2011 (4) TMI 825 - AT - Income Tax

Capital receipt vs Revenue Receipt - Compensation received by the assessee company from M/s Konica Gelatine Corporation (KGCL), Japan, purchaser company in lieu of stoppage of ossein purchases from assessee company - Held that - KGCL had stopped purchasing ossein on account of its being not able to sell gelatine manufactured by it from ossein. It allowed the assessee to operate in India in respect of ossein by not entering into Indian territory for sale of the product of the like manufactured by the assessee company. It clearly shows that KGCL did not have any intention to take over the production or marketing of ossein or gelatine in India. It had in fact already agreed to allow the assessee company to sell gelatine anywhere in the world by virtue of its 1995 agreement. The termination agreement of 2001 only provided that KGCL would cease to provide technical support to assessee company for manufacturing and operation of gelatine plant at Vapi. Thus neither the ossein manufacturing plant nor gelatine manufacturing plant being the source of the income of the assessee company were impaired. Since there was an obligation with KGCL to purchase ossein from assessee company and KGCL desired to forgo all these obligations, it paid compensation to the assessee. This will certainly be in the nature of revenue receipt - Decided in favor of Revenue Claim of additional depreciation on account of fluctuation in the rate of foreign exchange - assessee-company had purchased plant and machinery, cost of which increased due to adverse fluctuation in exchange rate - Held that - The liability of repayment increased on account of fluctuation in the exchange rate, hence depreciation claimed on such increased cost will be allowed - Decided in favor of assessee. Sale promotion expenses - Tribunal restricted the dis-allowance to 10% of total expenditure - Held that - We remit the matter back to the file of AO for considering dis-allowance at 10% of the total expenses subject to the rider that such dis-allowance will not be more than the dis-allowance already made by the AO - Decided in favor of Revenue for statistical purposes. Deduction u/s 80HHC - Held that - Excise duty and sales tax will be excluded from the total turnover for the purpose of deduction u/s 80HHC - Scrap and waste material if not relatable to export business of the assessee, has to be excluded from the business profit for the purpose of calculation of deduction u/s 80HHC. Similarly, the same will not form part of the total turnover. Exchange fluctuation loss - loan for circulating capital - Held that - Once loan is taken for revenue purposes then loss suffered by it on account of adverse exchange rate fluctuation has to be allowed as deduction u/s 37(1). The difference in foreign exchange rate in respect of foreign exchange liability by way of working capital or by way of trading transaction is either the revenue liability or revenue income for which necessary provision should be made - Decided in afvor of assessee. Matter of dis-allowance u/s 14A is remitted back to AO for fresh adjudication

Issues Involved:
1. Depreciation on account of foreign exchange fluctuation.
2. Disallowance of sales promotion expenses.
3. Inclusion of excise duty and sales tax in total turnover for section 80HHC deduction.
4. Inclusion of income from sale of empty bags and scrap in business profits for section 80HHC deduction.
5. Classification of "capital compensation" as revenue income.
6. Disallowance of exchange fluctuation loss.
7. Recalculation of income for section 80HHC relief.
8. Disallowance under section 14A.

Detailed Analysis:

1. Depreciation on Account of Foreign Exchange Fluctuation:
The Tribunal upheld the CIT(A)'s decision to allow the claim of depreciation on increased cost due to adverse foreign exchange rate fluctuation. The Tribunal referenced authoritative pronouncements, including the Hon'ble Supreme Court's decision, which clarified that increased liability on account of foreign exchange fluctuation should be added to the cost of capital assets for depreciation purposes. This ground of Revenue's appeal was rejected.

2. Disallowance of Sales Promotion Expenses:
The Assessing Officer (AO) had disallowed a portion of the sales promotion expenses, which was subsequently reduced by the CIT(A). The Tribunal followed its previous order and remitted the matter back to the AO to consider a disallowance of 10% of the total expenses, ensuring it does not exceed the initially disallowed amount. This ground of Revenue's appeal was allowed for statistical purposes.

3. Inclusion of Excise Duty and Sales Tax in Total Turnover for Section 80HHC Deduction:
The Tribunal decided this issue by following the Hon'ble Supreme Court's decision in CIT v. Lakshmi Machine Works, which held that excise duty and sales tax should be excluded from the turnover for section 80HHC purposes. This ground of Revenue's appeal was disposed of accordingly.

4. Inclusion of Income from Sale of Empty Bags and Scrap in Business Profits for Section 80HHC Deduction:
The Tribunal referenced the Hon'ble Madras High Court's decision in CIT v. Shiva Distilleries Ltd., which held that income from scrap and waste not related to the export business should be excluded from business profits for section 80HHC calculation. This ground of Revenue's appeal was decided in favor of the Revenue.

5. Classification of "Capital Compensation" as Revenue Income:
The Tribunal examined the compensation received by the assessee from a foreign company for terminating agreements and discontinuing purchases. The Tribunal concluded that the compensation was a revenue receipt, as the source of income (ossein manufacturing plant) was not impaired, and the assessee continued its business operations. The compensation was primarily for the loss of future profits due to the termination of purchase agreements. This ground of the assessee's appeal was dismissed.

6. Disallowance of Exchange Fluctuation Loss:
The Tribunal allowed the assessee's claim for exchange fluctuation loss, referencing its previous decisions and the Hon'ble Supreme Court's ruling in CIT v. Woodward Governor India (P.) Ltd. The Tribunal held that the increased liability due to adverse exchange rate fluctuation should be treated as an additional cost of capital and allowed as a deduction under section 37(1). This ground of the assessee's appeal was allowed.

7. Recalculation of Income for Section 80HHC Relief:
The CIT(A) had directed the AO to recompute the relief under section 80HHC. The Tribunal found no fault with this direction, as the AO was required to re-compute the relief to give effect to the Tribunal's directions regarding the items constituting the calculation. This ground of the assessee's appeal was general and required no specific adjudication, hence it was rejected.

8. Disallowance under Section 14A:
The AO had disallowed a portion of the interest and administrative expenses under section 14A, which was confirmed by the CIT(A). The Tribunal restored the matter to the AO to determine a reasonable amount of disallowance, following the Hon'ble Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which held that Rule 8D is applicable prospectively from the assessment year 2008-09. This ground of the assessee's appeal was restored to the AO for fresh adjudication.

Conclusion:
The appeal filed by the Revenue was partly allowed for statistical purposes, and the appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal provided detailed reasoning for each issue, referencing relevant case laws and authoritative pronouncements to support its decisions.

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