2008 (2) TMI 656 - AT - Income Tax

Tax Tribunal Upholds Depreciation, Recruitment Costs, Exchange Losses, and Book Profit Exclusions for Assessee.

Assistant Commissioner of Income-tax, Circle 9 (1), New Delhi Versus SRF Ltd.

Assistant Commissioner of Income-tax, Circle 9 (1), New Delhi Versus SRF Ltd. - [2008] 21 SOT 122 (DELHI) Issues Involved:1. Disallowance of depreciation on assets of SRF International Division.2. Disallowance of depreciation on temporary structures.3. Disallowance of 50% of recruitment and training expenses.4. Disallowance of loss due to exchange fluctuation on foreign currency loan.5. Addition of deferred tax liability while computing book profit under section 115JB.6. Addition of provision for bad and doubtful debts while computing book profit under section 115JB.Issue-wise Detailed Analysis:1. Disallowance of depreciation on assets of SRF International Division:The first ground of appeal concerns the deletion of disallowance of depreciation of Rs. 2,21,878 on assets of SRF International Division. The Assessing Officer disallowed the depreciation on the grounds that the assets were not used during the year. The CIT(A) held that the assets had been used in earlier and subsequent years, and the term 'user' includes passive user. The ITAT upheld the CIT(A)'s decision, stating that once assets form part of the block of assets, depreciation is allowable on the entire block, even if individual assets are not used in a particular year.2. Disallowance of depreciation on temporary structures:The second and third grounds relate to the deletion of disallowance of Rs. 16,39,293 being depreciation claimed at 100% on temporary structures. The Assessing Officer reclassified the expenditure under 'Furniture and Fixture' and restricted the depreciation to 10%. The CIT(A) held that the expenditure was of a revenue nature and allowable fully in the current year. The ITAT agreed, stating that the expenses on leased premises for making them suitable for business are revenue expenditures and do not bring into existence any capital asset.3. Disallowance of 50% of recruitment and training expenses:The fourth ground concerns the deletion of disallowance of Rs. 77,12,847, being 50% of recruitment and training expenses. The Assessing Officer allowed only 50% of the expenses, considering the long-lasting benefit derived. The CIT(A) held that the expenditure enhances the productivity and is revenue in nature. The ITAT upheld this view, stating that training expenses do not bring into existence any capital asset and cannot be spread over multiple years.4. Disallowance of loss due to exchange fluctuation on foreign currency loan:The fifth ground pertains to the deletion of disallowance of Rs. 16,39,293 due to exchange fluctuation loss on a foreign currency loan. Both counsels agreed that the issue is covered by the decision of the Delhi High Court in CIT v. Woodward Governor India (P.) Ltd., which allows such losses to be claimed in the year they accrue, even if the loan is not repaid.5. Addition of deferred tax liability while computing book profit under section 115JB:The sixth ground involves the addition of Rs. 77.82 crores on account of deferred tax liability while computing book profit under section 115JB. The CIT(A) held that deferred tax liability is not related to the tax liability of the current year's book profit and should not be added while computing book profit. The ITAT upheld this view, stating that deferred tax liability is neither tax paid nor payable for the year and is only an accounting adjustment to match income and expenses.6. Addition of provision for bad and doubtful debts while computing book profit under section 115JB:The final ground concerns the addition of Rs. 1,51,73,289 being provision for bad and doubtful debts while computing book profit under section 115JB. The CIT(A) held that the provision is for diminution in the value of assets and not an excess provision to be treated as a reserve. The ITAT agreed, stating that the provision for bad and doubtful debts cannot be added to the book profit as it is not carried to any reserve and merely restates the assets.Conclusion:The ITAT dismissed the appeal, upholding the CIT(A)'s decisions on all grounds, thereby allowing the assessee's claims for depreciation, revenue expenditure, and exclusion of deferred tax liability and provision for bad debts from book profit calculations.