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        <h1>Sales-tax subsidy treated as capital receipt; computer peripherals eligible for 60% depreciation; s.14A/Rule 8D remanded; forex loss allowable under s.37(1)</h1> <h3>Deputy Commissioner of Income-tax, Circle 3 (1), New Delhi Versus Cosmo Films Ltd.</h3> ITAT held the sales-tax subsidy was a capital receipt because its object was to fund factory setup in a backward area and thus excluded from total income. ... Treatment of Sales-tax subsidy - capital or revenue - object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area - Held that:- Sales-tax incentive allowed to it during the previous year in terms of the relevant Govt. order constituted capital receipt and was not to be taken into account in computation of total income - since object of subsidy under scheme impugned therein was to set up a new unit in a backward area to generate employment, said subsidy was clearly on capital account - Revenue failed to distinguish and make out a markable difference in basic purpose of subsidy received by assessee and subsidy received in case of Reliance Industries – subsidy received by assessee in instant case was to be held as capital receipt Depreciation on computer peripherals - disallowance of depreciation on account of computer accessories - Held that:- Peripherals such as printers, scanners, NT server etc. form integral part of the computer and, therefore, are eligible for deduction of depreciation @ 60% as applicable to the computers Ad hoc disallowance for interest and administrative expenses attributable to the earning of dividend income – Held that:- Tax-free investments had been made out of the assessee's own funds, this did not mean that there was no expenditure incurred to earn tax-free income. Even though Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1) - principle of consistency would not apply as s. 14A had introduced a material change in the law - matter remanded to the file of Assessing Officer Deduction of additional depreciation- Assessee purchased new assets during preceding previous year which were put to use for less than 180 days - Since assets were put to use for less than 180 days, in preceding assessment year assessee claimed only 50 per cent of 15 per cent - Balance additional depreciation was claimed by assessee in instant assessment year – Held that:- Assessee deserves to get the benefit in full when there is no restriction in the statute to deny the benefit of balance of 50% when the new plant and machinery were acquired and use for less than 180 days - restrictions cannot divest the statutory right. Law does not prohibit that balance 50% will not be allowed in succeeding year - The extra depreciation allowable u/s 32(1)(iia) in an extra incentive which has been earned and calculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year - in favour of assessee. Foreign exchange fluctuation loss - Held that:- Loss suffered by assessee on account of fluctuation in rate of foreign exchange as on date of balance sheet is an item of expenditure under section 37(1) – in favour of assessee Issues Involved:1. Treatment of Sales Tax Subsidy as Capital or Revenue Receipt.2. Depreciation Rate on Computer Peripherals and Accessories.3. Disallowance of Interest and Administrative Expenses Attributable to Dividend Income.4. Disallowance of Arrears of Additional Depreciation.5. Disallowance of Foreign Exchange Fluctuation Loss.6. Disallowance of Prior Period Expenses.7. Allocation of Management Salary for Deduction under Section 10B.8. Disallowance under Section 14A.9. Penalty under Section 271(1)(c).Issue-wise Detailed Analysis:1. Treatment of Sales Tax Subsidy as Capital or Revenue Receipt:The main issue was whether the sales tax subsidy received by the assessee should be treated as a capital receipt or a revenue receipt. The CIT(A) treated it as a capital receipt, relying on the decision of the Special Bench of Mumbai ITAT in the case of Reliance Industries Ltd., which was upheld by the Bombay High Court. The Tribunal agreed with the CIT(A), noting that the subsidy was intended to encourage the setting up of industries in underdeveloped areas, and thus, the purpose test indicated it should be treated as a capital receipt. The Tribunal dismissed the revenue's appeal on this ground.2. Depreciation Rate on Computer Peripherals and Accessories:The CIT(A) allowed depreciation at 60% on computer peripherals and accessories, treating them as integral parts of the computer system. This decision was supported by various ITAT decisions, including the Special Bench in the case of Datacraft India Ltd. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal on this issue.3. Disallowance of Interest and Administrative Expenses Attributable to Dividend Income:The assessee's appeal on the disallowance of Rs. 5,59,000 for interest and administrative expenses attributable to earning dividend income was restored to the Assessing Officer for reconsideration in light of the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which held that disallowance under Section 14A should be worked out on a reasonable basis for years prior to the applicability of Rule 8D.4. Disallowance of Arrears of Additional Depreciation:The assessee claimed additional depreciation for assets put to use in the second half of the preceding year. The Tribunal allowed the claim, stating that the additional depreciation is a one-time benefit earned in the year of acquisition, even if restricted to 50% due to usage of less than 180 days. The balance should be allowed in the subsequent year. The Tribunal set aside the orders of the authorities below and directed to extend the benefit.5. Disallowance of Foreign Exchange Fluctuation Loss:The CIT(A) allowed the foreign exchange fluctuation loss, and the Tribunal upheld this decision, citing the Supreme Court's ruling in CIT v. Woodward Governor India (P.) Ltd., which held that such losses are allowable under Section 37(1) as they are incurred in the normal course of business.6. Disallowance of Prior Period Expenses:The Tribunal upheld the CIT(A)'s order disallowing prior period expenses of Rs. 7,33,260, as the assessee failed to establish that these expenses were actually crystallized during the relevant year.7. Allocation of Management Salary for Deduction under Section 10B:The Tribunal sustained the CIT(A)'s order, agreeing that the allocation of management salary should be based on the sales turnover ratio, which is more accurate than the assessee's method based on estimated time spent.8. Disallowance under Section 14A:The issue of disallowance under Section 14A was restored to the Assessing Officer for working out reasonable disallowances in light of the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd.9. Penalty under Section 271(1)(c):The penalties under Section 271(1)(c) were related to the disallowance of additional depreciation. Since the Tribunal allowed the additional depreciation in the quantum appeals, the penalties were deleted.Additional Ground:The assessee raised an additional ground regarding the deduction of sales tax subsidy from the block of assets for computing depreciation. The Tribunal admitted the additional ground and restored the issue to the CIT(A) for a decision on merits.Conclusion:- Appeals of the revenue were dismissed.- Appeals of the assessee were partly allowed or allowed for statistical purposes.- Penalties under Section 271(1)(c) were deleted.

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