TMI Blog2006 (2) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in our opinion, prima facie means raw material for manufacture of motor vehicle. Apart from this, there is nothing on record to prove that loan was actually utilized for acquisition of capital goods. On the contrary, the stand of assessee before Assessing Officer was that loan was actually utilized to meet the needs of working capital of business. Assessing Officer also proceeded on the same footing. Therefore, on the basis of facts and material available on record, we are unable to find merit in the submissions of the ld. Special Counsel for the Revenue inasmuch as it is the actual utilization of funds which is relevant in deciding the issue before us and not the mere agreement. This view is fortified by the judgment of the Apex Courtin the case of Sutlej Cotton Mills Ltd [ 1978 (9) TMI 1 - SUPREME COURT] . Indeed, the aforesaid decision of the Hon'ble Calcutta High Court support the point of view canvassed by the ld. Special Counsel for the Revenue. However, it would be appropriate to refer to the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. wherein ratio has been enunciated for determining whether the loss on account of foreign exchange fluctuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes. What is required to be appreciated is the source of the income generated and not merely the source of funds for making investments which have generated such income. In the instant case, it is the investments by itself which is the source of income, which is distinct from the industrial undertaking. Therefore, in our view, the order of the CIT(A) is required to be reversed on this count. The order of the CIT(A) on this ground is thus set aside and that of the Assessing Officer is restored. Cash subsidy on Exports - The additional ground raised by the revenue is admitted. The rival contentions with respect to the merit of the dispute are on similar lines as noted by us while disposing of ground no. (iii) in the earlier paras. Following the parity of reasoning enunciated by the Apex Court in the cases of Sterling Foods [ 1999 (4) TMI 1 - SUPREME COURT] and Pandian Chemicals Ltd., the income on account of 'Cash Subsidy on Exports' cannot constitute income derived from the industrial undertaking and is thus not eligible for relief u/s 80-I of the Act. Whether the assessee can be put in a position, which is worst than the position in the original assessment proceedings? - Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on account of gifts presented by the assessee company exceeding Rs. 200 each, under Rule 6B of the Income-tax Rules. 2. Briefly stated the facts are that the Assessing Officer disallowed a sum of Rs. 2,57,534 under rule 6B, being the value of gifts given to dignitaries visiting the assessee's factory as well as other business associates. The CIT(A), following the judgment of the Hon'ble Delhi High Court in the case of CIT v. Indian Aluminium Cables Ltd. [1990] 183 ITR 611 and the orders of his predecessors in the assessee's own case for the earlier years has partly deleted the addition on the ground that the expenditure on gifts not containing the logo or name of the company is not covered by the provisions of rule 6B of the Income-tax Rules, 1962. Except an expenditure of Rs. 1,40,721 incurred on a car gifted which could not be satisfactorily explained, the CIT(A) deleted the balance addition of Rs. 1,16,803. 3. It was a common ground between the parties that the said ground is covered in favour of the assessee by the decision of the Tribunal in the assessee's own case for assessment year 1987-88 in ITA No. 3890/Del/90 dated 15-5-1995. The disallowance has been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly charged to the profit loss account. The assessee further submitted that such method of accounting was regularly followed by it. The assessee submitted that the method of accounting was in accordance with the pronouncements of the Institute of Chartered Accountants of India in this regard. The assessee accordingly justified its claim for deduction of the abovesaid loss as a trading loss. The Assessing Officer has, however, rejected the pleas of the assessee and disallowed the loss. The Assessing Officer held that under the accrual system of accounting, liabilities can be allowed which have either been paid during the year or which have crystallized and become ascertained during the relevant year. The impugned liability on account of variation in the exchange rate, has been considered by the Assessing Officer to be only a notional liability as there was no certainty that it would ultimately be borne by the assessee since the loans were repayable on a future date. The Assessing Officer held that the liability was not quantifiable because the ultimate liability would devolve only when the loan was actually repaid and any loss due to fluctuations in the exchange rate prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h reads as under:- 10. In order to understand whether the additional liability in the form of loss on account of change in the rate of exchange claimed in P L account is an ascertained liability or only notional, the terms and conditions of the three loans were gone through by me. These show that not only the due dates and the amounts in dollars as well as the instalments of the principal sum have already been stipulated in the agreements but the entire payment schedule has been worked out up to a specified date. However, while working out the year and liability of the loan, the appellant applied the rate of exchange prevailing on the last day of the year and worked out exchange loss accordingly. As regards Japanese Yen, loan of 5 billion in assessment year 1990-91, there was a gain of exchange rate fluctuation which was not accounted for on principles of conservatism. The loss in the subsequent year has been computed on the unaltered sum without taking the gain into account. As regards the loan of U.S. dollars of 40 million, a chart has been filed before me showing the position from q assessment years 1990-91 to 1993-94 as per which had the exchange rate variation not been taken i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assumption that the foreign exchange rate variation relates to revenue nature, is concerned, the same is indeed covered by the decision of the Special Bench of the Tribunal in the case of ONGC Ltd. v. Dy. CIT [2002] 83 ITD 151 (Delhi). He has further submitted, in the light of the additional grounds of appeal referred above, that the Assessing Officer and the CIT(A) have blindly accepted the assertion of the assessee before them that the foreign exchange variation loss pertains to the foreign currency loans utilized for the purpose of meeting the working capital requirements of the assessee. He highlighted the fact that the loan of US $ from EXIM Bank and the loans from Japanese lenders have been raised for the purposes of meeting the capital expenditures as well. Our attention was invited to pages 2 to 24 of the Revenue's Paper Book, wherein is placed a copy of the loan agreement between the assessee and EXIM Bank regarding the foreign currency loan of US $. It was highlighted that the loan was raised for a new project of establishment of a production facility for manufacture of 1000CC-3 BOX Car to be added to the existing factory of the assessee. Adverting to page 25 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate fluctuation. Of course, the controversy vis-a-vis the aspect regarding the loss being of capital nature is not focused in the main ground of appeal. The decision of the Calcutta High Court in the case of Bestobell (India) Ltd v. CIT [1979] 117 ITR 789 has been relied upon by the Revenue to justify the argument that the loss on account of exchange fluctuation on foreign currency loans was a capital loss. The ld. Special Counsel has relied on the decisions of the Apex Court in the case of Hukam Chand Mills Ltd. v. CIT [1967] 63 ITR 232; CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 and National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 in the course of his submissions. 11. At the outset, the ld. counsel Shri Ajay Vohra, appearing for the respondent assessee pointed out that the only controversy raised by the Assessing Officer was as to whether the exchange rate variation loss needs to be allowed on accrual or on payment basis. The Assessing Officer decided that the same was to be allowed only on actual payment basis as against the claim of the assessee that the same was to be allowed on accrual basis. The CIT(A) has since allowed the plea of the assessee that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 i.e. the year under consideration and for the assessment years 1993-94 to 1995-96, the Assessing Officer chose to dispute the basis adopted by the assessee for accounting for exchange rate fluctuation and held that the liability was to be allowed only on the basis of actual payment as against the accrual basis claimed by the assessee. It was submitted that it would be relevant to notice that hitherto up to the assessment year 1990-91, the loss on account of such fluctuation have been allowed to the assessee on accrual basis. 14. The ld. Counsel submitted that the observations of the ld. Special Counsel for the revenue based on the respective loan agreements only can at best be said to be an indicator that the impugned loans were contracted for by the assessee for meeting its working capital as well its capital expenditure requirements. However, the issue in question is required to be decided on the, basis of the actual utilization of the loan funds, whether for working capital requirement or for acquisition of capital assets. Challenging the assertion of the ld. Special Counsel for the Revenue that purport of the expression goods for manufacture of motor vehicles , placed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave carefully considered the rival submissions, perused the orders of the lower authorities and the material to which out-attention has been drawn during the course of hearing including the authorities cited at Bar and proceed to dispose of the issue on the following lines. We shall first take up for consideration the dispute raised by the revenue originally in its appeal. The dispute originally raised can be understood as follows: The assessee had taken three different loans in foreign currency of US $ 45 million, Japanese Yen 5 billion and US $ 30 million on different dates. For the purposes of expressing the liability in respect of such loans outstanding at the end of the year, the assessee applied the relevant foreign currency exchange rate prevailing on that date and the difference between such rate and the rate of exchange at the time the loan was originally contracted, was claimed as an enhancement in the liability or in other words, as a loss. Such a system of accounting has been followed by assessee hitherto also. This system is termed by the assessee as accrual system. In terms of such system, the assessee calculated the fluctuation in foreign exchange rates with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change prevailing at the year end and exchange loss due to depreciation of foreign currency were charged to profit of the year. The company is following the abovesaid accounting method consistently and this accounting method is also in conformity with accounting standard-11 issued by the Institute of Chartered Accountants of India in June, 1989 on Accounting for the effect of change in foreign exchange rates. Hence, were satisfying the condition as laid down under section 145 as stated above. Therefore, the loss resulting from depreciation of foreign currency is a trading loss and allowable for deriving a taxable income. We request you to kindly allow the above stated trading loss in our case also. It is also verifiable on record that similar exchange loss arising from normal trading transactions have never been disallowed in any of the earlier assessments of Maruti Udyog Ltd. 18. Further, the Assessing Officer specifically records the submission of the assessee that Rs. 24.75 crores pertains to loss on foreign currency utilized for the purpose of meeting working capital requirements.... Nowhere in the course of the entire discussion in the assessment order, as would be evident lat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the foregoing, it would be clear that the liability being referred to is only notional and contingent upon various factors and not an ascertained liability. Under the circumstances discussed herewith, it would have been a proper course of action to create a provision in the books of account and the same should have been credited to the extent the assessee envisages a loss on account of such fluctuations. Thereafter as and when at the time of repayment, the loss is actually suffered by the assessee due to exchange rate fluctuation, the same could be drawn from such provision and claimed as a revenue expenditure. Thus, the principle of accounting followed by the assessee i.e. quantifying the loss as on 31-3-1991 and claiming the same as revenue expenditure cannot be allowed since the liability under discussion is only a contingent liability which would remain so and convert itself into ascertained liability only at the time of repayment of the loan, and would therefore, be allowable at that point of time. The perusal of the above discussion by the Assessing Officer clearly shows that the Assessing Officer proceeded on the footing that the additional liability on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 20. The above view was expressed by the Tribunal after following the decision of theApex Courtin the case of Sutlej Cotton Mills Ltd. Further, the Hon'ble Jurisdictional High Court of Delhi in the case of CIT v. Bharat Heavy Electricab Ltd. [1999] 239 ITR 756 has also relied upon the principles laid down by the Apex Court in the case of Sutlej Cotton Mills Ltd. to hold that the additional liability incurred by the assessee on account of variation in foreign exchange rate was an allowable trading liability where the foreign exchange loans have been utilized on revenue account. In the present case, it is the stand of the assessee that loan obtained in foreign currency was utilized to meet the F working capital requirements. The Assessing Officer has also impliedly accepted this stand of assessee as he proceeded only on that footing. The method of accounting adopted by the assessee was consistent. Therefore, the decision of Special Bench of the Tribunal is squarely applicable to the present case. Accordingly, following the said decision, the order of CIT(A) is upheld on this issue. 21. Now, we come to the additional grounds preferred by the revenue. The said additional ground i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also mention here that the plea advanced on behalf of the revenue that the nature of the additional liability of loan on account of foreign exchange rate fluctuation was a capital loss by-relying on the decision of High Court of Calcutta in the case of Bestobell (India) Ltd. is also not acceptable. We have perused the decision of the Calcutta High Court in the case of Bestobell (India) Ltd. The assessee therein had borrowed loan in foreign currency for carrying out its business activity which was repayable within a specified period. The repayment was not made in time. Subsequently, on account of rupee devaluation, the assessee therein had to pay an extra amount due to foreign exchange fluctuation. Such extra expenditure was claimed as a loss by way of debit in the profit loss account. The revenue disallowed the loss as being in the nature of capital loss, which was upheld by the Hon'ble High Court of Calcutta. The relevant discussion of the order of the High Court is as follows:- The question which in our view is of real importance in the instant case is whether the loss or expenditure of the assessee as a result of the devaluation is of a capital nature or of a revenue nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd any merit in the additional grounds raised by the Revenue. 26. In view of the aforesaid discussion, in our view, the ground No. (ii) of the Revenue as also the additional grounds raised on this aspect are liable to be dismissed, both on facts and in law. We hold so. 27. Ground No. (iii) reads as follows:- The CIT(A) has erred in holding that income of 22.85 crores earned as interest on advances received from customers, qualifies for deduction under section 80-I. 28. The broad issue in the impugned ground relates to the decision of the CIT(A) in holding that the interest income of Rs. 22,85,31,015 is includible in the profits and gains of the c industrial undertaking so as to qualify for deduction under section 80-I of the Act. In brief, the facts are as follows. The assessee in its return of income had claimed deduction under section 80-I amounting to Rs. 9,76,03,328. The entire deduction was denied by the Assessing Officer by excluding from the profits and gains of the industrial undertaking certain items of income on the ground that the same could not be said to have been derived from the industrial undertaking. The dispute presently canvassed by the revenue by way of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance from customers and deposits from dealers, the interest earned on such deposits or advances is nothing but profits and gains derived from the business of industrial undertaking itself. The net income, therefore, earned from such interest of Rs. 22,85,31,015, qualifies for deduction under section 80-I of the Income-tax Act. 30. Against the aforesaid background we have heard the submissions of the rival counsels. The ld. Special counsel for the Revenue has argued that the CIT(A) has failed to appreciate that for an income to be eligible for deduction under section 80-I, there must exist a nexus between such income and the industrial undertaking. In the instant case, the argument of the ld. Special counsel is that the source of income is the interest earned on investments made on inter-corporate deposits, PSU Bonds, etc. and not the industrial undertaking. Ld. Special Counsel argued that as long as the source of an income was not the industrial undertaking directly, such an income cannot be held to be eligible for relief under section 80-I of the Act. In this regard, reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Dy. CIT v. Metro Tyres Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the ld. Counsel sought leave for admission of 'Guidelines issued by the Government of India' to support his contention that the assessee was required to deposit the advances received from its customers in the manner specified in the guidelines. A copy of the said guidelines is placed at pages 90-91 in the supplementary paper book filed by the assessee. The ld. Special Counsel for the Revenue did not have any objection to consideration of the aforesaid evidence while disposing of the present appeal. 33. We have considered the rival arguments, perused the orders of the lower authorities as also the material on record and proceed to dispose of the issue on the following lines. The provisions of section 80-I provide that the profits and gains derived from an industrial undertaking, as are included in the gross total income of an assessee are eligible for deduction at the specified rate while computing the taxable income. The crucial expression in the section is derived from . The said expression provides the boundaries within which the income must fall so as to constitute profits and gains of an undertaking, which are eligible for deduction under section 80-I. The Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to pay interest on the advances received by it from its customers. The net income earned on account of such interest is sought to be included as a profit and gains derived from the industrial undertaking by the assessee for the purposes of computing relief under section 80-I of the Act. In our view, applying the tests laid down by the Apex Court, the impugned income cannot be said to have a direct nexus with the industrial undertaking of the assessee. The immediate and the direct source of such income is the investment made in the bank deposits or the inter-corporate deposits, bonds etc. The activity of making the aforesaid investment is a step away from the industrial undertaking of the assessee. Therefore, in our view, the same cannot constitute incomes eligible or relief under section 80-I of the Act. The CIT(A) has however held that since the sale of vehicles by the assessee could not be made otherwise than by way of receiving advance from customers and dealers, the interest earned on such advances was nothing but profits and gains derived from the industrial undertaking itself. In our view, the CIT(A) has is directed himself in attempting to go into the source of funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prayed that it be admitted in view of the decision of the Apex Court in NTPC Ltd. v. CIT [1998] 229 ITR 383. 38. On the other hand, the ld. Counsel for the respondent equally strongly contends that the grant of relief under section 80-I in respect to 'Cash Subsidy on Export' was never an issue before the CIT(A) and was never considered by him and so this issue does not arise out of the order of the CIT(A). As it does not arise out of the order of the CIT(A), the department cannot be aggrieved by the order of the CIT(A) and so the additional ground is not maintainable at all. Assuming but not admitting that the additional ground raised is only a pure question of law on the fact already on record, it is submitted that as this matter was never considered by the Assessing Officer, its acceptance by the Tribunal by holding on merits that relief under section 80-I is not allowable on 'Cash Subsidy on Export' income, may result in an enhancement of the income which is not permissible under, section 254(1) of the Act. The legislature has granted the power of enhancement to the CIT(A) but this power has not been granted to the Tribunal and so it is urged that even if the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question in order to correctly assess the tax liability of the assessee. The following portion of the decision of the Apex Courtis relevant to notice:- 3. Under section 254 of the Income-tax Act the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; cannot constitute income derived from the industrial undertaking and is thus not eligible for relief under section 80-I of the Act. 42. Since, on merits, the additional ground raised by the Revenue is decided against the assessee, can it be said to be a case of enhancement of assessment. Therefore, the next question which arises for our consideration is whether the assessee can be put in a position, which is worst than the position in the original assessment proceedings. The answer to this question has to be given according to the rules of contextual interpretation. The scheme of the Act shows that an assessment made by the Assessing Officer is final unless disturbed by an appropriate authority under various provisions of the Act. If any wrong is committed by the Assessing Officer, which is prejudicial to the Revenue, it can be corrected either under section 263 by the CIT or in the rectification proceedings under section 154 or under the provisions of section 147 by the Assessing Officer himself, as the case may be. If any wrong is committed, which is prejudicial to the assessee, the right of appeal has been conferred on the assessee by virtue of section 246. Apart from this, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nhancement) which are conferred upon the Appellate Assistant Commissioner by section 31 of the Act. The above observations clearly indicate that the Tribunal does not have the power of enhancement. No doubt, the Hon'ble Court used the word 'possibly' but no judgment of the Apex Court has been brought to our notice to take the contrary view. 46. At this stage, it would be appropriate to refer to the judgment of the Hon'ble Supreme Court of India in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297, wherein the Apex Court had to consider the powers of an Assessing Officer under section 147. The Hon'ble Court held the powers of the Assessing Officer' were limited to the assessment of escaped income and such powers could not be extended in respect of the claims, which had already been disallowed by the Assessing Officer. According to the Court, the provision of section 147 are for the benefit of the Revenue and therefore, the assessee could not agitate any matter which was concluded against him in the original assessment. It would be appropriate to refer to the relevant observations of the Apex Court, which are being reproduced as under:- Keeping i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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