TaxTMI 
TaxTMI 
2026 (3) TMI 1341
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....on order for the sake of convenient and brevity. The grounds in all the six appeals are reproduced as under: ITA No.- 3625/Del/2015(A.Y. 2009-10) Assessee's appeal 1. That the orders passed by lower authorities are bad in law and against the facts & circumstances of the case. 2 That both CIT(A) & AO have erred in law and on facts in treating, IPO expenses amounting to Rs. 1,68,30,430/- as capital expenditure arbitrarily and without any justification.It is contended that the ratio of the judgements in case of 225 ITR 792 and 225 ITR 798 are not applicable to the appellant's case. 3 The above grounds of appeal are independent and without prejudice to one and another. ITA No.- 3626/Del/2015(A.Y. 2010-11) Assessee's appeal 1 That the orders passed by lower authorities are bad in law and against the facts & circumstances of the case. 2 That both CIT(A) & AO have erred in law and on facts in not allowing deduction u/s 10B amounting to Rs. 1,99,23,462/- abitrarily and without any justification on the assumptions that it is not derived from industrial undertaking. It is contended that the difference in foreign exch....
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....gnoring the mandatory provisions of sub-rule 8D r.w.s.14A of the Income tax Act, 1961. 3. On the facts and in the circumstances of the case, Id CIT(A) has erred in deleting the addition of Rs.11,28,57,724/- made by the AO where the loss on account of deficit on settlement of forward contracts(Net) was rightly taken as speculation loss under the provisions of section 43(5) of the Income tax Act, 1961. 4. The appellant craves to be allowed to add any fresh ground(s) of appeal and/or delete or amend any of the ground(s) of appeal." ITA No.- 3202/Del/2017(A.Y. 2011-12) Revenue's appeal "(i) That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of product development expenses Rs. 8,27,46,723/- made by the AO by ignoring the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs CIT 225 ITR 802 and the Department's appeal against the decision of ITAT in assessee's own case for A.Y.'s 07-08 & 08-09 are pending before the Hon'ble High Court. (ii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in rejecti....
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....venue and two issues raised by the assessee, which are recurring in all the years from A.Y. 2009-10 to A.Y. 2012-13. 3. For Assessment Year 2009-10, Ground No. 1 of the assessee is that the IPO expenses have been treated as capital expenditure. The contention of the Ld. Counsel for the assessee is that the IPO was not brought but aborted, therefore, the expenses made on raising the IPO is a revenue expenditure which has been claimed u/s 37(1) of the Act. It is a say of the Ld. AR that no asset was created and the assessee did not get any enduring benefit. The assessee has relied upon the decision of ITAT Mumbai Bench, in the case of Go Airlines (India) Ltd. vs. Deputy Commissioner of Income reported in [2021] 126 taxmann.com 152. 4. For Assessment Year 2010-11, the ground raised by the assessee is that the claim of expense u/s 10B has been wrongly disallowed. The Counsel for the assessee states that the assessee is a 100% export-oriented unit, and the income was shown as business income. Therefore, the same deserves to be upheld. The assessee has relied upon the order dated 06.10.2015 of the Hon'ble High Court of Delhi in the case of PCIT vs. Universal Precision Screws in ITA....
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....(A), relying on the decisions of Hon'ble Apex Court in the following cases: * M/s Punjab State Industrial Development Corporation Ltd. Vs CIT (1997) 225 ITR 792 It was held that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although, incidentally that would certainly help in the business of the company and may also help in profit-making, it still retained the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. Therefore, the amount paid to the ROC, as filing fee for enhancement of capital, was not a revenue expenditure. * Brooke Bond India Ltd. V CIT (1997) 225 ITR 798 It was held that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retains the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the comp....
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....nd proximate cause (i.e. first-degree nexus) is vital and fundamental to include any profit under the statutory expression "derived from which is eligible for deduction u/s 10B. Above addition was confirmed by the Ld. CIT(A) and reliance is sought upon the findings of the Ld. CIT(A) which are briefly stated as under: * Income in the nature of difference in foreign exchange and excess provision written back were not incomes derived from the business of export of articles. Therefore, the sane would not be considered as part of profits for claiming deduction u/s 10B. * In view of the decision of Apex Court in the case of Liberty India (supra) & Sterling Foods (supra), it was held by the Ld. CIT(A) that impugned incomes are not a first-degree source of receipt derived from the industrial undertaking Following decisions may kindly be considered in this regard: * K. Mohan & Co. (Exports), Mumbai Vs Department of Income Tax (Mumbai Tribunal) ITA No. 3473/Mum/2008 Regarding allowability of deduction u/s 80HHC on gains on forward contract, it was held that the Hon'ble jurisdictional High Court in the case of CIT Vs Shah Originals (20....
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....ection 143(3) making, inter alia, three major additions: (i) treating a substantial part of "product development expenses" as deferred revenue expenditure and disallowing two-thirds in the year, (ii) disallowance under section 14A read with Rule 8D on investments yielding exempt income; and (iii) treating loss/deficit on cancellation/settlement of forward foreign exchange contracts as "speculation loss" under section 43(5), allowable only against speculative income. The AO also denied deduction under section 10B on certain "other income" (primarily exchange difference) on the ground that it was not "derived from" the eligible undertaking. In appeal, the CIT(A) substantially allowed the assessee's claims. The disallowance on product development was deleted treating the entire expenditure as revenue, following favourable orders in assessee's earlier years. The disallowance under section 14A was drastically scaled down, essentially accepting the assessee's plea of availability of own funds and limited administrative involvement. The forward contract loss was held to be a hedging loss incidental to export business and allowed as normal bu....
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....y permitted spreading where the nature of the benefit so warrants. 1.3 Reliance by the assessee and CIT(A) on earlier years' relief is misplaced. The principle of consistency cannot override the statute or bind the Department where the earlier view is demonstrably erroneous or the factual pattern has changed. The Supreme Court in Distributors (Baroda) Pvt. Ltd. v. Union of India (1985) 155 ITR 120 has made it clear that an incorrect view cannot be perpetuated on the ground of past practice. Moreover, the Revenue has already carried earlier years in reference/appeal; those orders are at best persuasive, not binding, and cannot disable a correct application of section 37(1) in this year. 1.4 The assessee's case law on routine advertisement/sales promotion being revenue is distinguishable on facts. Here, the AO has recorded that the product development function is a core, recurrent investment in design capability and buyer-facing sample development, with benefits extending to future orders and buyer retention. This is closer to capacity-building/market-creation than mere year-to-year sales push. On these facts, the AO's calibrated approach of allowing one....
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....et deficit on cancellation/settlement of forward contracts as speculative loss on the twin factual findings that (i) the contracts were settled otherwise than by delivery; and (ii) the assessee failed to establish a one-to-one or even reasonably proximate nexus between specific export receivables and the contracts booked, in volume, timing and tenor. On these findings, the loss falls within section 43(5) and Explanation 2 to section 28, as part of a distinct speculative activity in foreign currency. 3.2 The assessee invokes decisions such as CIT v. BadridasGauridu (P) Ltd. (2004) 261 ITR 256 (Bom) and CIT v. SoorajmullNagarmull (1981) 129 ITR 169 (Cal) to contend that forward cover for exporters is hedging, not speculation. Those authorities, however, proceed on a clear foundational fact that the assessee had demonstrably booked forward contracts strictly to hedge identified export/import exposures, and that the volume and timing of such contracts were broadly commensurate with underlying assets/liabilities. In the present case, the AO has specifically recorded the absence of such correlation and the presence of repeated rollovers/ cancellations, for which no satisfactory ....
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....ange rate Held, yes Whether in such circumstances, when it was certain that no additional liability would arise to assessee on maturity of contract, possibility of such liability on balance sheet date also could not arise Held, yes Whether, thus, where all forward contracts were settled by way of actual delivery through dollars received on export receivables and there was no extra outgo for settlement of forward contract other than already determined in contract, loss claimed by assessee on account of mark to market losses on account of fluctuation in foreign currency in respect of hedging forward contract was not allowable Held, yes [Para 4][In favour of revenue). 9. We have heard the rival submissions and have perused the materials on record. We find that the issues involved in the instant cases are mostly legacy issues which have been decided in favour of the assessee by ITAT/Delhi High Court. 10. The solitary issue in assessee's appeal for AY 2009-10 is whether the IPO expenses be treated as capital or revenue. We find that it is an admitted and uncontroverted fact that the assessee could not bring the IPO and the same was aborted. Neither the AO nor the ld DR has raised ....
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....on with issuance of bonus shares as revenue expenditure. Similar view has been expressed in the other decisions cited before us. Therefore, keeping in view the ratio laid down in the judicial precedents referred to above, we allow assessee's claim by deleting the disallowance made by the Assessing Officer. This ground is allowed." In view of the above, the ground of the assessee is allowed. 11. The solitary issue of the assessee in AY 2010-11 relates to deduction u/s 10B disallowed on difference in foreign exchange and excess provision written back on the ground that it is not derived from industrial undertaking. We find that the AO has held that the difference in foreign exchange and excess provision written back can be in the nature of business income and also related to EOU Unit. The AO however, held that the same is not derived from EOU and therefore disallowed the deduction u/s 10B. We find that the assessee is a 100% export-oriented unit. Though the difference in foreign exchange and the excess provisions written back is categorized as 'other income' in financial statement, they are actually in consequence of the sale and purchase made by the EOU unit in its normal ....
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....e plea of the revenue is accepted, the net effect may be marginal or minimum. 8. In view of the aforesaid reasons, we do not find any merit in the present appeals. The same are dismissed. No costs." Respectfully following the same, we hold that the CIT(A) has rightly deleted the said addition. The ground is dismissed. 13. The second issue for AY 2009-10; AY 2010-11; AY 2011-12 and AY 2012- 13 relates to the disallowance under section 14A. We find that the issue has been decided in favour of the assessee by the ITAT in its own case for AY 2008-09 in ITA 1718/Del/2012. Further the Hon'ble Delhi High Court in the case of Joint Investment (P) Ltd. v. CIT (supra), has held that disallowance under Section 14A, read with Rule 8D, cannot exceed the exempt income earned by the assessee during the financial year. The court ruled that tax-exempt income cannot be "swallowed" by excessive expenditure disallowance. Following the ratio of the aforesaid decision, we hold that the disallowance under section 14A has to be limited only to the extent of the exempt income. The ground is dismissed. 14. The third issue for AY 2009-10; AY 2010-11; AY 2011-12 and AY 2012-13 relates to dis....