Steel Authority of India Ltd v. Comissioner of Income Tax

K ?I IN THE IIIGH COURT OF DELHI AT NEW DELHI Reserved on : 24th February.2}l2. STEEL AUTHORITY OF INDIA LTD .... Appellant Through: Mr.S.Ganesh, Sr.Advocate with Ms. Monika Garg, Adv. VETSUS COMISSIONER OF INCOME TAX ..... Respondent Through: Ms.Rashmi Chopra, sr. standing counsel CORAM: HON'BLE MR. JUSTICE SANJTV KIIANNA I{ON'BLE MR. JUSTICE R.V. EASWAR R.V. EASWAR" J.: For order, see ITA No.37l2010. [L\,** . (R.V. EASWAR) JUDGE o/, + ITA29l201l March 30,2012 vld Date of Decision : 30th March. 2012. | / ? - 'l( c-' (SANJIV KIIANNA) JUDGE trA29/2olt ' --\' I th. + ITA 37 t20t0 , + ITA38/2010 + ITA 41t2010 + ITA29t20Il fri \r--" STEEL AUTHORITY OF INDIA LTD .... Appellant Through' Vt.S.Ganssh, Sr.Advocate with. Ms. M.:nika Garg, Adv. i ; t COMISSIONER OF INCOME]T'AX ..... Respondent Through: Ms.Rashmi Chopra, sr. standing counsel

¶2To be referred to the Reporters or not ? v I ;,

¶3Whether the judgment should be.reported in the Digest? Y R.V. EASWAR." J.: These are four appeals filed by ttre assessee under Section ;. 26QA of the Income Tax Act, 1961(l1ereinafter referred to as "Act"). Th.y relate to the assessment years 2000-01 to 2003-04 and-are VETSUS CORAM: IION'tsLE MR.. JUSTICE SAN.InVT KtrIANNA IION'tsLE MR.. JUSTXCE R.V: EASWr'"R. ,'', I \{ ' . 'r-- | - I . Wh-ether Reporters of local papers may be alilowed.to see the judgment? . ITA 37/2OLO & conn. : : I II i : i I . Page tofLG I I t, iii' i i /o I L" i; directed against the decision of the Iqlcome Ta4 Appellate Tribunal n' L at. I (hereinafter referred to as "Tribunal) with regard to the claim of I depreciation. i i l-'

¶2The .facts giving rise to the alpeafs may be noticed. The i assessee is a public sector undertaking engaged in the manufacture ,I and sale, including export, of iron and steei,of various grades. It has I rl' several steel plants in India. At somp poitlt of time the'Indian Iron it and Steel Company Ltd. (IISCO) wasitaken over by the assessee and ; the steel plant of.IISCO also becamelthe qteel plant of the assessee. ir In order to meet the requirements 9f tge assessee company, the Government of India sanctioned ifr,rg:' loans from the Steel l'i. Development Fund (sOp). The loans were to bear interest and had been taken over a period of years (1979-80 to 1 gg3-g4) in the past. 'i Such loans stood at <5,277.1,6 crores ,ut on 3I.3.1999 in the , assessee's books of account.' The assessee came under gt.eat stress ' and difficult times from LggT on account pf glut in the international I, steel market due to heavy production;of stpel in South East Asia and ,l . the meltdown in USA. As a resuit of the $lut, the prices of steel fell rapidly and the assessee started incurring heavy losses. The assessee, therefore, approached the Government of l.{ndia in'the year 1998 for waiver of loans granted from the SDF as,vlel as to take steps to help i^', the steel industry in India. One of the measures taken by the lTA37/ZOLO & conn. tl I' I I il I ^\ / .Govelnment of India to provide relief to tlie steel industry in general ' and to the assessee in particular wab to waive repayment of the loans granted to the assissee. As noted earlier, the loans stoocl at <5,277 .16 crores as on 3L.3 .lggg. The Government waived the loans . to the extent of t5,073 crores. There,wereicertain other Government loans to the extent of t381 crores, which were also waived. The ' waiver of the loans in the case of the asseiBsee took place cluring the financial .year ended on 31.3.2000 relevant to the assessment year 2000-01. t', |-:

¶3It is common ground that in its books of account the assessee reduced the cost of the assets such as building and plant and machinery by the amount of the loans waived by the Government of India and accordingly calculated depreciation. However, in the returns filed for the years under consideilation,'the assessee took a contrary stand and claimed depreciation on the assets without rbducing the loans waived by the Governrnent. In the assessments for all the years, the Assessing 1 Officer took the view that depreciation ought to be allowed tq the assessee in respect of the building and the plant and machinery and'pther assets on the reduced rl cost, after reducing the loans waived,by th'b Government, in terms of ' lt Section 43(1) of thb Act. It was his case that the loans were granted by the Government to the assessee,to meet, a portion of the cost of the lTA37l20t0 & conn, t ) I ll i, /?/ assets and therefore, depreciation could,, be allowed only on the reduced cost. According to the AssessingiOfficer, the waiver of the loan was a confirmation of the fact that thby were originally granted .i: by the Government towards the cost of,{the assets. It would be appropriate to reproduce the following paragraphs from the .1 assessment order dated 28.3.2005 for the a$sessment yeat 2002-03 : , t; .,--\ '3.2During the period ended 31.3.?000 relevant to the i'-: Arr.rr-"ni Year 2000-01, the Goirernment of India, as a measure of rehabilitating the'iassessee company, waived the loan availed by it from the Steel Development Fund to thb extent of 5703 crores. The assessee' company in order to i save one of .its subsidiaries, namely Indian Iron ahd Steel Company Limited from{becoming sick, wroteioff a loan given by it to the extent ,of Rs.2072 crores. i Out of the receipt exceeding the outflow i.e. 3001 creres (5073 - 2072), the value of the assets were reduce$ by 2578.14 crores , and the balance amount . of Rs'ti422.87 crore was reduced from work in progress. a

3.4 The contention of the urr"rr".ipompany that since the value of the assets were rei{uced on its oM/Il, provisions of Section 43(L) we,ie not applicable, appears to be'completely misplaced. The reduction in the value of the assets was occasioned by the waiver of the loan by the Government u{d the amount of ., reduction was to the extent of accfption in capitahzed interest.'.' ;.' ll ,-i; lTA37/201'0 & conn. ry. 'l: , :| ---,f ._.-E tt . !' 1, tl ;rl ' i.t.i itI l; i, t5 't' ;l ' I t: ii In this view of the matter, the claiin for depreciation to Assessment Year 2000-01 2001..02 2002-03 2003-04 Depreciationl; Disallowed (t) t 64;692.69 lakhs 47,672.00 la[hs rl 35,775.63 la$fis iJ 26,87L 5a la|$s 1iI,!' down value? I . ,i ,fl , 'lt ' ^t tTA37la1t1&conn. , ,i ,t l 'i ,iI' t lriii "t Il /> the extent bf the loans waived was disallowed;in all the assessment ye.ars under consideration. The relevant figures are as under: ; :

¶4The disallowance of the claim of ldepreciation having been confirmed by the ClT(Appeals), the asseq$ee filed further appeals to the Tribunal. The Tribunal considered jhe matter elaborately and upheld the oSders of the departmental iuthorities and hence, the present appeals. ,t-t,,

¶5On 26.08.2011, the appeals were aidmitted and the following substantial questions of law were framed ji ' "(i) Whether on the .facts and ciircumstances of the .ur", the Income Tax Appellate tribunal erred in law and on merits in confirming the leduction of Written Down value of block of assets by the amount of loan waived by the central Government bs per Explanation 10 to Section 43(1) of the Income lfu* Act, 196l and consequently allowing depreciatio{! on reduced written /e

(ii) whether the Income Tax Appellate Tribunal rvas corrqct in law and on merits in con$Rning the reduction of cost of assets by the amount of waiver of loan by Central Government' ' and thei'eafter computing depreciation On the.reduced cost in tbrms of, Explanation 10 to Section 43(l) and Section32 ot6the Act?" -j

6.' The main contention put forth on behalf of the assessee is that on identical facts the Ahmedabad Bench cif the Tribunal in the case of Steelco Gujarat Ltd. Vs. Assistant Conimissioner of Income Tsx I - ';

(2009) 33 SOT 437, has taken a view ttiat the cost or the written down value of the assets cannot bb reduc?d bV the amount of loans waived by the lender and that Explanationit0 to Section 43(1) of the Act cannot apply to the waiver. It is sublnitted that no appeal was filed by the Income Tax Department against the aforesaid order of c\ the Ahmedabad Bench of the Tribunal and,therefore, as held by 'the Supreme Court 'tn [.Inion of India and Or$ Vs. nktumwclini Narayan Dalul And Anr. (2001) 249ITF.219, the d,gnartment is not entitled to challenge the correctness of a later orderi without just cause in the t. case of other asSeSSeeS 'after having'acceflted an order on the same t, facts and dealing with the same issue. T\'is decision does not apply '!i to the present situation where "the appeals have been filed by the assessee. The Assessing 'Officer, hirrlself did not accept the assessee's claim that the amount of lofns waived should not be i' ,! : '; ti t'. \ lTA37/2O!O & conn. r! it rri t! I I Jt J ), I '' I j,, . t,;

¶1i IT ; . l,i t, i reduced from the cost or WDV of the a$sets foi II the purposes of calculating depreciation. He has passed the assessment orders much before the order of the Ahmedabad Bench .jf tn" Tribunal, which rvas pronounced on 3L.7.200g. Revenue h?t succeeded before the 't tribunal. The assessee has filed the presftnt appeal under Section 260A of the Act. At this stage in an appexl filed by the assessee at the time of final hearing it will not be proirer to ask the Revenue to veriff facts whether any appeal was prefer4*ed in the case of Steel Co' (supra) and if no appeal was prefened ef<nlain the reason for the same. In this factual situation, which is'imuch different from the factual situation considered and dealt with in the judgment of the Supreme Court cited above, we have gravt doubts whether the ratio of the ruling would apply. The Revenue icitea the judgment of the Supreme Court rn C.I{tGangadh&rsn l/s.trCommissioner of lrcconrc Tax (2008) 304 ITR 61 in which the earli{r judgment in l(aumudini Narayan Dalal And A.nr. (supra) was considered and it was held that the non-filing by the department of the appeal in one case would not operate as a bar on the department to fileian appeal in another case where there is just cause for doing so or il$is in the public interest to do so or for pronouncement by u higher pourt because of divergent , views expressed by the tribunai's or the F,tigh Courts. The ratio of this judgment is that it is not an inviolabhe rule or practice that the fiA3712010 & conn. { t ,{ // department decision in exceptions should not cannot file an appeal in a l.case where an identical another case had not been apfiealed'aghinst. There are to the rule and we are satisfie$ that the present appeals i be allowed on this ground. .iW. should examine and made on behalf of the assessee.

¶7Section 32 of the Act deals with depreciation. It savs that in respect of'certain tangible and intangible frssets which are owned by the'assessee and used for the purposes ofl the business, a deduction .;: on account of depreciation would be allowobd at the rate prescribed in . '.lr the Rules from time to time. The depreci4tion would be allowed on the "actual cost" of the aSSeSSee or the "wiitten down value". These terms are defined in Sectio n 43 of the iA"r. Sub-section (1) of i Section 43 defines "actual cosf' to mean 'iactual cost of the assets to the assessee, reduced by that portion of thelcost thereof, if any, as has , been met directly or indirectly by any oilher person or authorify't. This definition came up for consideration before several Fligh Courts in the context of the subsidy granted;by the Central or State Governments as an incentive for development of industries. The ,I subsidy was granted with the , aim of industrialising the State and particularly the industrially backward arE[s. The quantification of tt. the subsidy was maqg as a percentaBe of tl,:re capital investment made decide the appeals on merits. We accordiilgly, reject the submission lTA37 /20tO & conn' Page B of 16 {\ .il : -'/ .il fi li? by the assessees, which included land, building, plant and machinery etc. The Revenue treated these subsidiei as amounts paid by the :- Government towards meetiqg the cost of 1,he assets and accordingly, applying the definition of "actual cost", sultably reduced the claim.of depreciation.. The dispute ultimately reached the Supreme Court in the case of ctrT v. P.,tr. ckemicals tr td. (L994) 210 ITR 830. The dispute was resolved in favour of the ur*"rr"", with the Supreme I Court'holding that the object of the subsid.i was to promote industrial growth in the States and merely because the quantum of the subsidy was calculated as a percentage of the capi!,al investment made by the 'gJ assessee in the assets such as land, builqling, plarft and machinery etc., it cannot be said that the Governmerii met a portion of the cost of the asset directly or indirectly. Accordingly, the assessees were l held entitled to the depreciation on the iactual cost without being :. reduced by the amount of the subsidy. f ,l

¶8Section 43(L) of the Act is reproduced hereunder: - "(1) "actual cost" means the actual i'bost of the assets to the assessee, reduced by that portiori of the cost thereof, if any, as has been met directly or indirectly by any other person or authorrty:'

¶9By the Finance Q) Act, 1998, Expleilation 10 to Section 43(1) was inserted with effect from L.4.1999. Itieads as under: / ,li !;i fl ) r-, T lTA37/2Ot0 & conn. ( Explanation 10 - Where a portion ol: the cost of an asset acquired by the urr"tt.. has bebn met directly or indirectly the Central Government or a State Government or any authority established underjany law or by any other person, in the form of a dubsidy or grant or reimbursement (by whatever name 1'called), so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be includedrin the actual cost of the asset to the assessee: ,j : Frovided that were such subbidy or grant or reimbursement is of such nature thati it cannot be directly relatable to the asset acquired, so frruch of the amount which bears to the total subsidy cir reimbursement or grarft the same proportion as such qisset bears to all the assets in respect of or with refelence to whiqh the subsidy or grant or reimbursement iis so received, shall not be included in the actuali cost; of the asset to the ASSESSEE.,, The aforesaid Explanation was e4plained by the Board. in ti Circular No.772 dated 23.12.1998 [reportEd in (1999) 235 ITR (St.) fi 35]. The relevant part of the Circular is rebroduced below: + "22.2 Explanation 10 provides thaf where a portion of the cost of an asset acquired by the itssessee has been net directly or indirectly by the Centrpl Govet'nment or a State Government or any authority tistablished under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatevqr name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not'i be included in the lTA37/2O1.O & conn. .i tl tT :l,t :/ t1 actual cost of the asset to th+ assessee. , Cost incurred/payable by the assesseb alone could be thb basis for any tax allowance. This Explanafion further provides that where such subsidy or grant or'&eimbursement is of such nature that it cannot be directly;pelatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with . ' reference to which the subsidy or gr+'nt or reimbursetnent . so received, shall not be included in Bhe actual cost of the ' asset to the assessee. The amendment made, throughi Explanation 10 will take effect from l't April, 1999, arid will, accordingly, I ' ielnfion to fhe A 1999-2000 and apply in ielation to the assessment *Year subsequent years.' i i

¶10The contention put forth on'behalf qf the assessee before us is .: that Explanation 10 below Section 43(I) hoes not take in waiver of the loan and that, in fact, the said FxPl4nation irarrows down the ambit and scope of the Section 43(1). lCorrnsel for the assessee " contends that in order to bring the case dhder the.Explanation, it is incumbent on the income tax authorities {o prove that the Waiver of the loan is in truth and reality a form of either a subsidy or a grant or reimbursement of the cost and that in "{the present case no such 'rt attempt has been made. According to hfm, t4" revenue authorities li .v have not been able to demonstrate or esta,blish that the Government 'I; i of India has actually'given a subsidy or gjrant or has reimbursed the ! t' ,i' ri lTA37/zOtO & conn. ']. iii t t, '), I * J )//) cost of the asset in the form of waiver of the loan. The argulent, with respect,' elroneously assumes that ihe case tnust fall under I Explanation 10. It is true that in the assess{nent orders, the Assessing Officer heis placed strong reliance on the Explanation but in our view the main provisions of Section 43(1) themgelves are sufficiently wide to cover the assessee's case. In the .ou{r" of the arguments, this t' aspect was put to the ld. counse! for the aisessee for his reply as the substantial questions of law framed on 26.08.2011 do not appear to cover thiS aspeci specifically, though the islue/question does arise for t-consideration. He submitted that evdri ,rold"t the main provisions of Section 43(l), a case of waiver of a foan dan never be considered as meeting the fulI or apart of the ccist of the'lassets. ':

¶11Since the substantial questions'of ta{v framed do not cover this aspect, we have considered it appropriaie to frame the foltowing 'i substantial question of law, in additioni to the quesfions already framed: - ,,whether in the facts of the preseni case waiver of loan would result in reduction of actual cost under Section 43(I) of the Income Ta><, 196l?" '1, :tl .ij

¶12We are unable to accept the contention of the assessee that the case is not covered by the main nrovisiols of Section a3(1) becattse id.,y .,: .J I .ii C lTA37/zOtO & conn. 1l ': ,il l; jl 2// ; . of the treatment given by the assessee in lits books of account. " We : have earlier noticed,that in the book$ of account, the assessee had actually reduced the cost/WDV of the ashets by the amount of the loans waived by the Government of Indial .In the returns, however, the depreciation was claimed without reducing the loans from the ' cosVWDV of the assets. It is true that th,e manner in which entries are made in the books of account is ,not ionclusive of the question, C' which has to be resolved on a true interpr{tation of the provisions of ,l$ . law. However, the real nature of a transaijion can be understood by reference to the contemporaneous act of ithe parties, which would throw considerable light on their true intention and their understanding of the transaction. It is theJbfore not impermissible to look into the entries made in the book, odu."ount, in the absence of ,\. any other evidence. They show that thg assessee understood the receipt of the loans from the Governmdnt as having been given ^ towards meeting apartof the cost of the 4ssets. The waiver cannot, l|{. therefore, have a different effect on such intention. The intention of ': the parties, as reflected by the accounts ofithe assessee, appears to be : that .the loans had been granted towardsi a part of the cost of the assets. It is also to be noted that the as$essee is a Government of India undertaking and the loans have beeri given by the Goverrunent of India from the SDF. It is apparent to 4s that even when the loans \4 B i : li , lTA37/2O!O & conn. i i trl, \., were granted, they were granted towards$ cost of the assets. The assessse's case is, therefore, caught within the mischief of Section .,1, ra3(1) itself and in this view of the matter jt maV not be necessaryto examine the impact of Explanation l0 t"lthe Section inserted with gffect from l.4.Ig9g. For the same reason it is also not necessary to refer to the other judgments cited on behali; of the assessee.

¶13It is, howwer, necessary to ' refei to and distinguish the judgment of the Supreme Court in the cbse of PJ Chemicals Ltd. (supra). In that case, the Goveinment gave subsidy under the Central Subsidy Scheme to the assessees. The ,subsidy was given as an n ' rose of incentive for industrial growth and not Sr the specific purl meeting a portion of the cost of .the ,assets. The subsidy was, however, quantified as or geared to a peicentage of the cost-The view of the income tax authorities was tl'rat the amount of subsidy represented a portion of the cost of the a$et met by the government i. and, therefore, depreciation was allowable{ only on the actual cost of the asset as reduced by the amount of the subsidy in terms of Section ,; 43(1) of the Act. Explanation l0 to Sectiqn 3(1") of the Act was not in the Income Tax Act at the time materia{ time. The Supreme Court held that the payment of subsidy did not pprtake of the character of a payment intended either directly or indireitly to meet the actual cost. The ratio of this ruling is not applicable lto the.facts of the present fi,A3712o!o & conn. Pale 14 of 15 rl l'l ri i --. -- - *-.". ;, ..J :i .J ,t .J 10 wa3 introduced to ',1 ensure fI appropriate computation of actual cost of assets in case ,subsidy is received. After the introduction of ExnlXnation 1.0, it is no longer possible to contend that the subsidy giv$n by the goverrunent, by l! whatever name called, cannot be redirced'from the actual'cost of the assets in terms of Section a3(1) ef th{ Act for the purpose of allowing depreciation.. But Explanation 10'does not cover the case of waiver of the loan. It covers only the furant of a subsidy or re-n imbursement by whatever name called. TIie case of the assessee may not, therefore, fall under Explanation 10j but having regard to the facts as found which we haVe alluded to'learlier, the waiver of the i loan amounted to the meeting of a portioh of the cost of the assets under the main provisions of Section a3(1) of the Act. The waiver of the loan is not a mere quantification of a$subsidy granted generally for industrial growth. It was granted specifically to the assessee and the assessee in its books of accounts reducied the cost of the assets by the amount waived. This reflected a contdlnporaneous understanding ri' of the purpose of the grant of the loan on tlre part of the assessee.' As already mentioned earlier, the assessee is ,f Public sector undertaking and the loan and the later waiver were frolJf the Government of India. The loans under the SDF were specifica{ly for meeting the capital r4 cost of the assets, on which depreciation rngas being claimed. case. Apparently ExPlanation lTA37/20tO & conn. rf: I .t..t .i ;, *'J

¶14In view,gf the aforesaid discussion, the substantial question of law framed by us in para 10 is answerdd in the affirmative and '; against the assessee and in favour of the Revenue. The questions of h( law framed on 26.8.20L1 arc academic in',itiew of our answei to the question framed by us in paru 10 and neqd not be answered' The appeals are dismissed with no costs. March 30,2012 vld lTA37/20!0 & conn' i ti,ri { nf F ht ''v'-'\ (n.v.E,aswAR) i .TUDGE ;.1 | '; -4 r/ i - 1_.l|i__ ;t $,.dNJnv Kr{dNI\A) I JUDGE I 1' ;i .|' .l I ,.. ;'riIr 'li iJ rt 't Il; I ! t -\ ;. .t' .i