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2013 (11) TMI 1335 - AT - Income TaxTPA - Allowance of usance interest and BLC interest as expenditure to the assessee - Machines, accessories and parts thereof were imported by the assessee company from its holding company Ricoh, Japan during the course of its normal business - As per the relevant bills of lading, the assessee was liable to pay interest to Ricoh, Japan for the delay in payment up to a period of 180 days - The assessee company had availed BLC from Citi Bank and as per the terms of the said credit, the Citi Bank was making the payment to Ricoh, Japan on behalf of the assessee company after a period of 180 days in Dollar terms and the said credit was subsequently repaid by the assessee again in Dollars along with interest. The usance interest to Ricoh, Japan and interest from BLC to Citi Bank was agreed to be paid at international libor Held that - Expenditure on account of usance interest and BLC interest was incurred by the assessee wholly and exclusively for the purpose of business and it cannot be said by any stretch of imagination that it was a case of transfer of its profits by the assessee company to the parent company Ricoh, Japan in the guise of the said interest in order to avoid the tax liability as alleged by the A.O. especially when the relevant international transactions of the assessee company with Ricoh, Japan were accepted by the transfer Pricing Office in its order passed u/s 92(3) as made at ALP Decided against the Revenue. Treating the bank interest on deposits as Business income instead of Income from other sources Held that - Deposits with Bank were kept by the assessee as its business necessity to obtain the performance guarantee in favour of the clients and the ld. D.R has not been able to controvert/rebut this finding recorded by the ld. CIT(A) - Once it is found that the fixed deposits with Bank were kept by the assessee for the purpose of its business, the interest earned on the said deposits has to be treated as business income of the assessee Decided against the Revenue. Allowability of loss due to fluctuation in foreign exchange Held that - Claim for foreign exchange fluctuation loss relating to usance interest and BLC interest is consequential to the issue relating to allowability of the said interest as involved in first ground above Since the first ground is already decided in favor of assessee, allowed the consequential relief due to the assessee on account of foreign exchange fluctuation loss relating to the said interest Decided against the Revenue. Taxability of interest on advance made on accrual basis - Advance to M/s CEAT Tyres Ltd Held that - Income Tax is a levy on income and Income Tax Act takes into account points of time at which the liability to tax is attracted viz. the accrual of income or its receipt. If the right to receive a particular income is vested in the assessee as per the agreement or understanding, the same can be said to have accrued to the assessee in the relevant year unless such right is waived by him as a result of revised agreement or understanding - Nothing has been brought on record in the present case either before the authorities below or even before the ITAT to show that interest chargeable by it on the advance to M/s CEAT Tyres Ltd. as per the agreement was actually waived in the year under consideration - On the other hand, a civil suit was filed by the assessee against M/s CEAT Tyres Ltd. to recover the advance along with interest which was pending before the Hon ble Bombay High Court - Having regard to all these facts of the case, income on account of interest receivable on advance paid by the assessee to M/s CEAT Tyres Ltd. had accrued to the assessee in the year under consideration and the same was taxable in the hands of the assessee as rightly held by the A.O. Decided in favor of Revenue.
Issues Involved:
1. Deletion of addition on account of usance interest and BLC interest. 2. Classification of bank interest as business income or income from other sources. 3. Allowability of foreign exchange fluctuation loss. 4. Disallowance of employees' contribution to gratuity fund under Section 43-B. 5. Classification of miscellaneous income as business income or income from other sources. 6. Deductibility of advances written off as bad debts. 7. Accrual of interest receivable on advance paid to M/s CEAT Tyres Ltd. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Usance Interest and BLC Interest: The Revenue challenged the deletion of additions made by the A.O. regarding usance interest and interest paid to the bank on Buyers Line of Credit (BLC). The assessee argued that the interest paid to Ricoh, Japan, and Citi Bank was a business expenditure. The A.O. disallowed these expenses, suspecting tax evasion. The CIT(A) found the explanations provided by the assessee satisfactory, noting that the transactions were validated by the Transfer Pricing Officer and allowed the deductions. The Tribunal upheld the CIT(A)'s decision, confirming that the expenses were incurred wholly and exclusively for business purposes, dismissing the Revenue's appeal on this ground. 2. Classification of Bank Interest as Business Income or Income from Other Sources: The A.O. classified the interest income on fixed deposits as "income from other sources," whereas the assessee claimed it as business income. The CIT(A) agreed with the assessee, noting that the deposits were made for obtaining performance guarantees necessary for business operations. The Tribunal upheld this view, affirming that the interest earned on such deposits should be treated as business income, thereby dismissing the Revenue's appeal on this issue. 3. Allowability of Foreign Exchange Fluctuation Loss: The A.O. disallowed the foreign exchange fluctuation loss related to usance interest and BLC interest. Since the CIT(A) allowed the usance and BLC interest, the foreign exchange fluctuation loss was also allowed. The Tribunal agreed, noting that the issue was consequential to the decision on usance and BLC interest, thereby dismissing the Revenue's appeal on this ground. 4. Disallowance of Employees' Contribution to Gratuity Fund under Section 43-B: The A.O. disallowed the employees' contribution to the gratuity fund paid after the due date under the respective Act. The CIT(A) deleted the disallowance, relying on the Tribunal's decision in a similar case, which held that the amendment to Section 43-B was retrospective. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in Allied Motors (P.) Ltd. v. CIT, confirming the retrospective application of the amendment, thus dismissing the Revenue's appeal on this issue. 5. Classification of Miscellaneous Income as Business Income or Income from Other Sources: The A.O. classified miscellaneous income as "income from other sources," while the assessee claimed it as business income. The CIT(A) accepted the assessee's claim, noting that the income had a direct nexus with the business activities. The Tribunal upheld the CIT(A)'s decision, agreeing that the miscellaneous income was intricately connected with the business, thus dismissing the Revenue's appeal on this ground. 6. Deductibility of Advances Written Off as Bad Debts: The A.O. disallowed the advances written off as bad debts, citing a lack of evidence that they were previously taxed or had become irrecoverable. The CIT(A) allowed a partial deduction, accepting the claim for certain advances but disallowing the rest due to insufficient evidence. The Tribunal upheld the CIT(A)'s decision, noting the assessee's failure to provide evidence of the advances becoming irrecoverable during the year, thus dismissing both the Revenue's appeal and the assessee's cross-objection on this issue. 7. Accrual of Interest Receivable on Advance Paid to M/s CEAT Tyres Ltd.: The A.O. added interest receivable on an advance to M/s CEAT Tyres Ltd., noting that the assessee was entitled to charge interest as per the agreement. The CIT(A) deleted the addition, stating that the recovery of the principal amount itself was doubtful, and interest could not be said to have accrued. The Tribunal disagreed, noting that the right to receive interest existed as per the agreement and was not waived. Therefore, the interest income had accrued and was taxable in the year under consideration, thus allowing the Revenue's appeal on this issue. Conclusion: - The appeals of the Revenue for assessment years 2002-03 and 2003-04 were partly allowed. - The appeal of the Revenue for A.Y. 2004-05 and the assessee's Cross Objections for assessment years 2002-03 and 2004-05 were dismissed.
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