2020 (9) TMI 62 - AT - Income Tax

Disallowance of foreign exchange fluctuation loss - assessee stressed that in view of the provision of section 43A realized loss and realized gain was on account of capital assets, the same were not allowable as revenue expenditure but were liable to be added to/reduced from cost of relevant assets in the year in which the liability in foreign currency is discharged - HELD THAT - The assessee had disclosed foreign exchange loss on acquisition of fixed assets at ₹ 2.16 crores (approx.) against which the foreign exchange gain of ₹ 53,05,919/- against CWIP was adjusted and the balance of ₹ 1.63 crores (approx.) was added back in the computation of income. Admittedly the foreign exchange loss on acquisition of fixed assets totaling to ₹ 1.63 crores (approx.) is not allowable as an expenditure in view of the section 43A of the Act. Further, foreign exchange gain of ₹ 53,05,919/- is to be adjusted against the aforesaid loan and net amount of ₹ 1.63 crores (approx.) having been offered to tax, warrants no further disallowance in the hands of the assessee. - Decided in favour of assessee. Disallowance of corporate social responsibility ( CSR ) in books of accounts - expenses not incurred for the purpose of business - assessee claimed that the expenditure has been incurred towards maintenance charges of GSS, Gurgaon for the benefit of the children of the employees of the assessee company - HELD THAT - The assessee has placed on record the list of the expenditure before us. The perusal of the same reflects the expenditure on certain renovation work at Mohindergarh including providing chairs and tables by the assessee. Expenses are debited on account of Tools for Honda Training Center Lab- Mohindergarh. All the said expenses are incurred for efficiently carrying out the business of the assessee and thus fulfill the condition of wholly and exclusively for the purpose of business - donation to Brahma Kumaris merits to be disallowed in the hands of the assessee, as it is case of charity. The same may be looked into as per the provision of section 80G of the Act. Further, expenditure incurred towards display of name/logo of the assessee on various items is undoubtedly for the promotion of the business of the assessee as it promotes goodwill. Hence, the expenditure is to be allowed as revenue expenditure. Alternate observations of AO that the Explanation (2) to section 37(1) which has been introduced w.e.f. 01.04.2015 is to be applied retrospectively - We find that the Raipur Bench of Tribunal in Jindal Power Ltd. 2016 (7) TMI 203 - ITAT RAIPUR and National Small Industries Corpn. Ltd. vs DCIT 2019 (2) TMI 1538 - ITAT DELHI have held that the said explanation is prospective in nature. Consequently, we find no merit in the stand of the Assessing Officer in this regard except expenditure of ₹ 50,000/-, the balance expenditure is allowed in the hands of the assessee. Disallowance of composition fee - expenditure has been incurred by the assessee towards composition fee for regularizing the Naurangpur Building and issuance of Occupancy certificate - HELD THAT - Hon ble Delhi High Court in CIT vs Lokenath Co. 1984 (1) TMI 53 - DELHI HIGH COURT on similar facts held that on similar facts wherein the assessee has constructed a multi-storeyed building and in view of excess construction on one of the floor, it submitted a fresh plan and where the revised plan was approved, subject to payment on adhoc composition fee, held that the mandate of the Legislature is that on the acceptance of the compensation, there is condonation of the disobedience of a procedural requirement. This compensation was not a penalty payment, to save the assessee from criminal liability or criminal prosecution or to compound any offence committed by the assessee. Thus, the Tribunal was justified and the impugned sum was admissible as business expenditure under section 37(1) of the Act. Following the said dictate of the Hon ble High Court, we hold that the composition fee paid by the assessee merits to be allowed as business expenditure. Nature of expenses - expenditure incurred on repair and maintenance/replacement of existing assets - as per AO such expenditure incurred by the assessee booked under the head repair and maintenance is capital in nature and hence, disallowed - HELD THAT - The Hon ble Supreme Court in CIT vs Saravana Spinning Mills (P.) Ltd. 2007 (8) TMI 16 - SUPREME COURT has laid down that in case the expenditure is incurred for current repairs, then it replaces part of the existing plant machinery and the same is to be allowed as business expenditure in the hands of the assessee u/s 31(1) of the Act. Expenditure in respect of repair and maintenance of existing structure and is to be allowed as an expenditure in the hands of the assessee - expenditure incurred on acquisition of chairs, which are detailed in Paperbook is capital in nature and amount needs to be capitalized in the hands of the assessee. The said expenditure is booked under the head furnishing furniture. Accordingly, we uphold the order of the Assessing Officer in this regard but direct the Assessing Officer to allow the expenditure incurred on repairs of plant machinery in entirety. Ground of assessee is partly allowed. Expenditure incurred on signages installed at the premises of dealers/sub dealers - HELD THAT - The expenditure was incurred on signage for display of the name of the assessee at the dealer s premises. However, once the same is fixed at dealers site then the Courts have held that it does not satisfy the test of ownership with the assessee and the expenditure is to be allowed as revenue expenditure. We find support from the ratio laid down by the Hon ble Delhi High Court in CIT vs Honda Siel Power Products Ltd 2017 (6) TMI 524 - SUPREME COURT - Thus, we are of the view that the expenditure to the extent claimed by the assessee is to be allowed in the hands of the assessee and not the entire expenditure.Ground of assessee is partly allowed.Ground of assessee is partly allowed. Disallowance of sales tools expenses - expenditure incurred by the assessee on sales tools/fixtures which are placed at dealer s outlets are specifically manufactured by third party manufacturers in accordance with the specifications provided by the assessee - whether the assessee is incurring expenditure to maintain standard format of displaying its products all over India in order to induce prospective customers to clearly identify the exclusive dealers of assessee s products in India and expenditure incurred was wholly and exclusively for the purpose of his business? - HELD THAT - We are of the view that the expenditure incurred on Signages expenses was in the nature of advertisement expenditure, which are recurring in nature, incurred for the purpose of business and in the absence of any capital asset being acquired/owned by the assessee, the same was allowable as business deduction under section 37(1) of the Act. Disallowing 25% of Royalty expenses - HELD THAT - The assessee had entered into a technical know-how agreement with Honda Motors Company, Japan under which it was paying lumpsum fee which was the amount in connection with the new models introduced in a year. The total amount paid during the year was capitalized by the assessee in its books of accounts and also in the P L A/c. The assessee also paid running Royalty which was paid for grant of the right to license and manufacturing of two-wheelers in India. The total running Royalty paid was ₹ 378.20 crores (approx.). The said Royalty which is the recurring Royalty paid by the assessee from year to year had been allowed as revenue expenditure in the hands of the assessee in the preceding years. We find no merit in the said exercise carried out by the Assessing Officer and accordingly we direct the Assessing Officer to allow the running Royalty as business expenditure in entirety. Admission of additional ground - Stand of the Revenue that where the assessee itself had not claimed as deductible in its hands, then the same cannot be allowed by the additional ground of appeal - HELD THAT - We find no merit in the stand of the Ld.DR for the Revenue as there is no estoppel in law; especially where the issue has been decided by the Jurisdictional High Court on similar facts. Accordingly, we allow the additional ground of appeal raised by the assessee.

Summary

Issues Involved:
1. Disallowance of unrealized foreign exchange loss.
2. Disallowance of Corporate Social Responsibility (CSR) expenditure.
3. Disallowance of composition fee for regularizing building deviations.
4. Disallowance of repair and maintenance expenditure.
5. Disallowance of expenditure on signages.
6. Disallowance of sales tool expenses.
7. Disallowance of royalty expenses and technical knowhow fees.
8. Levy of interest under section 234D of the Act.

Detailed Analysis:

1. Disallowance of Unrealized Foreign Exchange Loss:
The assessee claimed a foreign exchange loss on capital assets amounting to ?2.16 crores, against which a gain of ?53,05,919 was netted off, resulting in a net addition of ?1.63 crores to the taxable income. The Assessing Officer (AO) disallowed the ?53,05,919 gain due to lack of documentary evidence. The Tribunal held that the foreign exchange gain of ?53,05,919 should be adjusted against the loss, and the net amount of ?1.63 crores, already offered to tax, warrants no further disallowance. Thus, the issue was resolved in favor of the assessee.

2. Disallowance of Corporate Social Responsibility (CSR) Expenditure:
The AO disallowed CSR expenses totaling ?10,45,249 on the grounds that they were not incurred for business purposes and invoked Explanation 2 to section 37 of the Act. The Tribunal noted that expenses on renovation, tools for training centers, and items bearing the company logo were for business promotion and should be allowed as revenue expenditure. However, donations to Brahma Kumaris were disallowed as charity. The Tribunal held that Explanation 2 to section 37 is prospective and not applicable to the assessment year in question. Thus, most CSR expenses were allowed.

3. Disallowance of Composition Fee:
The assessee paid ?22,36,130 as a composition fee for regularizing building deviations. The AO treated this as a penalty and disallowed it. The Tribunal, referencing the Supreme Court's decision in Prakash Cotton Mills and the Delhi High Court's decision in Lokenath & Co., held that the composition fee was compensatory and not penal, and thus allowable as business expenditure.

4. Disallowance of Repair and Maintenance Expenditure:
The AO disallowed ?1,73,72,080 spent on repairs and maintenance, treating it as capital expenditure. The Tribunal, referring to the Supreme Court's decision in Saravana Spinning Mills, held that expenses on routine repairs and maintenance of existing assets should be allowed as revenue expenditure. However, expenses on acquiring new chairs were capitalized.

5. Disallowance of Expenditure on Signages:
The AO disallowed ?89,03,053 spent on signages at dealer premises, treating it as capital expenditure. The Tribunal, referencing the Delhi High Court's decision in Honda Siel Power Products Ltd., held that the expenditure was for business promotion and should be allowed as revenue expenditure.

6. Disallowance of Sales Tool Expenses:
The AO disallowed ?2,72,32,757 spent on sales tools, arguing there was no obligation to incur such expenses. The Tribunal noted that the expenses were for maintaining uniformity in dealer showrooms and were necessary for business promotion. The Tribunal allowed the expenses as revenue expenditure.

7. Disallowance of Royalty Expenses and Technical Knowhow Fees:
The AO disallowed 25% of the royalty expenses, treating them as capital expenditure. The Tribunal noted that the recurring royalty had always been allowed as revenue expenditure in previous years. The Tribunal directed the AO to allow the running royalty as business expenditure. Additionally, the Tribunal admitted the assessee's claim for lumpsum royalty as revenue expenditure, referencing the Delhi High Court's decision in Hero Honda Motors Ltd., and allowed the claim.

8. Levy of Interest under Section 234D:
The Tribunal did not specifically address the issue of interest under section 234D in the detailed analysis provided.

Conclusion:
The Tribunal allowed most of the assessee's claims, providing relief on issues related to foreign exchange loss, CSR expenses, composition fee, repair and maintenance, signages, sales tools, and royalty expenses. The decisions were based on established legal precedents and the nature of the expenditures being for business purposes.