2017 (5) TMI 677 - AT - Income Tax

Addition on account of the alleged pre-operative expenses - Held that - Only ground of disallowance of these expenses is on the ground that they relate to the period prior to the commencement of the business by the assessee.The sum and substance of the decisions as relied upon by assessee is that the company had to file various statements and returns and has to perform various functions to retain its status as a company and had to incur certain expenditure, and such expenditure is allowable as deduction. - Decided against revenue Addition on gain due to fluctuation in foreign exchange - Held that - There is a clear finding by the learned Commissioner of Income-tax (Appeals) that the loans were taken in foreign exchange for construction of plant and the foreign exchange gain was the result of revaluation of loan liability for capital expenditure which is a realised gain. He further recorded that no plant and machinery were acquired by the assessee during the year under consideration as such the learned Commissioner of Income-tax (Appeals) relied upon the decision reported in CIT v. Jagatjit Industries Limited (2009 (9) TMI 62 - DELHI HIGH COURT). In this decision, it is clearly held that the entire gain due to the fluctuation in foreign exchange when the source of funds was for capital expenditure, is a capital receipt. This judgment is applicable to the facts of the case on hand and following the same, we find no legal infirmity in the finding of the learned Commissioner of Income-tax (Appeals). - Decided against revenue

Summary

Issues:
- Disallowance of pre-operative expenses
- Disallowance of gain due to fluctuation in foreign exchange

Pre-operative Expenses Disallowance:
The Revenue challenged the deletion of expenses totaling ?21,09,962 by the learned Commissioner of Income-tax (Appeals). The Assessing Officer disallowed these expenses as they were incurred before the commencement of the business. However, the Commissioner allowed expenses related to audit fees, salaries, staff welfare, legal charges, etc., essential for maintaining the corporate entity under section 57(iii) of the Act. The Commissioner confirmed a disallowance of ?49,50,674 but deleted ?21,09,962. The Tribunal upheld the Commissioner's decision, citing precedents that necessitated companies to incur such expenses to retain corporate status, making them allowable deductions.

Gain on Foreign Exchange Fluctuation Disallowance:
The Revenue contested the deletion of ?53,95,253 by the Commissioner, relating to gain on foreign exchange fluctuations. The Commissioner, relying on precedent, treated this gain as a capital receipt and deleted the addition. The Tribunal found no legal flaw in the Commissioner's reasoning, as the gain resulted from revaluation of loan liability for capital expenditure, which was considered a realized gain. The Tribunal upheld the Commissioner's decision, stating that the gain was a capital receipt as per applicable law.

In conclusion, the Tribunal found no legal infirmity in the Commissioner's order regarding the disallowance of pre-operative expenses and gain on foreign exchange fluctuation. The Tribunal dismissed the Revenue's appeal, upholding the Commissioner's decisions.