2022 (4) TMI 694 - SC - Income Tax

Supreme Court upholds ITAT's decision on revenue expenditure, clarifies ITAT's authority

WIPRO FINANCE LTD. Versus COMMISSIONER OF INCOME TAX

The Supreme Court upheld the ITAT's decision, allowing the appellant's entire claim of Rs. 3,56,57,727 as revenue expenditure. The Court found that the ... Loss arising on account of exchange fluctuation - loan between the appellant and Commonwealth Development Corporation - loan was obtained in foreign currency however, while repaying the loan, due to the difference of rate of foreign exchange, the appellant had to pay higher amount, resulting in loss to the appellant - ITAT deleted the dislaoowance - HELD THAT:- Transaction of loan between the appellant and Commonwealth Development Corporation, the same was in the nature of borrowing money by the appellant, which was necessary for carrying on its business of financing. It was certainly not for creation of asset of the appellant as such or acquisition of asset from a country outside India for the purpose of its business. In such a scenario, the appellant would be justified in availing deduction of entire expenditure or loss suffered by it in connection with such a transaction in terms of Section 37 - For, the loan is wholly and exclusively used for the purpose of business of financing the existing Indian enterprises, who in turn, had to acquire plant, machinery and equipment to be used by them. It is a different matter that they may do so because of the leasing and hire purchase agreement with the appellant. That would be, nevertheless, an activity concerning the business of the appellant. In that view of the matter, the ITAT was right in answering the claim of the appellant in the affirmative, relaying on the dictum of this Court in India Cements Ltd. vs. Commissioner of Income Tax, Madras [1965 (12) TMI 22 - SUPREME COURT] The analysis done by the ITAT and the conclusion arrived at in respect of the subject claim of the appellant being the correct approach consistent with the exposition of this Court, needs to be upheld. In our opinion, the High Court missed the relevant aspects of the analysis of the ITAT concerning the fact situation of the present case. As a matter of fact, the High Court has not even adverted to the aforementioned reported decisions, much less its usefulness in the present case. Claim raised for the first time before the ITAT - whether since the appellant in its return had taken a conscious explicit plea with regard to the part of the claim being ascribable to capital expenditure and partly to revenue expenditure, it was not open for the appellant to plead for the first time before the ITAT that the entire claim must be treated as revenue expenditure - ITAT allowing the additional claim holding that the capitalisation of the said sum is to be treated as revenue expenses - In the first place, the ITAT was conscious about the fact that this claim was set up by the appellant for the first time before it, and was clearly inconsistent and contrary to the stand taken in the return filed by the appellant for the concerned assessment year including the notings made by the officials of the appellant. Yet, the ITAT entertained the claim as permissible, even though for the first time before the ITAT, in appeal under Section 254 of the 1961 Act, by relying on the dictum of this Court in National Thermal Power Co. Ltd. [1996 (12) TMI 7 - SUPREME COURT] - Further, the ITAT has also expressly recorded the no objection given by the representative of the department, allowing the appellant to set up the fresh claim to treat the amount declared as capital expenditure in the returns (as originally filed), as revenue expenditure. As a result, the objection now taken by the department cannot be countenanced. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored As a result of allowing the entire claim of the appellant being revenue expenditure, suitable amends will have to be effected in the final assessment order passed by the assessing officer for the concerned assessment year, thereby treating the consequential benefits such as depreciation availed by the appellant-assessee in relation to the stated amount towards exchange fluctuation related to leased assets capitalised as unavailable and nonest. Issues Involved:1. Deductibility of exchange fluctuation loss.2. Treatment of erroneously capitalized revenue expenses as revenue expenses.3. Applicability of Section 43A of the Income Tax Act, 1961.4. Permissibility of raising new claims before the ITAT.Detailed Analysis:1. Deductibility of Exchange Fluctuation Loss:The appellant company submitted income returns for the assessment year 1997-1998, claiming a loss due to exchange fluctuation amounting to Rs. 1,10,53,909. The assessing officer concluded the assessment with positive taxable income, disallowing the claimed loss. The ITAT reversed this decision, holding that the loss due to exchange fluctuation was a revenue expenditure and thus allowable as a deduction. The ITAT supported its decision by stating that the borrowed funds were utilized for regular finance business, and the loss was incidental to carrying on the business, thus falling within the purview of Section 37 of the Income Tax Act, 1961. The High Court, however, reversed the ITAT's decision, stating that the ITAT had not provided sufficient reasons for its conclusion.2. Treatment of Erroneously Capitalized Revenue Expenses:The appellant also claimed a fresh deduction of Rs. 2,46,04,418 for revenue expenses erroneously capitalized in the returns. The ITAT entertained this fresh claim, noting that the department's representative had no objection. The ITAT cited the Supreme Court's decision in National Thermal Power Co. Ltd. vs. Commissioner of Income Tax, which allows for fresh claims to be entertained under Section 254 of the Income Tax Act. The ITAT concluded that the entire claim of Rs. 3,56,57,727 should be allowed as revenue expenditure. The High Court disagreed, stating that the ITAT's conclusion lacked a basis.3. Applicability of Section 43A of the Income Tax Act:The ITAT found that Section 43A, which deals with adjustments to the actual cost of assets acquired from a country outside India due to changes in the rate of exchange, did not apply to the appellant's case. The appellant had borrowed money for financing its business, not for acquiring an asset from outside India. The High Court did not specifically address this issue.4. Permissibility of Raising New Claims Before the ITAT:The department argued that the appellant could not raise a new claim before the ITAT that was inconsistent with the original return. The ITAT, however, allowed the new claim, citing no objection from the department's representative and relying on the Supreme Court's decision in National Thermal Power Co. Ltd. The department's reliance on Goetze (India) Ltd. vs. Commissioner of Income Tax was dismissed, as the limitation on raising new claims applied to the assessing authority, not the ITAT.Conclusion:The Supreme Court upheld the ITAT's decision, allowing the appellant's entire claim of Rs. 3,56,57,727 as revenue expenditure. The Court found that the High Court had missed relevant aspects of the ITAT's analysis and had not considered pertinent Supreme Court decisions. The Supreme Court also clarified that the ITAT had the authority to entertain new claims under Section 254 of the Income Tax Act. Consequently, the High Court's judgment was set aside, and the ITAT's decision was restored. The assessing officer was directed to amend the final assessment order accordingly, treating consequential benefits such as depreciation as unavailable. The appeal was allowed with no order as to costs.