2005 (6) TMI 227 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of Rs. 32,28,152 under Section 35(1)(iv) of the Act.
2. Disallowance of Rs. 15,443 under Section 35(1)(iv) of the Act for research and development assets.
3. Investment allowance on account of foreign exchange fluctuations.
4. Deduction under Section 80HHC for rebate of duty on material imported against advance license.
5. Disallowance of expenditure on gifts and presents.
6. Disallowance of sales promotion expenses under Section 37(2A) of the Act.

Detailed Analysis:

1. Disallowance of Rs. 32,28,152 under Section 35(1)(iv):
The assessee did not press this ground as the necessary relief was already granted by the AO in accordance with the CIT(A)'s order. Consequently, this ground was disposed of without further deliberation.

2. Disallowance of Rs. 15,443 under Section 35(1)(iv) for research and development assets:
The AO disallowed the claim related to the addition to the cost of assets used for research and development due to exchange fluctuation on a foreign currency loan. The CIT(A) upheld that deduction should be allowed only upon actual payment. The Tribunal, however, referenced its previous decisions and concluded that the increased liability due to exchange rate fluctuation should be added to the actual cost of the asset under Section 43A, thereby allowing the claim on an accrual basis.

3. Investment Allowance on Account of Foreign Exchange Fluctuations:
The assessee claimed investment allowance by enhancing the actual cost of the asset due to exchange rate fluctuations. The AO and CIT(A) denied the claim, stating that the enhancement could only be considered upon actual repayment. The Tribunal, referencing its prior decisions and other judicial precedents, held that the investment allowance was allowable on the enhanced cost due to exchange rate fluctuations, even if the repayment had not occurred. The Tribunal dismissed the Departmental Representative's argument that Section 32A was not applicable for the year under consideration, as the assets were installed before the cutoff date of 31st March 1990.

4. Deduction under Section 80HHC for Rebate of Duty on Material Imported Against Advance License:
The assessee claimed that the rebate of Rs. 66,29,757 on custom duty should be considered under Section 28(iiic) for deduction under Section 80HHC. The AO and CIT(A) denied this, arguing it was not covered under the specified rules. The Tribunal, however, referenced its decision in the assessee's own case for a later year and other precedents, concluding that the rebate on custom duty, which reduces production costs and increases profit margins, should be considered as 'profits of business' for Section 80HHC purposes. The Tribunal also distinguished this case from the Supreme Court decision in Hindustan Lever Ltd., where the facts were different.

5. Disallowance of Expenditure on Gifts and Presents:
The assessee did not press this ground, and it was accordingly dismissed.

6. Disallowance of Sales Promotion Expenses under Section 37(2A):
Similarly, the assessee did not press this ground, and it was dismissed.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal ruled in favor of the assessee on the issues of disallowance under Section 35(1)(iv) for research and development assets and the investment allowance on account of foreign exchange fluctuations. The Tribunal also allowed the deduction under Section 80HHC for the rebate of duty on material imported against advance license. The grounds related to expenditure on gifts and presents and sales promotion expenses were dismissed as they were not pressed by the assessee.