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I.T Department: Business-hostile?
December, 01st 2007

It is high time our Income Tax department turned business friendly; it is still business-hostile. It is because its officers want to play safe and hence err on the side of caution leading to waste of time, energy and money for enterprises.

The Supreme Court has upheld the Income-Tax Appellate Tribunal (ITAT) order allowing enhanced depreciation on a notional increase in the cost of imported assets on account of forex rate fluctuation.  The courts verdict came in response to an appeal filed by Honda Siel Power Products which was into manufacture of portable gensets. 

Honda returned nil income for the assessment year 1991-92.  During the previous year, it had availed of a term loan in foreign exchange for import of machinery.  Owing to the depreciation of the rupee (INR), Hondas loan rose by INR 7,10,910.  Honda correspondingly enhanced the written-down value of the machinery in terms of Sec 43A of the Income Tax Act, 1961.  It helped the company claim a higher level of depreciation. 

The higher depreciation that Honda claimed was rejected by the Assessing Officer (AO).  The AO contended that such revision in the actual cost was not admissible as Sec 43A referred to adjustment of the actual cost of machinery on account of increase or decrease in liability of unpaid loans utilised for the purchase of machinery.  The AO was stretching it when he used the phrase unpaid loans.  Sec 43A no doubt refers to loan (in fact it uses the word borrow) but nowhere does it qualify the loan as paid or unpaid.  In the circumstances, it was unwarranted on the part of the AO to talk of the status of the loan (i.e., whether it was paid or unpaid). 

Honda appealed to the Commissioner of Income Tax (Appeals) or CIT (A), who allowed the appeal.  The Income Tax department then moved the ITAT which said the CIT (A) had erred in allowing the enhanced depreciation since under Sec 43A, actual payment was a condition precedent for availing of the benefit.  ITAT maintained that if actual payment was not made after fluctuation, the value of the asset could not be increased because of the fluctuation-induced change.  In other words, like the AO, the ITAT also talked of the status of the loan (i.e., whether it was paid or unpaid, as of a given date).  But on a rectification application filed by the assessee, the tribunal allowed the enhanced depreciation on the notional increase in the cost of imported machinery on account of forex fluctuation. 

The department filed an appeal in the Delhi High Court which set aside the Tribunals revised order.  Honda appealed to the Supreme Court against the High Court verdict.  The Supreme Court bench set aside the High Court verdict and restored the order passed by ITAT allowing the rectification application filed by the assessee.  The bench further said, When prejudice results from an order attributable to the Tribunals mistake, error or omissions, then it is the duty of the Tribunal to set it right. 

The point here is, although the buck fortunately stopped at the Supreme Court, for 17 long years the Income Tax department as well as Honda  Siel have wasted their precious time, energy and money over what is essentially a non-issue. 

Often, the Union Finance Minister talks of the ever-rising pile of income tax-related disputes pending resolution.  At the same time, his officers give the impression that they would like the pile to rise further.  Do these officers act in this manner out of ignorance?  Or do they want to play safe and hence err on the side of caution?  If any or both of these reasons are true, then it is really unfortunate.

It is not enough if our GDP has crossed 1 trillion USD.  It is not enough if our market capitalisation figure has crossed 1.5 trillion USD.  Simultaneously in areas like mark regulation, tax administration, improvements are to be made.  We are on our way to becoming a global economic power.  We cannot afford to waste our precious time, energy and money in trivial things like the one I have cited in the foregoing paragraphs.  The intent of the legislation is mostly ignored, the spirit of the law is mostly ignored and the letter of the law is mostly adhered to by our officers.  They should remind themselves of the dictum fiat justitia ruat et coelum (justice should be done even if the heaven falls).  The cause of justice should not be subservient to the rules of procedure

Our officers would do well to remember that in advanced economies even transfer pricing mechanisms have become business-friendly.  They have put in place an advance pricing arrangement or APA whereby the tax administration and the assessee define in advance the method of computing transfer pricing for inter-firm transactions.  Dispute resolution has thus become easier in the said economies. 

But given the mindset of our officers which is prone to complicate even minor tax-related issues, I am not sure we can rise anywhere near the level of the said economies at least in these matters. This being the state of affairs, it is overambitious on the part of our Finance Minister to believe that he can oblige individuals and companies to pay disgorgement.  Wishful thinking indeed!

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