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TMI Blog2015 (6) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... that:-CIT(A) has held that only when proceedings in BIFR are concluded in the case of Grapco and after recovering whatever is recovered , the dues of assessee can be ascertained. However from the order of TRF Ltd. VSs CIT [2010 (2) TMI 211 - SUPREME COURT ], we find that Hon’ble Apex Court has held that for a claim of bad debt, the assessee has to only establish that debt has been written off and it was not necessary to establish that debt has become irrecoverable. Admittedly, the debt has been written off as noted in the assessment order itself and the loan was given in ordinary course of regular business activities of the assessee. Therefore, as per the Hon'ble Supreme Court decision, the action of writing off of debt was sufficient to claim the loss. In the judgements relied upon by Ld. A.R., the Hon'ble Supreme Court had remitted back the claim of bad debt to A.O. as in that case, the facts of writing off of debt was not examined by A.O. However, in the present case, the debt has actually been written off therefore, relying upon the ratio of judgement of Hon'ble Supreme Court, we hold that the claim of assessee in respect of bad debt written off is allowable - Decided in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure can be spread over a period of time provided the assessee decides to do so and therefore, from the above judgement it can be concluded that right to claim deferred revenue expenditure is given to assessee and not to revenue. - Decided in favour of assessee. Disallowance of notional foreign exchange fluctuation loss - Held that:- As noted by A.O. in his assessment order the loss on account of foreign exchange fluctuation has occurred on account of working capital loans in foreign exchange and therefore, the loss claimed is allowable u/s 37(1) of the Act. See CIT Versus M/s Woodward Governor India P. Ltd.[2009 (4) TMI 4 - SUPREME COURT] - Decided in favour of assessee. - I.T.A. No. 2897 /Del/2007, I.T.A. No. 2807/Del/2007 - - - Dated:- 10-6-2015 - Shri G. C. Gupta And Shri T. S. Kapoor,JJ. For the Appellant : Shri Sanjeev Sabharwal, Sr. Adv. Shri Tushar Jarwal, Adv. Shri Rahul Satija, Adv. Shri Ankit Garg, Adv For the Respondent : Shri R.I.S.Gill, CIT (DR) ORDER Per T. S. Kapoor, AM: These are cross appeals filed by assessee as well as by Revenue against the order of Ld. CIT(A) dated 23.03.2007. These appeals were heard together, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (A) erred on facts and in law in not appreciating that for purposes of the Act, revenue expenses have to be allowed in full in the year of accrual unless specifically deferred as provided under the Act. B. I.T.A.No. 2807/Del/2007: (Appeal of Revenue): 1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of ₹ 12,27,50,000/- made U/S 14A on account of interest paid on the borrowed funds utilized for making investment in shares on which the tax free dividend income of ₹ 58,40,028/- has been earned, without appreciating the facts on record. 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in restricting the disallowance of ₹ 15,00,000/- made u/s 14A on account of proportionate administrative expenses incurred for earning the tax free dividend, to ₹ 2,92,000/- i.e. 5% of the gross dividend, without appreciating the facts on record. 3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of notional foreign exchange fluctuation loss of Rs.l,16,44,767/-, ignoring the fact that the liability is deductible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -was concerned. The Income-tax Rules, as amended with effect from 1.4.2003 rather helped the revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent. By, providing higher depreciation, it could not be said that prior to 1-4-2003, it was revenue expenditure, It was always a capital asset Prior to 1-4-2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 percent by the amendment considering the rapid wear and tear. Therefore, the expenditure was incurred on acquisition of capital assets and, thus, it was a capital expenditure. Resultantly, the same could not be allowed as' revenue expenditure. In view of the .decision in the case of Maruti Udyog Ltd. 92 LTD 1191 (Delhi. the action of the AO in disallowing the appellant's claim of revenue expenditure on software is confirmed. The ground consequently stands dismissed. b. Bad debts : - 3.3 I have considered the submission of the appellant. In order to establish a debt to be bad, on balance of probability circumstances must indicate to a reasonable and prudent businessman that the debt is unlikely to be recovered whether or not a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also to effect sales thereof. It has been specifically mentioned that in the case of default, the entry of the premises, removal of collateral from the premises and sale thereof would be with or without legal process. In view of the fact that the loans by the appellant to Grapco was secured, it would be relevant to place in perspective the state and the condition of the collateral, and the appellant's submission thereon. The appellant has relied on a report from M/s Panda Associates, CA of Balasore stating therein that 4 types of machine installed in the debtor's factory at Balasore would not be verified since they were not allowed entry into the factory The report is dated 02.06.2000. Thereafter MIs Fund point said to be service provider for recovery of GE Capital, dues from the party reported vide letter dated 24.02.2003 that on Inspection or Balafore factory, they could locate 2 machines i.e Budiarn Brezing / Tensioning Machine and single head automatic polishing machine. That other assets at Balasore site have been either transferred to their Bangalore/ Alwar site or have been sold out for payment of dues to other creditors . The inability of M/s Panda Associates t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of figures of investment and internal accrual, the AO goes on to elaborate at para 6.2.2. the logic of disallowance in the appellant s case as under: The assessee's contention does not appear to be acceptable. For F.Y. 99-00, the increase in accrual is only about. ₹ 41.00 crores, whereas increase in investment is about ₹ 54.00 crores. The borrowed funds on the other hand have increased from ₹ 226.17 crores to ₹ 317.56 crores. The assessee's own funds as on 31.03.99 were invested in the business of the assessee along with borrowed fund and there is no clear evidence that the own funds were invested directly in investment only . From the above narrations, it is clear that the A.O. has compared the increase in accrual to the increase in quantum of investment for the year under appeal and on such comparison has come to a conclusion that the increase in investment for the year under appeal has not come about through increase in internal accruals, since the quantum of increase in internal accrual was not sufficient to accommodate the increase in investment. Now from the figure of internal accrual as on 31.03.99 and 31.03.00 given at para 6.2.1 at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of those specific shares to the appellant accounts for Assessment Year 1996-97 and 97-98 In that view the appellant's contention that its internal accruals of ₹ 248.00,crores for the year ending 31.03.96 Rs. .253.00 crores for year ending 31.03.97 have been employed for making investment of ₹ 34.99 crores and ₹ 46.93 crores for the respective 2 years, have-not been disputed in any manner anywhere in the assessment order. The figures of internal accruals for the 2 years are 6 times more than the figure of investment for these 2 years, and there should be no apparent presumption against the appellant to hold to a view that the investments for these 2 years arose out of the borrowed funds From an analysis of the appellant's accounts for A Y. 96-97 97-98 and the decision in the case of AC IT Vs Eicher 101 TIJ 369 (Delhi), I hold that the provision of section 14A.are not applicable to the facts of the case and in that view the disallowance stands deleted The ground is allowed. d. Disallowance u/s 14A (regarding expenses): 5.3 I have considered the submissions of the appellant and, judicial precedents on the issue. In the case of DCIT Vs S.G. Invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the balance of ₹ 12,22,63,212/- has been claimed as deduction in the computation The breakup of the expenditure on raising of loan funds during the year are stated to be as under. (a) Debenture Issue expenses -- out of a gross expenditure of ₹ 4,05,10,227/-. ₹ 2,16.37594/- has been claimed in the accounts and the remainder claimed in the computation (b) Commercial Paper discounting - out of a gross expenditure of ₹ 14,50.80.450/-. ₹ 13,86.10 326/- has been claimed in the accounts and the remainder claimed in the computation. (c) Premium on ICICI forex loan - out of a gross expenditure of ₹ 10.1704,718/-, ₹ 4,46,58,375/- has been claimed in the accounts and the balance claimed in the computation. (d) Discount on debentures - out of a gross expenditure of ₹ 6.34,42,670/-, an amount of ₹ 2,35,68,058/- has been claimed in the accounts and the balance claimed in the computation. It has been stated by the AO. that the amount of expenditure amortized during the year is proportionate to the period of the fund for the relevant year as compared to the total period for which funds have been raised. It has been stated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 12 years. That although the assessee has incurred the liability to pay the discount in the year of issue of debenture, the payment is to secure a benefit over a number of years. 'There is a continuing benefit to the business of the company over the entire period. The liability should, therefore be spread over the period of debentures In the case of Taparia Tools Limited Vs. J.CI.T. 126 Taxman 544 (Bombay) 'he assessee had made payments of interest on non convertible debentures issued by the company The debenture holders had option either to periodically receive interest Or half yearly basis for five years or one year up-front payment. In that case two parties opted for upfront payment and after payment to those parties the appellant showed them in the financial statements as deferred revenue expenditure and wrote them off over a period of five years. However, in the return, it claimed the entire upfront payment as Expenditure. The High Court held that matching concept in which revenue and income on dealing an accounting period irrespective of actual cash inflow is required to be compared with expenses incurred during the same period, irrespective of actual outflow of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstituents, connotation and technical relevance of the rest of the loan raising instruments within deferred revenue expenditure. Commercial paper is said to be an unsecured, short term debt instrument issued typically for .short term financing of account receivables or inventories or for meeting short term liabilities. These are issued at a discount reflecting the prevailing market rates. Debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is like a certificate of loan or a loan bond evidencing the fact that the company is 1iable to pay a specified amount with interest. Similarly in contracting for foreign exchange loan forward contracts are obtained-to insulate the party obtaining the loan from any loss in discounting on the appointed day i.e. if a forward contract has not been booked, then the documents / loans will be discounted/paid @ prevailing on the day of discounting / payment. Whatever be the nomenclature given to the term, whether forward premium / discount on the foreign exchange loan or any other, the fact remains that forward premiums / discounts are purely funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,16,44,767/- has been stated to be in terms of the appellant's own accounting policy. At para vii to Schedule 15 (Notes to the Account), the auditors state that borrowings in respect of which no forward cover has been taken are restated at the exchange rate prevailing on the balance sheet date .. Exchange differences if any on account of restatement of liability are dealt with in the P L a/c. Other foreign currency transactions are recorded at the rates prevalent on the date of the transaction. Foreign currency assets and liability are re-stated at the year end rates and exchange gain flosses arising out of such transaction are taken to the P l a/c. The appellant refers to the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd. In that case it was held that where profit or loss arises on an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency such profit or loss will ordinarily be trading profit or loss IT the foreign currency is held by the assessee on the revenue account or as a trading asset or as a part of circulating capital embarked in the business But if on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the tax credit claimed by the assessee and should accordingly allow the same. Ld. A.R. submitted that vide order dated 06.05.2015 passed on the application itself, the Hon ble ITAT had admitted the application for additional ground relying on the case law of NTPC, 229 ITR 383. However, we find that one of the members had not signed on order passed by senior member and, therefore, it cannot be said that the order was passed on 06.05.2015. However, keeping in view the entirety of facts, we allow the admission of additional ground of appeal as the non admission of additional ground will cause irreparable harm and injury to the assessee whereas, it will not create any inconvenience to the Department. Moreover, we find that this ground is based on record and the claim of tax credit was made through income tax return of the assessee. 6. Ld. D.R. had no objection to the acceptance of additional ground of appeal, therefore, we admit the additional ground of appeal and direct the A.O. to verify the claim of assessee in respect of tax credit and allow the same as per law. In view of above, additional ground of appeal is allowed for statistical purposes. 7. Now, coming to the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. In the present case as noted by A.O. the expenditure was incurred on application software. Therefore, respectfully following the Hon'ble Delhi High Court, we hold the expenditure incurred on application software to be revenue in nature and therefore, we allow Ground No.2. ii) Bad Debts: Ld. A.R. submitted that bad debts had been written off by assessee in its books of accounts and, therefore, its case was squarely covered by the order of Hon'ble Supreme Court in the case of TRF Ltd. Vs CIT 323 ITR 397 placed at paper book 39 of compilation of judgements. Ld. A.R. further relied upon the case law of Auto Meters Ltd. 292 ITR 345 decided by Hon'ble Delhi High Court placed a paper book pages 42-43. Inviting our attention to A.O. s objection in disallowing the write off of bad debts, Ld. A.R. submitted that the A.O. had disallowed the claim holding that loan given by assessee has not fully become irrecoverable as the loanee was not declared BIFR Company and the case was pending with BIFR. Ld. A.R. submitted that the A.O. had held that till the final conclusion was pending before BIFR there was chance that assessee could get a part of amount and therefore, lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Admittedly, the debt has been written off as noted in the assessment order itself and the loan was given in ordinary course of regular business activities of the assessee. Therefore, as per the Hon'ble Supreme Court decision, the action of writing off of debt was sufficient to claim the loss. In the judgements relied upon by Ld. A.R., the Hon'ble Supreme Court had remitted back the claim of bad debt to A.O. as in that case, the facts of writing off of debt was not examined by A.O. However, in the present case, the debt has actually been written off therefore, relying upon the ratio of judgement of Hon'ble Supreme Court, we hold that the claim of assessee in respect of bad debt written off is allowable and in view of the same, we allow ground No.3 of appeal. iii) Disallowance u/s 14A: Ground No.4 relates to upholding of a part of disallowance u/s 14A of the Act. The A.O. had disallowed an amount of ₹ 12,27,50,000/- on account of expenditure of interest relatable to earning of dividend and further had disallowed an amount of ₹ 15 lacs relating to administrative expense for earning of dividend income. Ld. CIT(A) has however, deleted the additions on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment in the shares and it is also undisputed fact that dividend was earned from two companies which are group companies of assessee and the assessee had made investments in these companies as strategic investment and dividend amount of R.58,40,028/- comes to 0.15% of total income of assessee which fact is apparent from the order of Ld. CIT(A) at page 11. Moreover, Ld. CIT(A) has clearly held that investment in shares was made out of internal accruals and own funds and no borrowed funds were used. Ld. CIT(A) has held that out of internal accruals of s.248 crores for the year ended 31.03.1996, and ₹ 253 crores in the year ended 31.03.1997, the assessee had made investment of ₹ 34.99 crores and ₹ 46.93 crores in these two years, which means that the figures of internal accruals for two years was six times more than the figure of investments in these two years. Therefore, relying upon the decision of ACIT Vs Eicher Ltd. in 101 TTJ 369, Ld. CIT(A) has rightly held that disallowance on account of interest was not applicable to the assessee. 13. Ld. D.R. was not able to controvert any of the findings of Ld. CIT(A). In view of the above ground No.1 of Revenue s ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch income which does not form part of total income under the Act in accordance with the prescribed method. While rejecting the claim of assessee with regard to expenditure or no expenditure as the case may be, in respect of exempt income, the A.O. would have to indicate cogent reasons for the same which has not been done in the present case. Therefore, relying upon the ratio of Hero Cycles Ltd. 323 ITR 518, we hold that without recording of finding of fact as to the incurring of some expenditure, disallowance made by A.O. and partly confirmed by Ld. CIT(A) is not justified. Moreover, we find hat dividends were received from the group companies wherein the investment was made as a strategic investment and not for the purpose of earning dividend and since these are strategic investments there is no chance of incurring of any expenditure on day to day basis. In view of above facts and circumstances, ground No. 4 of assessee s appeal is allowed, whereas ground No.2 of Revenue s appeal is dismissed. 15. The last ground of appeal is regarding disallowance of expenditure incurred by assessee for raising loan by treating the same as deferred revenue expenditure. The Ld. A.R. submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee itself claimed expenses proportionately keeping in view of the nature of expenses, the assessee was permitted to do so. Whereas in the present case, the assessee has not availed such option and has claimed the amount partly in P L account and partly in computation of income. 17. We have heard rival parties and have gone through the material placed on record. We find that as per Section 37, all expenditure incurred wholly and exclusively for the purpose of business are allowed in the computation of income unless they are of capital nature or of personal nature. There is no mention of deferred revenue expenditure in the income tax Act. In the case of Mad. Industrial as relied upon by Ld. CIT(A), the issue was decided in favour of revenue on account of the fact that assessee itself had claimed proportionate amount in the P L account and the Hon ble Court had held that in such a scenario proportionate claim was admissible. We further find that Seciton 35D is also not applicable in the case of assessee as the assessee is a NBFC and in the year under consideration, Section 35D was applicable only for industrial units. We further find that similar issue was considered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment: Held also, that the questions whether the Tribunal was correct (i) in deleting the addition made by the AO by amortizing the expenditure towards the professional fee paid towards the project of supply chain management and human resource revenue-engineering by allowing deduction of one-fifth as expenditure in the year under assessment, and (ii) in holding that the unutilized amount of DEPB would be allowed as expenditure u/s 37(1) of the Income Tax Act,1961, and could be allowed as loss, were substantial questions of Law. 3. CIT vs. Panacea Biotech Ltd., vide ITA No. 22 24/2012, wherein the Hon'ble Delhi High Court observed as under: 4. The question of deferred revenue expenditure and the Judgment of the Supreme Court in the case of Madras industrial Investment Corporation Ltd. vs. CIT, MANUISCI049311997 : (1997)225 1TR 802 (SC) was examined and distinguished in CIT vs. Industrial Corporation of India MANUIDEl252112009 (2009) 185 Taxman 296 (Delhi) and it was held: 22. . .. The Ld. Counsel for the Revenue had strongly argued that matching concept is to be applied, as per which part of the expenditure had to be deferred and claimed in the subsequent years and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misleading to suppose that in all cases securing a benefit for business expenditure would be capital expenditure. The court added the caution in the following words: There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably white leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The lest of enduring belle fit is, therefore, not a certain or conclusive rest and it cannot be applied blindly and mechanically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in favour of the assessee and against the revenue by a number of decisions which were cited before us by the learned counsel for the assessee. In the Hyderabad Bench in the case of Amar Raja Batteries vs. Asstt. CIT [2004} 91 ITD 280which is squarely applicable to the facts of this case, it was held that- The undisputed fact is that the expenditure is in the revenue filed. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a period of five years. Though the assessee has written off the expenditure in its books of account over a period of five years, it must be allowed ill its entirety in the year in which it was incurred, if it is revenue expenditure and if it is wholly and exclusively incurred for the purposes of business. The assessee had launched a new product and incurred heavy advertisement expenditure. The period for which the assessee can be said to have secured benefit by incurring this expenditure cannot be reasonably estimated. The undisputed fact is that the new product launched may fail to take off in the year of launch itself or may ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which he had deleted an addition of ₹ 1,16,44,707/- which was made by A.O. on account of disallowance of notional foreign exchange fluctuation loss. Ld. D.R. had relied upon the order of A.O. Ld. A.R. submitted that the assessee had debited the aforesaid amount in the P L account on account of year end provision for change in exchange rate in respect of outstanding liability on account of working capital loans in foreign exchange. He submitted that the above debit in P L account was made on the balance sheet date and in accordance with accounting standard 11. He submitted that the A.O. had disallowed the claim treating the same as provision relying on the decision of the Tribunal in the case of ONGC reported in 83 ITD 151 and Ld. CIT(A) after analyzing the facts of the case, has held that the loss written off was not contingent in nature. Ld. A.R. submitted that the issue is squarely covered in favour of assessee by the decision of Hon'ble Supreme Court in the case of CIT Vs Woodward Governors India (P) Ltd. 312 ITR 254. 21. We have heard rival parties and have gone through material placed on record. We find that as per accounting policy, the assessee is follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in computing the income chargeable under the head Profits and gains of business . In sections 30 to 36, the expressions expenses incurred as well as allowances and depreciation have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, Parliament has used the expression ' any expenditure in section 37 to cover both. Therefore, the expression expenditure as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M. P. Financial Corporation v. err reported in [1987) 165 14 ITR 765 the Madhya Pradesh High Court has held that the expression expenditure as used in section 37 may, in the circumstances of a particular case, cover an amount which is a loss even though the said amount has not gone out from the pocket' of the assessee. This view of the Madhya Pradesh High Court has been approved by this court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in [1997] 225 ITR 802 . According to the Law and Practice of Income Tax by Kanga and Paikhiua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted value of the closing stock is not brought into account, as no prudent trader would care to show increased profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance With ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year's account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has -not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where section 145(2). comes into play. Under that section, the Central Government is empowered to notify from time to time the accounting standards to be followed by any class of assessees or in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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