2014 (6) TMI 988 - AT - Income Tax

Disallowing a sum towards exchange difference by resort to provisions of section 43A - Held that - Case of the assessee before the Commissioner of Income Tax (Appeals) was that the provisions of sec43A were not applicable as the foreign exchange was not on account of borrowing for the purpose of imported machinery. The assessee has filed a Paper Book which is available on record. However, it is not clear from the documents available on record whether the assessee had utilized the said foreign exchange for the purpose of acquisition of machinery from any country outside India. In case the basic condition of acquisition of asset from outside India is not satisfied then the provisions of section 43A are not attracted. In order to cull out the facts, we deem it fit to restore this issue back to the file of Assessing Officer to determine the facts of the case. Disallowance on account of processing fee against the ECB loan - Held that - The matter has been remitted back to the file of Assessing Officer against ground No. 2(a) in order to determine the nature of the ECB loan taken by the assessee. In case the said loan has been taken during the course of carrying on of the business, the expenditure incurred on processing fee is to be allowed as expenditure in the hands of the assessee. However, in case the said loan is utilized for the acquisition of assets from a country outside India, then the processing fee is a capital expenditure and the same is to be capitalized to the cost of Plant & Machinery. This aspect also shall be verified by the Assessing Officer Disallowance u/s 14A - Held that - The assessee had earned dividend income of ₹ 279,170/- and also agricultural income of ₹ 45,000/-. The Assessing Officer in view of the investments made by the assessee invoked the provisions of section 14A of the Act and disallowed a sum of ₹ 1,00,000/- out of general and administrative expenses and financial expenses relatable to earning of exempt income. The said disallowance was restricted to ₹ 50,000/- by the Commissioner of Income Tax (Appeals) against which the assessee is in appeal. The year under appeal is assessment year 2006-07 and the provisions of section 8D are not applicable and in view thereof, we restrict the disallowance to ₹ 20,000/-. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance of interest on capital-work-in-progress
2. Disallowance under section 43A for foreign exchange difference
3. Disallowance of processing fee against ECB loan
4. Disallowance under section 14A for exempt income

Issue 1: Disallowance of interest on capital-work-in-progress

The appeal concerned the Commissioner of Income Tax (Appeals)'s order under section 143(3) of the Income-tax Act, 1961. The appellant challenged the disallowance of interest on capital-work-in-progress. The Tribunal noted that the appellant did not press this ground earlier, leading to its dismissal.

Issue 2: Disallowance under section 43A for foreign exchange difference

The appellant contested the disallowance of Rs. 6,95,000 under section 43A related to foreign exchange difference on ECB loans. The Assessing Officer treated this as a capital loss, capitalizing it under Plant & Machinery. The appellant argued that the exchange difference was not due to borrowing for imported machinery, but to save interest costs. The Tribunal found ambiguity in whether the asset was acquired from outside India and remanded the issue back to the Assessing Officer for clarification.

Issue 3: Disallowance of processing fee against ECB loan

Linked to the previous issue, the disallowance of Rs. 3,05,735 processing fee against the ECB loan was contested. The matter was sent back to the Assessing Officer for determining the nature of the loan. If the loan was used for business purposes, the processing fee would be an allowable expense; otherwise, it would be a capital expenditure.

Issue 4: Disallowance under section 14A for exempt income

The appellant challenged the disallowance of Rs. 50,000 under section 14A for exempt income. The Assessing Officer disallowed a higher amount, which was reduced by the Commissioner of Income Tax (Appeals). The Tribunal further reduced the disallowance to Rs. 20,000, considering the investments made by the assessee. The appeal was partly allowed on this ground.

In conclusion, the Tribunal partially allowed the appellant's appeal, addressing various disallowances related to interest on capital-work-in-progress, foreign exchange difference, processing fee against ECB loan, and exempt income under different sections of the Income-tax Act, 1961. The Tribunal provided detailed reasoning for each issue and remanded certain matters back to the Assessing Officer for further examination and clarification.