2009 (11) TMI 468 - HC - Income Tax

Business Expenditure - Disallowance - The Assessing Officer disallowed the expenditure under section 92 and 40A(2) of the Act, on the ground that the price was higher than for similar goods purchased from local vendors. The Commissioner (Appeals) deleted the additions holding that the Assessing Officer had compared the price at which the goods were imported with the price of the goods in the local market in subsequent years. The Tribunal confirmed this. Held that - the entire expenditure was to be treated as revenue expenditure or 25 percent thereof could be capitalized, as held by the Tribunal. In either event, this entire expenditure could be treated as capital expenditure.

Summary

Issues:
1. Addition under section 92 read with section 40A(2) of the Income-tax Act, 1961.
2. Treatment of capital expenditure.
3. Loss on account of foreign exchange rate fluctuation.

Analysis:
1. The first issue pertains to the addition of Rs. 69,62,655 made by the Assessing Officer under sections 92 and 40A(2) of the Income-tax Act. The Assessing Officer disallowed the addition on the grounds of importing goods at a higher price compared to local vendors. However, the Commissioner of Income-tax (Appeals) found this comparison faulty as it was based on prices in subsequent years. The Commissioner justified the deletion of the addition, a decision upheld by the Income-tax Appellate Tribunal. The comparison should have been based on prices in the same year, as per the two appellate authorities, making it a factual finding with no question of law.

2. The second issue involves the treatment of capital expenditure. The Tribunal capitalized 25% of Rs. 2,11,20,147 as capital expenditure, citing the judgment in Southern Switch Gear Ltd. v. CIT. The assessee contended that the entire amount should be considered as revenue expenditure. The agreements with M/s. Denso Corporation, Japan, involved payments for technical services and personnel dispatching. The technical assistance fee of Rs. 2.11 crores was claimed as revenue expenditure, while the balance was treated as capital expenditure. The question arose whether the entire expenditure should be revenue or 25% could be capitalized. The Tribunal's decision was upheld, with the entire expenditure being considered as capital expenditure in the appeal by the Revenue.

3. The final issue concerns the loss of Rs. 1,91,24,374 due to foreign exchange rate fluctuation. This issue was covered by a previous decision of the court, which was upheld by the Supreme Court. The judgment in CIT v. Woodward Governor India was cited, confirming the treatment of the loss on account of foreign exchange rate fluctuation.

In conclusion, the court dismissed the appeal, finding no substantial questions of law in the matters raised by the Revenue.