TMI Blog2021 (9) TMI 1432X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, therefore, rightly treated and held as revenue expenditure by the Tribunal. The question, again, is not whether the assessee should be called upon to capitalise and claim depreciation; the question is whether the claim of the assessee conforms the deduction permissible under Section 37(1) of the Act. The preoperative expenses incurred by the assessee are revenue expenses, and are correctly so held by the Tribunal. The above view is fortified by a catena of decisions in favour of the assessee. We do not, as a matter of fact, see any reason distinguishable in the case on hand to accept the contest of the Revenue. Loan processing fee and bank charges claimed as revenue expenditure relating to setting up of new unit at Chennai as expansion of assessee's business - HELD THAT:- The processing fee and bank charges are expenses incurred for getting the loan, and interest is always paid on the loan availed/sanctioned by the bank, as the case may be. The simple expenditure incurred by way of outflow from the books of account of the assessee cannot be again included in the loan borrowed by the assessee and give a complexion of interest only to attract the proviso of Section 36(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear from the candid submissions made by both the counsel is that the reason that weighed with the Dispute Resolution Panel is not adverted to by the Tribunal while setting aside the dis-allowance. Either we accept the case of the Revenue and restore the conclusion recorded by the DRP or accept the explanation of the assessee that the claim is part of business expenditure, in such consideration this Court would be entering into a simple fact by re-examining the case of both sides for the first time. We are of the view that the Tribunal reconsiders this issue after taking note of the entire circumstances, the tenability of the claim and records such finding commensurate to the material on record. Thereafter party aggrieved, certainly can approach this Court under Section 260A. Having regard to the above consideration, the question is answered in favour of the Revenue and against the assessee wit, i.e., matter remitted to Tribunal for disposal in accordance with law. Allowance of foreign exchange loss on forward exchange contract - HELD THAT:- Tribunal, as a matter of fact, found in categorical terms, the error which was committed by the DRP/Assessing Officer. Now the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the assessee is required to claim the deduction in the year in which the expenses are incurred/services received and the claim made has to be considered in the applicable Assessment Year by the Department. Hence the question is answered in favour of revenue and the findings of the Tribunal are set aside. Difference between the conversion rate - HELD THAT:- A finding of fact by referring to the orders made by the competent authority is recorded. Firstly, it is not shown to us how those directives are incorrect or inapplicable to the case on hand, and, secondly, to interdict with a finding of fact, no reasons are stated with the directions issued by the Tribunal. Looked at it from either perspectives and the direction itself, we are of the view, the view taken by the Tribunal for the Assessment Year 2010-11 does not warrant interference of this Court. Decided against the Revenue. - ITA No. 44 of 2017 - - - Dated:- 22-9-2021 - Honourable Mr.Justice S.V.Bhatti And Honourable Mr.Justice Viju Abraham For the Appellant : Advs. Sri.P.K.R.Menon,Sr.Counsel, Goi(Taxes), Sri.Jose Joseph, Sc, For Income Tax Christopher Abraham, Income Tax Department For the Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38 2 Claim of preoperative expenditure disallowed in the assessment made u/s. 143(3) r.w.s. 144C dt. 18/02/2015 was directed to be deleted : 4,70,07,847 3 Disallowance of claim of additional weighted deduction u/s.35(2AB) restricted to : 94,98,220 4 Disallowance of claim of loss on sale of investment in shares as deduction : 4,07,24,151 5 Disallowance of claim of unrealized foreign exchange fluctuation gain for adjustment against cost of assets as per section 43A on actual payment restricted to : 4,72,34,591 6 Disallowance of claim of MTM loss on forward contract as deduction : 98,10,765 7 Disallowance of claim of prepaid expenses as deduction : 5,15,34,726 2.2 We have heard learned Counsel Mr Christopher Abraham and Senior Advocate Mr Joseph Markos for the parties. 3. Substantial Question Nos.1, 1.1, 1.2: 1 Whether the Hon'ble Tribunal, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim by the assessee. The claim for deduction of preoperative expenditure incurred by the assessee is rejected on the ground that the assessee, since had capitalized the expenses in its books of accounts and treated the ongoing establishment of a unit as work-in-progress, the expenses are added to the cost of the plant and the machinery etc. of the new plant in terms of Section 43(1) of the Act. Thereafter available depreciation could be claimed by adding the expenditure to the capital expenditure. In other words, the assessee, according to Revenue, is entitled to claim depreciation on the capitalized value of the new plant but cannot be allowed to book expenses towards preoperative expenditure incurred by the assessee for establishing the plant. 3.2 The Assessing Officer disallowed the claim of Rs.26,97,79,538/- towards preoperative expenditure. The Tribunal examined the rival contentions of the assessee and the Revenue; relied on the judgments reported in Commissioner of Income Tax v. Sakthi Sugars (2011) 339 ITR 400 (Mad) and Commissioner of Income Tax v. Priya Village Roadshows Ltd (2011) 332 ITR 594 (Del) and allowed the claim of assessee as revenue expenditure amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, and which is not in the nature of capital expenditure. In the infinite variety of situations and diversities in which the concept of what constitutes capital expenditure or revenue expenditure, it is not possible to formulate a general rule having universal application. However, a few broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably falls. These tests are generally efficacious and serve as useful servants; but as masters, they tend to be over-exacting. The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also, [see Alembic Chemical Works Co. Ltd. v. Commissioner of Income Tax, Gujarat (1989 3 SCC 329 ]. We would not repeat the decisions considered by the Tribunal while recording a conclusion on the question under consideration. For brevity and also to complete the narrative on how this aspect of the matter is examined by the Courts, we refer to the following decisions: Core Health Care Ltd : Section 36(1)(iii) of the Income-tax Act, 1961, has to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal allowed the appeal filed by the assessee and dismissed the appeal of the Revenue. On further appeal by the Revenue contending that (i) the expenses incurred in a new unit earlier to the commencement of the manufacturing process had to be capitalised and the new business of the assessee could not be said to be an extension of the existing business, (ii) the expenditure incurred in connection with the purchase and installation of plant and machinery was capital in nature and thus disallowable, and (iii) the pre-operative expenses could not be written off at one go but had to be capitalised and admissible depreciation allowed thereon: Held, dismissing the appeal, that the new unit was a part of the existing business and there was no dispute that there was unity of control and inter lacing of the units. Thus the expenses incurred by the assessee for the setting up of the new unit which was a part of the existing business were therefore to be allowed as a revenue expenditure. (emphasis supplied) 6.1 The Revenue does not contend on the tenability or genuineness of the expenditure incurred by the assessee as preoperative expenditure for establishing a radial car tyre manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were incurred for the purpose of running of the business and it cannot be held to be by way of investment. In fact there was no dispute that whatever investments made for Baramba unit and Dhenkanal unit were capitalised and were never claimed by way of revenue expenditure. 11. The Hon'ble Delhi High Court in the case of CIT Vs. Priya Village shows, 332 ITR 594 observed as under: 10. A harmonious reading of the aforesaid two judgments of this Court, namely, Triveni Engg. Works Ltd. (supra) on the one hand and Modi Industries (supra) on the other, would demonstrate that one has to keep in mind the essential purpose for which such an expenditure is incurred. If the expenditure is incurred for starting new business which was not carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event it would be irrelevant as to whether project really materialised or not. However, if the expenditure incurred is in respect of the same business 'which is already carried on by the assessee, even if it is for the expansion of the business, namely, to start new unit which is same as earlier business and there is unity of control and a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, travelling and commercial expenditure incurred in connection with staff, consultants etc. involved in establishing the new plant at Chennai. Substantial question no.2 relates to the expenditure incurred by the assessee towards loan processing fee, bank charges etc amounting to Rs.4,70,07,847/- as revenue expenditure. 8. Mr Christopher Abraham argues that the nature and character of expenses, namely, loan processing fee and bank charges are akin to interest payable by the assessee on the loan the assessee has borrowed, Section 36(1) proviso is kept in mind while entertaining the present claim of the assessee. The expenditure, if treated as akin to interest, there is bar under Section 36(1) proviso for allowing the expenditure and Section 37 cannot be relied upon which deals with other expenses not covered by any other provision. 8.1 For the assessee, it is argued that the proviso relied on by the Department is not applicable or attracted to the case on hand. The processing fee and bank charges are expenses incurred for getting the loan, and interest is always paid on the loan availed/sanctioned by the bank, as the case may be. The simple expenditure incurred by way of outf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id which did not commence production during the assessment year under consideration, the expenses incurred were capital in nature. The Department also placed reliance in this connection on Explanation 8 to section 43(1) of the Income-tax Act, 1961. On the facts and circumstances of this case, once the Department equated the charges payable to COFACE with interest, our judgment in the case of Deputy CIT v. Core Health Care Ltd. in Civil Appeals Nos. 3952-55 of 2002 comes in. Accordingly, the said question No. (2) is also answered in favour of the assessee and against the Department. Before concluding, we may also mention that in this case the finance charges paid by the assessee to COFACE have also been equated by the Department with commitment charges which, as stated above, are held to be revenue expenditure and deductible under section 37 of the Income-tax Act, 1961 [see Akkamamba Textiles Ltd. (supra) and Sivakami Mills Ltd. (supra)]. Therefore, on either count the above question No. (2) is answered in favour of the assessee and against the Department. The conclusion recorded by the Tribunal is in line with the principles laid down by various High Courts and this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al allowed the claim and the finding recorded by the Tribunal reads as follows: 21. It is pertinent to mention here that Section 35(2AB) was introduced as an incentive for encouraging research and development in the industrial sector and therefore, has to be liberally construed in view of the decision of Hon'ble Supreme court in Bajaj Tempo Ltd. V CIT, 62 Taxman 480. The AO and the DRP have misdirected themselves in not appreciating the true intent and purport of Section 35(2AB) of the Act. Having not disputed the fact that these tests are part of R D activities conducted by the appellant in Baroda, the disallowance in the present facts is not permissible. We, therefore, hold that the appellant is entitled for deduction under Section 35(2AB) of the Act. Ground No.7 and 7.1 are allowed. 22. Ground Nos.8 and 8.1 pertain to the disallowance of business loss of Rs.4,07,24,151/- incurred by the assessee on the sale of its wholly own subsidiary. In the year under consideration, the appellant company has shown a loss of Rs.4,07,24,151/- on the sale its 100% share holding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyprus Pvt. Ltd. (ATC). The said loss has been cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in Germany are rightly allowed. On the same analogy the weighted deduction is rightly held in favour of assessee by the Tribunal. 10.3 The substantial question deals with the incentive granted by the Act in a few circumstance. Section 35(2AB) reads as follows: Where a company engaged in the business of (bio technology or in any business of manufacture or production of any article or thing, not being an article or things specified in the list of 11th schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority then, there shall be allowed a deduction of a sum equal to [one and one half] times of expenditure so incurred: Provided that where such expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility is incurred in a previous year relevant to the assessment year beginning on or after the Ist day of April, 2021, the deduction under this clause shall be equal to the expenditure so incurred. Explanation-For the purpose of this clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iguous and grant an incentive not provided by the Parliament to a set of cases. The incentive is admissible only when the expenditure is incurred on scientific research on in-house research and development facility. The object of incentive is to encourage indigenisation of technology and show up the know-how of the assessee/entrepreneurs. The Tribunal's conclusion is accepted the same opens a new eligibility facility without reference to approval by the prescribed authority for claiming incentive of weighted deduction. The circumstances considered and the principle laid in Cadila Healthcare are completely distinguishable. He takes note of the circumstances that the claim of the assessee now encomposes revenue expenses said to have been incurred at assessee's subsidiary at Germany. The said expenditure allowed as weighted deduction then the words which have substantial meaning in Section 35(2AB) of the Act viz. that in-house research and development facility as approved by the prescribed authority would become otiose. The preference to liberal interpretation for literal construction is the correct principle. The meaning of words ought not to be stressed and strained while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pore is entirely fallacious and not supported by a shred of evidence. The loss on sale of the subsidiary ATAG is a made up affair, contrived to enable the assessee to claim a deduction from its taxable income. This objection of the assessee therefore deserves to be rejected. . 11.1 The Assessing Officer in Annexure-D order held that: 11.3 The facts, for A.Y.2010-11 are totally different from those of the A.Y.2002-03. In the relevant A.Y. 2002-03. In the relevant A.Y. 2002-03, the assessee company has sold the subsidiary concern to another subsidiary concern and the resultant capital loss had been claimed as business loss. Hence, the reliance of the assessee on the order of the ITAT for A.Y. 2002-03 in totally misplaced as the facts were totally different in A.Y.2002-03. 11.4 The investment was made by the assessee in a separate juridical corporate entity. The transaction between the two distinct, separate legal entities are subject to tax in their respective hands. The accretion/enhancement or decease in the value of investment is dependent on various factors. Merely because the said entity ATAG was doing business transaction with the assessee, the investment in shares ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Corporation (4 SOT 239), the ITAT Ahmedabad Bench held as under: As per the memorandum of association of the assessee, the main object of the assessee was to promote the interest of SSI units in the State. The main object of the assessee was to help industrial concerns in various ways and help industrial growth of the State. Obviously, the company G was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting. In view of the fact, it was found that investment in shares of company by the assessee was in the nature of trade investment. The Commissioner (Appeals) had correctly followed the judgment of the Supreme Court int he case of Brooke Bond India Ltd. vs. CIT [1986] 162 ITR 373. The commissioner (appeals) had also followed the judgment of the Rajasthan High Court in the case of Rajasthan Financial Corpn. V CIT [1967] wherein it was held that if the investment in shares and sale thereof is closely linked with the business of the assessee, the loss suffered on account of such sale would be a trading loss. 26. We, therefore, hold that the business loss claimed by the appellant is in accordance with law. Ground Nos.8 and 8.1 are allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Tribunal examined the discretion available to the assessee in matters of commercial expediency and by applying the test on commercial expediency accepted the claim for deduction. The first objection of the Revenue is that the Tribunal has taken the acceptability of the allowance on commercial expediency as first, without actually examining what weighed with the Dispute Resolution Panel and the Assessing Officer for disallowing the loss on account of sale of shares of subsidiary company in favour of subsidiary company. Assuming the assessee has acceptable margin and latitude in matters of commercial expediency, examination of commercial expediency is the second one in the sequence of considerations of relevant circumstances. No finding is recorded on the crucial aspect on which the Dispute Resolution Panel observed against the assessee. Therefore, the argument is that the Tribunal committed an error of law and the substantial question of law must be answered in favour of the Revenue and against the assessee. 12.1 Senior Advocate Mr Joseph Markos invites the attention of the Court to the overall consideration by the Tribunal and contends that the acceptability of the deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case as well as in law, is correct in directing to allow foreign exchange loss of Rs.98,10,765/- on forward exchange contract in the facts and circumstances of the case? 14. The assessee entered into forward contracts with Barclays Bank, Standard Chartered Bank and YES Bank for the purchase of raw material from foreign suppliers. The assessee entered into forward contracts with the said banks to avoid any loss that may occur due to foreign exchange fluctuation. Under this head on account of upward fluctuation the assessee claimed Rs.98,10,765/- as deductable allowance. The DRP and the Assessing Officer disallowed the loss claimed by the assessee on account of value fluctuation on foreign exchange contracts on the ground that it is notional and contingent in nature. The DRP/Assessing Officer while rejectingthe claim of assessee relied on CBDT instruction No.3 of 2010. The case of assessee is that the allowance relates to loss on forex forward contracts for purchase of raw materials. The nature of foreign exchange purchases and the loss on forex forward contracts are covered in revenue field as revenue expenditure. The revenue expenditure is not cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee to suppliers of services/goods, in other words, advance payment. The Assessing Officer rejected the claim for deduction on the ground that these expenses are not relatable to the income earned by the assessee during the previous year ending on 31.03.2010 (Assessment Year 2010-11). The Tribunal allowed the claim of advance payment towards expenses by the assessee. 15.1 Mr Christopher Abraham argues that the decisions relied on by the Tribunal are completely inapplicable to the circumstances under which the advance payments are claimed as expenses for the Assessment year 2010-11. There is no legal basis for entertaining the claim. The nature of payment since is advance, the said advance cannot be deducted from the net income of the assessee and corresponding benefit in tax liability could be given to the assessee. To merit the said ground, within the scope of Section 260A of the Act, the Standing Counsel invited our attention to the brief consideration of this aspect by the Tribunal in paragraphs 36 and 37. At this juncture, it is very apt to observe that the Tribunal has not actually appreciated the admissibility of the advance payment as an expenditure for this Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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