2019 (4) TMI 82 - HC - Income Tax

Claim of expenditure - Funds/loans by way of 'rights issue' of non-convertible debentures - claim was rejected by the Assessing Officer for the reason that the amount in question was in respect of the preceding assessment year, i.e. 1992-93 and hence it should have been claimed in that year - relevance to the 'mercantile system of accounting' projected as the basis for raising the challenge by the Department - HELD THAT - In the instant case, the bill was raised by the Stock Brokers only on 10.03.1993 (within the assessment year 1993-94), though the 'rights issue' had been closed on 04.10.1991 (assessment year 1992-93). This being the position, it was rightly claimed by the Assessee in respect of the assessment year 1993-94. Reliance is sought to be placed on the verdicts in Commissioner of Income Tax vs; Raj Motors Yad 2005 (9) TMI 49 - ALLAHABAD HIGH COURT and Commissioner of Income Tax vs. Sanco Trans Ltd. 2006 (1) TMI 83 - MADRAS HIGH COURT . It is also pointed out by the learned Sr. Counsel that there is no dispute for the Department as to the genuineness of the expenditure incurred by the Assessee and as such, the contention/challenge raised is rather hyper-technical. There was no need, necessity or occasion for the Assessee to have made any provision for meeting the expenses in the year 1992-93, as the demand from the Stock Brokers was raised only as per their bill dated 10.03.1993, accountable for the assessment year 1993-94. The finding and reasoning given by the Tribunal holding it in favour of the assessee and against the Department is within the four walls of law. No substantial question of law Characterization of income - gains earned on cancellation of the Foreign Exchange Forward Contract - capital receipts or revenue receipts - Raise additional ground - HELD THAT - It was noted by the Tribunal that additional ground was raised both by the Assessee and the revenue for the first time before the Tribunal; by virtue of which there was no opportunity for the Assessing Officer and the Commissioner of Income Tax (Appeals) to have it considered and hence left it to be decided by the Assessing Officer at the first instance. We find no illegality, irregularity or impropriety with the finding and reasoning given by the Tribunal and no interference is warranted with the direction given. Technical Know-how Collaboration Agreement - Assessee claimed the said amount during the assessment year 1993-94, which came to be rejected by the Assessing Officer, stating that approval was given by the Government only on 13.10.1993, i.e. coming within the assessment year 1994-95 - HELD THAT - The appeal preferred by the Assessee was partly allowed by the Commissioner of Income Tax (Appeals) holding that it was mentioned in the Government letter dated 02.04.1993 that duration of the agreement shall be for a period of 5 years from expiry of the earlier agreement and hence the agreement became operative on the date of expiry of the earlier agreement itself, i.e. from 26.01.1992, though the approval was given by the Government only later on 13.10.1993. It was held that the approval related back to the effective date of agreement viz. 26.01.1992. The Commissioner of Income Tax (Appeals) also observed that, out of the total royalty amount of ₹ 2,61,52,641/-, a sum of ₹ 49 lakhs was in respect of the period from 26.01.1992 to 31.03.1992 falling within the period of the assessment year 1992-93 and hence the said extent cannot be allowed as part of expenses of the assessment year 1993-94. CIT (Appeals) virtually deleted the dis-allowance of ₹ 2,12,52,641/- relatable to the period from 01.04.1992 to 31.03.1993. The Tribunal considered the facts and figures meticulously and found that the order passed by the Commissioner of Income Tax (Appeals) was not liable to be interdicted. It was accordingly, that the appeal preferred by the Revenue was dismissed. We hold that the finding and reasoning given by the Tribunal is correct and sustainable. Expenditure claimed towards payment of 'club membership fee' - HELD THAT - Tribunal under similar circumstances in respect of the assessment year 1991-92 (in the Assessee's own case) had been accepted by the Revenue and that the said finding was supported by the decisions of other High Courts as well, which stood in favour of the Assessee. It was accordingly, that the order passed by the CIT (Appeals) in favour of the assessee was upheld and the appeal preferred by the Revenue was dismissed in relation to the challenge against 'club expenses'. The finding arrived at by the Tribunal is well supported by reasons. The amount spent for acquiring membership in the Clubs stands on a different pedestal from the amounts incurred for availing materials supplied or service provided in the clubs. This Court finds that the said issue is to be answered in favour of the assessee. Deduction of commission - sister concern of the assessee, which according to the AO was an instance of 'diversion of funds' - HELD THAT - In the appeal preferred by the Assessee, the CIT(Appeals) deleted the above additions, holding that there was no dispute as to the actual payment of commission and that the details of export (through the sister concern/Raunaq International Ltd.) were produced before the AO and the said Company (payee) had duly disclosed the said income in its account and satisfied the income tax. It was also observed that the AO had no case that the agreement in this regard was not valid. Reliance was also placed on the various other supporting factors to hold that the allegation of diversion of income was wrong and misconceived. The finding of the CIT (Appeals) was affirmed by the Tribunal, leading to the dismissal of the appeal preferred by the Department (paragraph 48). This is a clear 'finding on fact' and the challenge raised by the Revenue in this appeal does not involve any substantial question of law. Depreciation claimed by the Assessee in terms of Section 43A on the increased cost of the asset due to fluctuation in currency rate - increased cost of the asset due to fluctuation in currency rate - HELD THAT - Assessee showed enhanced value of its capital assets of the plant and machinery to an extent of ₹ 9,95,75,351/- in its books of accounts, being the amount of increase in liability due to fluctuation in the exchange rates of foreign currency. AO disallowed the depreciation, holding that the increase in liability was artificial and did not represent any actual payment during the year, by virtue of which it would not come within the purview of Section 43A. CIT(Appeals) took a stand in favour of the Assessee and held that the instance would clearly fall within the ambit of Section 43A and in turn directed the AO to grant the relief, which was sought to be challenged by the Revenue before the Tribunal. Notice of this Court that the issue stands squarely covered in favour of the Assessee, by virtue of the rulings rendered by the Supreme court in Commissioner of Income Tax,Delhi vs. Woodward Governor India P.Ltd 2009 (4) TMI 4 - SUPREME COURT and Oil and Natural Gas Corporation Ltd, Dehradun 2010 (3) TMI 81 - SUPREME COURT Allowability of advertisement charges - re-open the assessment and to disallow some portion of advertisement expenses - payments made by 'account payee cheques' - HELD THAT - We find that the materials produced before the Assessing Officer clearly reveal that the amounts were paid by the Assessee by way of crossed cheques and that there was no dispute with regard to the works in relation to the publicity effected. So also, pursuant to the summons issued by the Assessing Officer, the Bank Manager had produced the details/records; asserting that all the cheques were encashed (also producing copies of the relevant cheques, except the Cheque for the amount aggregating to ₹ 9,30,332/-, which could not be traced out). There is no dispute as to the publicity effected and that the payment was effected through crossed cheques and further since all these cheques have been encashed, we are of the view that this is not a fit case where interference is to be made with the finding and reasoning given by the Tribunal. The omission/absence on the part of the Bank to produce the particulars in respect of the cheque for ₹ 9,30,332/- (stating that the said cheque could not be traced out) by itself cannot be a ground to draw any adverse inference, as the other ingredients with regard to the work involved, payment of publicity charges through crossed cheques and encashment of cheques by Bankers stand vindicated. That apart, the finding given by the Tribunal is purely a 'question of fact' and no substantial question of law is involved. 'Roll over charges' for renewal/roll over of the foreign exchange forward contracts taken by the Assessee for repayment of foreign currency loans - HELD THAT - We are of the view that the challenge raised by the Assessee does not constitute any substantial question of law coming within the purview of Section 260A of the Income Tax Act, to be entertained by this Court in the appeal. This Court is also aware of the present 'Litigation Policy' framed by the Government of India, Ministry of Finance as per the Circular No.3/2018 dated 11.07.2018 of the CBDT, Department of Revenue, which has been issued in suppression of the earlier Circular bearing No.21/15 dated 10.12.2015.

Summary

Issues Involved:
1. Deduction of expenditure for rights issue of non-convertible debentures.
2. Classification of gains on cancellation of Foreign Exchange Forward Contracts as capital or revenue receipts.
3. Deduction of royalty payments under a Technical Know-how Collaboration Agreement.
4. Deduction of club membership fees as business expenditure.
5. Deduction of commission paid to a sister concern.
6. Depreciation on increased cost of assets due to currency fluctuation.
7. Deduction of advertisement charges.
8. Classification of roll-over charges for foreign exchange contracts as capital or revenue expenditure.

Detailed Analysis:

1. Deduction of Expenditure for Rights Issue of Non-Convertible Debentures:
The Assessee claimed expenditure for raising funds through a rights issue of non-convertible debentures. The Assessing Officer rejected the claim for the assessment year 1993-94, stating it pertained to the previous year. The Tribunal allowed the claim, stating the liability arose upon receiving the bill within the assessment year 1993-94. The High Court upheld the Tribunal's decision, noting the expenditure was contractual and arose when the bill was raised, not when the rights issue closed.

2. Classification of Gains on Cancellation of Foreign Exchange Forward Contracts:
The Department sought to classify gains from the cancellation of Foreign Exchange Forward Contracts as capital receipts. The Tribunal referred the matter to a Special Bench, which classified the gains as capital receipts. The High Court found no fault in the Tribunal's procedure and upheld the classification, noting that the Tribunal's direction to the Assessing Officer for fresh consideration was appropriate.

3. Deduction of Royalty Payments under a Technical Know-how Collaboration Agreement:
The Assessee claimed royalty payments for the period 26.01.1992 to 31.03.1993, which was initially disallowed by the Assessing Officer. The Commissioner of Income Tax (Appeals) allowed the claim, stating the agreement's approval related back to its effective date. The Tribunal upheld this decision, and the High Court confirmed it, noting the approval was retrospective.

4. Deduction of Club Membership Fees as Business Expenditure:
The Assessee claimed club membership fees as business expenditure. The Assessing Officer disallowed it, considering it personal. The Commissioner of Income Tax (Appeals) allowed the claim, and the Tribunal upheld this decision, noting similar decisions in previous years. The High Court agreed, distinguishing membership fees from personal expenses.

5. Deduction of Commission Paid to a Sister Concern:
The Assessee paid commission to a sister concern, which the Assessing Officer disallowed as a diversion of funds. The Commissioner of Income Tax (Appeals) allowed the deduction, noting the validity of the agreement and the actual payment. The Tribunal upheld this decision, and the High Court found no substantial question of law, affirming the Tribunal's findings.

6. Depreciation on Increased Cost of Assets Due to Currency Fluctuation:
The Assessee claimed depreciation on the increased cost of assets due to currency fluctuation, which the Assessing Officer disallowed. The Commissioner of Income Tax (Appeals) allowed the claim, and the Tribunal upheld this decision. The High Court confirmed it, citing Supreme Court rulings supporting the Assessee's position.

7. Deduction of Advertisement Charges:
The Assessee claimed advertisement charges, which the Assessing Officer disallowed based on unserved summons to the parties involved. The Tribunal allowed the claim, noting the payments were made by crossed cheques and the work was substantiated. The High Court upheld the Tribunal's decision, finding no substantial question of law.

8. Classification of Roll-Over Charges for Foreign Exchange Contracts as Capital or Revenue Expenditure:
The Assessee initially treated roll-over charges as capital expenditure in the books but claimed them as revenue expenditure in the tax return. The Tribunal, following a Special Bench decision, classified them as capital expenditure. The High Court upheld the Tribunal's decision, noting no substantial question of law.

Conclusion:
The High Court dismissed all appeals, finding no substantial questions of law. The judgments were upheld based on the Tribunal's findings and relevant legal precedents. The Court also noted the Government's litigation policy, emphasizing the monetary limits for filing appeals and the importance of merit-based decisions.