2008 (1) TMI 896 - AT - Income Tax

Summary

Issues Involved:
1. Depreciation disallowed on account of foreign exchange fluctuation.
2. Product development expenditure.
3. Advertisement and brand promotion expenses.
4. Provision of warranty.
5. Loss on foreign exchange forward contract.

Summary:

1. Depreciation disallowed on account of foreign exchange fluctuation:

The learned CIT(A) erred in deleting the addition of Rs. 1,21,996/-, being depreciation disallowed on account of foreign exchange fluctuation, without appreciating the fact that it was a notional liability. The issue stands covered by the decision of Hon'ble Delhi High Court in CIT Vs. Woodward Governor India P. Ltd. (2007) 294 ITR 451, which held that the amendment in section 43A by Finance Act, 2002, was prospective. The assessee is permitted to rework the actual cost and depreciation due to foreign exchange fluctuation. Respectfully following this decision, ground no. 1 is dismissed.

2. Product development expenditure:

The learned CIT(A) deleted the addition of Rs. 33,61,975/- made on account of product development expenditure, considering it revenue in nature. The expenditure was for improving the existing business and not for setting up a new unit or manufacturing a new product. The learned DR argued that the benefit of this expenditure was available in subsequent years. The learned counsel relied on various judgments, including Glaxo Smithkline Consumer Healthcare Ltd. Vs. ACIT, which held that such expenditure is necessary to remain competitive and is revenue in nature. Respectfully following these decisions, this ground is also dismissed.

3. Advertisement and brand promotion expenses:

The learned CIT(A) allowed an expenditure of Rs. 1,00,55,260/- on advertisement and brand promotion, treating it as revenue in nature. The learned counsel cited several cases, including ACIT Vs. Medicamen Biotech Ltd., which held that advertisement expenses are revenue in nature. The learned DR argued that the expenses provide long-term benefits and should be capitalized. However, following various Tribunal orders, it is held that such expenditure is revenue in nature. Thus, this ground is also dismissed.

4. Provision of warranty:

The learned CIT(A) erred in holding that the company understated the provision of warranty by Rs. 2.34 lakh and directed the Assessing Officer to allow such claim. The matter is restored to the file of the Assessing Officer to ascertain the correct facts and re-compute the income if necessary. Thus, this ground is treated as allowed for statistical purposes.

5. Loss on foreign exchange forward contract:

The learned CIT(A) deleted the addition of Rs. 15,48,650/- made on account of loss suffered on foreign exchange forward contract, treating it as a capital loss. The loss was incurred in connection with the import of raw materials, components, and spare parts, which is in the revenue field. The learned CIT(A) pointed out that the assessee had offered a similar gain for taxation in the preceding year. The provisions of section 43-A are not applicable as the loss was not related to capital goods. Thus, this ground is dismissed.

Conclusion:

Appeal no. 3168(Del)/2005 is dismissed, and appeal no. 2361(Del)/2006 is treated as partly allowed for statistical purposes.