2021 (9) TMI 1432 - HC - Income Tax

Nature of expenses - amount expended by the assessee towards preoperative expenses for establishing a plant - whether would constitute capital expenditure or revenue expenditure? - HELD THAT - The case on hand satisfies all the independent and interrelated tests broadly laid down by the Sakthi Sugars 2010 (8) TMI 456 - MADRAS HIGH COURT and Priya Village Roadshows Ltd 2009 (8) TMI 765 - DELHI HIGH COURT cases. The proposed new plant is evidencing unity of control and interlacing of the units of the assessee for capacity building of production of Radial tyres. The horizontal expansion is to sustain/earn more profitability from the business, the assessee is already doing. The assessee, in accordance with the accounting standard practices has capitalised the expenditure in its books of accounts, it is not claiming depreciation on the value of the capitalised asset. The expenses are in effect outflow for increasing the business of the assessee and, therefore, rightly treated and held as revenue expenditure by the Tribunal. The question, again, is not whether the assessee should be called upon to capitalise and claim depreciation; the question is whether the claim of the assessee conforms the deduction permissible under Section 37(1) of the Act. The preoperative expenses incurred by the assessee are revenue expenses, and are correctly so held by the Tribunal. The above view is fortified by a catena of decisions in favour of the assessee. We do not, as a matter of fact, see any reason distinguishable in the case on hand to accept the contest of the Revenue. Loan processing fee and bank charges claimed as revenue expenditure relating to setting up of new unit at Chennai as expansion of assessee's business - HELD THAT - The processing fee and bank charges are expenses incurred for getting the loan, and interest is always paid on the loan availed/sanctioned by the bank, as the case may be. The simple expenditure incurred by way of outflow from the books of account of the assessee cannot be again included in the loan borrowed by the assessee and give a complexion of interest only to attract the proviso of Section 36(1) of the Act. - Decided against revenue. Weighted deduction u/s 35(2AB) - HELD THAT - There is no need for liberal interpretation of a tax provision when the language is unambiguous and grant an incentive not provided by the Parliament to a set of cases. The incentive is admissible only when the expenditure is incurred on scientific research on in-house research and development facility. The object of incentive is to encourage indigenisation of technology and show up the know-how of the assessee/entrepreneurs. The Tribunal's conclusion is accepted the same opens a new eligibility facility without reference to approval by the prescribed authority for claiming incentive of weighted deduction. The circumstances considered and the principle laid in Cadila Healthcare 2013 (3) TMI 539 - GUJARAT HIGH COURT are completely distinguishable. He takes note of the circumstances that the claim of the assessee now encomposes revenue expenses said to have been incurred at assessee's subsidiary at Germany. The said expenditure allowed as weighted deduction then the words which have substantial meaning in Section 35(2AB) of the Act viz. that in-house research and development facility as approved by the prescribed authority would become otiose. The preference to liberal interpretation for literal construction is the correct principle. The meaning of words ought not to be stressed and strained while constructing the application of a provision in a statute. Tribunal fell in a serious error by accepting the claim of assessee for weighted deduction - assessee fails to establish essential requirements for claiming weighted deduction. Therefore the conclusion recorded by the Tribunal warrants interference u/s 260A of the Act and the question is answered in favour of the revenue and against the assessee. Loss on transfer of 100% shareholding of assessee company in its AE - Assessee had shown a loss on sale of its share in ATAG in favour of ATC - The said amount is claimed as business expenditure and sale of shares is necessitated by business expediency - DRP recorded that ATAG Subsidiary, undertaking marketing related activities of the assessee in Singapore, is entirely malicious and not supported by evidence and loss on sale of subsidiary ATAG is a made-up affair contrived to enable the assessee to claim deduction from its taxable income - HELD THAT - What is clear from the candid submissions made by both the counsel is that the reason that weighed with the Dispute Resolution Panel is not adverted to by the Tribunal while setting aside the dis-allowance. Either we accept the case of the Revenue and restore the conclusion recorded by the DRP or accept the explanation of the assessee that the claim is part of business expenditure, in such consideration this Court would be entering into a simple fact by re-examining the case of both sides for the first time. We are of the view that the Tribunal reconsiders this issue after taking note of the entire circumstances, the tenability of the claim and records such finding commensurate to the material on record. Thereafter party aggrieved, certainly can approach this Court under Section 260A. Having regard to the above consideration, the question is answered in favour of the Revenue and against the assessee wit, i.e., matter remitted to Tribunal for disposal in accordance with law. Allowance of foreign exchange loss on forward exchange contract - HELD THAT - Tribunal, as a matter of fact, found in categorical terms, the error which was committed by the DRP/Assessing Officer. Now the revenue is commending the very same argument and such argument is untenable, unless and until the fallacy in the findings recorded by the Tribunal is established within the scope of Section 260A. The Revenue has not made up a ground for interfering with the findings recorded by the Tribunal. Suffice to note that the decision of the Supreme Court in Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT and ONGC 2010 (3) TMI 81 - SUPREME COURT are applicable to the case on hand. The correct proposition is applied and the Tribunal had recorded a finding in favour of the assessee. We do not, for brevity, propose to re-state the very reasons, we are in complete agreement in the order under appeal. On the contrary, the Revenue failed to make out a case warranting interference of this Court under Section 260A of the Act. We accept the findings recorded by the Tribunal. Disallowance on account of prepaid expenses - HELD THAT - There is no legal basis for entertaining the claim. The nature of payment since is advance, the said advance cannot be deducted from the net income of the assessee and corresponding benefit in tax liability could be given to the assessee. To merit the said ground, within the scope of Section 260A of the Act, the Standing Counsel invited our attention to the brief consideration of this aspect by the Tribunal in paragraphs 36 and 37. At this juncture, it is very apt to observe that the Tribunal has not actually appreciated the admissibility of the advance payment as an expenditure for this Assessment Year. The payment is an advance expenditure and is to be booked in the year in which the expenses are actually incurred. The deduction of advance payment expenditure is to be appreciated from the perspective of accounting standard followed by the assessee. The effect of said entries is limited to the accounts of the assessee but could not be extended for claiming deduction in the return filed in the Assessment Year 2010-11. The assessee is, as a matter of fact, entitled to claim deduction in the Financial Year in which the actual expenditure is incurred by the assessee. We are not convinced with the reasons assigned by the Tribunal for interfering with the orders of the Assessing Officer. The question is answered in favour of the Revenue and against the assessee. The entitlement of assessee for claim is not accepted on the ground that the assessee is required to claim the deduction in the year in which the expenses are incurred/services received and the claim made has to be considered in the applicable Assessment Year by the Department. Hence the question is answered in favour of revenue and the findings of the Tribunal are set aside. Difference between the conversion rate - HELD THAT - A finding of fact by referring to the orders made by the competent authority is recorded. Firstly, it is not shown to us how those directives are incorrect or inapplicable to the case on hand, and, secondly, to interdict with a finding of fact, no reasons are stated with the directions issued by the Tribunal. Looked at it from either perspectives and the direction itself, we are of the view, the view taken by the Tribunal for the Assessment Year 2010-11 does not warrant interference of this Court. Decided against the Revenue.

Summary

Issues Involved:
1. Disallowance of claim of preoperative expenditure.
2. Claim of loan processing fee and bank charges as revenue expenditure.
3. Weighted deduction under Section 35(2AB) for R&D expenses.
4. Loss on sale of investment in shares as revenue loss.
5. Unrealized foreign exchange fluctuation gain.
6. MTM loss on forward contract.
7. Prepaid expenses as deduction.
8. Difference in conversion rate of foreign currency.

Detailed Analysis:

Issue 1: Disallowance of Claim of Preoperative Expenditure
The assessee claimed Rs. 26,97,79,538/- as revenue expenditure for setting up a new unit at Chennai. The Revenue argued that since the expenditure was capitalized in the books, it should be added to the cost of the plant and machinery, allowing only depreciation. The Tribunal, relying on precedents like *Sakthi Sugars* and *Priya Village Roadshows Ltd*, allowed the claim as revenue expenditure. The Court upheld this view, noting that the expenditure was for horizontal expansion and satisfied the definition of revenue expenditure under Section 37 of the Act.

Issue 2: Claim of Loan Processing Fee and Bank Charges as Revenue Expenditure
The assessee claimed Rs. 4,70,07,847/- towards loan processing fee and bank charges as revenue expenditure. The Revenue contended that these should be treated akin to interest, thus falling under Section 36(1) proviso. The Tribunal, however, allowed the claim under Section 37, distinguishing it from interest. The Court upheld this view, citing judgments like *Gujarat Alkalies and Chemicals Ltd*.

Issue 3: Weighted Deduction under Section 35(2AB) for R&D Expenses
The assessee claimed weighted deduction for R&D expenses, including clinical trials conducted outside India. The Tribunal allowed the claim, interpreting Section 35(2AB) liberally. The Revenue argued that the expenditure did not satisfy the requirements of being incurred on an in-house R&D facility approved by the prescribed authority. The Court sided with the Revenue, noting that the Tribunal erred in not adhering to the specific conditions of Section 35(2AB).

Issue 4: Loss on Sale of Investment in Shares as Revenue Loss
The assessee claimed a loss of Rs. 4,07,24,151/- on the sale of its subsidiary as a business expenditure. The DRP and AO rejected the claim, labeling it a contrived transaction. The Tribunal allowed the claim, citing commercial expediency. The Court remanded the matter back to the Tribunal, instructing it to reconsider the issue in light of the DRP's findings.

Issue 5: Unrealized Foreign Exchange Fluctuation Gain
The Revenue's contention was that the foreign exchange gain of Rs. 4,72,34,591/- offered in AY 2011-12 had been removed based on DRP directions, thus adding it in AY 2010-11 would result in double addition. Both parties agreed that a similar issue was resolved in favor of the assessee in ITA No.249 of 2015. The Court followed this precedent and ruled in favor of the assessee.

Issue 6: MTM Loss on Forward Contract
The assessee claimed Rs. 98,10,765/- as a deductible allowance for MTM loss on forward contracts. The DRP and AO disallowed it, considering it notional and contingent. The Tribunal allowed the claim, citing Supreme Court judgments in *Woodward Governor India P. Ltd.* and *ONGC*. The Court upheld the Tribunal's decision, finding no error in its reasoning.

Issue 7: Prepaid Expenses as Deduction
The assessee claimed Rs. 5,15,34,726/- as prepaid expenses. The AO disallowed it, stating these expenses were not related to income earned in the previous year. The Tribunal allowed the claim, but the Court disagreed, noting that advance payments should be booked in the year the expenses are actually incurred. The Court ruled in favor of the Revenue, setting aside the Tribunal's findings.

Issue 8: Difference in Conversion Rate of Foreign Currency
The Revenue raised an issue regarding the conversion rate of CHF to INR. The Tribunal had directed the TPO to follow the DRP's rate of Rs. 42.88/CHF instead of Rs. 44.57/CHF. The Court found no reason to interfere with the Tribunal's direction, as it was based on the DRP's order. The question was answered in favor of the assessee.

Conclusion:
The Court allowed the Income Tax Appeal in part, ruling in favor of the assessee on issues 1, 2, 5, 6, and 8, while siding with the Revenue on issues 3, 4, and 7. The matter of the loss on the sale of investment in shares was remanded back to the Tribunal for reconsideration.