2011 (5) TMI 373 - AT - Income Tax

Disallowance - loss on foreign exchange fluctuation - It is thus free from any doubt that the estimated contracts which have not matured by the year end is also be allowed as a deduction in computation of business income - The Bench in assessee s own on identical issue held that loss on account of foreign exchange fluctuation in respect of inventory which is part of closing stock need not be taken into account for computation of closing stock value because the said expenditure is not to be taken into account for computation of cost of purchase - Appeal is allowed Regarding 36(1)(xi) - Conversion of non-Y2K compliant computer system into Y2K computer system - Where the vendor was unable to provide satisfactory Y2K compliance certification, due care was taken to either upgrade the system or replace the same so as to minimize or bring down the impact of Y2K to the assessee - The break up of the expenses incurred by the assessee and the nature of the expenses and the explanation offered by the assessee as to why these expenses are to be allowed as revenue expenditure have already been set out above - CBDT Circular No. 779, dated 14-9-1999 - The facts as claimed by the assessee have not been disputed by the revenue. The auditors in their report have certified that the claim under section 36(1)(xi) of the Act has been correctly made - there is no evidence to show that there was any acquisition of a new computer system. Taking into consideration the intention behind the provisions as explained in the Board Circular and the facts of the assessee s case, we feel that the claim of the assessee deserves to be accepted. - Decided in favour of the assessee Deduction u/s 80HHC - AO excluded income received by your appellant on account of sale of scrap and miscellaneous income from the profits of the business for the purpose of computing deduction under section 80HHC of the Act. - Held that - Assessing Officer to include the income received by the assessee on account of sale of scrap, lease rentals and camera repair charges for the purpose of computing deduction under section 80HHC of the Act.

Summary

Issues Involved:

1. Disallowance of foreign exchange fluctuation loss.
2. Disallowance of expenditure incurred on making computer systems Y2K compliant.
3. Exclusion of income from sale of scrap and miscellaneous income from business profits for computing deduction under section 80HHC.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss:

The assessee, a company involved in manufacturing and marketing imaging products, debited Rs. 1,03,82,810 as foreign exchange fluctuation loss in its profit and loss account. The Assessing Officer (AO) added Rs. 29,30,628 to the total income, attributing it to the closing inventory. The CIT(A) upheld this addition. However, the Tribunal referred to its earlier decisions and the Supreme Court ruling in CIT v. Woodworth Governor India (P.) Ltd., which allowed such losses to be debited to the profit and loss account. The Tribunal directed the AO to delete the addition, allowing the assessee's ground.

2. Disallowance of Expenditure on Y2K Compliance:

The assessee claimed Rs. 2,48,74,502 under section 36(1)(xi) for making its computer systems Y2K compliant. The AO disallowed the claim, arguing that the expenditure was for acquiring new assets rather than upgrading existing ones. The CIT(A) upheld this view but allowed Rs. 44,44,896 as revenue expenditure. The Tribunal noted that the assessee replaced only non-Y2K compliant components while retaining the rest of the system, aligning with the CBDT Circular No. 779. The Tribunal allowed the entire claim, holding that the expenditure was indeed for making the existing system Y2K compliant.

3. Exclusion of Income from Sale of Scrap and Miscellaneous Income:

The assessee included Rs. 52,35,000 from the sale of scrap and Rs. 10,92,000 as miscellaneous income in its business profits for section 80HHC deduction. The revenue excluded these, stating they were not derived from operational activities. The Tribunal referred to its earlier decisions and High Court rulings, directing the AO to include income from the sale of scrap, lease rentals, and camera repair charges in business profits. It also included packing and forwarding expenses recovered, rebate on sales, cash discounts, and bad debts recovered but excluded income from Kodak China towards training at Goa and bond money received from employees, as these were not pressed by the assessee.

Conclusion:

The Tribunal allowed the appeal partially, providing relief on foreign exchange fluctuation loss and Y2K compliance expenditure while directing specific inclusions and exclusions for computing section 80HHC deductions.