TaxTMI 
TaxTMI 
1999 (3) TMI 105
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.... 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 claims of depreciation, in....
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.... 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 provisions of section 35C and....
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....able 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 the Act, and modify the assessmen....
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....r under 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 sect....
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.... 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 on consideration of ....
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....t the nature of expenses amounting to Rs. 9,607, the same cannot be allowed and thus he upheld the disallowance made by the Assessing Officer. However, as regards the inclusion of Rs. 13,038, the ld. CIT(A), keeping in view the Bombay High Court decision in Kirloskar Oil Engines Ltd.'s case, held the gifts to the foreign collaborators would not amount to entertainment as envisaged under section 37(2A). Therefore, he directed the Assessing Officer to delete the addition of Rs. 13,038. Against the confirmed disallowance of Rs. 9,607, ground No. 3 for assessment year 1982-83 is preferred. 11. Details of communication expenses, among which the amount of Rs. 9,607 is forming part, are all given in Annexure 'C' to the grounds of appeal, which is as follows: Details of communication expenses for the accounting year 1981 -------------------------------------------------------------------------- Assessment year 1982-83 Sr.No. Particulars Amount (Rs.) 1. Sales Conference & meeting expenses. 65,863.22 2. Tea, coffee, cold drinks and hotel expenses incurred by wholesalers. (a) For wholesalers, stockists and other visitors. 6,456.56 (b) For employees 15,065.32 3. Other expenses 9,607.8....
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....T(A). Before the CIT(A), in the appeal for the assessment year 1983-84, it was contended that the disallowance of a sum of Rs. 40,725 spent by the assessee for sales conference and sales staff and holding the same as in the nature of entertainment expenses, was not correct. Further, the disallowance of Rs. 53,353, being the expenditure incurred for tea, coffee, etc., for the assessee's employees, should not also have been treated as entertainment expenditure. After considering the submissions made, the CIT(A) held that in view of the Explanation 2 to section 37(2A), expenses on tea, coffee, etc., to employees outside the place of work would get covered under the provisions of section 37(2A) and, therefore, he felt no justification to interfere with the decision of the Assessing Officer in disallowing both the sums of Rs. 40,725 and Rs. 53,353 mentioned above. However, he directed the Assessing Officer to allow the basic deduction of Rs. 5,000 under section 37(2A). Regarding the disallowance of Rs. 18,592 out of the total misc. expenses of Rs. 31,672, the ld. CIT(A) held that the Assessing Officer himself admitted in para No. 11.2 of his order that the sum of Rs. 18,592 was spent on....
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....he primary facts relating to some items of expenditure disallowed are important to bear in mind. The disallowed expenditure for the assessment year 1982-83 is Rs. 9,607. No doubt, it was contended before the CIT(A) that this represented items of expenditure below Rs. 1000. Since in assessment year 1983-84 such expenses falling below Rs. 1000 were all allowed, similarly, this amount should have been allowed, which appears to be the contention of the assessee; but, before putting forward any such contention, the contention itself is required to be substantiated on facts. That means, it should be shown to the Tribunal that it comprises of items each below Rs. 1000. However, no such evidence is ever produced either before the lower authorities or before the Tribunal. Further, it is stated that in assessment year 1983-84 expenses below Rs. 1000 were allowed and the same should be followed for assessment year 1982-83 also. However, we have gone through the assessment order for assessment year 1983-84. However, the reasons for allowing expenses upto Rs. 1000 are not appearing in para-11 of the Assessing Officer's order which is exclusively catered to the subject of advertisement expenses ....
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....the basic deduction of Rs. 5,000 under section 37(2A) should be allowed to the assessee. 14. We have already mentioned the case law cited before us in support of the contention that the conference expenses are to be allowed. The first of the decisions cited was Associated Marketing Agencies v. ITO [1992] 43 ITD 543 (Mad.). The facts as well as the decision rendered as appearing in the head note of the decision are found extracted at pages 202 and 203 of the second paper book filed by the assessee. It is significant that the Madras Tribunal was considering the facts relating to assessment year 1984-85. In that case, the assessee was deriving income as a wholesale dealer in electrical appliances and it spent certain amount for providing lunch and dinner to the delegates at the dealers' conference which was not allowed on the ground that the said expenditure would fall within the scope of sales promotion expenses under section 37(2B). The Tribunal held that this lunch and dinner were in connection with a one-day conference of the delegates held in the hotel for the purpose of the assessee's business. It also held that the main purpose was the holding of the conference of the dealers ....
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....ore the High Court was that the main purpose for organising the conference was advertisement and publicity. The High Court held that food and light refreshment had to be served to the trainees and engineers attending the dealers' conference organised by the assessee. This expenditure could not, therefore, be treated to be in the nature of entertainment but on account of business necessity and expediency. They did not fall within the ambit of section 37(2A) of the IT Act and could not be disallowed in the assessment years 1975-76 and 1976-77. This decision clearly applies to the facts of this case while appreciating the conference expenses since the facts discussed in that case relate also to assessment year 1976-77. 14.4 Another decision cited before us is Andhra Sugars Ltd.'s case, They have specifically considered Explanation 2 to section 37(2A) inserted by Finance Act, 1983, w.e.f. 1-4-1976. In the facts of that case, their Lordships of the Andhra Pradesh High Court were considering the claim for deduction of expenditure incurred in providing tea, coffee, etc., to customers, staff and technicians for the assessment year 1976-77. The Hon'ble High Court held that the expenditure ....
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....plying tea, coffee, etc., it is to be allowed in view of the Delhi High Court decision as well as the Andhra Pradesh High Court decisions, especially in view of the fact that it was not the case of the Assessing Officer that part of the expenditure must have been spent for the visitors and clients. 14.7 It was next contended that even with regard to the disallowance of Rs. 13,081 which comprised of Rs. 4,186 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 spent on providing tea, coffee, etc. to employees, the expenditure is purely allowable. The ld. representative for the assessee relied upon the following decisions: Gujarat State Finance Corpn.'s case Uttam Roadways (P.) Ltd.'s case Hindustan Petroleum Corpn. Ltd.'s case In the facts of that case, the Gujarat High Court was considering the facts relating to assessment year 1977-78. The total expenditure which had fallen for Their Lordships' consideration was Rs. 57,576. Their Lordships held that the assessee had incurred expenditure in providing tea, coffee and refreshments to its staff members and constituents or customers in th....
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....d and the disallowances for assessment year 1983-84 so far as they are contested in the appeal are deleted. 16. The 4th ground of appeal for assessment year 1982-83 is directed against the CIT(A)'s order stating that he erred in not treating gratuity payment to Mr. Gulati as payment to ex-employee. Copy of details of remuneration paid to Shri Y.P. Gulati as payment to ex-employee is furnished at page 211 of the second paper book. The gratuity payment of Rs. 23,002 was treated as part of salary paid and thus the total salary said to have been paid to Mr. Gulati was considered at Rs. 74,875. Out of that, the ceiling limit under section 40A(5), namely, Rs. 60,000, was deducted and the excess of Rs. 14,875 was considered as excess paid over and above the limit prescribed under section 40A(5). Before the CIT(A), the Calcutta High Court decision in Hindustan Motors Ltd.'s case was cited for the proposition that in respect of the calculation for the purpose of the ceiling limit under section 40A(5) it should be worked out for two periods in respect of employees who retire in the middle of a particular year. According to the assessee, he would be an employee so long as he is in service bu....
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.... Special Bench decision of the Tribunal in K. Ltd.'s case. The learned representative further contended that when there are more views than one on the matter and more than one interpretation covering the issue, the decision which is favourable to the assessee should be adopted and, therefore, the Bombay High Court decision in Colgate-Palmolive (I) (P.) Ltd.'s case is to be followed and no disallowance under section 40A(5) should be upheld. The learned Departmental Representative merely relied upon the CIT(A)'s order. 18. The Bombay High Court in Colgate Palmolive (I)(P.) Ltd's case held that any payment which is not relatable to the previous year is not covered by either section 40(c) or 40A(5). In our understanding, gratuity is a sum to be determined depending upon the length of service an employee put up under an employer and it is a one time payment which is due to the employee at the time of his retirement under an employer. The Bombay High Court, in the said decision, also held that various lump sum or one-time payments are excluded under various clauses of section 10 from the definition of the term "profits in lieu of salary" and, therefore, from the definition of "salary" i....
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....n Exchange, paid over a period of years on repayment of foreign currency loans obtained for purchase of Plant and Machinery. Yearwise statement showing Difference in Exchange paid is enclosed and marked "Annexure D". 5.4 The learned Commissioner of Income-tax (Appeals) erred in not allowing additional depreciation under section 32(i)(iia) in respect of Plant and Machinery of Rs. 37,27,823 coming into contact with corrosive chemicals. Assessment year 1983-84 5. The learned Commissioner of Income-tax (Appeals) erred in not allowing Investment Allowance on Rs. 1,14,165 being Difference in Exchange paid during the assessment year on repayment of foreign currency loans obtained for purchase of Plant and Machinery in the earlier years." As can be seen from the grounds extracted first we want to address ourselves on the question of grant of investment allowance under section 32A to the assessee. The assessee is a public limited company. It manufactures dry cell batteries in its factory at Baroda. For that purpose, the assessee imported plant and machinery for which foreign currency loan was obtained from ICICI. The agreement which the assessee entered into with ICICI is provided at pa....
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....(ii)(a), (b) and (c) of the Agreement. Clause 1 of the Heads of Agreement is the following: "1. In pursuance of the said Heads of Agreement and in consideration of ICICI having agreed to lend and advance to the Company the said Dollar and the said DM Loan, as may be determined in terms of the Euro-Currency agreement between ICICI and Standard Chartered Bank Limited for the purposes and on the terms and subject to the conditions contained in the said Heads of Agreement and in consideration of the premises the company doth hereby covenant with ICICI that the company shall unless otherwise agreed to by ICICI repay to ICICI in Bombay the said Dollar Loan and the said DM Loan agreed to be lent and advanced by ICICI to the Company as aforesaid in accordance with the following Amortization Schedules 'A' and 'B' respectively: AMORTIZATION SCHEDULE 'A' --------------------------------------------------------------------------------- Date Payment Payment of Principal amount due principal outstanding after 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 ....
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....tanding anything to the contrary contained in the said Heads of Agreement and/or these presents the Amortization Schedule/Amortization Schedules as subsequently agreed to will be effective and the Company shall repay to ICICI the said loan according to such revised Amortization Schedule/Amortization Schedules as so subsequently agreed to." Clause 4 under the Heads of Agreement is very important and it is as follows: "4. All obligations falling on the Company under the said Heads of Agreement and/or these presents in respect of principal of the said loan, interest, additional interest and redemption premium, if any, shall be due and payable by the Company in currencies in which the said loan is repayable and all references in the said Heads of Agreement and herein to obligations falling on the Company expressed in the various foreign currencies shall, if necessary, be deemed to be replaced by references to amounts of such other currencies determined as so provided." Clause 5, to the extent it is relevant to us, may be extracted as under: "5. Without prejudice to any of the obligations falling on the Company in terms of the said Heads of Agreement and/or these presents and notwi....
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....6,100.00 August 15, 1984 35,100.00 523,500.00 February 15, 1985 38,000.00 488,400.00 August 15, 1985 41,200.00 450,200.00 February 15, 1986 45,000.00 409,200.00 August 15, 1986 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) ---------------------------------------------------------------- Date Payment Payment of Principal amount due principal outstanding after each payment ---------------------------------------------------------------- 99,942.37 1. On April 29, 1984 7,697.37 92,245.00 2. " October 29, 1984 7,695.00 84,550.00 3. " April 29, 1985 7,695.00 76,855.00 4. " October 29, 1985 7,695.00 69,160.00 5. " April 29, 1986 7,695.00 61,465.00 6. " October 29, 1986 7,695.00 53,770.00 7. " April 29, 1987 7,695.00 46,075.00 8. " October 29, 1987 7,695.00 38,380.00 9. " April 29, 1988 7,695....
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.... of Rs. 2,03,965 had been debited under the head "Difference in exchange". However, this amount had been added by the assessee-company on its on its own in the revised return in view of the provisions of section 43A. The company claimed depreciation of Rs. 86,599 on the amount capitalised during the year as well as in the ANNEXURE'A' LAKHANPAL NATIONAL LTD., BARODA ASSESSMENT YEAR - 1982-83 STATEMENT SHOWING LOAN TAKEN FROM INDUSTRIAL CREDIT & INVESTMENT CORPORATION OF INDIA LTD., FOR PURCHASE OF MACHINERY FOR THE ACCOUNTING YEAR 1981 ----------------------------------------------------------------------------------------------- Sr. Nature of loan taken Loan amount as per Loan amount as Loan amount in No. from Industrial Original Agreement per amended Japanese Y Credit & Investment with Industrial Agreement with Corporation of Credit & Investment Industrial Credit India Ltd. Corporation of & Investment India Ltd Corporation of India Ltd ----------------------------------------------------------------------------------------------- 1. IBRD Loan $ 604800 $ 638483.81 Y 136248900 2. EVRD Loan $ 76200 $ 82390.69 Y 17166100 3. D.M. Loan DM 76200 DM 99942.30 Y 9633000 Total for....
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....8,88,876 Add: (a) 2,75,652 (b) 85,83,764 88,59,416 Rs. 1,57,48,292 Electrical installations installed in plant. Rs. 2,73,297 Four tour expenses capitalised in A.Y. 1980-81 34,353 A.Y. 1981-82 74,148 Rs. 1,08,501 ------------ --------------- Rs. 1,61,30,090 25% thereof Rs. 40,32,523 75% of reserved created Rs. 30,24,392 Therefore, he allowed investment allowance of Rs. 40,32,523. The claim of the assessee was that the sum of Rs. 2,43,168 could not have been excluded from the cost of plant and Machinery by the Assessing Officer. The said sum, according to him, represents loss incurred on account of fluctuations in the rate of exchange during the years: 1982,1983 and 1984 at the time of repayment of foreign loan obtained for the purchase of plant and machinery. According to the company, the Assessing Officer erred in not including the amount as cost of plant and machinery installed during the assessment year 1982-83 and not allowing depreciation of Rs. 40,340 thereon. The company took the plea that the loss incurred on account of difference in exchange rate forms part of cost of plant and machinery and it should be allowed depreciation (normal and extra shift and additional depr....
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.... 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 company from three angles set out in his impugned order as follows: (1) What should be considered as cost of plant and machinery on which depreciation has to be allowed for assessment year 1982-83. (2) On what amount the investment allowance has to be allowed. (3) What should the machinery on which additional depreciation is to be allowed on account of coming into contact with corrosive chemicals and further what portion of loss on account of difference in foreign exchange can be considered as attributable to the corrosive machinery in old plant and such machinery in the new plant. He held that as far as allowance of depreciation on amounts paid in subsequent years for exchange rate fluctuation is concerned, there is no justification for such claim even for the purpose of development rebate and/or investment allowance since courts have held that actual cost should be taken as the commercial cost to the assessee since depreciation is an actual deduction for specific year on the actual coat to the company as in that year ....
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.... 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. 1,14,155 as difference in exchange under section 43A. Depreciation of Rs. 18,665 was claimed on the same which was allowed as in the past. However, regarding the claim of depreciation on loss of Rs. 2,48,168 being exchange fluctuation loss suffered during the years 1982 to 1984, he followed his order for assessment year 1982-83 and disposed of the claim of depreciation on the said amount and denied Rs. 1,14,165 towards depreciation based on current year's loss on account of difference in foreign exchange arising on repayment of deferred loan obtained for purchase of plant and machinery. He allowed investment allowance of Rs. 9,85,437 while ultimately determining the total income of the company at Rs. 2,52,54,040 as per his assessment order dated 12-3-1987 under section 143(3). The company came in appeal before the CIT(A) and in ground No. 11 it had taken the ground that the ITO erred in not allowing investment allowance either in the current year or in the year of installation of plant and machinery, i.e., assessment year 1982-83, i....
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....86 Rs. 1,79,602 4. 1985 1986-87 Rs. 2,93,161 5. 1986 1987-88 Rs. 6,17,904 6. 1987-88 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 -------------------------------------------------------------- **Excluding difference in exchange rate of Rs. 1,09,501 for old loan taken in earlier year. so, the claim made increased to Rs. 44,37,798, while the claim before the Assessing Officer was Rs. 40,340, before the CIT(A) it was Rs. 26,25,235, whereas before the Tribunal, at the time of filing the grounds of appeal, the claim was revised at Rs. 42,61,768, and at the time of arguments, it was further revised at a figure of Rs. 44,37,798 as reflected in the table given above. The assessed filed written submissions for assessment year 1982-83 in respect of investment allowance at two times, first on 20-7-95 which was received in the office on 4-6-97. Those written submissions were concentrated only to highlight the case of the assessee for the whole claim of investment allowance. For the second time, the written submissions were given on 2-6-97 received by the Tribunal on 4-6-97 generally dealing with all the grounds rais....
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....s 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 over a period of years. In support of this contention that the quantification has nothing td do with incurring of liability, the assessee relied upon the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. In that case, inter alia, it is stated that a though the sales-tax liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The above ratio of the Hon'ble Supreme Court was sought to be pressed into service to claim the additional liability of Rs. 44,37,798 arising on account of fluctuation in the sate of exchange on the ground that the liability arises on the date of receipt of foreign currency loan. In our opinion, the ratio is only an authority for the proposition that the liability to pay the amount agreed upon for purchase of plant & machinery arose on the date of the agreement. Ho....
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.... 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 exchange fluctuation can be adjusted in the accounts of the earlier year in which the asset was acquired (if necessary, by reopening the said accounts)". However, we have gone through the whole judgment in Arvind Mills Ltd.'s case and the portion quoted above does not reflect the full decision of the Hon'ble Supreme Court on this point of ascertainment of actual cost of an asset arising from exchange fluctuation. After the quoted portion, the Hon'ble Full Bench of the Supreme Court stated further as follows: "In other words, in the illustration given earlier, the actual cost of Rs. 1,00,000 and the allowances based thereon shown in the accounts for the financial year 1965-66 would have to be revised to show an actual cost of Rs. 1,20,000 and allowances based on that figure. The figures of written down value and depreciation allowances for subsequent years would also need consequential revision. However, though this is a course which is theoret....
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....hereof 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 to the cost of acquisition". In that case, the assessee company was manufacturing paper and it imported machinery from a foreign company with a loan obtained from Industrial Finance Corporation of India. The question was whether the incremental liability incurred by the assessee for discharging the foreign currency loan instalments was to be considered as capital expenditure. In that very case itself, the Bombay High Court as per the headnote held as follows: "(ii) That in view of section 43A of the Income-tax Act, 1961, the additional liability amounting to Rs. 21,36,840 and Rs. 4,89,502 on account of exchange fluctuations with reference to the amount of loan outstanding on the last day of the accounting period at the then prevailing exchange rate had to be added to the actual cost of the machinery for the purpose of computation of depreciation for that year". Thus, it does not throw any light as to how to compute the incremental liability due to fluctua....
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.... 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 contention of the company that the whole of the incremental liability accrued to the company in repayment of foreign exchange instalments from 1982-83 to 1989-90 should all he aggregated and taken to represent part of the actual cost of plant & machinery to the assessee while giving the benefit of section 43A of the Income-tax Act to the company. The other decisions relied on by the assessee are the following: 1. CIT v. Widia (India) Ltd. [1992] 193 ITR 475 (Kar.) 2. CIT v. Coromandel Fertilizers Ltd. [1984] 156 ITR 283/18 Taxman 451 (AP) 3. Addl. CIT v. Kwality Spg. Mills (P.) Ltd. [1977] 109 ITR 646 (Mad.) 4. CIT v. Baker Mercer India (P.) Ltd. [1992] 196 ITR 667 (Bom.) 5. Maneklal Harilal Spg. & Mfg. Mills Co. Ltd. [IT Appeal Nos. 1639 and 1640 Ahd. of 1984] 6. CIT v. Shri Dinesh Mills Ltd. [IT Appeal No. 2575 (Ahd.) of 1984] 7. CIT v. Shri Ambika Mills Ltd. [1993] 201 ITR (St.) 63 (SC) 8. CIT v. Tarun Commercial Mills Ltd. [1992] 195 ITR (St.) 148 (SC). It was contended t....
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....tc. 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 respective years of actual payment of exchange. This view is supported by the following judgments: 1. Southern Asbestos Cement Ltd.'s case 2. Arvind Mills Ltd.'s case 3. Maneklal Harilal Spg. & Mfg. Co. Ltd.'s case (pages 242-250 of paper book) 4. Shri Dinesh Mills Ltd's case (pages 251-253 of paper book). We entirely agree with this alternative submission and we feel that we are justified to give relief to the assessee on the lines of this alternative argument which, according to us, is fair and also represents the correct view of law decided even by the Supreme Court. The reasons for our accepting this alternative contention may be stated briefly as under. 32. Under section 29, business income is to be computed in accordance with the provisions of sections 30 to 43D. Investment allowance is a one time deduction allowable under section 32A and it came into the statute book on and from 1-4-76. The portion of section 32A which is relevant and deleting the unnecessary portions reads as follows: "Section 32A(1)-....
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....vestment Allowance Reserve Account") to be utilised - (a) for the purposes of acquiring, before the expiry of a period of ten years next following the previous year in which the machinery or plant was installed . . . for the purposes of the business of the undertaking; and (b) until the acquisition of a new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India." Now, as regards the fulfillment of this condition, the facts obtaining in the case before us are as follows. Detailed working showing the amount of investment allowance reserve created in the year 1982-83 and the amount of investment allowance allowed by the Assessing Officer is explained in a note filed before as accompanied by a tabular statement showing the figures as under: (1) Investment Allowance claimed in revised Return of Income Rs. 41,02,836 (2) Investment Allowance claim revised vide our letter dated 2-7-1985 Rs. 40,97,999 (3) Investment allowances granted by Income Tax Officer in Assessment Order passed under section 143(3) of t....
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....e acquisition of such asset, 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 ....
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....each of the instalment dates 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....
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....ection 43 A applies. It is clear from the already extracted portion of section 43A that if any asset from a country outside India has been acquired for the purpose of business or profession and in consequence of a change in the rate of exchange at any time after the acquisition of such asset and there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by it from any person directly or indirectly in any foreign currency specifically acquiring the asset, the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to the amount arrived at after such addition or reduction and such 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 exchan....
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....y goes to augment the actual cost of the asset to the company. It was also argued that in order to do complete justice between the parties, subsequent events after the assessment is over can also be taken into consideration, and following this principle, the investment allowance should be allowed determining the total amount of Rs. 44,37,798 as the actual cost of the plant & machinery to the assessee even at the time of its purchase or at least on the date of the agreement between the company on the one hand the ICICI on the other. It was also argued that there is no perceptible difference between section 32A and section 33. Both of them are one time allowances and, therefore, it is not permissible to conclude the actual cost of plant & machinery every year till the last instalment is paid since such 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 ....
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....be allowed in relevant previous years". According to us, this alternative contention can be supported by the ratio of the following decisions. We rely upon the decision of the Hon'ble Supreme Court in Arvind Mills Ltd's case from which we have already extracted the relevant portions in the above paragraphs and there is no need to repeat them here and the relevant portions in the above paras may be referred to in this context. We also rely upon Century Enka Ltd.'s case. In that case, the question referred to under section 256(1) was : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was entitled to investment allowance and in directing the Income-tax Officer to give the assessee opportunity of creating a reserve before 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 Ho....
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....l cost. Stated differently, that section cannot be invoked to add to the actual cost the incremental cost that arises after the expiry of the limitation period incorporated into that section. Section 155 is silent on the issue. Again, the granting of investment allowance is, inter alia, subject to the creation by the assessee of investment allowance reserve. This would mean that, even in cases where recourse is taken to section 154, the assessee will have to create incremental investment allowance reserve. But the difficulty here is that, the concept of reopening closed accounts has no place under the Indian Income-tax Act, 1922. Since there is nothing either in section 43A or in section 32A to deny the assessee the benefit of the former section in respect of investment allowance, a 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 Ahmed....
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....taken into consideration whereas section 43 A says that the incremental liability of each previous year should either reduce the actual cost of plant & machinery or augment the cost of plan-t & machinery. Therefore, our thinking that there is every necessity to determine the actual cost of plant & machinery for each of the assessment years is required as per the provisions of section 43A, is correct and supportable by decided case laws. The argument of the Id. Departmental Representative that grant of investment allowance is not contemplated and therefore, it should not be allowed on the incremental foreign exchange liability under section 43A is to be stated to be rejected in view of the fact that several decisions cited on behalf of the assessee granted investment allowance. In Madras 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 bef....
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....d by foreseeing any change in the exchange rate. Quantification of the amount at 25 per cent of the actual cost to be allowed by way of deduction as investment allowance got crystallized on the basis the actual cost and no change can be made therein for that previous year on the basis of any fluctuation that takes place in the exchange rate in the subsequent years which will have impact only on the liability to pay as it stands immediately prior to the date of fluctuation in such subsequent year. The fact that the investment allowance is carried forward under sub-section (3) or that the reserve can be created in any subsequent assessment year due to insufficiency of profits in the earlier years will not alter this situation. Therefore, no question of revising the full amount 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 a....
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....ment allowance made by the assessee in these appeals has to be rejected. 35. Now, coming to depreciation, extra shift allowance and additional depreciation, we feel that the claims made with regard to those reliefs should be allowed, in view of the several decisions cited and in view of the fact that the Gujarat High Court decision in Windsor Foods Ltd.'s case does not come in the way of such claim being considered in the light of section 43A. Since the foreign exchange difference for the assessment year 1982-83 and subsequent assessment years was not allowed to be taken into consideration for the purpose of computing the actual cost on which investment allowance only is allowable by the Gujarat High Court decision in Windsor Foods Ltd.'s case, there is no prohibition 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 ....
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....------------------------------ Accounting Asst. year Amount of Reasons of year foreign capitalisation. tour capitalised ----------------------------------------------------------------------------------- 1976-77 & 1977 1978-79 73,640 (a) For know how of manufacturing of UM - 3 pencil type cell. (b) For import of plant & machinery. (c) For technical training for UM - 3 cell manufacturing. 1978 1979-80 24,594 For increase in paid capital. 1979 1980-81 10,000 For import of plant & machinery. ----------------------------------------------------------------------------------- The claim arose in the following circumstances. During the assessment proceedings for assessment year 1982-83, the assessee company had claimed depreciation of Rs. 53,675 on foreign tour expenses or Rs. 2,58,468 which, according to it, were capitalised in the following assessment years: 1976-77 : Rs. 7,949 1978-79 : Rs. 98,686 1979-80 : Rs. 34,353 1981-82 : Rs. 92,886 On verification of records while going into the merits of this claim, the Assessing Officer came across records for earlier years and there he found that a sum of Rs. 24,814 was capitalised in the assessment year 1979-80 by relatin....
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....of foreign tour expenses should be capitalised depends upon the facts and circumstances of each case. We find, after reading the Assessing Officer's order as well as the CIT(A)'s order for assessment year 1982-83, that the Assessing Officer had given cogent reasons for disallowing capitalisation of foreign tour expenses. In fact, for the assessment year 1980-81, the company had claimed Rs. 10,000 only for foreign tour expenses. However, the Assessing Officer at para 14.6 of his assessment order was generous to allow Rs. 34,353 for assessment year 1980-81 and Rs. 74,138 for assessment year 1981-82 for capitalisation and it is significant that depreciation, investment allowance, etc., is being allowed on the said total sum. It is also stated that the machinery was acquired and installed during the year relevant to assessment year 1982-83. We are unable to find any further point in favour of the assessee. We agree with the lower authorities for not considering certain foreign tour expenses as not eligible for capitalisation. In this result, this ground is rejected. 39. Now, let us take ground No. 6 in assessment year 1982-83. The company seems to have claimed loss of Rs. 15,153 on th....
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.... this ground at para 7 of his order. It was contended that the fees for discussion and preparation of return and sur-tax return for which a sum of Rs. 7,500 and a further sum of Rs. 1,600 for getting written opinion for payment of bonus cannot be included under the provisions of section 80VV. It was further contended before him that the proceedings started only after filing the returns. Reliance 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 allow....
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....aid provision, even if such matter was in connection with the Act. Thus, the Gujarat High Court went to the extent of holding that the expenditure incurred for surtax assessment and fees paid for attending matters other than proceedings before the income-tax authority or the Tribunal or any Court was not hit by section 80VV. 43.5 The next decision relied on was ITO v. Shilpi Advertising 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 f....
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....ure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any Court relating to the determination of any liability under this Act, by way of tax, penalty or interest. In the proviso under that section, it is stated that no deduction shall, in any case, exceed in the aggregate Rs. 5,000. Therefore, upto 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 w....