TaxTMI 
TaxTMI 
2016 (4) TMI 904
X X X X Extracts X X X X
X X X X Extracts X X X X
.... learned Commissioner of Income Tax (Appeals) has erred in confirming allocation of director's remuneration, directors' traveling expenses, audit fees, computer expense and security charges for calculating profit of Captive Power plant for deduction u/s. 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). 2.1. Without prejudice to above, the learned Commissioner of Income Tax (Appeals) has erred in confirming allocation of salary of Rs. 117.44 lacs paid to Mr. S.B. Dangayach, Managing Director & In-charge of Plastic Division and salary of Rs. 143.65 lacs paid to Mr. Rahul Patel, Managing Director who is looking after sales of Textile Division to Captive Power Plant for calculation of profit eligible for deduction u/s.80IA of the Act who are dedicatedly working on the respective divisions and have nothing to do with the operations of the CPP units. It is submitted to be held so now. 3. The learned Commissioner of Income Tax (Appeals) has erred is not deleting interest charged u/s 234B, 234C & 234D. It is submitted that no interest u/s 234B, 234C & 234D is leviable. It be so held now." ITA No.1548/Ahd/2012 (Asstt.Year 2010-11) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....abad erred in law and on facts in restricting the disallowance u/s.80IA to Rs. 19.25 Lacs for the Captive Power- Plant (CPP) unit. [2]. The Ld. CIT[A] has erred and on facts in deleting the disallowance of Rs. 18,25,69,000/-made u/s. 80IC on Baddi Unit. [3]. The Ld. CIT[A]-XIV, Ahmedabad has erred and on facts in deleting the disallowance of Rs. 82,34,951/- made by the Assessing Officer u/s. 14A of the Act. [4]. The Ld. CIT[A]-XIV, Ahmedabad has erred and on facts in granting relief regarding the disallowance of Rs. 24,37,500/- made by the Assessing Officer treating the expenditure towards service charge fee paid to DSP Merill Lynch for purchase of units under Portfolio Management Scheme(PMS) as Capital in nature u/s. 37 of the Act. [5]. On the facts and in the circumstances of the case, the Id. Commissioner of lncome-tax[A]-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer. [6]. It is therefore, prayed that the order of the Id. Commissioner of Income-tax[A]-XIV, Ahmedabad may be setaside and that of the Assessing Officer be restored. ITA No.1524/Ahd/2012 (Asstt.Year 2010-11) 1 .a). The Ld. Commissioner o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1.k). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Rent / general charges of Rs. 289 Lacs while computing deduction u/s.80IA of the Act. 2). The Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad has erred in law and on facts in directing the AO to allocate the interest expenses on the investment ratio for allowing deduction U/S.80IC of the Act, in respect of Baddi Unit. 3). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the allocation of common head office expenses to Baddi Unit for calculating profit eligible for deduction U/S.80IA of the Act. 4). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the allocation of certain expenses claimed to be incurred specifically for plastic Division as well as common head office expenses for Baddi Unit while calculating profit eligible for deduction u/s.80lC of the IT. Act. 5). The Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad has erred in deleting the addition of Rs. 39,48,81,350/-, being gain on account of forei....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d "office expenses", which according to the AO were required to be allocated in proportionate to the turnover of CPP vis-à-vis other business of the assessee. On an analysis of the details of the account, the ld.AO recorded a finding that the turnover of CPP unit in comparison to the total turnover of the assessee-company worked out to 2.05% in the Asstt.Year 2009-10, and 1.53% in the Asstt.Year 2010-11. The ld.AO thereafter, tabulated various common head expenses. Out of which, expenses are required to be allocated to the CPP in ratio of turnover of CPP vis-à-vis the total turnover. It read as under: Assessment Year 2009-10 Sr. No. Particulars Amount (Rs.in lakhs) 1 Directors' Remuneration 670.00 2 Directors' Traveling 46.00 4 Audit Fees 43.00 5 Computer Maintenance Expenses 165.07 6 Security charges 15.12 7 General Charges 4228.11 8 Miscellaneous Expenditure 98.00 9 Interest & Financial Charges 6396.75 10 Director Fees 3.90 11 Rlates & Taxes 34.00 12 Stationery & Printing Expenses 1495.00 13 Charity & Donation 7.00 14 Salaries &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Rs. 19.25 lakhs for CPP units as against Rs. 3,75,59,000/- made by the AO. In the Asstt.Year 2010-11, the grounds of appeal taken by the Revenue are argumentative in nature, which are not in consonance with Rule 8 of the Income Tax (Appellate Tribunal) Rules, 1963. In ground no.1, the Revenue has taken eleven sub-grounds, which are basically heads of accounts, which have been excluded by the CIT(A) for making disallowance of expenditure alleged to have been attributable to CPP. 7. Before we embark upon an inquiry as to whether the items of expenditure considered by the AO for proportionate allocation to CPP unit has any nexus to the operation of CPP unit, we find that in Asstt.Year 2010-11, the ld.First Appellate Authority has taken cognizance of the submissions made by the assessee as well as the order of the CIT(A) passed in A.Y.2009-10. The ld.First Appellate Authority, thereafter, recorded a finding on all these issues independently and upheld the allocation partly which is being challenged by the assessee in its appeal and deleted the allocation partly which is challenged in Revenue's appeal. It is pertinent to take note of the arguments raised by the assessee and the findi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... looking after the overall operations of the company. ii) Directors Traveling expenses - As regards Directors' traveling to the tune of Rs. 16 lacs, it is to be submitted that traveling of Directors comprises of mainly foreign travel and that has nothing to do with or even by any limb, with the operations of the CPP. Hence, it is submitted that the same should not be considered at all towards allocation of appropriate expenses, vis a vis turnover. iii) Audit fees In this regard it is submitted that Audit fees ofRs.40 lacs have been considered which should not at all be considered, vis a vis turnover of CPP and total turnover. iv) Computer maintenance expenses In this regard it is submitted that during the year under review, the company has incurred total computer maintenance expenses of Rs. 68.96 lacs. The expenses would reveal that it has no connection so far as CPP is concerned and hence, it should not at all be considered for the same. v) Security charges It is pertinent to note here that during the year under review, the appellant company has incurred Security charges of Rs. 10.21 lacs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny is unrelated to the CPP units by any stretch of imagination and cannot be considered for the purpose of allocation to CPP units. These expenses are in no ways be considered to be contributing towards earning profits from the CPP units. Without prejudice to above, it is respectfully submitted that there can never be allocation of these expenses which are actually related to other activities of the Appellant Company. It may please be appreciated that on identical facts the addition on account of Interest & Financial Charges, Stationery & Printing Expenses, Rates & Taxes and Rent were deleted by the Hon 'ble CIT (A) for the Assessment Year -2009-10. In view of this factual background appellant submits that on same facts for the year disallowance made should be deleted. Copy of the C1T(A) order for the Assessment Year -2009-10 is submitting herewith as Annexure -2 for your immediate reference. viii) Director Fees (Rs.5 lacs), Charity & Donation (Rs.68 lacs). Salary & Wages of Corporate Division (Rs.450 lacs), Contribution to PF of Corporate Division (Rs.l54 lacs). Welfare Expenses of Corporate Division (Rs. 1,026.86 lacs) & Miscellaneous expenditure (Rs. 17 lac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r are decided after following the decision of my predecessor in the following manner: Sr.No. Particulars Remarks 1. Directors' Remuneration The claim of the appellant has been dismissed in the earlier year and the is allowance made by the A. O. has been confirmed by CIT(A) - XIV in A. Y. 2009- 10. Respectfully following the decision, the disallowance is upheld. 2. Directors' Traveling The claim of the appellant has been dismissed in the earlier year and the Is allowance made by the A.O. has been confirmed by CIT(A) - XIV in A. Y. 2009- 10. Respectfully following the decision, the disallowance is upheld. 3. Audit fees The claim of the appellant has been dismissed in the earlier year and the disallowance made by the A. O. has been confirmed by CIT(A) - XIV in A.Y.2009-10. Respectfully following the decision, the disallowance is upheld. 4. Computer Maintenance Expenses The claim of the appellant has been dismissed in the earlier year and the disallowance made by the AO has been confirmed by CIT(A)-XIV in A.Y.2009-10. Respectfully following the decision, the disallowance is upheld. 5. Security charges The claim of the appellant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted to be deleted. 14. Contribution to PF of Corporate Division The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10. Respectfully following the decision of earlier year, the allocation of general charges of Rs. 154 lacs is directed to be deleted. 15. Welfare Expenses of Corporate Division The issue has been decided in favour of Corporate Division the appellant by my predecessor in para 5 of his order for A. Y. 2009-10. Respectfully following the decision of earlier year, the allocation of general charges of Rs. 1026.86 lacs is directed to be deleted. 18. Rent The issue has been decided in favour of the appellant by my predecessor in para-5 of his order for A. Y. 2009-10. (Respectfully following the decision of earlier year, the allocation of general of Rs. 289 lacs is directed to be deleted. The A. O. is directed to work out the disallowance in accordance with the above direction. The ground of appeal is accordingly partly allowed. 8. With the assistance of the ld.representatives, we have gone through the record carefully. The ld.counsel for the assessee has placed on recor....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the table extracted (supra) on the basis of past history. Before us, neither party was able to point out any circumstances which can demonstrate the disparity on the facts or about the nature of expenditure which deserves to be either included for allocation or excluded from allocation. Considering the detailed finding of the CIT(A) in Asstt.Year 2010-11, in the light of the Tribunal order in the Asstt.Years 2004-05 to 2008-09, we are of the view that the issue in dispute is squarely covered. The ld.First Appellate Authority has excluded the items, namely, general charges, misc. expenses, interest and financial charges, directors' fees, rent and taxes, stationery and printing, charity and donations, salary and wages of corporate division, contribution to PF of corporate division, welfare expenses of cooperative division and rent. We do not find any error in the order of the ld.CIT(A) for exclusion of these items from allocation to the CPP units. Similarly, the ld.First Appellate Authority has upheld the inclusion of items for allocation viz. directors' remuneration, directors' travelling expenses, audit fees, computer maintenance expenses, security charges etc. and we do not find ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....are 13.89% and 15.87% of the total financial charges debited by the assessee. The AO, thereafter, debited the amounts of Rs. 120.56 lakhs and Rs. 81.51 lakhs out of these figures, because this much expenditure has already been allocated by the assessee itself. In this way, the ld.AO has allocated the expenditure of Rs. 637.40 lakhs and Rs. 642.84 lakhs on account of interest/financial charges in these assessments years to the Bhaddi units. In other words, the profit has been further reduced by the AO by these two amounts. 13. On appeal, the ld.CIT(A) has deleted the allocation of such expenses. The finding recorded by the CIT(A) in para-9 and 10 read as under: "6. The next grounds of appeal (i.e. 3,4,5 & 6) is against the allocation of expenditure allocated to the Baddi unit for computing deduction u/s 80IC. As regards interest expenses of Rs. 637.40 lacs to the Baddi Unit in the ratio of turnover against the allocation made by the appellant on the basis of investment while calculating the profit eligible for deduction u/s. 80IC of the IT. Act. The AO observed that the appellant has incurred-interest charge of Rs. 5456.88 lacs (other than textile division) agai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llocation. The assessee has allocated the expenditure on account of financial charges, keeping in view the investment in Bhaddi units. In other words, these are direct expenditure relatable to Bhaddi units. Therefore, the ld.CIT(A) has rightly deleted the allocation of interest/financial charges in the Bhaddi made on the basis of sales ratio. We do not find any infirmity in the order of the ld.CIT(A) on this issue. 18. The next item considered by the AO is salary expenses including directors' remuneration. 19. In the Asstt.Year 2009-10, the ld.AO observed that the assessee has debited salary of Rs. 236.44 lakhs. In terms of sales ratio, the expenditure is 328.56 lakhs. He has reduced the eligible profit by this amount. In the Asstt.Year 2010-11, the salary expenditure is of Rs. 2426.86 lakhs. The sale ratio of Bhaddi to the total sale is 15.87%. He worked out the salary expenses required to be allocated to Bhaddi Units in this sale ratio at Rs. 385.14 lakhs which is 15.87% of total salary of Rs. 242686 lakhs. 20. On appeal, the assessee has contended that remuneration to the employees of Rs. 360.00 lakhs already been considered by the assessee for the purpose of Bhaddi Uni....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the AO, therefore, we allow the ground of appeal raised by the assessee and reject the ground of appeal raised by the Revenue. We direct that the expenses allocated by the assessee of Rs. 341.46 lakhs has rightly been allocated by the assessee, which includes direct expenses as well as out of total salary of plastic division where the Bhaddi unit is situated. No further allocation in this assessment year is required. 23. Next item out of which the ld.AO has made allocation of Bhaddi unit in both the assessment years is common head office expenses. According to the ld.AO, a perusal of profit & loss account, it reveals that there are certain common head office expenses viz. audit fees, computer maintenance expenses, security charges, misc. expenses, directors' fee, charity and donation, bad debts, forex etc. The ld.AO has worked out total of these expenditure in the Asstt.Year 2009-10 at 3535.09 lakhs. In the Asstt.Year 2010-11. He worked out total expenses at Rs. 209.17 lakhs. According to the ld.AO, the sale made by the assessee of the products produced from Bhaddi units is 13.85% and 15.87% of the total sales of the company in these two assessment years respectively. Thus, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rect nexus with the activity of 80IC units, vis-à-vis this expenditure, it has already made disallowance. Let us take an example. As far as security charges are concerned, the assessee already accounted the security charges relevant for the purpose of 80IC units. Why allocation out of the expenditure incurred at head office ought to be made to this unit. Similarly, it has allocated out of computer maintenance. This expenditure would relate to the computers which are directly involved in 80IC units. After considering the orders of the ld.CIT(A) on this issue, we do not find any error in the orders, and accordingly, the orders of the CIT(A) in both the years are upheld on this issue. The ld.CIT(A) has rightly deleted the disallowance made by the AO, out of common head expenses of corporate division. 26. Next item of expenditure allocated by the AO is expenditure incurred by plastic division and corporate division. Under this head, the ld.AO found that the expenditure of Rs. 8106.37 lakhs and 7180.75 lakhs have been incurred by the assessee on rates and Taxes, printing and stationery, common expenses on sales, general charges and insurance. The assessee has allocated on expe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 0.52 lakhs attributable to earning of income. The ld.AO has confronted the assessee as to why the disallowance for the purpose of section 14A should not be made with help of Rule 8D. In response to the query of the AO, the assessee has filed a detailed reply vide letter dated 20.2.2010 in the Asstt.Year2009-10. The ld.AO has reproduced the explanation of the assessee, and thereafter, recorded a finding in both the assessment years. For the facility of reference, we take note of the assessee's explanation along with finding of the AO in the Asstt.Year 2010-11. It reads as under: "1.1. Regarding disallowance u/s 14A of the Act, we would like to state that during the year under consideration, we have earned dividend amounting to Rs. 22.55 lacs on account of investment made equity shares and the same has been claimed as exempt in return of income. In this regard, we would like to state that certain expenses incurred in relation to earning such income have already been disallowed of Rs. 0.52 lacs on suo moto basis by us in its Return of Income. We request your goodself to refer to Annexure 1 for details in this regard. 1.2. At the outset, we would like to mention ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....btained by the assessee for specific projects. These funds have been directly used for such projects and therefore cannot be taken into account at all. Details of the projects on which such interest was paid is given in Annexure 2. The balance interest was paid on working capital facilities utilized by us for the purpose of the business. 1.8 Your goodself had also sought reason why Rule 8D should not be used for computing disallowance u/s. 14A. In this regard, we would like to mention that Rule 8D can be applied only if the amount disallowed u/s. 14A is not correct. We have completely explained the facts of the case and in view thereof, all the expenditure incurred for the purpose of earning such income has been disallowed appropriately. 1.9. Further, computation of such disallowance is also in consonance with the earlier year assessment orders up to AY 2008-09 and thus the amount of disallowance made by us u/s. 14A is appropriate and thus Rule 8D cannot be invoked. Further, during AY 2009-10 additions were made by applying Rule 8D in the case of the Assessee however learned CIT(A) vide his order dated 19th January 2011 deleted the addition made by AO in this rega....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e exempt income of Rs. 0.22 crores. In view thereof if at all Rule 8D is to be applied the amount of disallowance has to be restricted to Rs. 0.22 crores. 7.1 The above submission of the assessee has been duly considered. As per section 14A no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under the I.T. Act, As per section 14A (2) the assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the assessing officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. The Parliament is its wisdom had enacted section 14A with retrospective effect from 1-4-1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to the taxable income. In the past, it was seen that assessee's were push....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in mutual fund. The prime motive of investment in mutual fund is to gain appreciation in the net asset value of the funds. Most of the investment made by the assessee-company was "growth option" of mutual fund. It would also submit that in the case of growth-option, no dividend is declared by the mutual funds, and only income received by the investor is in the form of capital gains. The capital gains derived by the assessee on mutual fund are taxable and no an exempt income is derived from such investment. In the Asstt.Year 2009-10, the assessee has earned profit of Rs. 19.22 on sale of such investment, and the same has been appropriately offered for tax for categorizing the same in long term capital gains/short term capital gains. Similarly, the assessee had made investment in overseas subsidiaries, which also do not generate any exempt income. It was also disclosed that in certain mutual fund scheme, it has opted dividend option and also earned dividend income. But the investment in such type of scheme was of Rs. 60.36 crores as on 31.3.2008 which was liquidated during the Asstt.Year 2009-10 and on 31.3.2009, such investment was shown at NIL. The ld.AO was not satisfied with the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t that no expenditure has been incurred was not acceptable in view of various findings that have been mentioned in the order. The appellant has also relied on the order of my the learned and predecessor for assessment year 2009 - 10 wherein the disallowance made by the AO under section 14 A was deleted. I have carefully considered the order of my Ld. Predecessor and I respectfully disagree with the finding given by him in that order. Tn the present assessment year the assessing officer has clearly given a finding after considering the contention of the assessee regarding applicability of rule 8D and has accordingly made disallowance. He has rejected the claim of the appellant that no expenditure has been incurred. The facts of the case for the present year are therefore, different from the preceding year and accordingly the findings given by learned predecessor are not applicable on this issue for the present year. The appellant has also claimed that the disallowance by applying rule 8D is much more than the exempt income earned by the appellant and the disallowance should accordingly be restricted to the income earned. The appellant's claim cannot be accepted....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that following the principle of consistency and order of his predecessor, she accepted the contentions of the assessee, but somehow on this issue of disallowance under section 14A of the Act, the ld.CIT(A) did not assign any reason for such diversion. The ld.counsel for the assessee further relied upon its decision of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT, 347 ITR 272. He placed on record copy of the Hon'ble Delhi High Court decision. He further relied upon the order of the ITAT, Mumbai in the case of Justice Sam P. Bharucha v. ACIT (2012) 53 SOT 192. 35. In rebuttal, the ld.CIT-DR contended that though in these two years, the applicability of Rule 8D is not disputed, but in the Asstt.Year 2005-06, the disallowance of Rs. 3,25,863/- was made under section 14A. When this issue travelled upto the Tribunal in ITA No.4352/Ahd/2007 and ITA No.4357/Ahd/2007, then the Tribunal has observed that since Rule 8D is not applicable in this year, therefore, no disallowance can be made. The Tribunal has deleted the disallowance by following its order in the case of ACIT Vs. Vepar Pvt. Ltd. in ITA No.1374/Ahd/2009. The Revenue was not satisfied with conclusi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in subsection (2) of Section 14A of the said Act. It is only if th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt in the mutual fund was only Rs. 144.51 crores. The assessee has also submitted that its investment in earning exempt income has been reduced during the year from 78.45 crores to Rs. 18.09 crores. The assessee has submitted these details in its submissions reproduced by the AO. Similarly, in the Asstt.Year 2010-11, it has reserve fund of Rs. 2319.17 crores and made investment of Rs. 111.09 crores. The ld.AO has not given any heed to these submissions or figures submitted by the assessee. The assessee has further made disallowance of Rs. 5.12 lacs in the Asstt.Year 2009-10. This was mainly for management of investment. He simply discussed the background for bringing section 14A as well Rule 8D on the statute book. He has specifically not worked out the amounts even on the basis of Rule 8D. He called for a working from the assessee and made a lumpsum addition in both the years. The ld.AO has not recorded any finding that amounts added back by the assessee are not commensurate with the administrative expenses which might be attributable to earning exempt income. Because, on interest expenses account, there cannot be any disallowance as the assessee has far more interest free fund th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee about nature of securities or the instruments where the assessee can make investments. In other words, he provides information in a scientific manner to his clients on the investment from time to time. He pointed out that services of portfolio manager are akin to safeguard the assets in any other forms owned by a company. By virtue of the payments the assessee does not acquire any asset. It only maintains its assets. Thus, the expenditure was of revenue nature. The ld.counsel for the assessee relied upon the decision of the Hon'ble Supreme Court in the case of Dalmia Jain and Co. Ltd. Vs. CIT, (1971) 81 ITR 754 (SC), CIT Vs. Bengal Coal Co. Ltd., (1989) 47 Taxman 284 (Cal.), CIT Vs. Raigarh Jute Mills Ltd., (1989) 47 taxman 166 (Cal.), CIT Vs. Hindustan Times Ltd., (2000) 241 ITR 509 (Del) and CIT Vs. Patiala Flour Mills Co. P. Ltd., (1989) 180 ITR 75 (P&H). In the case of Dalmia Jain and Co. Ltd. (supra) the issue relates to litigation expenses. The government was supposed to lease out land to the assessee, if it succeeded in a litigation against the third party. The assessee was impleaded as defendant along with the government, and hence, it incurred litigation expenses defe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as confronted the assessee as to how such gain should not be brought to tax. In response to the query of the AO, the assessee has filed detailed submissions. The assessee contended that as per section 43A of the Income Tax Act, if any asset is acquired in foreign exchange for which the assessee has borrowed in foreign currency, then any increase or decrease in such borrowing on account of change in the exchange rate after acquisition of such asset is required to be added or reduced, from cost of acquisition of a capital asset for the purpose of section 48. It was also contended by the assessee that the loan was acquired by the assessee for financing the expenditure for expansion plan in existing business. 48. The ld.AO was not satisfied with the explanation of the assessee. He recorded a finding that the assessee was required to account for difference foreign exchange as gain or loss in its books of accounts. The gain or loss cannot be considered as a notional gain/loss. According to the AO, the assessee follows accrual system and gains has been duly accounted for in its audited books of accounts, therefore, there is no reason that such gain be excluded from taxation. He made ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of section 43A and observed that where the assessee has acquired asset outside India for the purpose of his business, and that asset was acquired by borrowed funds, the amount by which the liability stood increased or reduced on account of foreign exchange rate during the previous year, they be added to or deducted from the actual cost of the asset as defined in section 43(1) of the Income Tax Act. The observation of the Hon'ble Supreme Court has been noticed by the ld.CIT(A) while taking note of assessee's submissions on page no.49 of the impugned order. The observation of the Hon'ble Supreme Court reads as under: "9. Section 43 A, before its substitution by a new section 43 A vide Finance Act, 2002, was inserted by Finance Act, 1967 with effect from 1-4-1967, after the devaluation of the rupee on 6-6-1966. It applied where as a result of change in the rate of exchange there was an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring an asset. The section has no application unless an asset was ....