2005 (5) TMI 546 - AT - Income Tax

Deductions, Business expenditure, Foreign exchange - Special provision consequential to changes in rate of exchange of currency,

Issues Involved:

1. Disallowance under section 37(4) of the Income-tax Act, 1961.
2. Inclusion of telephone expenses at the guesthouse under section 37(4).
3. Disallowance under Rule 6D of the Income-tax Rules, 1962.
4. Addition on account of estimated travel expenses for foreign technicians.
5. Disallowance under section 40A(9).
6. Disallowance of entertainment expenses.
7. Disallowance of royalty payment under section 40(a)(i).
8. Unpaid excise duty disallowance under section 43B.
9. Computation of deduction under section 80HHC including sales tax and excise duty.
10. Adjustment of carried forward loss in computing deduction under section 80HHC.
11. Revenue's appeal on food and beverages disallowance under section 37(4).
12. Revenue's appeal on deduction of premium payable on redemption of debentures.
13. Revenue's appeal on disallowance under Rule 6D for local conveyance.
14. Revenue's appeal on disallowance under Rule 6D for gift articles.
15. Revenue's appeal on unutilized MODVAT credit.
16. Revenue's appeal on disallowance under section 37(2A).
17. Revenue's appeal on depreciation due to foreign exchange rate fluctuations.
18. Revenue's appeal on legal and professional charges.
19. Revenue's appeal on interest on borrowed capital for machinery.
20. Revenue's appeal on technical services income under section 80HHC.

Detailed Analysis:

1. Disallowance under section 37(4) of the Income-tax Act, 1961:
The assessee's claim for deduction of Rs. 9,09,289 incurred on rent, rates, and taxes was disallowed under section 37(4). The Tribunal confirmed the disallowance based on a previous decision for the assessment year 1993-94, rejecting the ground.

2. Inclusion of telephone expenses at the guesthouse under section 37(4):
The disallowance of Rs. 2,59,045 for telephone expenses at the guesthouse was upheld, following the Tribunal's decision for the assessment year 1993-94. This ground was rejected.

3. Disallowance under Rule 6D of the Income-tax Rules, 1962:
The disallowance of Rs. 3,80,756 under Rule 6D was confirmed, consistent with the Tribunal's decision for the assessment year 1993-94. This ground was rejected.

4. Addition on account of estimated travel expenses for foreign technicians:
The addition of Rs. 1,59,000 for estimated travel expenses of foreign technicians was upheld, following the Tribunal's decision and the Jurisdictional High Court's ruling in Inaroo v. CIT. This ground was rejected.

5. Disallowance under section 40A(9):
The disallowance of Rs. 1,15,498 was restored to the Assessing Officer for further examination, following the Tribunal's decision for the assessment year 1993-94 and the principles laid down by the Bombay High Court in CIT v. Bharat Petroleum Corpn. Ltd. This ground was allowed for statistical purposes.

6. Disallowance of entertainment expenses:
The disallowance of Rs. 2,00,000 for entertainment expenses was restored to the Assessing Officer for fresh adjudication, following the Tribunal's decision and the case of Lakhanpal National Ltd. This ground was allowed for statistical purposes.

7. Disallowance of royalty payment under section 40(a)(i):
The disallowance of Rs. 8,79,962 for royalty payment to SKF Aktiebolaget was set aside for fresh adjudication. The Tribunal instructed the Assessing Officer to examine the applicability of Article 26(6) of the DTAA with Sweden and the timing of TDS deduction and payment. This ground was allowed for statistical purposes.

8. Unpaid excise duty disallowance under section 43B:
Ground No. 9 was not pressed by the assessee and was rejected.

9. Computation of deduction under section 80HHC including sales tax and excise duty:
The Tribunal directed the Assessing Officer to exclude sales tax and excise duty from the total turnover for computing deduction under section 80HHC, following the Bombay High Court's decision in CIT v. Sudershan Chemicals Industries Ltd. This ground was allowed.

10. Adjustment of carried forward loss in computing deduction under section 80HHC:
The Tribunal held that brought forward losses must be adjusted against export profits for computing deduction under section 80HHC, following the Supreme Court's decision in IPCA Laboratories Ltd. v. Dy. CIT. However, only brought forward losses from export activities should be adjusted. This ground was allowed in part.

11. Revenue's appeal on food and beverages disallowance under section 37(4):
The Tribunal allowed the revenue's ground, disallowing food and beverages expenses under section 37(4), consistent with the decision for the assessment year 1993-94.

12. Revenue's appeal on deduction of premium payable on redemption of debentures:
The Tribunal upheld the allowance of the deduction for the premium payable on redemption of debentures, following its order for the assessment year 1990-91.

13. Revenue's appeal on disallowance under Rule 6D for local conveyance:
The Tribunal upheld the CIT(A)'s direction to exclude the disallowance under Rule 6D for local conveyance, following its decision for the assessment year 1993-94.

14. Revenue's appeal on disallowance under Rule 6D for gift articles:
The Tribunal upheld the CIT(A)'s deletion of the disallowance for gift articles under Rule 6D, consistent with its decision for the assessment year 1993-94.

15. Revenue's appeal on unutilized MODVAT credit:
The Tribunal upheld the CIT(A)'s deletion of the addition for unutilized MODVAT credit, following its decision and the Supreme Court's ruling in CIT v. Indo Nippon Chemicals Co. Ltd.

16. Revenue's appeal on disallowance under section 37(2A):
The Tribunal upheld the CIT(A)'s deletion of the disallowance under section 37(2A), following its decision and the Bombay High Court's ruling in OTIS Elevator Co.

17. Revenue's appeal on depreciation due to foreign exchange rate fluctuations:
The Tribunal upheld the CIT(A)'s direction to allow depreciation on account of foreign exchange rate fluctuations, following the Bombay High Court's decision in Padamjee Pulp & Paper Mills Ltd. v. CIT.

18. Revenue's appeal on legal and professional charges:
The Tribunal upheld the CIT(A)'s allowance of legal and professional charges as revenue expenditure, following the Supreme Court's decision in CIT v. Bombay Dyeing & Mfg. Co. Ltd.

19. Revenue's appeal on interest on borrowed capital for machinery:
The Tribunal upheld the CIT(A)'s allowance of interest on borrowed capital for machinery as revenue expenditure, following the Supreme Court's decision in CIT v. Associate Fibre & Rubber Industries (P.) Ltd.

20. Revenue's appeal on technical services income under section 80HHC:
The Tribunal upheld the CIT(A)'s direction to consider technical services income for deduction under section 80HHC, following the ITAT's decision in Asstt. CIT v. Herbal Isolates (P.) Ltd.

Conclusion:
The assessee's appeal was partly allowed, and the revenue's appeal was partly allowed. The Cross Objection (CO) of the assessee was dismissed as infructuous.

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