TaxTMI 
TaxTMI 
1999 (3) TMI 105
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....s obliged to pay the instalments in foreign currency to the foreign party, this is a fit case to be considered by a Special Bench consisting of three Members of the Tribunal. By their referral order dated 8-8-1995, this Special Bench was constituted by the orders of the President dated 6-3-1997. Before dealing with the several issues involved, we have to record the general facts concerning the assessee-company. 3. The assessee is an industrial company in which the public are substantially interested. It is engaged in the business of manufacture and sale of dry cell batteries. The previous year adopted by the assessee-company is calendar year and, therefore, for the assessment year 1982-83 the previous year ends by 31-12-1981 and for the assessment year 1983-84 the previous year ends by 31-12-1982. The assessee maintains its books of account on mercantile basis. 4. For the assessment year 1982-83, the assessee filed its return of income on 24-6-1982 showing income of Rs. 39,23,310. The return was accompanied by audited statement of profit and loss account and balance sheet. However, the return was revised on 17-1-1985 showing an income of Rs. 38,00,561 on account of revised cl....
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....whom a sum of Rs. 59,149 was said to have been reimbursed for purchase of seeds, fertilizers and pesticides, etc. A perusal of the bills produced before the Assessing Officer showed that no sums were reimbursed to the farmers towards purchase of seeds, fertilizers and pesticides, etc., but they had been paid development charges @ Rs. 1.35 per kg. on the quantity of mochi rice purchased from them. One of the receipts was also extracted in the assessment order for the assessment year 1982-83. The Assessing Officer, therefore, held that the payments claimed to have been made in the garb of development charges were nothing but the consideration for the purchase of mochi rice. The Assessing Officer held that otherwise there seemed to be no reason why the development charges sought to be given to the farmers as a measure of bounty be tagged with the amount of rice purchased from them. The Assessing Officer further found that some of the purchases of mochi rice had been made @ Rs. 2.40 per kg. (Rs. 1.05 towards cost of rice plus Rs. 1.35 towards development charges). He further held that splitting of the purchase bills in two parts was only an attempt to make misuse of the well intended p....
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....rought on record, we find considerable force in the submissions made on behalf of the assessee that it was not only entitled to claim deduction of Rs. 57,792 as revenue expenditure but was also entitled to weighted deduction as contemplated under section 35C of the Act. It may be mentioned that we have gone through the aforesaid affidavit of Shri Bishan Singh who was an Administrative Officer of the assessee as well as the details of the expenditure incurred on cultivation of mochi rice (Pages 42, 43A, 43B & 44 of the paper book) and we are of the view that no adverse inference could be drawn against the assessee in the manner drawn by the Commissioner (Appeals). We find from pages 43A & 44B of the paper book that the ITO himself has allowed the expenditure incurred on paddy purchased from S/Shri Harvindra Singh and Gurbux Singh. He, however, had disallowed the assessee's claim for deduction of development charges for fertilizers, pesticides, irrigation etc. In this view of the matter, we uphold the action of the Commissioner (Appeals) in allowing Rs. 57,792 as business expenditure. We further direct the ITO to accept the assessee's claim for weighted deduction under section 35C of....
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....port promotion of Mr. P.K. Dhawan, Dy. Sales Manager 38,423 10% of tour expenses of Mr. M. Asahara, Deputy Managing Director considered for export. Thus 10% of Rs. 46,186.23 4,619 Advertisement by Radio Rs. 3,95,563 By English News Papers Rs. 1,55,520 5,51,083 (i.e., in Times of India, Indian Express, Hindustan Times and Illustrated Weekly) Gift to foreign visitors &n....
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....nder section 35B was towards foreign tour expenses of Rs. 49,766. The ITO denied the claim. The ld. CIT(A) allowed it in full and the reasons adopted by the CIT(A) to allow the claim in full of assessment year 1981-82 are extracted in para-24 of the Tribunal's order for assessment year 1981-82 and ultimately in para-26 thereof the Tribunal clearly stated that they did not find any justification to interfere with the order of the CIT(A). The particulars of the expenses in this year are already extracted above. Following the earlier order of the Tribunal, the assessee is entitled to 35B deduction on Rs. 38,423 and Rs. 4,619. As regards the advertisement by radio as well as the English newspapers and weekly, we do not think that the assessee is entitled to 35B relief. We fully agree with the reasoning given by the Assessing Officer in para 9.2 of his order. There, he stated the following: "9.2 The major claim is in regard to advertisement expenses of Rs. 5,51,083 incurred on publicity through All India Radio and in the Newspapers and weekly. I fail to understand how this expenditure, which has been incurred for publicity in India, would come within the purview of sub-clause 1 secti....
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....well as the Karnataka High Court decisions but also comprehended by section 35B(1)(b)(ix). Thus, we hold that the assessee's claim under section 35B is to be allowed on the following: (1) Rs. 38,423 (2) Rs. 4,619 (3) Rs. 11,343 the particulars of which are all given in the table given above. On these amounts, the assessee is also entitled to l/3rd as weighted deduction. Thus, this ground is partly allowed for the assessment year 1982-83. The claim under section 35B for assessment year 1983-84 is dismissed as not pressed. 9.1 Incidentally, we may state here that against the allowance of foreign tour expenses and weighted deduction under section 35B granted by the Tribunal for the assessment year 1981-82, the department tiled a reference before the Tribunal in R.A. No. 30/Ahd./88. The second question in that reference was the following: "Whether, in law and on facts, the assessee is entitled to allowance of foreign tour expenses and weighted deduction under section 35B of the Income-tax Act, 1961, on such foreign tour expenses?" This question was not referred by the Tribunal on the ground that it did not constitute a question of law, but a decision was given only....
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.... ----------- The Assessing Officer held that the first two items directly come within the meaning of Explanation 2 inserted in section 37(2A). As regards the last item of expenditure of Rs. 9,607, he states that no details have been furnished and as such deduction of this amount is also not being allowed. Therefore, addition of Rs. 73,030 (Rs. 56,966 + Rs. 6,457 + Rs. 9,607) is being made and deduction as admissible under section 37(2A) would be separately allowed. Further, in the details given of misc. expenses, it is seen that a sum of Rs. 7,579 has been incurred in providing tea, coffee, etc., to the visitors and Rs. 13,038 (Rs. 11,343 + 1,695) has been incurred for giving gifts to foreign visitors and business associates. The Assessing Officer held that these are also in the nature of entertainment expenditure because the gifts would be covered by the words 'provision of hospitality of every kind' used in Explanation 2 to section 37(2A). Against this disallowance of Rs. 9,607 out of total of Rs. 96,992 under the head "Communication expenses account" and the disallowance of Rs. 13,038 from out of mi....
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....p; 15,065.32 3. Other expenses 9,607.82 ----------- Total &nbs....
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....i)Tea, coffee, cold drinks, Hotel exp. incurred for employees. Rs. 53,353 Purporting to follow his assessment order for the assessment year 1982-83 on the above expenses, the Assessing Officer held that the above expenses clearly fall in the nature of entertainment expenses within the meaning of Explanation 2 to section 37(2A). He also held that from the details furnished of the misc. expenses mentioned above, a sum of Rs. 18,592 was spent on gifts to visitors and Diwali gifts to various persons. Further, he found that a sum of Rs. 4,186 was spent on providing tea, coffee, cold drinks and hotel expenses in respect of wholesalers, stockists and other visitors and an amount of Rs. 8,895 on providing tea, coffee, etc., to employees. All these items of expenditure were also held to be in the nature of entertainment expenditure as was done by him for earlier years also. Against these two disallowances, the assessee w....
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....ng year 1982 (more than Rs. 1,000)." Therefore, it was his contention that expenditure less than Rs. 1,000 was allowed by the Assessing Officer for assessment year 1983-84. The next argument advanced by the ld. representative for the assessee was that whatever that had been spent towards conference expenses should have been allowed in view of the following case law: (1) CIT v. Escapes (I) (P.) Ltd. [1991] 191 ITR 674 (Cal.) (2) Kirloskar Oil Engines Ltd.'s case (3) CIT v. Indo Asian Switch-Gears (P.) Ltd. [1996] 222 ITR 772/92 Taxman 86 (Punj. & Har.) (4) CIT v. Andhra Sugars Ltd. [1997] 225 ITR 118/93 Taxman 676 (AP) (5) CIT v. Expo Machinery Ltd. [1991] 190 ITR 576/59 Taxman 182 (Delhi). The expenditure incurred for the visitors in order to serve them with tea, etc., is an allowable expenditure, argued the ld. representative for the assessee, in view of the following citations: 1. CIT v. Gujarat State Finance Corpn. [1992] 196 ITR 822 (Guj.) 2. Addl. First ITO v. Uttam Roadways (P.) Ltd. [IT Appeal No. 4936 (Bom.) of 1987 (page 205 of paper book)] 3. ITO v. Hindustan Petroleum Corpn. Ltd. [1986] 16 ITD 574 (Bom.). 13. Before going into the case la....
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....any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or usage of trade. This is not kept in view by the Assessing Officer. The ld. representative for the assessee brought to our notice that in assessment year 1983-84 the following were held to be entertainment expenditure by the Assessing Officer: (i) Expenses for sales conference and sales staff (Total expenditure) Rs. 40,725 (ii) Tea, coffee, cold drinks, Hotel exp. incurred for employees. Rs. 24,949 (iii) Tea, coffee, cold drinks, Hotel exp. incurred for employees. ....
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....ges and whether or not such provision is made by reason of any express or implied contract or customs or usage of trade. In the case before them, the provision of lunch and dinner was neither contractual nor customary. The main purpose was the conference and in order to retain the presence of the dealers throughout the conference, the assessee had perforce to provide lunch and dinner. Explanation would not cover such a situation. The Tribunal further held that the retrospective operation of the Explanation 2 to section 37(2A) could not make that expenditure an entertainment expenditure disregarding the main nature of that expenditure. 14.1 The next decision cited was the decision of the Calcutta High Court in Escaps (I)(P.) Ltd.'s case where the Calcutta High Court held while considering the impugned addition before them that where hospitality is undertaken solely with the object of promoting the business, the expenditure is not disqualified because the nature of the activity necessarily involves some other result, e.g., entertainment of hospitality. Therefore, the Calcutta High Court held that it is not in the nature of entertainment expenditure within the meaning of section 37....
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....ployees in the office, factory or other places of their work as well as to customers, such expenditure did not fall within the enlarged meaning of "entertainment expenditure" in Explanation 2 to section 37(2A) and, therefore, the expenditure was deductible. 14.5 The next decision cited was of the Delhi High Court in Expo Machinery Ltd.'s case. In that case also, Explanation 2 to section 37(2A) was considered by the Delhi High Court, especially to a situation where the employees of the company were sent along with the customers and dealers to a hotel. In such a case, the question was whether the food was given to the employees at their work place, which was allocable under Explanation 2 to section 37(2A). In the head note of the decision, the following is held: "Where, in the discharge of their official duties, the employees of a company have their food along with the company's customers in a hotel, they take food while at work because it is their work and duty to entertain the customers of the company. Therefore, any expenditure incurred on the food and beverages of the employees when they are discharging their duty to entertain the customers of the company is to be excluded ....
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...., an admissible deduction. 14.8 The Tribunal decision cited in this regard was the Bombay D-Bench decision in ITA No. 4936/Bom./87, a copy of which is provided at pages 205 to 207 of the second paper book. The assessment year involved in that case was 1985-86. The disallowance came for consideration was Rs. 32,330. The Tribunal, following the Gujarat High Court decision in CIT v. Patel Bros. & Co. Ltd. [1977] 106 ITR 424 and the Bombay High Court decision in the case of CIT v. Shah Nanji Nagsi [1979] 116 ITR 292, confirmed the decision of CIT(A) to treat the expenses as business expenditure. 14.9 Another decision cited was again the Bombay Tribunal's decision in Hindustan Petroleum Corpn. Ltd.'s case (a copy of which is furnished at page 209 of the paper book). The total expenditure considered was Rs. 1,57,393. Out of it, Rs. 50,000 had been estimated by the Assessing Officer as expenditure in the nature of hospitality and entertainment and the balance under dispute was Rs. 1,07,393. This was ultimately allowed by the Tribunal which held that in a company of this magnitude with a turnover of about Rs. 800 crores and disclosed income of Rs. 20 crores it was unrealistic to expe....
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....The ld. CIT(A), after considering the submissions, agreed with the alternate plea of the assessee and he directed the Assessing Officer to re-calculate the disallowance undersection 40A(5) by taking the gratuity in excess of the exempted portion under section 10(10) only as remuneration to the employee. He also found that the exempted portion would not form part of the remuneration. 17. In the arguments advanced before us, the ld. representative for the assessee contends that Shri Gulati worked as an employee in the assessee company only for a part of the year and he retired on 7-11-1981. On his resignation, he was paid gratuity of Rs. 23,002. It was contended that gratuity paid to ex-employee was outside the scope of section 40A(5) and as such the same should not be clubbed for the purpose of applying the ceiling of (sic) as gratuity is one time payment and it cannot be equated with salary for the purpose of section 40A(5). Reliance was placed for this proposition on the Bombay High Court judgment in CIT v. Colgate Palmolive (I) (P.) Ltd. [1994] 74 Taxman 68. In view of the said judgment, it was submitted that no part of the gratuity amount could be included as remuneration for....
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...." for the purposes of section 40A(5) under the basic scheme of section 40A(5) any one-time payment or a payment which is not relatable to any period covered by the previous year, cannot be taken into account for the computation of the ceiling prescribed under that section. The ceiling is to be calculated with reference to the period covered by the previous year. Including such one-time payment as forming a part of section 40A(5) would render it impossible to calculate the ceiling prescribed in that section in connection with that payment. Including such a payment would make the operation of the section impossible. 18.1 The Calcutta High Court in Hindustan Motors Ltd.'s case held that it is possible for a person to be an employee for a part of the relevant previous year, i.e., upto the date of his retirement. After that period, when such an employee retires, he has to be treated as a former employee and payments made to him as a former employee again ought to be deductible within the permissible limit. Any other construction of the said section under which such an employee is treated only as an "employee" or as a "former employee" in the year in question would render one part of ....
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....eed case between both the parties that the plant and machinery from the foreign company were to be supplied and the price was agreed to be paid in foreign exchange (Yen in this case). ICICI undertook to pay the foreign exchange towards the purchase of plant and machinery on behalf of the assessee-company in view of the terms of Agreement it had entered into with the assessee-company. The price towards purchase of plant and machinery was to be repaid to the supplier on instalment basis. The Agreement which the assessee had entered into with ICICI is dated 16-12-1980. The essential terms of the Agreement which are germane for our purpose are the following. ICICI has agreed to lend and advance to M/s. Lakhanpal National Ltd., (hereinafter referred to as "company") has agreed to borrow from ICICI a foreign currency loan of Japanese Yen 17,166,100 which is equivalent to U.S. $76,200 which is referred to as "Dollar Loan" and also a foreign currency loan of Japanese Yen of 96,33,000 or its equivalent in other foreign currencies to an aggregate extent of DM 76,200 ("DM Loan" for short). The Dollar Loan and the DM Loan are collectively referred to as "the loan" in the body of the agreement.....
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.... each payment US$ US $ --------------------------------------------------------------------------------- 1. On April 29, 1984 5,867 76,200 2. On October 29, 1984 5,867 70,333 3. On April 29, 1985 &n....
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....EDULE 'B' --------------------------------------------------------------------------------- Date Payment Payment of Principal amount due principal outstanding after each payment DM  ....
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....sp; 5,867 17,570 12. On October 29, 1989 5,867 11,663 13. On April 29, 1990 5,796 5,796 --------------------------------------------------------------------------------- Provided that- (I) The abovementioned Amortization Schedules have been drawn up proportionately on the basis of corresponding obligation of ICICI to repay the amounts representing the said loan under the Euro Currency Agreement. Any differences on account of exchange fluctuations in the rates of foreign currencies involved shall be borne by or be given credit to the company". Proviso (III) at page 221 of paper book is as follows: "(III) If for any reason any excess payments are made over and above the said loan in any manner what....
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....e shall be borne by or be given credit to the Borrower." 20. A survey of these provisions makes the following matters clear: (1) The foreign loan with which the machineries are to be purchased should be met by the ICICI on behalf of the company. (2) The foreign loan thus given by ICICI has to be repaid with interest etc. mentioned in the Agreement on an amortization schedule as mentioned in the Agreement. (3) The Amortization Schedule may be revised on mutual agreement between the company and ICICI, in which case the revised Amortization Schedule would prevail over the Amortization Schedule mentioned in the first Agreement. (4) The incremental difference while repaying the foreign loan provided by ICICI to the assessee-company according to the instalments agreed to under the Amortization Schedule shall be borne by the company. In fact, the first Agreement was revved by three more Agreements. First it was revised on 10-3-1988 and the revised Agreement was duly signed by both the ICICI as well as on behalf of the company. Under the second Agreement, the foreign loan agreed to in the first Agreement at "US $ 6,04,800" mentioned in sub-clause (1) was to be substituted....
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....sp; 48,800.00 364,200.00 February 15, 1987 53,000.00 315,400.00 August 15, 1987 57,500.00 262,400.00 February 15,1988 62,600.00 204,900.00 August 15, 1988 68,300.00 142,300.00 February 15,1989 74,000.00 74,000.00 ---------------------------------------------------------------- Similarly, the Amortization Schedule is revised as far as repayment of DM LOAN is concerned which is provided at page 414 of IVth paper book as under: SCHEDULE III(B)....
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.... 7,600.00 13. " April 29, 1990 7,600.00 - ---------------------------------------------------------------- A consolidated statement showing loan taken from ICICI for purchase of machinery purported to be for the accounting year 1981 relevant to assessment year 1982-83 is furnished at page 415 of the IVth paper book filed by the assessee, which is as follows: As per Annexure "A" As already stated, the invoice under which the Japanese company had supplied the various items of plant and machinery are all furnished at page 416 in order to show the purchase of plant and machinery from the foreign company. The first among the invoices is dated 5-12-1980 and the plant and machinery shipped thereunder reached Bombay on 22-12-1980. It is stated that under this invoice plant and machineries including accessories, attachments and spare for dry batteries were shipped. Their value was shown at l,75,80,000 Yen. The plant and machinery are said to be of three sets. Under the invoice dated 4-2-1981, which shipment reached Bombay on 13-2-1981, capital ....
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....bsp; Credit & Investment with Industrial Agreement with Corporation of Credit & Investment Industrial Credit India Ltd. Corporation of & Investment India Ltd Corporation &....
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....; Y 186230000 ----------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------- Invoice No. of Invoice value in M.E.T. Co. Ltd, Japanese Y Japan ----------------------------------------------------- (1) SC 21112-2 Y 146550000 (2) SC21112-2S Y 39680000 Total Y 186230000 ----------------------------------------------------- preceding assessment years. However, this amount was found by the Assessing Officer to be in order and, according to him, the depreciation allowable worked out to Rs. 91,278 as against Rs. 86,599 claimed in the return. 21. Besides the above, the assessee had sought to capitalis....
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..... 1980-81 34,353 A.Y. 1981-82 74,148 Rs. 1,08,501 ------------ --------------- Rs. 1,61,30,090 25% thereof ....
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....Thus, it was argued for the company that the amount paid as instalments for repayment of loan has to be in terms of the loan arrangement and as such the amount repaid in view of the fluctuation in foreign exchange dates back to the date of Agreement which is prior to the date of installation of plant and machinery. It was also contended that the Assessing Officer had already accepted the difference in exchange fluctuation is a capital expenditure and allowed depreciation thereon. It was submitted for the company that the repayment on account of exchange rate fluctuation was also for the acquisition of capital asset. It was further submitted that the company incurred the liability for exchange rate fluctuation when it started drawing upon the loan account to make the purchase of machinery irrespective of such liability being quantified and disbursed later, it was further submitted that such increased liability was brought into the books of the company when the liability crystallised. However, on that score, it cannot be said that the liability had not been incurred or was incurred after the purchase or installation of machinery. The learned CIT(A) has examined the claim of the compa....
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....assessee for the purpose of investment allowance is to be ascertained. If there were no restrictions or limitations in the year m which the investment allowance could be allowed, then the claim of the company for its actual cost should be allowed to keep open in view of the totality of payments in subsequent years. However, he felt that the cost has to be ascertained in the year in which the investment allowance is to be actually allowed and not any subsequent period. Ultimately, he felt that there was no justification in interfering with the decision of the Assessing Officer. Therefore, he held as follows: "I would uphold that since the actual cost for the year in question was only the amount which was actually ascertained and paid on account of rate fluctuation, no other amounts can be taken note of for the purpose of investment allowance even if in commercial terms such amount could be considered as the actual cost to the appellant." 22. Now, let us survey the facts relating to assessment year 1983-84 in relation to grant of investment allowance. In para-13 of his order, the Assessing Officer held while making the assessment that the assessee added back an amount of Rs. 1,....
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....bsp; Rs. 53,482 1984 Rs. 1,79,602 1985 Rs. 2,93,161 1986 Rs. 6,17,904 The company took the ground that the Assessing Officer had also not allowed investment allowance of Rs. 11,48,813 being additional cost of plant and machinery on account of loss arising due to difference in foreign exchange on repayment of instalments of foreign loan. The CIT(A) dealt with this topic in paras 13 and 13.1 of his order. The claim of Rs. 1,14,813 made in the statement of facts filed before him was subsequently substituted with a higher claim of Rs. 42,61,758 said to be arising pit of loss on account of difference in foreign exchange on repayment of loans obtained for purchase of plant and machinery. The same arguments, which were advanced for the immediately prece....
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....nbsp; 1988-89 Rs. 14,71,002 7. 1988-89 1989-90 Rs. 16,41,944 8. 1989-90 1990-91 Rs. 1,76,040 ------------- Total Rs. 44,37,798 -------------------------------------------------------------- ....
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....ring at page-8 of the paper book. In view of the stipulation that the assessee shall repay the borrowed fund in the currency in which it had received, the liability to pay additional amount on account of fluctuation in the rate of exchange relates back to the date of borrowal. The liability to pay the borrowed funds in foreign currency arose on receipt of the loan amount and hence the assessee incurred additional liability arising cm account of fluctuation in the rate of exchange on the date of receipt of loan. In the circumstances, the additional liability of Rs. 44,37,798 accrued to the assessee in the year 1981, the year of receipt of foreign currency loan, relevant to assessment year 1982-83. It is, no doubt, true that the accrued liability was Rs. 44,37,798. Its quantification was made in Subsequent years. The process of quantification of liability is independent of accrual of liability as the assessee maintains its account on accrual basis. The additional liability of Rs. 44,37,798 accrued on the date of receipt of the loan under the agreement to repay the same in foreign currency in assessment year 1982-83 itself though the same is quantified on repayment of loan instalments....
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.... with the actual cost of the machinery or plant to the assessee. The actual cost of the machinery or plant should be the cost on the relevant date. Therefore, on the relevant date, when the contract was entered into it was entered into with the direction to pay back in dollars and whatever was necessary to pay back must be treated as actual cost to the assessee." We have no quarrel with the proposition but in order to find out the actual cost to the assessee, whatever was necessary to pay back in dollars was to be ascertained. In fact, it is this process we have to undertake in this case and, therefore, the ratio of the Calcutta High Court decision cannot be of much use to the company. 27. The next decision cited was CIT v. Arvind Mills Ltd [1992] 193 ITR 255/7 Taxman 192 (SC). The portion relied upon by the assessee in the said judgment is a portion appearing at page 261 of the said judgment as under: "Reverting now to the first of the two questions posed earlier in the background of the above principles and amendments, the position appears to be that, on strict accountancy principles, the increase or decrease in liability towards the actual cost of an asset arising from ....
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....cal difficulties confronted in the first method can be obviated. Our endeavour in this judgment would be to follow the alternative method suggested by the Hon'ble Supreme Court and give effect to it fully. Therefore, the portion of the Supreme Court judgment in Arvind Mills case relied on by the company does not reflect the full truth but only half truth. It does not advance the case of the assessee. 28. Another judgment relied upon by the assessee was Padamjee Pulp & Paper Mills Ltd. v. CIT [1994] 210 ITR 97 (Bom.). A portion of the Judgment obtaining at page 101, which is relied upon by the company in its written arguments is extracted as under: "In the present case, the assessee had acquired a capital asset from a country outside India for the purpose of its business by making payment in foreign currency. For this specific purpose, it borrowed moneys in foreign currency from the Industrial Finance Corporation of India and the liability in respect thereof was outstanding at the end of the relevant previous year. This liability had increased on account of change in the rate of exchange. Thus, section 43A fully applies and the additional liability so created had to be added t....
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....ssee itself relied upon a portion of the judgment reported at page 450 in that decision which is as follows: "It is common knowledge that the rate of exchange fluctuates every day depending on the conditions prevailing in the International Monetary Market but such fluctuation in conversion cannot be taken into account unless, at the time of actual payment of the liability in foreign currency, there has been, in fact, an additional liability. It is, therefore, necessary to ascertain in every case whether the assessee incurred any additional liability on the date of repayment or not. Only if any additional liability is incurred on the date of repayment due to change in the rate of conversion, such liability will be added to the cost of the capital asset and benefit of depreciation and investment allowance will be allowed on such added cost." In our opinion, this is exactly on the point which we are discussing and we intend to follow the same and we also hold that the ratio of this decision is quite in accord with the Full Bench decision of the Hon'ble Supreme Court in Arvind Mills Ltd.'s case. In fact, we are of the view that the ratio of this decision goes against the contenti....
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....er section 43(1). We also agree with the conclusion that augmenting of actual cost by the incremental cost occasioned by fluctuations in the rate of foreign exchange contemplated by section 43A(1) is also applicable to section 32A which also talks of actual cost even for the purpose of computing investment allowance under section 32A. It was further contended that section 32A is a provision giving incentive to the business people and such provision should liberally construed and in support of that proposition the following decisions were cited: 1. Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) 2. CIT v. Strawboard Mfg. Co. Ltd. [1989] 177 ITR 431/44 Taxman 189 (SC) 3. CIT v. Satellite Engg. Ltd. [1978] 113 ITR 208 (Guj.) 4. CIT v. Trinity Hospital [1997] 225 ITR 178/[1996] 87 Taxman 127 (Raj.) 5. Warner Hindustan Ltd. v. ITO [1982] 134 ITR 158 (AP) 6. Gokuldas Exports v. CIT [1993] 200 ITR 401/67 Taxman 219 (Kar.) 31. Without prejudice to the above contention that investment allowance etc. should be allowed in the assessment year 1982-83, it was contended by the assessee as part of its written arguments that investment allowance etc. may be allowed in respecti....
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.... is not allowable in respect of plant & machinery for which the deduction by way of development rebate is allowable under section 33. Under sub-section (2) of section 32A together with clause (iii) which are relevant for our purpose, are extracted as under: "(2) The . . . machinery or plant referred to in sub-section (1) shall be the following, namely:- (iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule". There are some important pre-conditions prescribed before grant of investment allowance under section 32A. They are set out in section 32A(4) which, inter alia, states that investment allowance shall be allowed only if an amount equal to 75% of the investment allowance to be actually allowed is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Investment Allowance Reserve Account") to be utilised - (a) for the purposes of acquiring, before the expiry of a period of ten years next following the p....
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....bsp; Rs. 40,38,521 (6) Excess Investment allowance reserve created (5-4) Rs. 10,14,129 (7) Investment allowance on exchange rate difference capitalised from assessment year 1983-84 to assessment year 1990-91. (a) Amount on fluctuation of exchange rate difference from assessment year 1983- 84 to assessment year 1990-91 Rs. 44,37,798 (b) Investment Allowances 92.6% of Rs. 44,37,798 Rs. 11,09,450 (8) Investment allowance Reserve require @ ....
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...., there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital na....
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....tes as per the amortization schedule. It is, no doubt, argued on behalf of the revenue that section 43A should be allowed on the actual cost determined under section 43(1) and that too only in the assessment year in which the plant & machinery was purchased or it was set up or they were put to use for the first time. In view of this position, it cannot be allowed that the incremental foreign exchange liability should be taken into consideration and added to the actual cost each year till the assessment year in which the last instalment falls and then only the actual cost is to be determined. This argument is not tenable under law. Our reasoning for not accepting the above proposition can better be illustrated by the following hypothetical example. Suppose, plant & machinery was acquired from a foreign supplier and a foreign country on 1-1-1981 for 1 crore dollars. Since the company, which is the purchaser, had no foreign currency with it, it approached ICICI to supply the foreign currency. Then, the ICICI and the company entered into an agreement in which one of the stipulations was that the total of the foreign exchange cost of the plant & machinery should be paid in 10 equal year....
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....p; Rs. 15 lakhs 1-1-83 10 lakhs Rs. 10 lakhs 1-1-84 10 lakhs Rs. 8 lakhs 1-1-85 10 lakhs Rs. 7 lakhs 1-1-86 10 lakhs Rs. 20 lakhs 1-1-88 10 lakhs Rs. 11 lakhs 1-1-89 10 lakhs Rs. 14 lakhs 1-1....
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....total amount should be taken to be the actual cost of the asset or capital asset (plant & machinery). According to the above illustration, which represents the practical working of section 43A, it determines the actual cost, namely in assessment year 1992-93, as Rs. 1,10,00,000 when, in fact, it was purchased at 1 crore $ on 1-1-81. Therefore, in our opinion, the incremental foreign exchange liability should be added to the actual cost every year till the last payment of instalment is made. It is, no doubt, true that investment allowance is to be allowed at 25% of the plant & machinery to the assessee either in the year of purchase or in the year of setting up of plant & machinery. There may be cases where the 'actual cost' may not be found out exactly either on the date of acquisition of the plant & machinery or on the date of its setting up or putting it to use. However, that does not debar the revenue to grant investment allowance on the basis of section 43A, though such investment allowance is only tentative and is liable to be adjusted finally in the last of the assessment years in which the last foreign currency instalment has to be paid at the ruling official rate of exchang....
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....uch course appears to be against the spirit of section 32A. The ld. Departmental Representative, on the other, opposed the claim of the assessee and contended that at the most the incremental liability due to foreign exchange fluctuation under section 43A is allowable to the assessee only for assessment year 1982-83 and on the basis of the incremental liability investment allowance can be allowed. However, the whole of Rs. 44,37,798 representing the total of the incremental liability for assessment years 1982-83 to 1989-90 cannot be allowed taking as the actual cost of plant & machinery even in assessment year 1982-83 itself. Assessment for each of assessment years is distinct and separate under the Income-tax Act. For ascertaining or while determining the profits & loss for the assessment year 1982-83, the cumulative loss due to incremental liability in foreign exchange suffered by the assessee for a number of subsequent assessment years cannot be allowed to be aggregated and adjusted while determining the tax liability for the assessment year 1982-83. While considering the state of affairs of the company for the accounting year 1981 (assessment year 1982-83), there is scope only ....
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....allowing the investment allowance"? Their Lordships of the Hon'ble Calcutta High Court was considering the facts relevant to assessment year 1978-79 only and in that there was a incremental foreign exchange liability of Rs. 4,04,741. The question was whether investment allowance was allowable only on that figure. The Tribunal held in favour of the assessee and the same was confirmed by the Hon'ble Calcutta High Court. If the correct law was that the incremental liability of 1978-79 should not be considered for investment allowance separately but the said incremental liability should be taken to form part of actual cost as on the date of purchase of plant & machinery as on the date of purchase itself and if the incremental liability should not be separately considered for investment allowance, the Hon'ble High Court would have stated so. However, they have granted investment allowance on the incremental liability which arose for one assessment year. This alternative argument of the company was also supported by the decision of the Madras Bench of the Tribunal in Southern Asbestos Cement Ltd.'s case. In that case, the Tribunal was considering the incremental liability in foreign e....
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.... practical way must be found to ensure that the benefit conferred by the enactment reaches the assessee. The most practical solution would allow the assessee the benefit of investment allowance in respect of the incremental cost in the year in which the incremental cost arises provided, of course, that the assessee created a suitable reserve for this purpose. The appeal was allowed." So also, the Ahmedabad Bench decision rendered in the case of Maneklal Harilal Spg. & Mfg. Co. Ltd., a copy of which is provided at page 232 of paper book, also supports the alternative contention. Unfortunately, at the fag end of the arguments, our attention was drawn to the latest Gujarat High Court decision in CIT v. Windsor Foods Ltd. [1998] 99 Taxman 355 (Guj.). In that case, it is stated that the investment allowance is only a one-time allowance. It should be allowed cither on the date when the plant & machinery was acquired or on the date when it was first put to use even if it is put to use in the immediately succeeding previous year. When once the investment allowance is determined with reference to the above dates, it is unalterable and it is not affected by the incremental foreign exchang....
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....adras Fertilizers Ltd v. CIT [1994] 209 ITR 174/[1993| 71 Taxman 476 (Mad.), the following is what is held as part or the headnote: "(ix) that the rate relevant for the application of section 43A would be the rate at the beginning of the accounting year, and not at the end of the accounting year or any other rate during the interim period. The income-tax authorities did not consider all these aspects before applying the provisions of section 43A of the Act. Therefore, considering all these aspects and in the absence of particulars, the Tribunal gave certain guidelines for the purpose of applying section 43A. The guidelines were reasonable on the facts and justified in law". Thus, the Madras High Court was of the considered opinion that the first date of the accounting year relevant to the assessment year should be taken to be the date on which the foreign exchange fluctuation is to be ascertained. The concept of 'actual cost' is relevant to determine not only investment allowance but also additional depreciation, development rebate, etc. However, the Gujarat High Court in Windsor Foods Ltd.'s case took the view that section 32A is a one-time allowance and it is not an allowan....
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....of the investment allowance which was already worked out in the relevant previous year can ever arise by virtue of any subsequent fluctuation in the exchange which brings about a change in the liability that existed immediately before the date on which the change in rate of exchange takes effect. The Tribunal was, therefore, clearly in error in holding that the assessee was entitled to deduction of investment allowance on the amount of Rs. 80,414 being the additional liability that arose due to fluctuation in foreign exchange rate in respect of the payments of outstanding instalments of machinery. Therefore, given its full play, the provision of section 43A(1), notwithstanding the specific provision regarding development rebate made in sub-section (2) will not have any impact on the full amount of the investment allowance already quantified on the basis of the actual cost in the relevant previous year which was much prior to the year in which the additional liability arose due to fluctuation in the exchange rate.- CIT v. Widia (India) Ltd. [1991] 97 CTR (Kar.) 218 : [1992] 193 ITR 475 (Kar.) : TC 29R. 483 dissented from : CIT v, Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar.) :....
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....to allow the claims of depreciation, additional depreciation and extra shift allowance since the claims can be justified on the ratios revealed by the plethora of case law filed on behalf of the company before, which are already listed above. 36. For the assessment year 1982-83, on a sum of Rs. 37,27,823, additional depreciation under section 32(i)(iia) was claimed on the ground that the plant & machinery came into contact with corrosive chemicals. The Assessing Officer denied the claim on the ground that Ammonium Chloride and Zinc Chloride, which chemicals were only salts, could not have corrosive effect especially when these machineries have been specifically designed as anti-corrosive and chemically resistant construction. Thus, additional depreciation claimed on the machineries worth Rs. 40,03,475 for the assessment year 1982-83 was denied. Further, the Assessing Officer stated that the following three machineries, which were also among the machineries claimed to be coming into contact with corrosive chemicals, were imported from Matsuishita Electric Trading Co. Ltd., Osaka, Japan: (a) Bobbin Tamping Equipment for UM-1 &n....
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....the total value of such machineries. We find that the direction given by the CIT(A) adequately meets the ends of justice and no interference is called for from us. 37. Now, let us come to ground No. 7 for assessment year 1982-83. This relates to not allowing investment allowance, additional depreciation and extra shift allowance on Rs. 83,640 out of total foreign tour expenses treated as capital expenditure for purchase of plant & machinery to the new unit. The statement of the capitalised foreign tour expenses is enclosed with the grounds of appeal and marked as Annexure 'E', which is extracted below: ----------------------------------------------------------------------------------- Accounting Asst. year Amount of Reasons of year foreign capitalisation. &....
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....sp; for UM - 3 cell manufacturing. 1978 1979-80 24,594 For increase in paid capital. 1979 1980-81 10,000 For import of plant & ....
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....8 had already been allowed as revenue expenditure by the CIT(A) and, therefore, the amount which requires consideration is Rs. 1,08,501 (for 1980-81: Rs. 34,353 and for 1981-82: Rs. 74,148). These two amounts were allowed to be capitalised towards the cost of the machinery acquired and installed during the year and depreciation, investment allowance, etc., is being allowed in accordance with law. Against the short allowance and disallowance, the assessee came up in appeal before the CIT(A). This ground was raised before him by the company's letter date 16-4-1988. After going through the assessment order dealing with the subject, the CIT(A) was unable to dislodge the finding of the Assessing Officer and hence rejected the additional ground raised by the assessee before him. 38. Now, the assessee's contention is that for the assessment year 1980-81 in the case of this very company the Ahmedabad Tribunal in ITA No. 194/ Ahd. 90 allowed a similar claim. In order to prove its contention, the assessee filed the order of the Tribunal at pages 311 to 320 of the paper book. After persuing the order, we hold that what portion of foreign tour expenses should be capitalised depends upon ....
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....n connection with filing up of income-tax returns, statement of advance-tax payable etc. and statement of legal & professional matters which are explained in Annexure 'B' annexed to the grounds of appeal, which is as under: 1. Fees paid to R.M. Chokshi & Co., Chartered Accountants, Bombay, with riling of income-tax return, statement of advance-tax payable etc. as per separate statement attached: Rs. 14,600 2. Fees paid to J.B. Dadachandji & Co., Advocate, Supreme Court, New Delhi, following matters: (a) For conference & discussion for tax matter Rs. 2,681 (b) Fees for appearing in court for writ petition Rs. 1,500 (c) Fees for conference, discussion and appearing in court ....
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....ance was placed upon the Delhi Tribunal decision in K.V. Bombay v. ITO [IT Appeal No. 2529 (Bom.) of 1978] where it was held that consultation prior to the filing of return was not covered under section 80VV of the Act. However, the CIT(A) held that the payment of legal advice for preparation of the return is, in any case, ultimately in respect of proceedings before the income-tax authority. Similar is the view with regard to legal advice for preparation of sur-tax return and the fees paid for that purpose. The ld. representative for the assessee relied on the folllowing decisions: 43.1 The first decision is in Saurashtra Cement & Chemical Industries Ltd. v. CIT [1995] 80 Taxman 61. In that case, the Gujarat High Court held, examining the scope of section 80VV, that the expenses which are allowable under section 80VV have nexus with any proceedings relating to the determination of any liability under the Income-tax Act by way of tax, penalty or interest which are before the income-tax authorities or Tribunal or any Court. 43.2 The next decision relied upon was of Delhi Tribunal reported in Modipon Ltd. v. Dy. CIT [1995] 81 Taxman 27 (Mag.). In that case also, it was contended....
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....tising Ltd. [1989] 44 Taxman 363 (Ahd.) (Mag.). The Tribunal took the view in that case that if the payment was primarily for obtaining secretarial assistance in taxation, accounting and banking matters and not for representation before the income-tax authorities, it would not be hit by that section. 43.6 Another decision cited was the Bombay Bench-C of the Tribunal rendered in K.V. Bombay's case, a copy of which is furnished at page 370 of the paper book. In that case, the matter was argued threadbare. One of the questions which came up before the Tribunal for decision was not whether the proceedings before the Income-tax authorities started with the filing of the return but whether it could be said that they started before the filing of the return. In that case, it was held that it was clear that the filing of an estimate of advance-tax did not give rise to any proceedings before any income-tax authority. Advising in the matter of closing of the books of account of the assessee, preparation of the final accounts of the assessee, etc., with the object of preparing a proper return of income could be considered as work relating to the proceedings before the income-tax authority, ....
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....to Rs. 5,000, the expenditure, even if it is covered by section 80VV, can be allowed. This matter is to be looked into by the Assessing Officer, and if not allowed by the Assessing Officer earlier, it should be allowed, in which case, there should not be any disallowance for Rs. 4,500. 44.2 The third item is said to have been incurred for discussion regarding the return of income and preparing the same. This expenditure was incurred prior to the filing of the income-tax return and, therefore, is not covered by section 80VV. 44.3 The 4th item is said to be towards payment of professional fees for conference for getting written opinion from Shri V.H. Patil regarding payment of bonus to various categories of employees. It is not an expenditure incurred in income-tax proceedings and, therefore, it does not come within section 80VV. 44.4 The 5th item is said to be paid for discussion and preparation of return of income for assessment year 1982-83. Since the proceedings did not being and it was only for preparation, this item is also not covered by section 80VV. 44.5 The item No. 6 is an expenditure incurred for discussion and preparation of surtax return for assessment year ....