2008 (11) TMI 431 - AT - Income Tax

ITAT decision: Appeal partly allowed, depreciation upheld, sales tax liability addition reversed

The ITAT partly allowed the appeal filed by the revenue. It upheld the CIT(A)'s decision regarding the deletion of addition on account of depreciation ... Remission or cessation of trading liability Issues Involved:1. Deletion of addition on account of depreciation claimed based on foreign exchange fluctuation.2. Addition on account of gain from the assignment of sales tax deferral liability to another company.Issue-wise Detailed Analysis:1. Deletion of Addition on Account of Depreciation Claimed Based on Foreign Exchange Fluctuation:The revenue contested the deletion of an addition amounting to Rs. 10,59,669, which was made due to depreciation claimed on foreign exchange fluctuations. The Assessing Officer (AO) observed that the assessee claimed foreign exchange fluctuations of Rs. 84,77,357 by debiting it to plant and machinery and claimed depreciation accordingly. The AO disallowed the depreciation on the grounds that adjustments for foreign exchange liability should be made only in the year of actual payment, as per section 43A of the Income-tax Act, 1961.Upon appeal, the CIT(A) allowed the assessee's claim, referencing the ITAT Delhi Bench's decision in the assessee's own case for earlier assessment years (1991-92 and 1992-93) and the Supreme Court's decision in CIT v. Arvind Mills [1992] 193 ITR 255. The ITAT upheld the CIT(A)'s decision, noting that the amendment to section 43A effective from the assessment year 2003-04 was not applicable to the assessment year 1998-99. Therefore, the decision of the Supreme Court in Arvind Mills was applicable, which stated that the increase or decrease in liability due to exchange rate fluctuations should be adjusted in the year the fluctuation arises. The ITAT rejected the revenue's ground and upheld the CIT(A)'s order.2. Addition on Account of Gain from Assignment of Sales Tax Deferral Liability:The revenue also contested the deletion of an addition of Rs. 401.40 lakhs, which was made due to gain from the assignment of sales tax deferral liability to another company. The AO observed that the assessee assigned its sales tax deferral liabilities of Rs. 532.82 lakhs to a partnership firm for Rs. 131.41 lakhs, crediting the difference of Rs. 401.41 lakhs to the profit and loss account. Initially, the assessee included this amount in its income but later revised the return to exclude it, claiming it was wrongly included.The AO included the amount in the total income, treating it as a revenue account item covered by sections 28 and 41(1) of the Act. The CIT(A) deleted the addition, directing the AO to tax the gain on a proportionate basis in the year of actual payment by the assignee firm.The ITAT examined the provisions of section 41(1) and Explanation 1 thereto, which states that remission or cessation of liability includes unilateral acts by the assessee, such as writing off the liability in the accounts. The ITAT noted that the deferred sales tax liability was allowed as a deduction in earlier years, and the assignment of liability at a discounted value, followed by writing back the difference in the profit and loss account, constituted a remission or cessation of liability.The ITAT concluded that the AO was justified in treating the entire amount of Rs. 401.41 lakhs as income for the year under consideration. The unilateral act of writing off the liability in the accounts amounted to a remission or cessation of liability within the meaning of section 41(1) read with Explanation 1. Consequently, the ITAT decided in favor of the revenue, reversing the CIT(A)'s order on this issue.Conclusion:The appeal filed by the revenue was partly allowed. The ITAT upheld the CIT(A)'s decision regarding the depreciation claimed on foreign exchange fluctuation but reversed the CIT(A)'s decision on the gain from the assignment of sales tax deferral liability, ruling in favor of the revenue.