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2022 (6) TMI 341 - AT - Income TaxNature of expenses - Disallowance of Corporate Debt Restructuring Expenses - expenses were incurred by the assessee towards resettling of interest rate and for restructuring debt. The assessee also paid fees to consult in respect of restructuring - AO disallowed the restructuring expenses on the ground the assessee has derailed benefit of enduring in nature which is not revenue expenditure - HELD THAT - This issue is been settled by the judgement of the honourable Supreme Court in the case of India cements Ltd wearing it is held that loan is not an asset or a advantage of enduring nature and expenditure incurred in connection with obtaining loan is not capital expenditure. Further in the case of Compton engineering Co Ltd 1998 (6) TMI 23 - MADRAS HIGH COURT held that professional fee paid to management consultant for comprehensive restructuring of business could not be treated as capital expenditure, since the report was not for the purpose of any new business, but for efficient carrying on of existing business. Further it is a fact that out of Rs.17.3 crore of total resetting premium paid, as recovery was made from the assessee to the extent of Rs.14.62 crores in the financial year 2004-05 onwards and credited to sales account. This also shows that resetting premium paid was on revenue account. This the assessing officer contention that by incurring expenses in question, the assessee derailed benefit of enduring nature is not tenable in view of the decision of India cements Ltd., 1965 (12) TMI 22 - SUPREME COURT thus addition made by the assessing officer is hereby deleted and expenditure is to be treated only Revenue in nature. Thus issue allowed in favour of the assessee. Additions under section 115 JB on account of TDS on this delayed payment charges - CIT A deleted the addition - HELD THAT - We do not find any infirmity in the order passed by the ld.CIT A . Thus no interference is called for and we uphold the order passed by the ld CIT A . Thus issue no. (vii) is allowed in favour of the assessee. Upgradation of software expenses - Capital or revenue expenses - HELD THAT - As Counsel submitted that jurisdictional High Court in the case of CIT -Vs- N.J. India Invest (P.) Ltd. 2013 (7) TMI 738 - GUJARAT HIGH COURT held that Expenditure on maintenance, back-up and support services to existing hardware and software is revenue in nature, and therefore allow the expenditure as revenue in nature. Per contra the Ld DR could not contravent this decision and could not produce any decision in favour of the Revenue. Therefore respectfully following the jurisdictional judgement supra we allow this ground and delete the addition made by the AO. Thus issue no. (viii) is allowed in favour of the assessee. Charging of interest under section 234B on book profits - AO charged interest u/s.234B on addition made on account of provision for deferred tax in the book profit u/s.115JB relying on restrospective amendment made in section 115JB by the Finance Act, 2008 - HELD THAT - This issue is squarely covered against the assessee by recent judgement of the Karnataka High Court judgement in the case of CIT -Vs- JSW Steel Ltd. 2020 (3) TMI 398 - KARNATAKA HIGH COURT - we reject this ground and the confirm the addition made by AO. Loss due to foreign exchange difference rate - assessee incurred a loss due to foreign exchange rate difference, which is a actual loss and not notional loss - HELD THAT - Difference between the exchange rate and the rate as per the forward contract was debited to the profit loss account as foreign exchange loss. AO has not accepted this loss - AR claimed that the issue is directly covered by the judgment in the case of CIT Vs. Industrial Financial Corporation of India Ltd. 2009 (9) TMI 877 - DELHI HIGH COURT wherein it has been held that where the assessee enters into a contract for purchase of foreign currency on a future date at pre-determined rates, the difference between the forward contract rate and exchange rate on the date of entering into contract has to be recognized as income or expenses, which ascertained and definite in terms of contract and would be alone as business expenditure in the year of entering into forward contract itself, though as per the contract part payment is to be succeeding year.
Issues Involved:
1. Replacement of parts of machines treated as capital expenditure. 2. Disallowance under Section 14A. 3. Disallowance under Section 14A in computation of Book Profit under Section 115JB. 4. Claim of deduction under Section 43B. 5. Depreciation on Managing Director’s residence. 6. Disallowance of Corporate Debt Restructuring Expenses. 7. Additions under Section 115JB on account of TDS on delayed payment charges. 8. Disallowance on upgradation of software expenses. 9. Charging of interest under Section 234B on Book Profits under Section 115JB. 10. Loss due to foreign exchange difference rate. Detailed Analysis: 1. Replacement of Parts of Machines Treated as Capital Expenditure: The Tribunal held that the replacement of parts in machinery should be treated as revenue expenditure. It was noted that the spares consumed did not give an enduring benefit nor increased the life or capacity of the machines. The Tribunal relied on the Supreme Court's decision in the case of CIT vs. Saravana Spinning Mills and CIT vs. Sri Mangayarkarasi Mills, which stated that replacing parts of a machine does not amount to replacing the entire unit. Therefore, the addition made by the AO was directed to be deleted. 2. Disallowance under Section 14A: The Tribunal observed that Rule 8D is prospective and could not be applied to assessment years prior to 2007. The Tribunal noted that the assessee had sufficient interest-free funds and no administrative expenses were incurred. Therefore, the disallowance under Section 14A was unwarranted and was deleted. 3. Disallowance under Section 14A in Computation of Book Profit under Section 115JB: The Tribunal referred to the jurisdictional High Court's decision in the case of Principal Commissioner of Income-tax-4 vs. Sintex Industries Ltd., which held that no disallowance under Section 14A is justified when the assessee had sufficient interest-free funds. Thus, the Tribunal deleted the disallowance under Section 14A in the computation of book profit under Section 115JB. 4. Claim of Deduction under Section 43B: The Tribunal upheld the CIT(A)’s decision that the AO was correct in not allowing the deduction of interest amounting to Rs.2,49,82,597/-. However, the AO was directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08, should be allowed as a deduction in this year. 5. Depreciation on Managing Director’s Residence: The Tribunal allowed the depreciation claim at 10% on the building used for the Managing Director’s residence-cum-office, noting that the building was used for official purposes with all office facilities. 6. Disallowance of Corporate Debt Restructuring Expenses: The Tribunal held that the expenses incurred for restructuring debt did not result in an asset or advantage of enduring nature. The Tribunal relied on the Supreme Court's decision in the case of India Cements Ltd., which held that loan is not an asset or advantage of enduring nature and expenditure incurred in connection with obtaining loan is not capital expenditure. Thus, the addition made by the AO was deleted. 7. Additions under Section 115JB on Account of TDS on Delayed Payment Charges: The Tribunal upheld the CIT(A)’s decision that only Rs.16.01 crore out of Rs.78.1 crore should have been included in the book profits under Section 115JB as well as in the income chargeable to tax under normal provisions of the Act. The balance was deleted. 8. Disallowance on Upgradation of Software Expenses: The Tribunal allowed the expenditure as revenue in nature, relying on the jurisdictional High Court's decision in the case of CIT vs. N.J. India Invest (P.) Ltd., which held that expenditure on maintenance, back-up, and support services to existing hardware and software is revenue in nature. 9. Charging of Interest under Section 234B on Book Profits under Section 115JB: The Tribunal rejected the assessee’s ground and confirmed the addition made by the AO, following the Karnataka High Court's decision in the case of CIT vs. JSW Steel Ltd., which held that interest under Section 234B can be levied even if the amendment to Section 115JB was retrospective. 10. Loss due to Foreign Exchange Difference Rate: The Tribunal allowed the loss as a business expenditure, following the Delhi High Court's decision in the case of CIT vs. Industrial Financial Corporation of India Ltd., which held that the difference between the forward contract rate and the exchange rate on the date of entering into the contract should be recognized as income or expenses. Conclusion: The appeals and cross objections of the assessee were partly allowed, while the appeal of the Revenue was also partly allowed. The Tribunal provided a detailed and comprehensive judgment on each issue, ensuring the application of relevant legal principles and precedents.
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