2024 (5) TMI 1318 - AT - Income Tax

Foreign Exchange Fluctuation Gain - capital receipt or revenue receipt - HELD THAT - DR fairly agreed that the issue stood covered in favour of the assessee by the order of the Hon ble jurisdictional High Court in the case of the assessee for AY 2007-08 2018 (4) TMI 1691 - GUJARAT HIGH COURT and there was no distinction in the facts of the case pertaining to AY 2007-08 and the present two years i.e. AYs 2005-06 and 2006-07 and he was unable to point out any distinction on law also before us. No reason to interfere in the order of the CIT(A) treating the Foreign Exchange Fluctuation Gain in AYs 2005-06 and 2006-07 respectively as being capital in nature. Deduction u/s 10B - export sales the sale consideration of which was admittedly not received within six months from the end of the impugned financial year but the sales was actually returned back in the succeeding year - HELD THAT - There is no dispute with regards to the provision of law allowing claim of deduction u/s 10B of the Act only on those goods exported whose sale consideration is received within six months from the end of the concerned financial year. The assessee admittedly having failed to fulfil this necessary prerequisite the ld. CIT(A) we hold has rightly held the assessee not entitled to claim deduction u/s 10B of the Act with respect to the export turnover of Rs. 1.70 crores. The alternative claim of the assessee for direction to allow deduction u/s 10B in the year of return of the impugned goods when it is duly accounted for in the books of the assessee we find has been adequately addressed by the ld. CIT(A) giving necessary directions in this regard to allow the assessee s claim after due verification of the facts of the return of sale of goods. MAT computation - Upward adjustment to be made to the book profits of the assessee on account of provision for bad and doubtful debts in terms of provision of Section 115JB r/w clause (i) of Explanation to the said section - HELD THAT - Our attention as specifically drawn to the Schedule-9 of Current Assets revealing the debtors balances - as pointed out there from that the provision for doubtful debts had been reduced from the debtor s balance. Thus assessee contended that the case of the assessee was squarely covered by the decision of Vodafone Essar Gujarat Limited 2017 (8) TMI 451 - GUJARAT HIGH COURT according to which the provision for bad and doubtful debts having been netted/reduced from the debtor s balance appearing in the balance-sheet the same need not be added back to the book profit of the assessee u/s 115JB of the Act. DR fairly agreed with the ld. Counsel for the assessee that the issue was covered in favour of the assessee by the decision of the full bench of Vodafone Essar Gujarat Limited 2017 (8) TMI 451 - GUJARAT HIGH COURT We have no hesitation in holding that the provision for bad and doubtful debts are not to be added to be book profit of the assessee for the purposes of Section 115JB of the Act. Provision for Leave Encashment under section 43B - HELD THAT - Hon ble Apex Court in the case of Union of India Vs. Exide Industries Ltd 2020 (4) TMI 792 - SUPREME COURT has decided the issue against the assessee ruling that the leave encashment will be allowed as deduction only on payment of the same in terms of provision of Section 43B - we see no reason to interfere in the order of the ld. CIT(A) confirming the disallowance of leave encashment u/s 43B of the Act. Disallowance of expenses u/s 14A r.w.r. 8D - investments in partnership firm to be considered in the said formula are to constitute only the fixed capital investment and not the investment reflected in the current capital account - HELD THAT - As is evident Section 48 clause (b) sub-clause (iii) states that on settlement of accounts between partners the assets of the firm are to be applied in paying the debts of the firm to the third parties; thereafter paying partners what is due to them for advances other than capital and then paying the partners rateably what is due to them on account of capital. There is no distinction made by Section 48 between the amount to be paid to the partners on account of current capital account and fixed capital account. It is only any amount paid by partner to the firm as an advance as distinguished from capital which has priority of payment over the amount to be paid to partners as capital. We noted no distinction made between the two sets of capital account in section 13 of the partnership Act also. Therefore even as per the Partnership Act there is no distinction between the current capital account and fixed capital account. As rightly pointed by the ld. CIT(A) the assessee has never reflected the amount in the current capital account as receivable . On the contrary the same is reflected as current capital i.e. part of capital account only to be construed as capital contributed by the partner in the firm. In view of the same we have no hesitation in confirming the order of the CIT(A) that the computation of disallowance of administrative expenses as per Rule 8D of the Income-Tax Rules 1962 read with Section 14A of the Act is to be made after taking into consideration both the investment made by the assessee in the fixed capital and current capital of the firm. The disallowance therefore made by the Assessing Officer in accordance with the said formula is accordingly confirmed. TP Adjustment - Addition on account of Corporate Guarantee provided to Associated Enterprise ( AE ) - HELD THAT - Before us assessee stated that the issue has been decided against the assessee by Redington (India) Ltd 2020 (12) TMI 516 - MADRAS HIGH COURT categorically holding the provision of guarantees to be in the nature of international transactions and adjustment being necessitated for guarantee commission therefore. In view of the same we see no reason to interfere in the order of the ld. CIT(A) confirming the addition made to the Arm s Length Price of Corporate Guarantee. Disallowance of deduction u/s 10B on account of export turnover the sale consideration of which was admittedly not received within six months from the end of the financial year but in fact the sales was returned in the subsequent years confirmed . Weighted deduction u/s 35(2AB) - expenses incurred in in-house research and development activities - AO had disallowed the weighted deduction so claimed by the assessee of expenses which were allegedly not certified by the prescribed authority i.e. Department of Scientific and Industrial Research (DSIR) in Form No. 3CL - HELD THAT - Assessee contended that it is now settled by various decisions of the Hon ble jurisdictional High Court followed by the ITAT Ahmedabad Bench in several cases that for the impugned year i.e. AY 2011-12 the DSIR was not required to certify the quantum of expenses incurred by the assessee in inhouse development and research expenses and therefore the non-approval of expenses by DSIR could not be a ground for refusing weighted deduction to the assessee on expenses so incurred for the specified purpose. Reference was made to the decision of Banco Products (India) Ltd. 2018 (7) TMI 1559 - GUJARAT HIGH COURT and to the decision of Pharmanza Herbal (P.) Ltd 2023 (8) TMI 1468 - ITAT AHMEDABAD - DR fairly agreed with the same. Since the denial of weighted deduction in the present case is solely for the reason that the amount was not approved by the DSIR the disallowance we hold is not sustainable in view of the decisions cited by the ld. Counsel for the assessee before us. The disallowance made u/s 35(2AB) of the Act is therefore directed to be deleted. The assessee therefore succeeds in its appeal while the Revenue s appeal is dismissed.

Summary

Issues Involved:

1. Treatment of Foreign Exchange Fluctuation Gain.
2. Reduction of unrealized export proceeds from export turnover for the purpose of deduction u/s 10B.
3. Addition of provision for doubtful debts and advances while calculating book profit u/s 115JB.
4. Provision for Leave Encashment under section 43B.
5. Disallowance u/s 14A read with rule 8D.
6. Addition on account of Corporate Guarantee provided to Associated Enterprise (AE).
7. Claim of weighted deduction u/s 35(2AB) for in-house research and development expenses.

Summary:

1. Treatment of Foreign Exchange Fluctuation Gain:
The solitary issue in the appeals for AYs 2005-06 and 2006-07 related to the treatment of Foreign Exchange Fluctuation Gain. The ITAT had restored the issue back in the first round to determine the nature of the gain. The Assessing Officer treated it as revenue, but the CIT(A) held it to be capital in nature, referencing the ITAT and High Court's decisions for AY 2007-08. The ITAT upheld the CIT(A)'s decision, treating the gains as capital in nature.

2. Reduction of Unrealized Export Proceeds for Deduction u/s 10B:
For AYs 2006-07 to 2009-10, the issue was the reduction of export turnover for computing deduction u/s 10B due to non-receipt of export proceeds within six months. The ITAT upheld the CIT(A)'s decision disallowing the deduction for the impugned years but directed to allow it in the subsequent year when the goods were returned and accounted for.

3. Addition of Provision for Doubtful Debts and Advances u/s 115JB:
For AY 2006-07, the issue was the addition of provision for doubtful debts while calculating book profit u/s 115JB. The ITAT referred to the Gujarat High Court's decision in Vodafone Essar Gujarat Ltd., holding that the provision for bad and doubtful debts, if netted off against debtors, should not be added back to the book profits. The ITAT allowed the assessee's appeal.

4. Provision for Leave Encashment u/s 43B:
For AYs 2007-08 and 2008-09, the issue was the disallowance of provision for leave encashment u/s 43B. The ITAT upheld the CIT(A)'s decision, referencing the Supreme Court's decision in Exide Industries Ltd., which mandates that leave encashment is deductible only on payment.

5. Disallowance u/s 14A read with Rule 8D:
For AYs 2007-08 to 2009-10, the issue was the computation of disallowance u/s 14A. The ITAT upheld the CIT(A)'s decision to include both fixed and current capital accounts of the partnership firm for calculating the disallowance, rejecting the assessee's contention to consider only the fixed capital.

6. Addition on Account of Corporate Guarantee to AE:
For AYs 2007-08 to 2009-10, the issue was the addition to the Arm's Length Price for corporate guarantees provided to AEs. The ITAT upheld the CIT(A)'s decision, referencing the Madras High Court's decision in Redington (India) Ltd., affirming the need for adjustments for guarantee commissions.

7. Claim of Weighted Deduction u/s 35(2AB):
For AY 2011-12, both the assessee and the Revenue were in appeal regarding the claim of weighted deduction u/s 35(2AB). The ITAT held that the DSIR's non-approval of expenses could not disqualify the weighted deduction, referencing the Gujarat High Court's decision in Banco Products (India) Ltd. The ITAT allowed the assessee's appeal and dismissed the Revenue's appeal.

Conclusion:
The appeals filed by the Revenue for AYs 2005-06, 2006-07, and 2011-12, and the appeals filed by the assessee for AYs 2007-08 to 2009-10 were dismissed. The appeal of the assessee for AY 2006-07 was partly allowed, and the appeal for AY 2011-12 was allowed.