2006 (2) TMI 210 - AT - Income Tax

Loss on account of exchange rate fluctuation - P L account - interest on advances - deduction u/s 80-I - business of manufacture and sale of vehicles - Cash subsidy on Exports. HELD THAT - In the present case, it is the stand of the assessee that loan obtained in foreign currency was utilized to meet the F working capital requirements. The Assessing Officer has also impliedly accepted this stand of assessee as he proceeded only on that footing. The method of accounting adopted by the assessee was consistent. Therefore, the decision of Special Bench in the case of ONGC Ltd. 2002 (8) TMI 802 - ITAT DELHI is squarely applicable to the present case. Accordingly, following the said decision, the order of CIT(A) is upheld on this issue. In our opinion, the mere agreement is not enough to conclude that the loans in question were obtained for acquiring any capital asset. The expression goods for manufacture of Motor Vehicle , in the agreement in our opinion, prima facie means raw material for manufacture of motor vehicle. Apart from this, there is nothing on record to prove that loan was actually utilized for acquisition of capital goods. On the contrary, the stand of assessee before Assessing Officer was that loan was actually utilized to meet the needs of working capital of business. Assessing Officer also proceeded on the same footing. Therefore, on the basis of facts and material available on record, we are unable to find merit in the submissions of the ld. Special Counsel for the Revenue inasmuch as it is the actual utilization of funds which is relevant in deciding the issue before us and not the mere agreement. This view is fortified by the judgment of the Apex Courtin the case of Sutlej Cotton Mills Ltd 1978 (9) TMI 1 - SUPREME COURT . Indeed, the aforesaid decision of the Hon'ble Calcutta High Court support the point of view canvassed by the ld. Special Counsel for the Revenue. However, it would be appropriate to refer to the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. wherein ratio has been enunciated for determining whether the loss on account of foreign exchange fluctuation is to be treated as revenue or capital in nature. According to the Apex Court, if the profit or loss arises to an assessee on account of variation in the value of foreign currency held by it on conversion into another currency, such profit or loss would be on revenue account if the foreign currency is held by the assessee on revenue account or as a trading account or as a part of the working capital of the business. Of course, the conclusion would be to the contrary if the foreign currency is held as a capital asset or as a part of fixed capital. Therefore, the point of view brought out by the Calcutta High Court in the case of Bestobell (India) Ltd. 1978 (9) TMI 42 - CALCUTTA HIGH COURT stands overruled by the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. Therefore, the said decision does not help the stand of the revenue at this juncture. On this issue therefore, we do not find any merit in the additional grounds raised by the Revenue. Thus, in our view, the ground No. (ii) of the Revenue as also the additional grounds raised on this aspect are liable to be dismissed, both on facts and in law. We hold so. Interest on advances received - The net income earned on account of such interest is sought to be included as a profit and gains derived from the industrial undertaking by the assessee for the purposes of computing relief u/s 80-I of the Act. In our view, applying the tests laid down by the Apex Court in the case of Pandian Chemicals Ltd. 2003 (4) TMI 3 - SUPREME COURT , the impugned income cannot be said to have a direct nexus with the industrial undertaking of the assessee. The immediate and the direct source of such income is the investment made in the bank deposits or the inter-corporate deposits, bonds etc. The activity of making the aforesaid investment is a step away from the industrial undertaking of the assessee. Therefore, in our view, the same cannot constitute incomes eligible or relief u/s 80-I of the Act. The CIT(A) has however held that since the sale of vehicles by the assessee could not be made otherwise than by way of receiving advance from customers and dealers, the interest earned on such advances was nothing but profits and gains derived from the industrial undertaking itself. In our view, the CIT(A) has is directed himself in attempting to go into the source of funds which have resulted into impugned incomes. What is required to be appreciated is the source of the income generated and not merely the source of funds for making investments which have generated such income. In the instant case, it is the investments by itself which is the source of income, which is distinct from the industrial undertaking. Therefore, in our view, the order of the CIT(A) is required to be reversed on this count. The order of the CIT(A) on this ground is thus set aside and that of the Assessing Officer is restored. Cash subsidy on Exports - The additional ground raised by the revenue is admitted. The rival contentions with respect to the merit of the dispute are on similar lines as noted by us while disposing of ground no. (iii) in the earlier paras. Following the parity of reasoning enunciated by the Apex Court in the cases of Sterling Foods 1999 (4) TMI 1 - SUPREME COURT and Pandian Chemicals Ltd., the income on account of 'Cash Subsidy on Exports' cannot constitute income derived from the industrial undertaking and is thus not eligible for relief u/s 80-I of the Act. Whether the assessee can be put in a position, which is worst than the position in the original assessment proceedings? - The scheme of the Act shows that an assessment made by the Assessing Officer is final unless disturbed by an appropriate authority under various provisions of the Act. If any wrong is committed by the Assessing Officer, which is prejudicial to the Revenue, it can be corrected either u/s 263 by the CIT or in the rectification proceedings u/s 154 or under the provisions of section 147 by the Assessing Officer himself, as the case may be. If any wrong is committed, which is prejudicial to the assessee, the right of appeal has been conferred on the assessee by virtue of section 246. Apart from this, the assessee can also invoke the provisions of section 154 or of section 264, as the case may be. The right of appeal against the assessment is only for the benefit of the assessee but even under these proceedings, special provisions have been enacted which confer power of enhancement on the CIT(A) but similar powers have not been conferred by the Legislature on the Income-tax Appellate Tribunal. This is also apparent from the fact that the power of enhancement has been conferred on the Tribunal under the Wealth-tax Act. This is clear from the comparative study of sub-section (5) of section 24 of the Wealth-tax Act, 1957, and section 254(1) of the Income-tax Act, 1961. Therefore, by implication, it means that the order of the Tribunal cannot enhance the income originally assessed. Since the assessee has got substantial relief in the appeal proceedings, it is not a case of enhanced assessment as the relief to assessee is much more than the relief allowed to revenue qua the additional ground. Hence, the objection of assessee in this regard does not have any merit. As a result, the additional ground stand allowed, as above - In the result, the appeal of the revenue is partly allowed.

Summary

Issues Involved:
1. Disallowance of expenditure on gifts under Rule 6B.
2. Addition due to loss on account of exchange rate fluctuation.
3. Deduction under section 80-I for interest income.
4. Additional ground regarding deduction under section 80-I for cash subsidy on exports.

Detailed Analysis:

1. Disallowance of Expenditure on Gifts under Rule 6B:
The revenue's first ground was the disallowance of Rs. 1,16,803 out of Rs. 2,57,534 for gifts exceeding Rs. 200 each under Rule 6B. The CIT(A) had deleted this disallowance, except for Rs. 1,40,721 for a car gift that was not satisfactorily explained. The Tribunal affirmed the CIT(A)'s decision, citing a precedent from the assessee's case for the assessment year 1987-88, where it was held that gifts not containing the company's logo or name were not covered under Rule 6B. Thus, ground No. (i) was dismissed.

2. Addition Due to Loss on Account of Exchange Rate Fluctuation:
The Assessing Officer disallowed Rs. 24.74 crores claimed as a loss due to exchange rate fluctuation, deeming it a notional liability. The CIT(A) reversed this, treating it as an ascertained liability, supported by the Supreme Court and Gujarat High Court judgments. The Tribunal upheld the CIT(A)'s decision, referencing the Special Bench decision in ONGC Ltd. v. Dy. CIT and the Delhi High Court in CIT v. Bharat Heavy Electricals Ltd., which recognized such losses as trading liabilities when loans were used for working capital. The Tribunal dismissed the additional grounds raised by the revenue, which argued the loss was capital in nature, as the Assessing Officer had accepted the loans were for working capital.

3. Deduction Under Section 80-I for Interest Income:
The CIT(A) allowed the deduction under section 80-I for Rs. 22.85 crores earned as interest on advances from customers, considering it part of the profits derived from the industrial undertaking. The Tribunal reversed this decision, citing Supreme Court judgments in CIT v. Sterling Foods and Pandian Chemicals Ltd. v. CIT, which required a direct nexus between the income and the industrial undertaking. The Tribunal concluded that the interest income did not have a direct nexus with the industrial undertaking, as it arose from investments, not the manufacturing activity.

4. Additional Ground Regarding Deduction Under Section 80-I for Cash Subsidy on Exports:
The revenue raised an additional ground challenging the deduction under section 80-I for Rs. 6,51,93,675 as cash subsidy on exports. The Tribunal admitted this ground, referencing NTPC Ltd. v. CIT, which allows new legal questions based on existing facts. The Tribunal ruled that the cash subsidy on exports did not qualify for deduction under section 80-I, as it was not derived directly from the industrial undertaking, aligning with the reasoning in Sterling Foods and Pandian Chemicals Ltd.

Conclusion:
The revenue's appeal was partly allowed. The Tribunal upheld the CIT(A)'s decisions on the disallowance of gift expenditure and the exchange rate fluctuation loss but reversed the decision on the deduction under section 80-I for interest income. Additionally, it admitted and ruled against the deduction for the cash subsidy on exports under section 80-I.