Revenue's appeal dismissed: waived ECB cannot reduce asset cost for depreciation calculation under Section 43(1)

ITAT Mumbai dismissed revenue's appeal regarding depreciation disallowance on plant machinery where ECB was waived. AO reduced asset cost by waived ECB amount under Section 43(1) and 41(1), recalculating depreciation from AY 2009-10 to 2015-16. ITAT held that asset purchase and loan availing are separate transactions. Following SC precedents in Mahindra Mahindra and Tata Iron Steel, waiver of loan cannot affect asset cost as Section 43(1) doesn't apply when cost wasn't met by another person at purchase time. Asset cost remains the price paid by assessee regardless of loan repayment mode.

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Issues Involved:

1. Disallowance of depreciation on Plant & Machinery due to waiver of External Commercial Borrowing (ECB).
2. Applicability of Section 43(1) of the Income Tax Act for reworking depreciation allowance.
3. Definition and interpretation of "actual cost" under Section 43(1).
4. Reliance on judicial precedents, specifically Mahindra & Mahindra Ltd. and other cases.
5. Ignoring the ratio of judgments by Kerala High Court and Apex Court regarding "actual cost."
6. Consideration of ITAT Bangalore's decision on inflated capital costs.

Detailed Analysis:

1. Disallowance of Depreciation on Plant & Machinery:
The core issue was whether the assessee was entitled to claim depreciation on the original cost of plant and machinery despite the waiver of a portion of the ECB. The Assessing Officer (AO) argued that the waiver should reduce the cost of the asset, thereby affecting the depreciation calculation. However, the CIT(A) disagreed, holding that the waiver was a capital receipt and did not alter the original cost of the asset for depreciation purposes. This position was supported by the Supreme Court's decision in Mahindra & Mahindra, which established that loan waivers related to capital equipment are not taxable under Section 41(1).

2. Applicability of Section 43(1) for Reworking Depreciation:
The revenue contended that Section 43(1) should be applied to rework depreciation in subsequent years. However, the CIT(A) maintained that Section 43(1) applies only in the year of purchase and not for reworking depreciation in later years. The Tribunal upheld this view, noting that the cost of the asset had not been met by any other person in the year of purchase, thus Section 43(1) was not applicable for altering depreciation retrospectively.

3. Definition of "Actual Cost" under Section 43(1):
The AO's interpretation of "actual cost" was challenged. The CIT(A) and the Tribunal emphasized that the actual cost refers to the cost incurred by the assessee at the time of acquisition, not affected by subsequent financial arrangements like loan waivers. This interpretation aligns with the Supreme Court's stance in Tata Iron & Steel Co., which clarified that the cost of an asset remains unaffected by the manner of loan repayment.

4. Reliance on Judicial Precedents:
The CIT(A) relied heavily on the Mahindra & Mahindra case, where the Supreme Court ruled that loan waivers for capital assets do not constitute taxable income under Section 41(1). The Tribunal supported this reliance, finding it applicable to the present case, where the waiver of ECB did not alter the original acquisition cost for depreciation purposes.

5. Ignoring Kerala High Court and Apex Court Judgments:
The revenue argued that the CIT(A) ignored relevant judgments by the Kerala High Court and Apex Court, which they claimed supported their position. However, the Tribunal found these cases distinguishable, as they dealt with different contexts and did not directly address the situation of loan waivers affecting depreciation.

6. Consideration of ITAT Bangalore's Decision:
The revenue cited a decision by ITAT Bangalore, suggesting that the legislative intent was to prevent inflated capital costs for higher depreciation claims. Despite this, the Tribunal found that the facts of the present case did not involve any inflation of costs, as the waiver was a separate transaction from the asset purchase.

Conclusion:

The Tribunal concluded that the CIT(A)'s decision to delete the disallowance of depreciation was correct. The waiver of the ECB was a capital receipt and did not affect the "actual cost" of the assets for depreciation purposes. The appeal by the revenue was dismissed, affirming the CIT(A)'s reliance on the Mahindra & Mahindra precedent and the interpretation of Section 43(1) as applicable only in the year of asset acquisition.

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