2005 (5) TMI 260 - AT - Income Tax

Tribunal Partly Favors Assessee: Foreign Fund Swaps & Interest Claims Allowed; Key Issues Sent for Reassessment.

The Tribunal partly allowed the assessee's appeal, specifically allowing claims related to the swapping of foreign currency funds and interest on ... Business Expenditure - loans and advances to various industrial concerns - Swapping of foreign currency funds for augmenting the rupee funds - Depreciation on leased assets - Interest on borrowed capital. HELD THAT:- In the instant case, as noted, the impugned swapping cost has to be considered in the light of the contractual obligation on the part of the assessee and it cannot be said that there is any continuous benefit accruing to the assessee under the contract. Secondly, the Hon'ble apex Court also noted that the allowance of the entire expenditure in the year of incurring itself would give a distorted picture of profit for that particular year as there was a continuous benefit. In the instant case, the situation is reverse. If the cost of swapping is not provided against the profit of the impugned year, that would lend the profits of the year a distorted picture, as would be clear from the following. The assessee has converted its foreign currency borrowings into Indian rupees and deployed the same to earn income by way of interest, return on investments, etc. The impugned cost is incurred to enable the assessee to obtain such funds and to enable it to ascertain the actual cost of such funds the cost required to reconvert it and repay the foreign currency is essential as it has a direct nexus. If the income in relation to such activity is offered for taxation, on which there is no dispute, the matching cost should also be accordingly allowed. Therefore, the ratio of the decision of the Hon'ble apex Court cannot be said to be applicable to the instant case inasmuch as not allowing the impugned expenditure in the year of incurring would result in a distorted picture of profits. As a result of the discussions, in our view the circumstances and the nature of the expenditure in the instant case do not justify the invocation of the ratio of the decision of the Hon'ble apex Court in the case of Madras Industrial Investment Corpn. Ltd[1997 (4) TMI 5 - SUPREME COURT]. Thus, the claim of the assessee for allowance of expenditure incurred in connection with swapping of foreign currency funds for augmenting the rupee funds required by it for its business is to be allowed in the year of incurrence of the same i.e. during the current assessment year itself. The assessee succeeds on this ground. In the result, the appeal of the assessee is treated as partly allowed. Depreciation on leased assets - Viewed in the above background, in the instant case, we find that the CIT(A) concludes that during the currency 0f lease, the assessee alone remains the owner and at the end of the lease period, the assessee-lessor is within its right to receive back the leased asset. We may mention that the reliance placed by the CIT(A) on the decision of Shaan Finance (P) Ltd.'s [1998 (3) TMI 8 - SUPREME COURT] to allow the claim of depreciation on leased assets cannot be faulted in principle. Once it is held that the leasing of the machinery is the mode of business carried on by the assessee and the income thereof is treated as business income, it would be, therefore, natural to allow depreciation on the same. However, before reaching to the conclusion that leasing is the mode of business, such an aspect has to be factually supported and our remanding the issue to the file of AO is with this objective. The said ground of the Revenue accordingly stands disposed of. Interest on borrowings used for construction of office building - As long as the borrowing has been made for the purposes of business, then even if it is used for incurring a capital expenditure, the claim of the assessee would be within the scope of s. 36(1)(iii). Insofar as the instant case is concerned, the business of the assessee has been in operation hitherto. Having utilized the borrowings for the purposes of construction of building for its own use, it cannot be anybody's case that the utilization is not for the purposes of business. We are thus in agreement with the conclusion drawn by the CIT(A) that the impugned interest was an allowable expenditure. With regard to the objection of the AO to the treatment in the books of account, the same, in our view, is not determinative of the liability for deduction, having regard to the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT [1971 (8) TMI 10 - SUPREME COURT]. We affirm the conclusion of the CIT(A) on this issue. Accordingly the Revenue fails in this ground. The appeal of the Revenue is treated as partly allowed. In the result, the appeal of the assessee is partly allowed and the appeals of the Revenue are dismissed. Issues Involved:1. Disallowance of maintenance expenses for visiting officer's flats.2. Disallowance of revenue expenditure related to swapping of foreign currency funds.3. Disallowance of lease rent amortization.4. Revision of interest charged under sections 234B and 234C.5. Deletion of disallowance of depreciation on leased assets.6. Deletion of disallowance of interest on borrowings for construction of office building.7. Allowance of depreciation in an order under section 154.Detailed Analysis:1. Disallowance of Maintenance Expenses for Visiting Officer's Flats:The assessee contested the disallowance of Rs. 6,96,449 incurred on maintaining visiting officer's flats. The Assessing Officer (AO) categorized these as guest-house expenses, disallowed under Section 37(3) of the Income Tax Act. The CIT(A) upheld this view. The Tribunal found the decision aligned with the precedent set by the Special Bench in Eicher Tractors Ltd. vs. Dy CIT, thus dismissing the assessee's ground.2. Disallowance of Revenue Expenditure Related to Swapping of Foreign Currency Funds:The assessee incurred Rs. 67,06,33,245 for swapping foreign currency funds to augment rupee resources, claimed as revenue expenditure. The AO disallowed this, stating it pertained to future periods and was capital in nature. The CIT(A) upheld the disallowance, agreeing it did not relate to the current assessment year. The Tribunal, however, found the expenditure to be definite and ascertainable at the time of the contract, thus allowable in the year incurred. The Tribunal allowed the assessee's claim, referencing the principles from Calcutta Co. Ltd. vs. CIT and Metal Box Co. of India Ltd. vs. Their Workmen.3. Disallowance of Lease Rent Amortization:The AO and CIT(A) disallowed Rs. 52,799 claimed for amortization of lease rent, treating the assessee as the owner of the properties due to long lease periods. The Tribunal noted the absence of full facts and terms of the lease agreements, thus remanding the matter back to the AO for fresh consideration, emphasizing the need for a detailed examination.4. Revision of Interest Charged Under Sections 234B and 234C:The interest charges under sections 234B and 234C were deemed consequential by the Tribunal, implying they would be revised based on the final determination of the principal issues.5. Deletion of Disallowance of Depreciation on Leased Assets:The Revenue challenged the CIT(A)'s deletion of Rs. 18,74,22,388 disallowed by the AO, who viewed the transactions as finance/hire purchase rather than lease. The Tribunal found the CIT(A)'s reliance on Shaan Finance (P) Ltd. justified in principle but noted the need for factual verification of the AO's findings. The matter was remanded to the AO to reassess the nature of the transactions and the true ownership of the assets.6. Deletion of Disallowance of Interest on Borrowings for Construction of Office Building:The AO disallowed Rs. 9,43,19,666 as interest on borrowings for constructing an office building, viewing it as capital expenditure. The CIT(A) allowed the claim, noting the treatment in books does not alter the expenditure's nature. The Tribunal upheld the CIT(A)'s decision, referencing the principle from Kedarnath Jute Mfg. Co. Ltd. vs. CIT, affirming that interest on borrowings for business purposes is allowable under Section 36(1)(iii).7. Allowance of Depreciation in an Order Under Section 154:The Revenue's appeal against the CIT(A)'s order allowing depreciation in a Section 154 order was deemed consequential. Since the Tribunal upheld the CIT(A)'s decision in the primary appeal, this ground did not survive for consideration and was dismissed.Conclusion:The assessee's appeal was partly allowed, primarily regarding the swapping of foreign currency funds and interest on borrowings. The Revenue's appeals were dismissed, with key issues remanded for further factual verification.