2014 (3) TMI 731 - HC - Income Tax

Allowability of expenditure - Fees paid to ROC, printing and postage in respect of bonus issue Held that - The decision in Commissioner of Income-Tax Versus General Insurance Corporation 2006 (9) TMI 116 - SUPREME Court followed - the expenditure on issuance of bonus shares is revenue expenditure Decided in favour of Assessee. Computation of business income - Disallowance of interest and additional expenditure Expenses incurred on account of exchange fluctuation Applicability of section 43A of the Act Held that - The decision in Commissioner of Income-tax v. Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT followed - paragraph 9 of AS-11 recognises exchange differences as income or expenses in the period in which they arise - Section 43A, as it stood originally, would have application in a case where an asset is acquired and the liability existed before the change in the exchange rate takes place - Adjustments in the cost are thus made depending on the fluctuation in the currency rate. There is no denial of fact that the amount drawn from the loan should be utilized for the purpose approved and strictly subject to the terms and conditions stipulated by the Reserve Bank of India vide their letter dated 21st September, 1994 - when the object and the purpose of loan clearly points out to the purpose of the loan given as for capital expenditure on modernization and expansion, the fact that the exchange fluctuation had been added on to the cost under Section 43-A(1), however, does not, lead to the inference that as far as the balance amount is concerned, the interest payment difference on exchange fluctuation would fall under Revenue head there was no ground to uphold the contention of the assessee that the difference in the interest on the balance of principal amount on account of exchange fluctuation to be treated as revenue expenditure. The Tribunal s findings are upheld that the assessee had failed to support its contention through any concrete evidence - The assessee in its accounts admitted the foreign exchange loan as capital for acquisition of machineries and assets and accordingly the scheme was capitalized - there was no evidence that the funds were utilized for the purpose other than what was stated in the annual accounts - in the cash flow statement and the balance sheet, the assessee could not point out that the assessee had obtained the foreign loan with the approval of the RBI for financing export operations meant for inter-corporate investments Decided against Assessee.

Issues Involved:
1. Disallowance of interest and additional expenditure due to exchange fluctuation.
2. Applicability of Section 43A for disallowing the appellant's claim.
3. Restriction of denial of deduction to amounts spent on acquisition of capital assets using other sources of income.
4. Allowability of expenditure towards fees paid to the Registrar of Companies, printing, and postage for a bonus issue.

Issue-wise Detailed Analysis:

1. Disallowance of Interest and Additional Expenditure Due to Exchange Fluctuation:
The assessee claimed exchange fluctuation loss and related expenditure as revenue deductions. The Assessing Officer disallowed this claim, treating the fluctuation as capital expenditure. The assessee argued that the loan was for enhancing export effectiveness and modernization, and hence, the fluctuation should be treated as revenue. The first Appellate Authority and the Tribunal upheld the Assessing Officer's decision, emphasizing that the foreign loan was used for acquiring capital assets, making the fluctuation a capital expenditure.

2. Applicability of Section 43A:
The Tribunal invoked Section 43A, which applies to adjustments in the cost of assets due to exchange rate changes. The assessee contended that Section 43A was inapplicable as no capital asset was acquired using the foreign exchange loan. However, the Tribunal, referencing the Supreme Court's decision in CIT vs. Tata Locomotive and Engineering Co Ltd., concluded that the foreign exchange loss related to capital equipment purchase should be treated as capital in nature.

3. Restriction of Denial of Deduction:
The assessee argued that the denial of deduction should be limited to amounts spent on acquiring capital assets using other income sources, not the entire foreign exchange loan. The Tribunal rejected this, noting the lack of evidence for one-to-one correlation between the loan and inter-corporate deposits. The Tribunal emphasized that the loan was for capital expenditure on modernization and expansion, and the assessee's accounts reflected this.

4. Allowability of Expenditure for Bonus Issue:
The Revenue conceded that the expenditure towards fees paid to the Registrar of Companies, printing, and postage for a bonus issue was allowable, referencing decisions in Commissioner of Income-tax v. General Insurance Corporation and Commissioner of Income-tax v. Dalmia Investment Co. Ltd. Thus, this issue was resolved in favor of the assessee.

Conclusion:
The High Court upheld the Tribunal's decision on disallowing the interest and additional expenditure due to exchange fluctuation, applying Section 43A, and rejecting the alternate plea for restricted denial of deduction. However, it ruled in favor of the assessee regarding the allowability of expenditure for the bonus issue. The appeal was allowed in part, with no costs.

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