DCIT,CIRCLE-5(1)(1), AAYAKAR BHAWAN vs. COFFER CONSTRUCTION TECHNOLOGY PVT. LTD., TARDEO

"Whether on the facts, in the circumstances of the case and in law, the CIT(A) has erred in ignoring the ratio laid down by the judgement of the Kerala High Court in the case of Commissioner Of Income-Tax Vs. Poulose And Mathen (Put.) Ltd. dated 03.02.1998, (1999) 236 ITR 416 Ker, wherein, the Hon'ble High Court has held that the “actual cost" contemplated under Section 43(1) means the actual cost of the assets to the assessee, reduced by that portion of the cast met by any other person or authority directly or indirectly."

"Whether on the facts, in the circumstances of the case and in law, the CIT(A) has erred in ignoring the ratio laid down by the Hon'ble Apex court judgment in the "Whether on the facts, in the circumstances of the case and in law, the CIT(A) has erred in ignoring the ratio of the decision of ITAT, Bangalore in the case of Sango BPL Put. Ltd, Vs. DCIT, (2016] 75 taxmann.com253 (Bangalore - Trib.), dated 04.11.2016 wherein it was held that the Legislature has prefixed the word 'actual' to the word cost' in section 43(1) which suggests that the intention of the Legislature was to curb the malpractices and tendencies to inflate capital costs for obtaining higher depreciation while not burdening the other with any material tax liability and to exclude collusive, inflated and fictitious cost."

Briefly stated the facts of the case are that the assessee is engaged in the business of manufacturing of construction panels and selling the same in domestic as well as international market. The assessee electronically filed its return of income on 28/09/2015, declaring total income at Rs. Nil, under the normal provision of the Act and also u/s 115JB of the Act. The return of income was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.

During the course of scrutiny assessment proceedings, the AO found that the assessee has purchased plant and machinery on 11/08/2008, from a foreign company M/s. Coffor Intercacional Exploracao De Patentes, for US$ 33,00,000 (INR 16,61,16,683). Since the machines were purchased on credit, the suppliers were shown as creditors. Later on, on 27/03/2009, the supplier issued External Commercial Borrowing (ECB) to assessee in respect of loan. On 16/09/2010, the assessee paid US$ 400,000 (INR 2,01,20,000) and entered into an agreement with ECB holder for waiver of loan. The said waiver of loan was treated as capital receipt and shown as non-taxable.

The AO was of the opinion that the treatment of asset of the said waiver as capital receipt is not correct because as per Section 43(1) of the Act, actual cost of plant and machinery should be cost borne by the assessee and depreciation should be given on actual cost only. 4.1. 1. The AO further observed that till FY 2012-13, the assessee has not made any payment against ECB and only after 02/12/2013, the assessee entered into a loan waiver agreement with the borrower. The AO found that the assessee has claimed depreciation on cost of US$ 33,00,000 (INR 16,61,16,683) instead of cost US$ 400,000 (INR 2,01,20,000).

The assessee was asked to showcause as to why this capital receipt should not be treated as business receipt and why depreciation should not be computed on actual cost as per Section 43(1) of the Act. The assessee filed detailed reply which did not find any favour with the AO. Invoking provisions of Section 43(1) of the Act, the AO re-computed the depreciation at Rs. 9,91,93,491/- and added the same.

The assessee carried the matter before the ld. CIT(A) and reiterated its claim of depreciation. It was strongly contended that the waiver of loan being capital receipt is not taxable. Strong reliance was placed on the decision of the Hon'ble Supreme Court in the case of Mahindra & Mahindra (2018) 414 ITR 1 (SC).

After considering the facts and submission, the ld. CIT(A) was of the opinion that re-working of depreciation based on the re-worked cost of acquisition and adding the depreciation of earlier years in the current

Before us, the ld. D/R strongly supported the findings of the AO but could not point out any legal/factual error in the findings of the ld. CIT(A). Per contra, the ld. Counsel for the assessee reiterated what has been stated before the lower authorities.

It is an undisputed fact that while calculating the disallowance of depreciation, the AO has adjusted cost of plant and machinery by reducing the amount of ECB waived off during the year and has calculated the depreciation on the adjusted amount of cost of plant and machinery imported. The re-computation of depreciation has been done from AY 2009-10 to AY 2015-16 and the same has been disallowed. The disallowance has been made by invoking the provision of Section 43(1) and 41(1) of the Act.

It is also a fact that, purchase of capital asset is a different transaction from availing a loan in the form of ECB. The waiver of loan is on capital account and the ratio laid down by the Hon'ble Supreme Court in the case of Mahindra & Mahindra (supra) squarely applies wherein, the Hon'ble Supreme Court has held that waiver of loan in respect of capital equipment cannot be taxed u/s 41(1) of the Act. Since the assets were purchased in AY 2009-10, therefore provision of Section 43(1) of the Act are not applicable as in that year, the cost of asset was not directly or indirectly met by any other person.

On similar facts, the Co-ordinate Bench in the case of Akzo Nobel Coatings vs. DCIT [2012] 28 taxmann.com 82 (Bangalore) has held as under:- "

We have considered the rival submissions on the above issue. The facts are not in dispute. The assessee acquired plant & machinery for its Hoskote plant in April, 1996. The assessee did not make any payments for the purchase of plant & machinery, ultimately the CEL, UK, one of the group company made payments of the machinery to the suppliers. The assessee thereafter recognized this liability for payment for purchase of machinery as payable to CEL, UK. Later on, CEL, UK was taken over by Akzo International BV. Akzo International BV waived repayment of monies due on purchase of machinery. It is not in dispute that in April, 1996 when the machinery was purchased, the actual cost was recorded in the books of account including the monies payable to the supplier of machineries. Even today the Assessee has not made any adjustment in its books of accounts recognizing the write of amounts payable for purchase of machineries. The benefit as a result of waiver of the loan was shown in the books of accounts of the Assessee in the balance sheet as a capital receipt not chargeable to tax. The above claim of the Assessee has also been accepted by the Revenue. The assessee has claimed depreciation of those machineries from the A.Y. 1997-98. In April, 2000, Akzo International BV, the parent company waived the amounts payable by the assessee for purchase of machineries. This fact came to the knowledge of the AO in the course of assessment proceedings for the AY 2004-05. Thereafter action was initiated u/s. 148 to reduce the WD V of the relevant block of assets and withdraw the depreciation already granted to the assessee in the past. Such action was initiated only from A.Y. 2001-02 to 2006-07. A notice u/s. 148 for AY 2001-02 was issued by the AO on 01.02.2007. This is probably because the AO could not reopen the earlier assessment years as they could not be reopened in view of the limitation of time laid down in section 149 of the Act. The question now to be decided by the Tribunal is as to whether the action of the revenue could be justified. The relevant provisions of law in this regard have to be seen. The concept of