Revenue Appeals Dismissed, Expenditure Ruling Upheld

The Tribunal dismissed both appeals by the revenue, upholding the CIT-A's decisions. It affirmed that the purchase of sales tax exemption certificates constituted a revenue expenditure and that unabsorbed depreciation could be carried forward indefinitely under the amended provisions of section 32(2).

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Issues Involved:
1. Whether the purchase of sales tax exemption certificates is a revenue expenditure.
2. Disallowance of set off on unabsorbed depreciation carried forward from A.Y 1998-99.

Issue-wise Detailed Analysis:

1. Whether the purchase of sales tax exemption certificates is a revenue expenditure:

The primary issue in ITA No. 1936/Kol/14 for A.Y 2006-07 was whether the CIT-A was justified in holding that the purchase of sales tax exemption certificates is a revenue expenditure. The assessee, a company engaged in manufacturing various products, claimed a sum of Rs. 1,62,74,997/- towards the purchase of sales tax exemption certificates from three different Wind Power Projects under the Sales Tax Scheme 1998 introduced by the Govt. of Maharashtra. The AO treated this expenditure as capital in nature, relying on the decision of the Hon'ble Special Bench, ITAT Mumbai in the case of Reliance Industries Ltd, which dealt with subsidy receipts.

Upon appeal, the CIT-A distinguished the case from Reliance Industries Ltd, noting that the assessee did not receive a subsidy for setting up an industrial unit but purchased the sales tax exemption certificates from another company. The CIT-A concluded that the transaction was purely commercial, and both the receipt and expenditure were revenue in nature. The CIT-A deleted the disallowance of Rs. 1,62,74,997/-.

The Tribunal upheld the CIT-A's order, agreeing that the facts of the present case differed from Reliance Industries Ltd. The Tribunal found that the expenditure was incurred under a scheme introduced by the Govt. of Maharashtra and was a commercial transaction. Therefore, the CIT-A was justified in treating it as a revenue expenditure. Consequently, the appeal of the revenue was dismissed.

2. Disallowance of set off on unabsorbed depreciation carried forward from A.Y 1998-99:

In ITA No. 1937/K/14 for A.Y 2007-08, the issue was whether the CIT-A was correct in deleting the disallowance of set off on unabsorbed depreciation of Rs. 17,57,36,896/- carried forward from A.Y 1998-99. The AO did not allow the set off beyond eight years, based on the amendment made in Finance (No.2) Act, 2006, which limited the carry forward period for unabsorbed depreciation to eight years.

The CIT-A relied on the decision of the Mumbai Tribunal and the Hon'ble Gujarat High Court in the case of General Motors (I) Pvt. Ltd, which held that unabsorbed depreciation available on the first day of April 2002 would be governed by the provisions of section 32(2) as amended by Finance Act, 2001, allowing it to be carried forward indefinitely. The CIT-A concluded that the unabsorbed depreciation for A.Y 1998-99 merged with the depreciation for A.Y 2002-03 and became entitled for carry forward without any time limit. Hence, the disallowance by the AO was deleted.

The Tribunal upheld the CIT-A's decision, referencing the Gujarat High Court's ruling that unabsorbed depreciation from A.Y 1997-98 to A.Y 2001-02, carried forward to A.Y 2002-03, could be set off against profits of subsequent years without any limit. The Tribunal also noted similar decisions by other courts and tribunals. Therefore, the revenue's appeal was dismissed.

Conclusion:

Both the appeals by the revenue were dismissed. The Tribunal upheld the CIT-A's decisions, confirming that the purchase of sales tax exemption certificates was a revenue expenditure and that unabsorbed depreciation could be carried forward indefinitely as per the amended provisions of section 32(2).

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