TMI Blog2014 (3) TMI 731X X X X Extracts X X X X X X X X Extracts X X X X ..... mount drawn from the loan should be utilized for the purpose approved and strictly subject to the terms and conditions stipulated by the Reserve Bank of India vide their letter dated 21st September, 1994 - when the object and the purpose of loan clearly points out to the purpose of the loan given as for capital expenditure on modernization and expansion, the fact that the exchange fluctuation had been added on to the cost under Section 43-A(1), however, does not, lead to the inference that as far as the balance amount is concerned, the interest payment difference on exchange fluctuation would fall under Revenue head – there was no ground to uphold the contention of the assessee that the difference in the interest on the balance of principal amount on account of exchange fluctuation to be treated as revenue expenditure. The Tribunal's findings are upheld that the assessee had failed to support its contention through any concrete evidence - The assessee in its accounts admitted the foreign exchange loan as capital for acquisition of machineries and assets and accordingly the scheme was capitalized - there was no evidence that the funds were utilized for the purpose other than wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the case of Commissioner of Income-tax v. General Insurance Corporation reported in [2006] 286 ITR 232 and Commissioner of Income-tax v. Dalmia Investment Co. Ltd. reported in [1964] 52 ITR 567, accordingly the question No.4, is answered in favour of the assessee and against the Revenue. 4. The assessee a public limited company is engaged in manufacture of bicycles, cycle accessories, cycle dynamo lamps, steel tubes and strips. 5. For the assessment year 1996-97, the assessee filed the return of income admitting a total income of Rs.6,84,04,240/-. The return was accepted under Section 143(1)(a) of the Income Tax Act (Act) and refund including interest was granted to the assessee. Thereafter, the case was taken up for scrutiny by issuing notice under Section 143(2) of the Act and the assessment was finalised by order dated 18.03.1999. Though there were seven issues on which the assessment was taken up for scrutiny and finalised by order of assessment dated 18.03.1999, in this appeal we are concerned only with two issues viz. (i) exchange fluctuation loss and expenditure incurred and (ii) on bonus share which issue has been already decided supra in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion of the Reserve Bank of India, no capital goods were imported and the assessee has repaid the loan not from exports proceeds and the amount borrowed was invested in earning interest and the interest income was offered to tax. During the course of hearing the appeal, the assessee took another plea stating that it was money generated out of GDR issue which had funded the capital expenditure and that the foreign exchange loan had been used only for Revenue purpose. After taking note of the contentions raised, the Commissioner of Income Tax (Appeals) held that it will not be proper to disbelieve what has been printed in the balance sheet for the public at large and the share holders in particular in terms of the note 12 and the arguments advanced by the assessee are factually contrary to note 12 in the printed balance sheet. 9. Aggrieved by the order passed by the first Appellate Authority, the assessee preferred appeal to the Tribunal. The Revenue also preferred appeals in respect of the order passed by the first Appellate Authority, which was against the Revenue and all the appeals for the assessment years 1993-94 to 1996-97 were taken up together and in this appeal, we are c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as such the foreign exchange loan equivalent to Rs.54 crores was invested in inter-corporate deposits which earned interest and the interest income has been offered to tax. Therefore, it is submitted that the amount of Rs.763 lakhs (inclusive of Rs.35.50 lakhs towards interest capitalized) is entirely Revenue in nature and should therefore be allowed as such. In the alternative it is submitted that even assuming without admitting that the foreign exchange loan was utilized for acquisition of imported machinery, treating the entire fluctuation as being relatable to imported machinery is not justified. In other words it is contended that the denial of deduction ought to have been restricted to the amounts spent by the assessee on acquisition of capital asset using other sources of income and not the entire amount of the foreign exchange loan. The learned counsel extensively referred to the printed balance sheet published in the assessee's annual report 1995-96. 12. Mr.T.Ravikumar learned Senior Standing counsel appearing for the Revenue submitted that the RBI granted permission for raising foreign exchange loan of US$ 50lakhs from Standard Chartered Bank, Bahrain subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and submitted that the very nature of expenditure would justify the claim of the expenditure as Revenue expenditure. By referring to the letter of approval given by RBI, it is submitted that the expression expansion used in the letter of approval with reference to the purpose of the loan is not solely meant for capital expenditure. Further, it is submitted that utilisation of the foreign currency may not be the only test for considering the allowability of the expenditure. Referring to Section 43A of the Act, it is submitted that it has to relate specifically to an asset and the Revenue has set down two instances of import machinery and there is no other import and at best Section 43A would have applicability only to that extent being a sum of about Rs.7.2 crores. Consequently, the other expenditures are allowable as deduction as expended for the purpose of business. Therefore, it is submitted that Section 43A would stand attracted only to that part of the amount expended for the purchase of import machinery and not to the entire amount. It is further submitted that the decision of the Division Bench of this Court in the case of CIT vs. ELGI Rubber Products Ltd, (supra), will n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account or capitalized where they relate to fixed asset. Plant and machinery acquired through foreign currency loans are capitalized at the rate prevalent at the time of purchase. In view of the said admission in the balance sheet, the Tribunal affirmed the view taken by the Assessing Officer that the claim of the assessee regarding exchange fluctuation was never held to be Revenue, as the claim was not supported by any material brought on record and therefore to be treated as capital. By referring to the decision of the Hon'ble Apex Court in the case of CIT vs. Tata Locomotive and Engineering co Ltd., (supra) the Tribunal pointed out that if capital asset is purchased, capitalizing as capital work in progress, the nature of the same is to be treated as capital and if no assets are purchased as regards the principal devaluation of gains and loss due to devaluation, the allowance of loss on devaluation, if any, arising on the loans obtained for purchase of assets will certainly be in capital account and covered by Section 43A of the Act. It was further pointed out that if any part of the loan is not used for the purpose of purchase of assets, the corresponding loss has to be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under peculiar and distinct circumstances. Therefore, it was held that the facts of each case, the attendant circumstances revolving round the expenditure, the aim, object and purpose of the same, their impact on the assessee, particularly in matters relating to the future of the assessee's trade and business, whether it could be sustained on ordinary canons of commercial expediency simpliciter, whether it is a step-in-aid of future expansion or prolongation of life of an existing business, whether it is to secure an enduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and potential future and these were all held to be the main incidents, which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to revenue. Thus, it was held that an objective application of a judicial mind to the facts of each case is necessary. 17. Therefore, we would be required to examine the facts of the case on hand minutely to ascertain the aim, object, purpose and true nature of the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is reflected as part of the actual cost of the asset acquired in foreign currency and the depreciation is to be allowed accordingly. 19. Learned Standing Counsel appearing for the Revenue placed reliance on this decision only to re-emphasize the fact that as far as the assessee was concerned, it had no doubt purchased machinery in foreign exchange to the extent of Rs.7.01 crores in all during the Accounting Year 1995-96 and 1996-97. To the extent of exchange fluctuation, the actual cost of the purchase of machinery thus would include the exchange fluctuation. This would be so for the purpose of finding out the actual cost for the purpose of depreciation. As far as the balance of amount which had been borrowed is concerned, there is no denial of the fact that under the Reserve Bank of India Scheme, the approval was issued sanctioning the loan for the purpose of capital expenditure and modernization and expansion. There is no denial of fact that the amount drawn from the loan should be utilized for the purpose approved and strictly subject to the terms and conditions stipulated by the Reserve Bank of India vide their letter dated 21st September, 1994. It is also not denied by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f modernization and expansion, we do not find any merit in the contention of the assessee that the deposits kept were also for business purposes and hence, the difference in exchange rate merited to be allowed as revenue expenditure. The terms of payment of the principal show that the loan thus taken was to be repaid in four equal semi-annual instalments, the first being made six months after the disbursement of the loan. Half-yearly interest (floating) at 1.5% per annum over six months was also stipulated. Thus on facts found and the purpose of the loan taken as represented by the assessee, we do not find any ground to uphold the contention of the assessee that the difference in the interest on the balance of principal amount on account of exchange fluctuation to be treated as revenue expenditure. 22. Learned counsel appearing for the assessee placed reliance on the decision of the Karnataka High Court reported in (1986) 162 ITR 163 (Periyar Chemicals Ltd. V. Commissioner of Income-tax). The said decision refers to the issue of exchange fluctuation. The company therein imported machinery from Germany, for which, it availed foreign currency loan from a German company through Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that the loan was applied wholly and exclusively for the purpose of business, hence, was an admissible deduction under Section 10(2)(xv) of the 1922 Act. The Supreme Court pointed out that a loan may be intended to be used for the purchase of raw-material when it is negotiated, but the company may after raising the loan change its mind and spend it on securing capital assets; it posed the question, as to whether the purpose at the time the loan was negotiated was to be taken into consideration or the purpose for which it was actually used. In the accounting year the purpose was to borrow and buy raw-material, but in the assessment year the company found it unnecessary to buy raw-material and spent it on capital asset, in such an event, the Supreme Court agreed with the decision in the case of Nagpur Electric Light and Power Co. vs. Commissioner of Income-Tax reported in (1931) 6 ITC 28 that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure. Thus, the Supreme Court held that the loan obtained was not an asset or advantage of an endur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture as revenue expenditure. 28. This Court further observed that the expenditure incurred for the purchase of machinery was undoubtedly capital expenditure, for it brought in an asset of enduring advantage. But the guarantee commission stands on a different footing and that by itself, it did not bring into existence any asset of an enduring nature; nor did it bring in any other advantage of an enduring benefit. The acquisition of machinery on instalment terms was only a business exigency. This Court opined that if interest paid on a credit purchase of machinery could be held to be revenue expenditure, the guarantee commission paid to a bank for obtaining easy terms for acquisition of machinery could not be treated differently. 29. The reliance placed on the above two decisions have to be seen on the facts of the case, which we have already noted. With the stringent terms of loan availed, particularly with reference to the purpose of the loan, in the absence of one to one correlation between the loan amount and the inter-corporate deposits as pointed out by the Tribunal, we do not find that the assessee could safely draw support from the above decisions. 30. Unlike the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er-corporate investments. 34. With the distinct features thus seen, this Court holds that the decisions of the Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras, reported in [1966] 60 ITR 52 and this Court in the case of Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras) are distinguishable on facts and hence are not of any assistance to the assessee. 35. As pointed out by the learned Standing Counsel appearing for the Revenue, the assessee was irrecoverably bound by the terms of the approval by its conduct in signing the loan agreement, which clearly stipulates that the condition set out shall be strictly complied with. Several restrictions have been made and spelt out in the conditions. In terms of clause 11 of the letter of approval, the assessee was bound to submit quarterly statements duly supported by invoices in original such as exchange control, copies of bills of entry and copies of the import licences endorsed for C.I.F., value of the machinery, debit note, etc., positively by the end of the month following the quarter to which the statement relates, till the loan is fully utilis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation of Rs.736.01 lakhs and interest Rs.35.50 lakhs and the increase in rupee liability on account of outstanding foreign currency loan utilized in respect of acquisition of plant and machinery based on the exchange rate applicable on the date of balance sheet is Rs.537.58 lakhs including capital work in progress. After taking into consideration, the total value of the imported machinery, the Assessing Officer held that it has to be capitalized as per Section 43A of the Act following the decision in the case of CIT vs. ELGI Rubber Products Ltd, (supra). 37. Thus, it was pointed out that the material issue would be to prove one to one relationship which was not proved by the assessee. After noticing the above findings recorded by the Assessing Officer, the first Appellate Authority noted the conduct of the assessee in accepting that it had raised the foreign loan as per scheme and it accepted that it had put up the application for the utilisation of the loan for the specified purpose for which the loan had been actually meant, it admitted the utilisation of the loan in accordance with the RBI scheme for acquisition of plant and machinery in the notes to the accounts and subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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