2022 (7) TMI 1581 - AT - Income Tax

Disallowance of telecommunication line expenses as capital in nature - DRP sustained the disallowance on the ground that the assessee has claimed internet and telephone expenses separately and that the telecommunication line expenses pertain to expenses incurred for IT infrastructure which is capital in nature - HELD THAT -Charges paid by the assessee are towards telephone lines monthly port charges and recurring internet charges and hence we are of the considered view that the expenditure incurred by the assessee under the head telecommunication lines is of revenue nature. We also notice that the AO in assessee s own case for AY 2018-19 has allowed the expenditure after verifying the sample invoices on the basis that the expenditure is recurring charges and paid for a specified period . DPR/AO has in the order had stated that the assessee has claimed telephone and interest charges separately and stated it as reason for holding that the expenditure incurred as telecommunication lines is capital in nature. This in our view is not correct as the expenditure incurred under the head telecommunication lines have to be verified based on invoices submitted to decide whether they are capital or revenue in nature. From the sample invoices it is clear that the assessee incurs monthly recurring charges towards internet telephone lines port charges etc. which in our view are of revenue nature. These expenditure do not bring any benefit of enduring nature to the assessee and is incurred in the normal course of business. We therefore delete the addition made with regard to telecommunication lines . This ground of the assessee is allowed. Disallowance of foreign exchange loss - AO disallowed the forex loss stating that the assessee has not provided proper explanation as to why the forex loss is claimed as an expenditure - HELD THAT -From the perusal of the breakup of the forex loss claimed by the assessee we notice that the major portion of the loss has arisen out of the year end restatement of receivables and the balance in the EEFC a/c of the assessee which as per the ICDS VI clauses extracted above is a monetary item and accordingly to be converted into reporting currency based on closing rate and the difference shall be recognized as income/expense. Therefore the assessee has correctly recognized the forex as per the ICDS which is to be recognized as a loss as per the provisions of section 43AA. It is also noticed here that the amount claimed is net loss after considering the forex gains arising in certain transactions and that the assessee has also submitted that the invoice-wise details of forex loss/gain - Thus forex loss claimed by the assessee is an allowable expenditure. This ground is allowed in favour of the assessee. Disallowance of unexplained expenses - AO disallowed the expenditure on the ground that the assessee has not provided details of the nature of expenditure - AR submitted before us that the issue may be remanded back to the AO before whom the details for the balance amount disallowed would be furnished by the assessee - HELD THAT - We remand this issue back to the AO for verification of further details and supporting documents and decide the allowability in accordance with law. The assessee is directed to submit the relevant details in this regard before the AO and cooperate with the proceedings.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

• Whether the telecommunication line expenses should be treated as capital in nature or as revenue expenses.
• Whether the foreign exchange loss incurred by the assessee is deductible as a revenue expense.
• Whether the disallowance of miscellaneous expenditure due to lack of supporting documentation was justified.
• Whether the levy of interest under section 234D of the Income Tax Act was appropriate.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance of Telecommunication Line Expenses

• Relevant Legal Framework and Precedents: The issue revolves around the classification of expenses as either capital or revenue. Precedents such as Assam Bengal Cement Co. Limited, Empire Jute Co Ltd vs CIT, and Bombay Steam Navigation Co. (P) Limited v CIT were considered.
• Court's Interpretation and Reasoning: The Tribunal examined the nature of the telecommunication line expenses, emphasizing that these were recurring charges for internet and telephone services necessary for daily business operations.
• Key Evidence and Findings: Sample invoices were provided, showing monthly charges for telephone lines, port charges, and recurring internet charges. The Tribunal found these to be revenue in nature, as they did not confer any enduring benefit.
• Application of Law to Facts: The Tribunal concluded that the expenses were incurred for maintaining business efficiency and were not capital in nature.
• Treatment of Competing Arguments: The Tribunal rejected the AO's argument that the expenses were capital due to their classification as 'centrex wireline' or 'port charges'.
• Conclusions: The Tribunal allowed the expenses as revenue, deleting the addition made by the AO.

Disallowance of Foreign Exchange Loss

• Relevant Legal Framework and Precedents: Section 43AA of the Income Tax Act and ICDS VI were relevant, along with the Supreme Court's decision in CIT vs. Woodward Governor India (P.) Ltd.
• Court's Interpretation and Reasoning: The Tribunal noted that the foreign exchange loss was due to year-end restatement of receivables and EEFC account balances, which are monetary items.
• Key Evidence and Findings: The assessee provided a detailed breakup of the forex loss, which was consistent with the provisions of ICDS VI.
• Application of Law to Facts: The Tribunal found that the forex loss was correctly recognized as per ICDS and section 43AA, making it deductible as a revenue expense.
• Treatment of Competing Arguments: The Tribunal disagreed with the DRP's classification of the forex loss as a TP adjustment and capital in nature.
• Conclusions: The Tribunal allowed the forex loss as a deductible expense.

Disallowance of Miscellaneous Expenditure

• Relevant Legal Framework and Precedents: The issue concerned the requirement for adequate documentation to support expense claims.
• Court's Interpretation and Reasoning: The Tribunal noted the AO's partial allowance of expenses based on provided invoices and the disallowance due to missing documentation.
• Key Evidence and Findings: The Tribunal acknowledged the breakdown of disallowed expenses and the lack of supporting documents for certain items.
• Application of Law to Facts: The Tribunal remanded the issue to the AO for further verification, allowing the assessee to provide additional documentation.
• Treatment of Competing Arguments: The Tribunal accepted the assessee's request for a remand to furnish the necessary documents.
• Conclusions: The issue was remanded to the AO for further examination.

Levy of Interest under Section 234D

• The Tribunal did not provide a detailed analysis of this issue, as it was consequential in nature and dependent on the outcomes of the other issues.

3. SIGNIFICANT HOLDINGS

• Telecommunication Line Expenses: "The expenditure incurred by the assessee under the head 'telecommunication lines' is of revenue nature."
• Foreign Exchange Loss: "The forex loss claimed by the assessee is an allowable expenditure."
• Miscellaneous Expenditure: The issue was remanded for further verification and documentation.
• Core Principles Established: The judgment reinforced the principle that recurring operational expenses necessary for business efficiency are revenue in nature, and foreign exchange losses recognized under ICDS are deductible.
• Final Determinations: The Tribunal allowed the appeal in favor of the assessee, permitting the deductions claimed for telecommunication expenses and foreign exchange loss, while remanding the miscellaneous expenses issue for further review.