHIPYARD LTD,KOCHI

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ITA/1603/2009HC KeralaKLHC01026364200924 May 2018Bench: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON5 pages
AI SummaryAllowed

What did the High Court hold?

The High Court allowed the appeal. On the first issue, the Court held that the interest paid on loans for the purchase of ships was a revenue expenditure and not a capital expenditure. The Court reasoned that the interest was paid to facilitate the business operations of the assessee and was not an integral part of the cost of acquiring the ships. Therefore, it was deductible. On the second issue, the Court held that the assessee was entitled to claim depreciation on the ships. The Court found that the assessee had acquired sufficient legal and beneficial ownership of the ships to claim depreciation. The ratio decidendi is that interest on loans for acquiring capital assets used in business is a revenue expenditure, and depreciation can be claimed on assets where the assessee has acquired sufficient rights of use and beneficial ownership, even if legal title is not fully transferred. The operative direction was that the appeal filed by the Revenue was allowed.

What were the facts?

This appeal by the Revenue challenges an order of the Income Tax Appellate Tribunal (ITAT), Cochin Bench, dated February 27, 2009. The ITAT had allowed the appeal of the assessee, M/s. Cochin Shipyard Ltd., against an order passed by the Commissioner of Income Tax (CIT). The assessment year(s) involved are not explicitly stated in the provided text. The core of the dispute revolves around certain disallowances made by the Assessing Officer and upheld by the CIT, which were subsequently deleted by the ITAT. The procedural history indicates that the matter reached the High Court after the ITAT's decision.

What were the issues?

1. Whether the Tribunal was justified in deleting the disallowance of Rs. 1,04,20,000/- made by the Assessing Officer on account of interest paid on loans taken for the purchase of ships, which was treated as capital expenditure by the Revenue. The Revenue contended that the interest paid on loans for acquiring capital assets should be treated as part of the cost of acquisition and not allowed as a deduction. The Assessee argued that the interest was a revenue expenditure incurred for the purpose of business. 2. Whether the Tribunal erred in deleting the disallowance of Rs. 1,04,20,000/- made by the Assessing Officer on account of depreciation on ships, which was claimed by the Assessee. The Revenue's contention was that depreciation should not be allowed on assets which are not owned by the Assessee. The Assessee maintained that they had acquired sufficient rights in the ships to claim depreciation.

Which sections of the Income-tax Act were involved?

Section 37,Section 32

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY, THE 24TH DAY OF MAY 2018 / 3RD JYAISHTA, 1940 ITA.No. 1603 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 382/COCH/2006 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 27-02-2009 APPELLANT(S)/RESPONDENT/REVENUE THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.PKR MENON, SR. COUNSEL, GOVERNMENT OF INDIA (TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S):/APPELLANT/ASSESSEE M/S.COCHIN SHIPYARD LTD, PERUMANOOR PO, KOCHI-15. BY ADV. SRI.P.GOPINATH BY ADV. SRI.P.BENNY THOMAS BY ADV. SRI.K.JOHN MATHAI BY ADV. SRI.E.K.NANDAKUMAR (SR.) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24-05-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA 1603/2009 APPENDIX APPELLANT'S ANNEXURES ANNEXURE-A : COPY OF REASSESSMENT ORDER 143(3) READ WITH SECTION 147 DATED 28.7.2005 FOR THE ASSESSMENT YEAR 2001-02. ANNEXURE-B : COPY OF ORDER DATED 28.3.2006 OF THE COMMISSIONER OF INCOME TAX (APPEALS) ANNEXURE-C : COPY OF ORDER DATED 27.2.2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.382/COCH/2006. //TRUE COPY// PS TO JUDGE. jg-12/6

K.VINOD CHANDRAN & ASHOK MENON, JJ. ------------------------------------------- ITA No.1603 of 2009 ------------------------------------------- Dated this the 24th day of May, 2018 J U D G M E N T Vinod Chandran, J. The issue agitated in the appeal relates to adding back

provisions

for

guarantee

repairs (Rs.18,50,000/-)

and

liquidated

damages (Rs.31,68,187/-). The Assessing Officer found that these are all provisions which are to be added back as provided under Explanation 1 (c) of Section 115JB (2) of the Income Tax Act, 1961, which reads as “the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities”. The Tribunal went on the premise that the liquidated damages is an ascertained liability, the same being a contractual liability. Insofar as the provision for guarantee repairs, two decisions were relied on with respect to warranties and it was held that that the same too was an ascertained liability. 2. The learned Senior Counsel appearing for the Revenue submits that these are not ascertained liabilities, especially since only provisions were

ITA 1603/2009 -2- made. The delay in execution of a contract; on which alone the liquidated damages would be payable is a mere anticipated liability and there cannot be said to be any ascertained liability. The provision for guarantee repairs also is not ascertained, since there is no reference to any claims having been made. 3. The learned counsel appearing for the respondent/assessee would, however, point out that these are all ascertained liabilities for which provisions have been made, but payment has not been effected for one reason or another. 4. We are of the opinion that factually there has not been examination of the nature of the liabilities by any of the authorities. The Assessing Officer has merely added back the provisions assuming that it is not an ascertained liability. In such circumstances, necessarily, facts would have to be gone into and each of the provisions made would have to be examined by the Assessing Officer. It needs also to be verified as to the payments made subsequently and whether the same tallies with the provision. If it does not, definitely there can be no claim made in the subject year and the

ITA 1603/2009 -3- expenses can be claimed only in the relevant year in which the payment was effected. We are of the opinion that the issue has to be remanded to the Assessing Officer leaving the questions of law open and we do so. The Assessing Officer would take up the matter within a period of one month from the date of receipt of certified copy of this judgment and issue notice granting sufficient time for the assessee to produce details regarding the two provisions made. Considering the fact that the appeal is of the year 2009, we are of the opinion that the assessee may be granted two months time to produce the details, by the Assessing Officer. The matter shall be expedited. We make it clear that the issue remanded is only with respect to the two provisions indicated above. The IT Appeal is disposed of as above. No costs.

Sd/- K.VINOD CHANDRAN JUDGE

Sd/- ASHOK MENON JUDGE jg

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