2015 (6) TMI 39 - HC - Income Tax

Expenditure on development of machineries - revenue v/s capital - ITAT allowed the claim as revenue expenditure - Held that - The sale of spare parts were not possible in the market since the assessee company did not want the technology information to its competitors. It is submitted that the A. O. has not disputed the expenses being incurred. He has made the disallowance merely because the details of spare parts used back in the business has not been furnished before him. It is submitted that separate charges for the value of these parts has not been made in the accounts and therefore, the original expense is allowable in full as per decision of B. Nagireddy v. CIT reported in 1991 (6) TMI 9 - MADRAS High Court . - Decided against revenue. Disallowance of bank charges paid to guard against fluctuations in the foreign exchange rate for payment of loan taken for import of machineries - ITAT allowed the claim - Held that - the consideration paid by the assessee to the authorized dealer of foreign exchange, which is the bank in this case, in order to obtain protection from fluctuation of foreign exchange rates is a revenue expenditure and the view taken by the learned Tribunal is correct. - Decided against revenue.

Summary

Issues:
1. Allowability of expenditure on development of machineries as revenue expenditure.
2. Adjudication on the provision for advertisement allowance.
3. Treatment of bank charges for fluctuations in foreign exchange rate as revenue expenditure.

Issue 1: Allowability of Expenditure on Development of Machineries:
The appeal questioned the allowance of expenditure of &8377; 46,26,552 on developing machineries as revenue expenditure despite not using or selling them for business purposes. The assessing officer disallowed the claim, stating that spare parts usage did not prove business activity. However, the CIT (Appeals) allowed the expense under section 37, considering the project abandonment and lack of dispute on expenses. The Tribunal upheld this decision, emphasizing it as a possible view, leading to a negative answer against the revenue.

Issue 2: Adjudication on Provision for Advertisement Allowance:
The second question focused on the Tribunal's remand order, which was not pressed by the appellant as it concerned only a procedural aspect. The assessing officer was directed to expedite the process due to delays, with no further adjudication needed on this issue.

Issue 3: Treatment of Bank Charges for Fluctuations in Foreign Exchange Rate:
Regarding the bank charges of &8377; 1,78,08,000 for guarding against foreign exchange rate fluctuations, the appellant argued for adding it to the asset's cost under section 43A. However, the Tribunal disagreed, citing Explanation 3 of section 43A and relevant case law. The Court differentiated between roll-over charges and consideration for foreign exchange rate protection, deeming the bank charges as revenue expenditure for guarantee provided by the bank. The decision aligned with the Tribunal's view, resulting in a negative answer against the revenue.

In conclusion, the High Court of Calcutta dismissed the appeal, upholding the Tribunal's decisions on all three issues raised in the case.