2012 (6) TMI 574 - HC - Income Tax

Dis-allowance of foreign exchange loss of Rs 49.12 lacs - Tribunal while allowing appeal of assessee, directed admission of foreign exchange loss to the entire extent of Rs. 99.23 lacs - Held that - Tribunal directed the admission of foreign exchange loss to the entire extent of Rs. 99.23 lacs on the premise this was the amount which had been disallowed by the Assessing Officer which is a mistake of fact. Hence, we set aside the order of the Tribunal and deem it proper to remand the matter to the Assessing Authority to re-determine the income after taking note of foreign exchange loss of Rs 49.12 lacs. Expenditure incurred over the office premises for renovation and paying compensation to the lessor which was taken on lease by the assessee - revenue or capital expenditure - Held that - Amount of Rs 6.73 lacs actually spent by the assessee as a revenue expenditure could have been allowed as a deduction, however, other amount of Rs. 22,19,000/- admittedly paid by the assessee to its lessor can never partake the character of a revenue expenditure and not even as a capital expenditure as the assessee has not constructed the building part but the amount is paid to the lessor. Order of the Tribunal is set aside to this extent and on these two aspects, the matter is remanded to the Assessing Authority.

Summary

Issues:
1. Allowability of foreign exchange loss as a deduction.
2. Claim of revenue expenditure for renovation and compensation.

Analysis:

Issue 1: Allowability of foreign exchange loss as a deduction
The appeal before the Karnataka High Court revolved around the correctness of the Tribunal's decision to reverse the Assessing Officer's disallowance of a foreign exchange loss claimed by the assessee. The Court examined the guidelines provided by the Supreme Court in CIT v. Woodward Governor India (P.) Ltd. and emphasized the importance of considering the mercantile system of accounting, consistency in treatment of losses and gains, adherence to Accounting Standards, and fairness in assessing the deductibility of such losses. The Court noted that the Assessing Officer's decision was based on earlier assessments and lacked consideration of the guidelines outlined by the Supreme Court. The Court also highlighted a factual error in the computation of the disallowed amount, leading to the remand of the matter to the Assessing Authority for re-determination based on the Supreme Court's guidelines.

Issue 2: Claim of revenue expenditure for renovation and compensation
Regarding the claim of revenue expenditure for renovation and compensation, the Court found the Tribunal's view untenable. The Court pointed out that while the expenditure incurred by the assessee for renovation could be considered as revenue expenditure eligible for deduction, the amount paid to the lessor for altering the structure did not qualify as revenue expenditure. The Court referred to Section 32 Explanation 1 of the Act, which specifies the treatment of capital expenditure incurred for renovation or improvement of a building not owned by the assessee. The Court directed the Assessing Officer to recompute the deductible expenditure, allowing the amount spent on renovation as a revenue expenditure but disallowing the amount paid to the lessor as it did not qualify as either revenue or capital expenditure.

In conclusion, the Karnataka High Court partially allowed the appeal, setting aside the Tribunal's order and remanding the matter to the Assessing Authority for reevaluation based on the Court's findings on both issues.