STEEL AUTHORITY OF INDIA LTD vs. COMMISSIONER OF INCOME TAX

er * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 241h February, 2012. % Date of Decision : 301h March, 2012. + ITA41/2010 STEEL AUTHORITY OF INDIA LTD .... Appellant Through: Mr.S.Ganesh, Sr.Advocate with • Ms. Monika Garg, Adv. versus COMIS STONER OF INCOME TAX .....Respondent Through: Ms.Rashmi Chopra, sr. standing counsel CORAM: HON'BLE MR. JUSTICE SANMV KHANNA HON'BLE MR. JUSTICE R.V. EASWAR R.V. EASWAR, J.: For order, see ITA No.37/20 10. (R.V. EASWAR) JUDGE (SANIIV KHANNA) JUDGE March 30, 2012 vld ITA41/2010 Pagelofi Digitally Signed By:AMULYA Signature Not Verified

* IN THE HIGH COURT iOF 1'ELHI AT NEW DELHI Reserved o: 24" February, 2012. % Date of Decision : 30th March, 2012. + tTA37/2010 + 1TA38/2010 + ITA41/2010 + 1TA29/2011 STEEL AUTHORITY OFINDIA LTh .... Appellant Through: Mr.S.Ganesh, Sr.Advocate with Ms. Monika Garg, Adv. versus COMISSIONER OF INCOMETAX. Respondent Through: Ms.Rashmi Chopra, Sr. standing counsel CORAM: HON'BLE MR0 JUSTICE SANJIVI KJH[ANNA HON'BLE MR. JUSTICE R.V. EASWAR Whether Reporters of local papers may be alowedto see the judgment? To be referred to the Reporters or not? '-1 Whether the judgment should be reported in the Digest? I R.V. EA WAR, J.: * These are four appeals filed by the assessee under Section, 260A of the Income Tax Act, 1961 (hereinafter referred to as "Act"). They relate to the assessment years 2000-01 to 2003-04 and are TA 37/2010 & conn. Page 1 of.16

directed against the decision of the IicomTax Appellate Tribunal (hereinafter referred to as "Tri1unal) with regard to the claim of depreciation. 2. The facts giving rise to the appeals may be noticed. The assessee is a public sector undertaki4g engaged in the manufacture• and sale, including export, of iron and steel of various grades. It has several steel plants in India. At,some point of time the Indian Iron and Steel Company Ltd. (HSCO) wastake over by the assessee and the steel plant of IISCO also became the teel plant of the assessee. In order to meet the requirements of the assessee company, the Government of India sanctioned huge loans from the Steel pevelopment Fund (SDF). The loanswere to bear interest and had been taken over a period of years (19794,0 to 1993-94) in the past. Such loans stood at 5,277.16 crOres as on 31.3.1999 in the assessee's books of account. The assesse.e came under great stress and difficult times from 1997 on account èf glut in the international . steel market due to heavy productionof steel in South East Asia and the meltdown in USA As a result of the glut, the prices of steel fell rapidly and the assesseé started incurriñg heavy losses. The assessee, therefore, approached the Governmeiit of India in the year 1998 for waiver of loans granted from the SDF as well as to take steps to help the steel industry in India One of the measures taken by the TA 37/2010 & conn. Page 2 of 16

'Al Goverirnent of India to provide relief to the steel industry in general and to the assessee in particular was to waye repayment of the loans granted to the assessee. As noted eajTlier, the loans stood at 5,277.16 crores as on 31.3.1999. The Government waived the loans to the extent of Z5,073 crores. There wer certain other Government loans to the extent of Z381 crores, which were also waived. The waiver of the loans in the case of the assesee took place c[uring the financial year ende.d on 3 1.3.2000 relevant to the assessment year .

2000-01. 3. It is common ground that in its boos of account the assssee reduced the cost of the assets such as building and plant and machinery by the amount of the loans wai; ed by the Government of India and accordingly calculated deprediation. However, in the returns filed for the years under coñsideration, the asessee took a contrary stand and claimed depreciation on the assets without reducing the loans waived by the Goverirnent In the assessments . for all the years, the Assessing Officer took the view that depreciation ought to be allowed to the assesee in respect of the building and the plant and machinery, and other assets on the reduced cost, after reducing the loans waived by the Government, in terms of Section 43(1) of the Act. It was his case that the loans were granted by the Government to the assessee to meet a portion of the cost of the TA 37/2010 & conn. Page 3 of 16

assets and therefore, depreciation could be allowed only on the reduced cost. According to the Assessing LOfficer, the waiver of the loan was a confirmation of the fact that they were originally granted by the Government towards the cost ofL the assets. It would be appropriate to reproduce the following paragraphs from the assessment order dated 28.3.2005 for the assessment year 2002-03: "3.2 During the period ended 31.3.2000 relevant to the Assessment Year 2000-01, the Go}vernment of India, as a measure of rehabilitating the assessee company, • waived the loan availed by if from the Steel Development Fund to the extent o.1 5703 crores. The assessee company in order to save one of its subsidiaries, namely Indian Iron thd Steel Company Limited from becoming sick, wroteoff a loan given by it to the extent of Rs.2072 crores. Out of the receipt exceeding the outflow i.e. 3001 crres (5073 - 2072),. the value of the assets were reduces' by 2578.14 crores and the balance amount of Rs422.87 crore was reduced from work in progress. 3.4 The contention of the assessee company that since the value of the assets were reduced on its own, • provisions of Section 43(1) wei'e not applicable, .. appears to be completely misplaced. The reduction in the value of the assets was occasioned by the waiver of . the loan by. the Government and the amount of . / reduction was to the extent of accition in capitalized interest." TA 37/2010 & conn. Page 4 of 16

In this yiew of the matter., the, clail: for depreciation to the extent of the loans waived was disallowed in all the assessment years under consideration. The relevant figures re as under: Assessment Year DepreciatioriDisallowed (!1 2000-01 64,692.69 iakhs 2001-02. 47,672.00 la. khs 200203 . 35,775.63 1as 2003-04 26,871.54 lahs The disallowance of the claim of depreciation having been confirmed by the CIT(Appeals), the assesee filed further appeals to the Tribunal. The Tribunal considered the matter elaborately. and upheld the orders of the departmental authorities and hence, the present appeals. . On 26.08.2011, the appeals were dmitted and the following substantial questions of law were framed: • "(i) Whether on thk facts and ircumstances of the case, the Income Tax Appellate 'flribunal erred in law and on merits in confirming the +eduction of Written Down Value of block of assets by the . amount of loan waived by the Central Government s per Explanation 10 to Section 43(1) of the Income .Tax Act, 1961 and consequently allowing depreciatioi On reduced written down value? . .: . TA 37/2010 & conn. . . Page 5 of 16

(ii) Whether the Income Tax. Apil1ate Tribunal was f correct in law and on merits in confirming the reduction of cost of assets by the amount ot waiver of loan by Central Government and theeafter computing depreciation on the reduced cost in trms of Explanation 10 to Section 43(1) and Section 32 of the Act?" 6. The main contention put forth on behalf of the assessee is that on identical facts the Ahmedabad Bench Of the Tribunal, in the case of Stéelco Gujarat Ltd. Vs. Assistant Coftimissioner of Income Tax • (2009) 33. SOT 437;i has taken a view that the cost or the Written down value of the assets cannot be reduced by the amount of loans waived by the lender and that Explanation 10 to Section 43(1) of the Act cannot apply to the waiver. It is su1mitted that no appeal was filed by the income Tax Department against the aforesaid order of the Ahmedabad Bench of the Tribunal ani therefore, as held by the. Supreme Court in Union of India and Or. Vs; Ilaumudini Narayan Dalal And Anr0 (2001) 249 ITR 219, the dbpartment is not entit1ed to challenge the correctness of a later order without just cause in the case of other assessees after having accepted an order on the sarne facts and dealing with the same j1 • This decision does not apply to the present situation where the appeals have been filed by the assessee. The Assessing Officer: hinself did not accept the assessee's claim that the amount of lois .waived should not be

reduced from the cost or (WDV of the a*ets for the purposes : of calculating depreciation. He has passedassessment orders much before the order of the Ahmedabad Bench cf the Tribunal, which was pronbunced on 31.7.2009. Revenue h.s succeeded before the tribunal The assessee has filed the presnt appeal under Section 260A of the Act. At this stage in an 'appeiti filed by the assessee at the time of final hearing it will not be proper to ask the Revenue to veni facts whethe any appeal Was preferrd in the case of Steel Co. • (supra) and if no appeal was preferred ci plain the reason for the same. In this factual situation, which isHmuch different from the factual situation considered and dealt with in the judgment of the Supreme Court èited above, we havegrave doubts whether the ratio of the ruling would apply. The Revenue cited the judgment of the Supreme Court in CII. Gangadharan Vs. omrnissioner of Income Tax (2008) 304 ITR 61 in which the earlir judgment in Kaurnudini Narayan Dalal And Anr. (supra) was consklered and it was held that the non-filing by the department of the apeal in one case would not • operate as a bar on the department to fi1ean appeal in another case where there is just cause for doing so or r is in the public interest to do so or for pronouncement by a higher court because of divergent views expressed by the tribunals or the iligh Courts. The ratio of this judgment is that it is not an invjolabie rule or practice that the TA 37/2010 & conn. ' Page 7 of 16

/ department cannot file an appeal in a case where an identical decision in another case had not been appealed against. 'There are exceptions to the rule and we are satisfied that the present appeals should not be allowed on this ground.. We should examine and decide the appeals on merits. We accordiigly, reject the submission made on bthalf of the ass:essee / 7 Section 32 of the Act deals with depreciation It says that in respect of certain tangible and intangible assets which are owned by S the assessee and used for the purposes of the business, a deduction on account of depreciation would be allowed at the rate prescribed in the Rules from time to time. The deprecition would be allowed on the "actual cost" of the assessee or the "wiien down value". These terms are defined in Section 43 of the Act. Sub-section (l) of Section 43 defines "actual cost" to mean 'actua1 cost of the assets to the assessee, reduced by that portion of the cost theteof, if any, as has been met directly or indirectly by any other person or authority". This definition came up forconsidertion iefore several High Courts in the context of the subsidy granted by the Central or State Governments as an incentive for development of industries. The subsidy was granted with the aim of industrialising the State and particularly the industrially backward ars. The quantification of" the subsidy was made as a percentage of tie, capital investment made 1TA37/2010&conn. ' , Page8ofi6

/2 by the assessees, which included land, building, plant and machinery etc. The Revenue treated these subsidie. as amtunts paid by the Government towards meeting the cost of the assets and accordingly, applying the definition of "actual cost", suitably reduced the claim of depreciation. The dispute ultimately reacted the Supreme Court in the case of CIT-v. P.J. chemicals Ltd. (1994) 210 ITR 830. The dispute was resolved in favour of the -assessee, with the Supreme Court holding that the object of the subsidy, was to promote industrial growth in the States and merely because the quantum of the subsidy was calculated as a percentage of the capi4tl investment made by the assessee in the assets such as land, building, plant and machinery etc., it cannot be said that the Government met a portion of the cost of the asset directly or indirectly. Accoringly, the assessees were held entitled to the depreciation on the actual cost without being reduced by the amount of the subsidy Section 43(1) of the Act is reproducd hereunder: - "(1) "actual cost" means the acl;ual ost of the assets to the assessee, reduced by that portiom of the cost thereof, if any, as has been met direétly or indirectly - by any other person or authority:" By the Finance (2) Act, 1998, Explanation 10 to Section 43(1) was inserted with effect from 1.4.1999. It reads as under: 1TA37/2010&conri. Pge9of 16

(V Explanation 10 - Where a portion othe cost of an asset acquired by the assessee has been met directly or indirectly the Central Government oi a State Government or any authority established Under any law or by any other person, in the form of a ubsidy or grant Or reimbursement (by whatever name called), so much of the cost as is relatable to such ubsidy or grant or • reimbursement shall not be included.,i in the actual cost of the asset to the assessee fl Provided that were such subidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so icuch of the amount • which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with refeence to which the subsidy or grant or reimbursenent us, so received, shall not be included in the actual cost u of the asset to the assessee." The aforesaid Explanation was ep1ained by the Board in Circular No.772 dated 23.12.1998 [reported in (1999) 235 ITR (St.) 35]. The relevant part of the Circular, is reproduced below: • "22.2 Explanation 10provides thai where a portion of the cost of an asset acquired by the dssessee has been net directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the )orm of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the TA 37/2010 & conn. •• Page 10 of 1

/ T . actual. cost of the asset tà th assessee. Cost incurred/payable by the assesseè' alone could be the basis for' any tax allowance. This Explanation further provides that where such subsidy or grant or reirnbursement is of such nature that it cannot be directlyelatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant he same proporl:ion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement so received, shall not be included in he actual cost of the asset to the assessee. The amendment made through Explanation 10 will take effect from 1st April, 1999, arid will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.". 10. The contention put forth on behalf of the assessel before us is that Explanation 10 below Section 43(1) does not take in waiver of the loan and that, in, fact, the said Expk:nation narrows down the ambit and scope of the Section 43(1). Counsel for the assessee contends that in order to bring the case under the Explanation, it is incumbent on the income tax authoritiesip p rove that the waiver of the loan is in truth and reality a form of eg.her a subsidy or a grant or reimbursement of the ëost and that in the present case no such attempt has been made. According to hrn, the revenue authorities have not been able to demonstrate or estblish that the Government of Irdia has actually given a subsidy or grant or has reimbursed the TA 37/2010 & conn. Page 11 of 16

cost of the asset in the form of waier Of:'the loan. The argument, with respect, erroneously assumes that he case must fall under Explanation 10. It is true that in the assessjent.orders, the Assessing. Officer has placed strong reliance on the Eplanation but in our view the main provisions of Section 43(1) themselves are sufficiently wide to cover the assessee's case. In the course of the arguments, this aspect was put to the id. counsel for the asessee for his reply as the substantial questions of law framed on 2.08.201 1 do not appear to cover this aspect specifically, though the isue/question does arise for consideration. He submitted that even under the main provisions of Section 43(1), a case of waiver of a loan dan never be considered as meeting the lull or a part of the cost of theassets. Since the substantial questions of la* framed do not cover this = aspect, we have considered it apprbpriae to frame the following substantial question of law, in addition: to the questions already framed: - "Whether in the facts of the present case waiver of loan would result in reduction of actual cost under Section 43(1) of the Income Tax, 19617 We are unable to accept the cQntent•ion of the assessee that the case is not covered by the main provisiors of Section 43(1) because 1TA37/2010&conn Pagel2ofl6

DA of the treatment given by the assesse iniiits books of account. We have earlier noticed that in the hooks of.account, the assessee had actually reduced the cost/WDV of the assets by the amount of the loans waived by the Government of Indial In the returns, however, the depreciation was claimed without reducing the loans from the cost/WDV of the assets. It is true that th manner in which entries are made in the books of account is not conclusive of the question, which has to be resolved on a true interprtation of the provisions of law. However, the real nature of a transaction can be understood by reference to the contemporaneous act ofthe parties, which would throw considerable light on their tiue intention and their understanding of the transaction. It is therlefore not impermissibJ[e to look into the entries made in the books of account, in the absence of any other evidence. They show that the assessee understood the • receipt of the loans from the Governmónt as having been given towards meeting a part of the cost of the ssets. The waiver cannot, therefore, have a different effect on such intention. The intention of • the parties, as reflected by the accounts of the assessee, appears to be that the loans had been granted towards a part of the cost of the assets. It is also to be noted that the asessee is a Government of India undertaking and the loans :have been given by the Government of India from the SDF. It is apparent to ts that even when the loans TA 37/2010 & conn. Page 13 of 16

0 were granted, they were granted towarth cost of the assets. The assessee's case is, therefore, caught withrn the mischief of Section 43(1) itself and in this view of the matter itrnay not be necessary to examine the impact of Explanation 10 to the Section inserted with effect from 1.4.1999. For the same reason it is also not necessary to refer to the other judgments cited on behalf of the assessee. 13. It is, however, necessary to refei to and distinguish the judgment of the Supreme Court in the cse of PJ Chemicals Ltd. (supra). In that case, the Government gave subsidy under the Central Subsidy Scheme to the assessees. The subsidy was given as an incentive for industrial growth and not fcr the specific purpose of meeting a portion of the cost of the ssets. The subsidy was, howver, quantified as or geared to a pefcentage of the cost. The view of the income tax authorities was that the amount of subsidy represented a portion Of the cost of the asset met by the government and, therefore, depreciation was allowable only on the actual cost of the asset as reduced by the amount of the subsidy in terms of Section 43(1) of the Act. Explanation 10 to SectiØn 43(1) of the Act was not in the Income Tax Act at the time material time. The Supreme Court held that the payment of subsidy did not prtake of the character of a payment intended either directly : or indirectly to meet the actual cost. The ratio of this ruling is not applicable to the facts of the present

case. Apparently, Explanation. 1O was introduced to ensure appropriate computation of actual cost of assets in case subsidy is received. After the introduction of Expinatiofl 10, it is no longer possible to contend that the subsidy given by the government, by whatever name called, cannot be reduced from the actual cost of the assets in terms of Section 43(1) of th, Act for the purpose of allowing depreciation. But ExplanatiOn 1C does not cover the case of waiver of the loan. It covers only the grant of a subsidy or re- • imbursement by whatever narnecalled. Tle case of the assessee may not, therefore, fall under Explanation 1 0 but having regard to the facts as found which we have alluded to earlier, the waiver of the loan amounted to the meeting of a portion of the cost of the assets under the main provisions of Section 43(1) of the Act. The waiverof the loan is not a mere quantification of a subsidy granted gener1ly for industrial growth. It was granted specifically to the assessee and the assessee in its books of accOunts reduced the cost of the assets by the amount waived. This reflected a cont poraneous understanding of the purpose of the grant of the loan on the part of the assessee. As alrea4y mentioned earlier, the assessee is a public sector uridertalçing and the loan and.the later waiver were from I ii the Government of India. The loans under the SDF were specifically for meeting the capital cost of the assets, on which depreciation Was being claimed. TA 37/2010 & conn. Page 15 of 16 I -

r 14 In view of the aforesaid discussion, the substantial question of law framed by us in para 10 is answerd in the affirmative and against the assessee and in favour of the Revenue The questions of law framed on 26.8.2011 are academic in view of our answer to the question framed by us in para 10 and need not be answered. The appeals are dismissed with no costs. (RN. EAS WAR) IIJDGE (SANQIIV KHANNA) JuDGE. March 30, 2012 vid 1TA37/2010&conn. Page 16 of 16