2014 (1) TMI 544 - AT - Income Tax

Disallowance of amortization expenses u/s 35D of the Act Expenditure incurred on FCCB bonds Held that - If the expenditure has been incurred for the purpose of business of the assessee and if it is not in the nature of capital expenditure or personal expenditure, the same is allowable under Section 37 - Merely because in the accounts the assessee has set off all these expenditure against the share premium or assessee has not debited any amount in its profit and loss will not prevent the assessee to claim expenditure which is otherwise allowable under the Income tax Act - If Section 35D is applicable to the instant case, expenditure on issue of debentures which is otherwise allowable u/s 37, will be allowable in full and the expenditure need not be amortised Relying upon CIT Vs East India Hotel 2001 (8) TMI 102 - CALCUTTA High Court and CIT Vs Thirani Chemicals Ltd 2005 (12) TMI 86 - DELHI High Court - expenditure on issue of bonds allowable under Section 37 Decided in favour of Assessee. Disallowance of loss on account of foreign exchange fluctuation Held that - Profit and loss arising on exchange fluctuation in respect of loan taken will constitute capital or revenue expenditure depending on the purpose for which the loan has been utilized Following ONGC Vs CIT 2010 (3) TMI 81 - SUPREME COURT - loss on exchange fluctuation in respect of loans acquired for revenue purpose is an allowable deduction matter remitted back to the AO Decided in favour of Assessee. Exclusion of Annual Maintenance Charges u/s 80IB of the Act Held that - The decision of the AO and the CIT(A) upheld - AMC is a separate stream of income and is not connected to the main activities of manufacture and sale of goods by the assessee - This service is rendered after the sale of goods has been completed - The AMC services can be provided independent of the sales also thus, providing Annual maintenance Services cannot be considered as connected in the first degree with the activity of manufacture and sale of goods - Section 80IB is available only for profit derived from business of manufacture of goods and therefore it is not applicable to income derived from any ancillary activities/ services Thus, AMC charges should be excluded for the purpose of computing relief under Section 80IB Decided against Assessee. Disallowance u/s 14A of the Act Indirect interest expenditure Held that - The entire borrowals on which interest expenditure has been incurred has been applied for the purpose of the business, then no part of the borrowals can be taken to be indirectly applied for investments - if the entirety of borrowals can be established to have been utilised for the purpose of business and therefore could not have been used for the purpose of investment, then there can be disallowance even in respect of indirect interest expenditure - This point has not been examined by the lower authorities Thus, the matter remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Summary

Issues involved:
1. Disallowance of amortization of expenses under Section 35D in relation to expenditure incurred on FCCB bonds.
2. Disallowance of loss arising from foreign exchange fluctuation.
3. Exclusion of annual maintenance charges in computing relief under Section 80IB.
4. Disallowance under Section 14A.

Analysis:

Issue 1: Disallowance of amortization of expenses under Section 35D:
The appellant claimed amortization of expenses under Section 35D for expenditure on FCCB bonds. The AO disallowed the claim citing non-compliance with Section 35D requirements. The CIT(A) upheld the disallowance, stating the conditions were not satisfied. However, the ITAT found that the entire expenditure could be allowed under Section 37 if incurred for business purposes, even if not debited in the profit and loss account. Referring to relevant case laws, the ITAT allowed the appellant's alternate claim under Section 37, setting aside the matter for verification by the AO.

Issue 2: Disallowance of loss from foreign exchange fluctuation:
The CIT(A) treated the loss on foreign exchange fluctuation as capital expenditure due to loans utilized for capital assets. The ITAT remitted the matter to the AO to determine the purpose of loans and categorize the loss as capital or revenue expenditure based on utilization, in line with Supreme Court decisions.

Issue 3: Exclusion of annual maintenance charges under Section 80IB:
The AO and CIT(A) excluded annual maintenance charges from relief under Section 80IB, deeming them separate income streams not directly linked to the manufacturing business. The ITAT agreed with the lower authorities, dismissing the appeal on this issue.

Issue 4: Disallowance under Section 14A:
The AO disallowed indirect interest expenditure under Section 14A, but the ITAT noted the lack of examination regarding the utilization of borrowings for business purposes only. The ITAT remitted the issue to the AO for reevaluation and directed a rework of the disallowance after verifying borrowings' utilization for investments, treating the appeal as allowed for statistical purposes.

In conclusion, both appeals were partly allowed for statistical purposes, with specific issues remitted to the AO for further examination and verification. The ITAT's decisions were based on legal interpretations and precedent cases, ensuring a thorough analysis of each issue involved.