2020 (3) TMI 113 - AT - Income Tax

Addition u/s. 14A r.w. Rule 8D(2)(iii) - HELD THAT - It is admitted fact that the assessee has not earned exempted income. As decided in case of Cheminvest Ltd. vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT wherein it was held that the expression does not form part of the total income u/s. 14A of the I.T. Act envisages that there should be actual receipt of income which was not includible in the total income, during the relevant previous year, for the purpose of disallowance of any expenditure incurred in relation to the said income. In other words, section 14A of the Act would not apply if no exempt income was received or receivable during the relevant previous year. Since in the present case, the Assessing Officer has not brought on record any earning of exempt income so as to invoke the provisions of section 14A r.w. Rule 8D(2)(iii) of the Act, we are in agreement with the finding of the CIT(A) on this issue. Accordingly, this ground of appeal of the Revenue in both the appeals is dismissed. Additional depreciation - Addition made u/s. 32(1)(iia) - whether coffee, beverage and food stuffs are not distinct and new articles or things within the meaning of section 32(1)(iia) 2(29BA) - whether storing, drying of coffee, hulling, pealing, polishing, grading, colour sorting, garbling and manual grading, out-turning of garbled coffee and bulking thereby turning to liquid coffee is a manufacturing activity or not ? - HELD THAT - In the present case, converting raw coffee beans which are not fit for human consumption as such to 'liquid coffee' which is fit for human consumption has to be considered as manufacturing activity, as it is an irreversible process producing different marketable product fit for human consumption. It came to that position by storing, drying of coffee, hulling, pealing, polishing, grading, colour sorting, garbling and manual grading, out-turning of garbled coffee and bulking, thereby, the same being a irreversible process, there is a change in the chemical composition of the product. Alternatively, one cannot say that the same is a 'processing'. It amounts to production and manufacture of a distinct commercial product different from original product. In view of this, the machinery like coffee making machine, vending machine, express kiosks etc., which are used for such activities, on which the additional depreciation was claimed by the assessee is to be allowed. The Supreme Court in the case of Commissioner of Income-tax vs. N.C. Budharaja and Co. and another reported in 1993 (9) TMI 6 - SUPREME COURT has held that for determining whether manufacturing can be said to have taken place is where the commodity which is subject to the process of manufacturing can no longer be regarded as the original commodity but is recognized in a trade as a new and distinct commodity. Thus, the whole process of conversion of the raw material when leads to production of new article and when its character, use and nature also indicate complete transformation bringing into existence the new product altogether. The assessee has rightly been allowed the benefit of additional depreciation by the CIT(A) . Interest capitalization towards work in progress - HELD THAT - As decided in own case e proviso to section 36(1)(iii) inserted by the Finance Act, 2003 w.e.f. 01.04.2004 is very relevant for this issue. As per the same, till the asset for which the loan is borrowed is put to use, interest is not allowable. The judgments cited by the learned AR are for the period before insertion of this proviso and hence, not relevant. Hence, there is no merit in these grounds of the assessee and therefore, rejected. Nature of expenses - expenditure related to establishment of outlets - Revenue or capital expenditure - HELD THAT - The above expenditure consisting of salary, travelling/conveyance etc. is in the nature of revenue. The Assessing Officer had allowed the salary expenses but had disallowed the other expenses like travelling, conveyance, etc. which were linked to the above expenditure and are of the same nature and there is no enduring benefit accruing to the assessee for incurring such expenditure. The provisions of Income Tax Act also do not provide for capitalization of such expenses. The CIT(A) by relying on the decisions of the Bangalore Bench of the Tribunal in the case of EMDEE Apparels cited supra and the Mumbai Bench of the Tribunal in the case of Reliance Wellness Ltd. supra and the also considering the decision of the CIT(A) for the A.Ys. 2011-12 2012-13, held that the disallowance made in the assessment order was not warranted, as the expenditure on setting up of new outlets being an expansion of the existing business, is an allowable expense. Accordingly, the CIT(A) deleted the disallowance under project expenses made by the Assessing Officer. We do not find any infirmity in the order of the CIT(A) and confirm the order of the CIT(A). This ground of appeals of the Revenue is dismissed. Forex Loss - Allowable revenue expenditure - whether as per proviso to section 43A of the Act any adjustment can be done only on final settlement of the liability - HELD THAT - The Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT had already held that the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions at the end of the closing year. We are, therefore, unable to concur or agree with the view of the Assessing Officer that liability could arise only when the contract would have matured as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Apex Court in the case of Woodward Governor India Pvt. Ltd. (supra). It is also not in dispute that assessee is following the mercantile system of accounting consistently. The foreign exchange loss is due to the reinstatement of the accounts at the end of the financial year as well as loss incurred on account of exchange fluctuation on repayment of borrowings is similar to the interest expenditure and it is to be allowed as revenue expenditure u/s 37 as per the accounting standard approved by the Institute of Chartered Accountants of India. Hence, we do not find any infirmity in the finding of the CIT(A) on this issue and confirm the same. This ground of appeals of the Revenue is dismissed.

Summary

Issues Involved:

1. Deletion of addition made under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules.
2. Deletion of addition made under Section 32(1)(iia) of the Income Tax Act regarding additional depreciation.
3. Deletion of addition related to interest capitalization towards work in progress.
4. Deletion of addition by allowing expenditure related to establishment of outlets as revenue expenses.
5. Deletion of addition by allowing Forex Loss as a revenue expenditure.

Detailed Analysis:

1. Deletion of Addition Made Under Section 14A Read with Rule 8D(2)(iii):

The Revenue contested the deletion of additions made under Section 14A read with Rule 8D(2)(iii) for the assessment years 2013-14 and 2014-15. The Assessing Officer had disallowed certain expenses related to investments in group companies, considering them for the purpose of earning exempt income. The CIT(A) deleted these additions, relying on the Tribunal's decision in the case of M/s. J.P. Distilleries and the Delhi High Court’s decision in Cheminvest Ltd. vs. CIT, which held that no disallowance can be made under Section 14A if no exempt income is earned. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not earn exempt income during the relevant years.

2. Deletion of Addition Made Under Section 32(1)(iia) Regarding Additional Depreciation:

The Revenue challenged the deletion of additions related to additional depreciation claimed by the assessee under Section 32(1)(iia). The assessee argued that their activities, including converting raw coffee beans into liquid coffee, constituted manufacturing, thus qualifying for additional depreciation. The CIT(A) agreed, noting that the process involved significant transformation of the product, which is irreversible and results in a new, marketable product fit for human consumption. The Tribunal upheld the CIT(A)’s decision, citing the definition of "manufacture" under Section 2(29BA) and various judicial precedents, confirming that the activities met the criteria for additional depreciation.

3. Deletion of Addition Related to Interest Capitalization Towards Work in Progress:

The Revenue appealed against the CIT(A)'s decision to allow relief on interest capitalization towards work in progress. The Assessing Officer had disallowed interest expenses, arguing that they should be capitalized until the assets were put to use. The CIT(A) allowed the interest as revenue expenditure, referencing the Supreme Court's decision in Vardhaman Polytex vs. CIT and other judicial precedents. The Tribunal, however, followed its earlier decision in the assessee's case for assessment year 2010-11, which upheld the disallowance of interest capitalization, and thus allowed the Revenue's appeal on this issue.

4. Deletion of Addition by Allowing Expenditure Related to Establishment of Outlets as Revenue Expenses:

The Revenue disputed the CIT(A)’s decision to treat expenses related to the establishment of new outlets as revenue expenses. The Assessing Officer had capitalized a portion of these expenses. The CIT(A) reversed this, considering the expenses as revenue in nature, citing judicial precedents that such expenses do not create an enduring benefit and are part of the ongoing business expansion. The Tribunal upheld the CIT(A)’s decision, agreeing that the expenses were rightly classified as revenue expenses.

5. Deletion of Addition by Allowing Forex Loss as a Revenue Expenditure:

The Revenue contested the deletion of additions related to Forex Loss claimed as revenue expenditure. The Assessing Officer had disallowed the Forex Loss, arguing it should be capitalized under Section 43A. The CIT(A) allowed the Forex Loss as revenue expenditure, noting that the assessee had consistently treated such gains/losses as revenue and that there were no assets acquired from outside India to invoke Section 43A. The Tribunal upheld the CIT(A)’s decision, referencing the Supreme Court’s decision in CIT vs. Woodward Governor India Pvt. Ltd., which supports recognizing Forex Loss as revenue expenditure under the mercantile system of accounting.

Conclusion:

The Tribunal dismissed the Revenue’s appeals on the issues of Section 14A disallowance, additional depreciation under Section 32(1)(iia), and Forex Loss as revenue expenditure, upholding the CIT(A)’s decisions. However, it allowed the Revenue’s appeal on the issue of interest capitalization towards work in progress, following its earlier decision in the assessee’s case. The Tribunal confirmed the CIT(A)’s decision to classify expenses related to the establishment of new outlets as revenue expenses. The appeals of the Revenue were thus partly allowed.