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TMI Blog2013 (1) TMI 621X X X X Extracts X X X X X X X X Extracts X X X X ..... n normally take the colour of the primary transactions. The assessee has entered into certain transactions in foreign currency in connection with its core activity. Accordingly the exchange difference arising out of such activities should be treated as related to the core activity – In favour of assessee Disallowance of Gratuity – CIT doubting the credibility of the report of the actuary – Revenue argued that there is no evidence of accrual of the liability by the close of the relevant accounting year, the expenditure cannot be allowed in terms of Sec.43B – Assessee had deposit said amount in gratuity fund with bank before the due date of filling of return - Held that:- The CIT was not justified in discarding the evidences produced before him, on doubts and presumptions only without properly verifying them. If the fact of payment of gratuity is established from the evidence available on record, then the deduction claimed by the assessee cannot be disallowed invoking the provisions of Sec.43B. Direct the A.O. to verify the bank account – Remand back in favour of assessee Disallowance of expenses for issuing Foreign Currency Convertible Bonds (FCCB) – Revenue or capital expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Profit Loss Account, the assessee had debited an amount of Rs.17,77,598 towards loss on sale of fixed assts. However, an amount of Rs.16,37,540 was only added back under EDSC Division while computing the total income leaving a balance of Rs.1,40,058 which is required to be brought to tax. (c) It is seen from the computation of total income (EDSC Division) that the assessee had claimed an amount of Rs.1,32,95,577 towards gratuity paid to Gati Group Gratuity Fund. As per the Notes on Accounts at Sl.No.6 Employee Benefit , an amount of Rs.176.12. lakh (including the said gratuity paid of Rs.132,96 lac) had been adjusted against General Reserve as at 01.07.2006 in accordance with transitional provision in the Accounting Standard(AS) 15. Since the said gratuity payment was met from General Reserves and not debited to the Profit Loss Account, the expenditure could be held as not pertaining to previous year 2006-07 relevant to assessment year 2007-08. In view of the judgments of Kedarnath Jute Manufacturing Co. Ltd. V/s. CIT(82 ITR 364), as reaffirmed in CIT V/s. Kalinga Tubes Ltd. (218 ITR 164); and the decision of the Apex Court in the case of Tuticorin Alkali Chemic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to discrepancy with regard to administrative expenses debited to Profit Loss Account, the Commissioner of Income-tax was convinced with the explanation of the assessee, and as such, did not give any direction to the assessing officer. With regard to the other three issues, the Commissioner of Income-tax was not convinced with the submissions of the learned Authorised Representative for the assessee, and accordingly directed the assessing officer to bring to tax the amounts of Rs.15,46,428 on account of foreign exchange fluctuation gain; Rs.1,32,95,577 being gratuity liability; and Rs.2,64,26,757 being FCCB issue expenses, vide impugned order dated 26.3.2012 passed under S.263 of the Act. 6. Aggrieved by the order of the Commissioner of Income-tax, assessee preferred the present appeal before us. 7. The grounds raised by the assessee basically pertain to four issues. In ground Nos.1,2,3,4 and 8, the assessee has challenged the validity and legality of the proceedings initiated under S.263 of the Act. The learned Authorised Representative for the assessee submitted before us that invoking of jurisdiction under S.263 of the Act is without authority of law, as the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of legality and validity of the impugned order of the Commissioner of Income-tax passed under S.263 of the Act. We have also gone through the written submissions of the assessee and the case-law relied upon by the parties on this issue. We find that the Commissioner of Income-tax has issued show cause notice under S.263 of the Act to the assessee, proposing to revise the assessment in relation to the four issues, in relation to which, according to him, the order of assessment was erroneous and prejudicial to the interests of the Revenue. On consideration of the submissions of the assessee in response to such show-cause notice, the Commissioner of Income-tax has in fact invoked the jurisdiction under S.263 of the Act only in relation to three issues, having satisfied himself with the explanation of the assessee in relation to the fourth issue. Ongoing through the order of assessment dated 29.12.2009, which came to be revised by the Commissioner of Income-tax through the impugned order under S.263 of the Act, we find in the said assessment order which hardly runs into three pages, only two adjustments, as mentioned in para 2 of this order, one by way of addition of Rs.81,99, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer should reveal that there is proper investigation and enquiry made by the Assessing Officer and he has applied his mind to the material available before him before coming to his conclusions. In the facts of the present case, as already stated earlier, reveals neither application of mind nor proper enquiry or investigation into the issues pointed out by the Commissioner of Income-tax. In this view of the matter, we do not find any merit in the contentions of the assessee with regard to the legality or validity of the impugned order of the Commissioner of Income-tax passed under S.263 of the Act. 10. Now, we may deal with the arguments of the parties and the merits of the directions given by the Commissioner of Income-tax in the impugned order under S.263 of the Act in relation to each of the three issues involved. ISSUE-I Assessment of difference in exchange of Rs.15,46,428 as income from other sources: 11. The learned Authorised Representative for the assessee submitted before us that assessee plies ships and it is taxed under Tonnage Tax Scheme, as provided under Chapter XIIG of the Income-tax Act, 1961. S.115VA of the Act gives an option to the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying ships by the assessee. The learned Authorised Representative for the assessee further submitted that the other deficiencies/discrepancies pointed out by the Commissioner of Income-tax are also non-existent and had the Commissioner of Income-tax given an opportunity to explain the same, the doubts in the mind of the Commissioner could have been removed by the assessee. The learned Authorised Representative for the assessee strongly placing reliance upon a decision of the Income-tax Appellate Tribunal, Visakhapatnam Bench in the cases of Dredging Corporation of India Ltd. in ITA Nos.6 to 8/Vizag/2011 of the assessee and ITA Nos.15 to 17/Vizag/2011 of the Department for the assessment years 2006-07 to 2008- 09 dated 25.7.2011 and submitted that the issue involved herein is squarely covered by the said decision of the Visakhapatnam Bench, wherein it was held that the amounts received on account of foreign exchange fluctuation constitutes income from tonnage tax shipping income and cannot be assessed as income from others sources. 12. The learned Departmental Representative, on the contrary, supporting the order of the Commissioner of Income-tax submitted that the amounts recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying of qualifying ships. Keeping in view the aforesaid items, the observation of the Commissioner of Income-tax that the gain arising from foreign exchange fluctuations do not represent receipt transactions is not correct. In our view, the gain on account of foreign exchange fluctuations is in the course of operating qualifying ships and therefore, part of the profit derived from such business. The Visakhapatnam Bench of the Tribunal in the case of Dredging Corporation of India Ltd. (supra), while dealing with identical issue of gain on account of foreign exchange fluctuations, held, vide order dated 25.7.2011, as follows- 9.3 The gains realized on the foreign exchange fluctuation normally take the colour of the primary transactions. It has been stated that the assessee has entered into certain transactions in foreign currency in connection with its core activity of dredging. Accordingly the exchange difference arising out of such activities should be treated as related to the core activity of dredging. Similar view has been taken by the Bangalore Bench of the ITAT in the case of ITC Hotels V/s. Dy. Commissioner of Income-tax (2007)(107 TTJ (Bang) 955). Accordingly, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid of Rs.1,32,95,577 by the assessee, only on suspicion. The learned Authorised Representative for the assessee seriously disputing the observation made by the Commissioner of Income-tax that no evidence was produced with regard to the accrual of liability, submitted that the assessee has produced all the evidences including the certificate of actuary. The learned Authorised Representative for the assessee submitted that apart from the certificate, evidence with regard to payment of fee to the actuary and other details were also produced. The learned Authorised Representative for the assessee submitted that the Commissioner of Income-tax without seeking any clarification from the assessee on this issue was not justified in drawing his own inference only on presumptions and surmises. 17. The learned Departmental Representative, on the contrary, strongly supporting the order of the Commissioner of Income-tax on this issue, submitted that since the liability was not shown as payable in the assessee s account, the Commissioner of Income-tax was justified in directing for disallowance of the amount claimed towards payment of gratuity. 18. We have heard the rival submissions and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of Rs.2,47,52,069 as on 31.3.2007. It is the claim of the assessee that over and above the amount of Rs.90,23,315 debited to the Profit Loss Account of the relevant previous year, the assessee has paid further amount of Rs.1,32,95,577 towards the gratuity liability, by directly debiting the General Reserve Account, without affecting the Profit Loss Account. In support of such claim, the assessee has submitted a bank account copy of the GATI Group Gratuity Fund held with Indian Overseas Bank. An examination of the aforesaid bank account which is at pages 20 and 21 of the written submissions, it appears that amounts of Rs.1 crore and Rs.32,95,577 have been deposited into the aforesaid Gratuity Fund Account in March, 2007 and October, 2007 respectively. The aforesaid documents produced before us establishes the fact that there is a liability towards gratuity as on 31.3.2007 and the assessee has actually paid the amount of Rs.1,32,95,577, within the period prescribed under the provisions of S.43B of the Act. In the aforesaid view of the matter, in our view, the Commissioner of Income-tax was not justified in discarding the evidences produced before him, on doubts and presump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Authorised Representative for the assessee submitted that the Assessing Officer has not only examined these facts in detail but has completed the assessment after due enquiry. The learned Authorised Representative for the assessee assailing the order passed by the Commissioner of Income-tax in directing disallowance of expenditure claimed, by treating it as capital expenditure, submitted that while coming to such a conclusion, the Commissioner of Income-tax has completely ignored the decisions rendered by the Hon ble Supreme Court in the case of India Cements V/s. CIT(60 ITR 52) and Hon ble Rajasthan High Court in the case of CIT V/s. Secure Meters Limited (321 ITR 611). The learned Authorised Representative for the assessee submitted that it is immaterial whether the borrowal is for acquiring a capital asset or for working capital, but once, it is established as loan for business, the expenditure for such borrowal has to be allowed as revenue expenditure. 21. The learned Departmental Representative, relying upon the decision of the Hon ble Supreme Court in the case of Brooke Bond India Ltd. V/s. CIT (225 ITR 798), submitted that any expenditure incurred by a company in connect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y related to the expansion of the capital base of the company. In the case of India Cements V/s. CIT (supra), decided by the Hon ble Supreme Court, the assessee had taken a loan against the fixed assets of the company. The assessee claimed the expenditure incurred towards stamp duty, registration fee, etc. as mortgage loan expenses. The ITO disallowed the expenditure by holding that the expenditure was incurred in obtaining a capital and therefore should not be allowed as an expenditure. In that context, the Hon ble Supreme Court held that allowability of expenditure in connection with the obtaining of a loan does not depend on the purpose and utilization of loan. In the case of CIT V/s. Secure Meters Limited (supra), the Hon ble Rajasthan High Court, while considering the expenditure claimed by the assessee in connection with the issue of debentures, after considering the decisions of the Hon ble Supreme Court in the case of Brooke Bond India Ltd. (supra) and India Cements Ltd. (supra) held that the debentures when issued were in the nature of loan, and therefore, the expenditure would be allowable as revenue expenditure. 24. We find from the record that though the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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