TMI Blog1999 (3) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign party, this is a fit case to be considered by a Special Bench consisting of three Members of the Tribunal. By their referral order dated 8-8-1995, this Special Bench was constituted by the orders of the President dated 6-3-1997. Before dealing with the several issues involved, we have to record the general facts concerning the assessee-company. 3. The assessee is an industrial company in which the public are substantially interested. It is engaged in the business of manufacture and sale of dry cell batteries. The previous year adopted by the assessee-company is calendar year and, therefore, for the assessment year 1982-83 the previous year ends by 31-12-1981 and for the assessment year 1983-84 the previous year ends by 31-12-1982. The assessee maintains its books of account on mercantile basis. 4. For the assessment year 1982-83, the assessee filed its return of income on 24-6-1982 showing income of Rs. 39,23,310. The return was accompanied by audited statement of profit and loss account and balance sheet. However, the return was revised on 17-1-1985 showing an income of Rs. 38,00,561 on account of revised claims of depreciation, investment allowance, excise duty and ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase of seeds, fertilizers and pesticides, etc. A perusal of the bills produced before the Assessing Officer showed that no sums were reimbursed to the farmers towards purchase of seeds, fertilizers and pesticides, etc., but they had been paid development charges @ Rs. 1.35 per kg. on the quantity of mochi rice purchased from them. One of the receipts was also extracted in the assessment order for the assessment year 1982-83. The Assessing Officer, therefore, held that the payments claimed to have been made in the garb of development charges were nothing but the consideration for the purchase of mochi rice. The Assessing Officer held that otherwise there seemed to be no reason why the development charges sought to be given to the farmers as a measure of bounty be tagged with the amount of rice purchased from them. The Assessing Officer further found that some of the purchases of mochi rice had been made @ Rs. 2.40 per kg. (Rs. 1.05 towards cost of rice plus Rs. 1.35 towards development charges). He further held that splitting of the purchase bills in two parts was only an attempt to make misuse of the well intended provisions of section 35C and thereby claiming extra relief. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee that it was not only entitled to claim deduction of Rs. 57,792 as revenue expenditure but was also entitled to weighted deduction as contemplated under section 35C of the Act. It may be mentioned that we have gone through the aforesaid affidavit of Shri Bishan Singh who was an Administrative Officer of the assessee as well as the details of the expenditure incurred on cultivation of mochi rice (Pages 42, 43A, 43B 44 of the paper book) and we are of the view that no adverse inference could be drawn against the assessee in the manner drawn by the Commissioner (Appeals). We find from pages 43A 44B of the paper book that the ITO himself has allowed the expenditure incurred on paddy purchased from S/Shri Harvindra Singh and Gurbux Singh. He, however, had disallowed the assessee's claim for deduction of development charges for fertilizers, pesticides, irrigation etc. In this view of the matter, we uphold the action of the Commissioner (Appeals) in allowing Rs. 57,792 as business expenditure. We further direct the ITO to accept the assessee's claim for weighted deduction under section 35C of the Act, and modify the assessment accordingly." Since the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------ 100% Export Expenses 2,09,918 Claim under section 35B 1/3rd of Rs. 2,09,918 69,973 In support of the assessee's claim, the learned representative for the assessee, Shri R.M. Chokshi, firstly relied upon a similar claim having been allowed in the case of this very assessee-company for assessment year 1981-82 and he filed the Tribunal's order at page 105 of his paper book. We have perused the said order. The total claim made in that year under section 35B was towards foreign tour expenses of Rs. 49,766. The ITO denied the claim. The ld. CIT(A) allowed it in full and the reasons adopted by the CIT(A) to allow the claim in full of assessment year 1981-82 are extracted in para-24 of the Tribunal's order for assessment year 1981-82 and ultimately in para-26 thereof the Tribunal clearly stated that they did not find any justification to interfere with the order of the CIT(A). The particulars of the expenses in this year are already extracted above. Following the earlier order of the Tribunal, the assessee is entitled to 35B deduction on Rs. 38,42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to weighted deduction under section 35B in respect of such expenditure." Before the CIT(A), the assessee relied upon the decision of the Bombay High Court in CIT v. Kirloskar Oil Engines Ltd. [1986] 157 ITR 762/[1985] 20 Taxman 11 where it was held that expenditure involved in giving presentation articles to the assessee's foreign distributors was expenditure incurred in connection with the assessee's business and was an allowable deduction. The amount claimed is towards gifts to foreign visitors and, therefore, we feel that it is not only covered by the Bombay as well as the Karnataka High Court decisions but also comprehended by section 35B(1)(b)(ix). Thus, we hold that the assessee's claim under section 35B is to be allowed on the following: (1) Rs. 38,423 (2) Rs. 4,619 (3) Rs. 11,343 the particulars of which are all given in the table given above. On these amounts, the assessee is also entitled to l/3rd as weighted deduction. Thus, this ground is partly allowed for the assessment year 1982-83. The claim under section 35B for assessment year 1983-84 is dismissed as not pressed. 9.1 Incidentally, we may state here that against the allowance of foreign tour exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misc. expenses, it is seen that a sum of Rs. 7,579 has been incurred in providing tea, coffee, etc., to the visitors and Rs. 13,038 (Rs. 11,343 + 1,695) has been incurred for giving gifts to foreign visitors and business associates. The Assessing Officer held that these are also in the nature of entertainment expenditure because the gifts would be covered by the words 'provision of hospitality of every kind' used in Explanation 2 to section 37(2A). Against this disallowance of Rs. 9,607 out of total of Rs. 96,992 under the head "Communication expenses account" and the disallowance of Rs. 13,038 from out of misc. expenses account of Rs. 7,59,087, which was treated as entertainment expenditure and disallowed under section 37(2A), an appeal was taken to the CIT(A). The ld. CIT(A) took the view that in the absence of details about the nature of expenses amounting to Rs. 9,607, the same cannot be allowed and thus he upheld the disallowance made by the Assessing Officer. However, as regards the inclusion of Rs. 13,038, the ld. CIT(A), keeping in view the Bombay High Court decision in Kirloskar Oil Engines Ltd.'s case, held the gifts to the foreign collaborators would not amount to enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Assessing Officer dealt with the disallowance in paras 11.1 and 11.2 of his order. Under the head "Communication expenses", he considered the following three items: (i) Expenses for sales conference and sales staff (Total expenditure) Rs. 40,725 (ii) Tea, coffee, cold drinks, Hotel exp. incurred for employees. Rs. 24,949 (iii)Tea, coffee, cold drinks, Hotel exp. incurred for employees. Rs. 53,353 Purporting to follow his assessment order for the assessment year 1982-83 on the above expenses, the Assessing Officer held that the above expenses clearly fall in the nature of entertainment expenses within the meaning of Explanation 2 to section 37(2A). He also held that from the details furnished of the misc. expenses mentioned above, a sum of Rs. 18,592 was spent on gifts to visitors and Diwali gifts to various persons. Further, he found that a sum of Rs. 4,186 was spent on providing tea, coffee, cold drinks and hotel expenses in respect of wholesalers, stockists and other visitors and an amount of Rs. 8,895 on providing tea, coffee, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 79 of paper book no. 2 of the assessee, under the heading of the 'Total expenditure' a sum of Rs. 20,50,676.70 is given as follows: "Details of Miscellaneous expenses incurred during the accounting year 1982 (more than Rs. 1,000)." Therefore, it was his contention that expenditure less than Rs. 1,000 was allowed by the Assessing Officer for assessment year 1983-84. The next argument advanced by the ld. representative for the assessee was that whatever that had been spent towards conference expenses should have been allowed in view of the following case law: (1) CIT v. Escapes (I) (P.) Ltd. [1991] 191 ITR 674 (Cal.) (2) Kirloskar Oil Engines Ltd.'s case (3) CIT v. Indo Asian Switch-Gears (P.) Ltd. [1996] 222 ITR 772/92 Taxman 86 (Punj. Har.) (4) CIT v. Andhra Sugars Ltd. [1997] 225 ITR 118/93 Taxman 676 (AP) (5) CIT v. Expo Machinery Ltd. [1991] 190 ITR 576/59 Taxman 182 (Delhi). The expenditure incurred for the visitors in order to serve them with tea, etc., is an allowable expenditure, argued the ld. representative for the assessee, in view of the following citations: 1. CIT v. Gujarat State Finance Corpn. [1992] 196 ITR 822 (Guj.) 2. Addl. First ITO v. Uttam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came into force on and from 1976-77 include expenditure for provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or usage of trade. This is not kept in view by the Assessing Officer. The ld. representative for the assessee brought to our notice that in assessment year 1983-84 the following were held to be entertainment expenditure by the Assessing Officer: (i) Expenses for sales conference and sales staff (Total expenditure) Rs. 40,725 (ii) Tea, coffee, cold drinks, Hotel exp. incurred for employees. Rs. 24,949 (iii) Tea, coffee, cold drinks, Hotel exp. incurred for employees. Rs. 53,353 In the appeal before the CIT(A) for assessment year 1983-84, disallowances of Rs. 40,725 spent by the assessee for sales conference and/or sales staff and Rs. 53,353 being expenditure for tea, coffee, etc., for the assessee company's employees only were impugned. Disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operation of the Explanation 2 to section 37(2A) could not make that expenditure an entertainment expenditure disregarding the main nature of that expenditure. 14.1 The next decision cited was the decision of the Calcutta High Court in Escaps (I)(P.) Ltd.'s case where the Calcutta High Court held while considering the impugned addition before them that where hospitality is undertaken solely with the object of promoting the business, the expenditure is not disqualified because the nature of the activity necessarily involves some other result, e.g., entertainment of hospitality. Therefore, the Calcutta High Court held that it is not in the nature of entertainment expenditure within the meaning of section 37(2B) of the IT Act, 1961. 14.2 The next decision cited was the Bombay High Court decision reported in Kirloskar Oil Engines Ltd.'s case, a copy of which is provided at page 208 of second paper book. This is distinguishable inasmuch as the facts which arose before the Bombay High Court relate to assessment years 1964-65 to 1968-69 and 1969-70 and 1970-71, whereas Explanation was inserted in Finance Act, 1983 with retrospective effect from 1976. 14.3 The next decision cited b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company were sent along with the customers and dealers to a hotel. In such a case, the question was whether the food was given to the employees at their work place, which was allocable under Explanation 2 to section 37(2A). In the head note of the decision, the following is held: "Where, in the discharge of their official duties, the employees of a company have their food along with the company's customers in a hotel, they take food while at work because it is their work and duty to entertain the customers of the company. Therefore, any expenditure incurred on the food and beverages of the employees when they are discharging their duty to entertain the customers of the company is to be excluded from the purview of section 37(2A) of the Income-tax Act, 1961, by virtue of Explanation 2 thereto. Held, that in the case of composite expenditure incurred in hotels in entertaining customers, it was necessary to resort to an estimate and ascertain that part of the expense incurred on food and beverages of the employees which is excluded from the purview of section 37(2A), and the Tribunal's estimate of such part of the expenses would be a question of fact." Taking all the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nagsi [1979] 116 ITR 292, confirmed the decision of CIT(A) to treat the expenses as business expenditure. 14.9 Another decision cited was again the Bombay Tribunal's decision in Hindustan Petroleum Corpn. Ltd.'s case (a copy of which is furnished at page 209 of the paper book). The total expenditure considered was Rs. 1,57,393. Out of it, Rs. 50,000 had been estimated by the Assessing Officer as expenditure in the nature of hospitality and entertainment and the balance under dispute was Rs. 1,07,393. This was ultimately allowed by the Tribunal which held that in a company of this magnitude with a turnover of about Rs. 800 crores and disclosed income of Rs. 20 crores it was unrealistic to expect details of every item comprising of Rs. 1,57,393. Further, they took into consideration a letter addressed by the assessee company in that case in which it was explained broadly the break-up of the expenses as spent on dealer/customer programmes, dealer/consumer meetings and conferences, etc. 15. Therefore, similarly taking into consideration the turnover of this company, we hold that a sum of Rs. 13,081 is a meagre amount which is not at all lavish in nature. Further, a mere sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as an employee in the assessee company only for a part of the year and he retired on 7-11-1981. On his resignation, he was paid gratuity of Rs. 23,002. It was contended that gratuity paid to ex-employee was outside the scope of section 40A(5) and as such the same should not be clubbed for the purpose of applying the ceiling of (sic) as gratuity is one time payment and it cannot be equated with salary for the purpose of section 40A(5). Reliance was placed for this proposition on the Bombay High Court judgment in CIT v. Colgate Palmolive (I) (P.) Ltd. [1994] 74 Taxman 68. In view of the said judgment, it was submitted that no part of the gratuity amount could be included as remuneration for the purpose of computing the ceiling under section 40A(5). Without prejudice to the above contention, even if gratuity is to be considered for the purpose of section 40A(5), as gratuity amount is paid to the employee after cessation of employment, it has to be considered as payment to ex-employee for which separate limit of Rs. 60,000 is laid down under section 40A(5)(c)(i) of the Income-tax Act. As the amount of gratuity paid to Mr. Gulati is less than the said ceiling, no part of the remunera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at section in connection with that payment. Including such a payment would make the operation of the section impossible. 18.1 The Calcutta High Court in Hindustan Motors Ltd.'s case held that it is possible for a person to be an employee for a part of the relevant previous year, i.e., upto the date of his retirement. After that period, when such an employee retires, he has to be treated as a former employee and payments made to him as a former employee again ought to be deductible within the permissible limit. Any other construction of the said section under which such an employee is treated only as an "employee" or as a "former employee" in the year in question would render one part of the said section or the other nugatory. 18.2 Having regard to the above, we fully agree with the contentions of the learned representative for the assessee and hold that no part of the remuneration paid to Shri Gulati is inadmissible on the ground that it exceeds the limit prescribed under section 40A(5). 19. Now, let us take up one of the substantial issues involved in both the appeals. Grounds No. 5.1 and 5.4 for assessment year 1982-83 and ground No. 5 for assessment year 1983-84 can be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had entered into with ICICI is dated 16-12-1980. The essential terms of the Agreement which are germane for our purpose are the following. ICICI has agreed to lend and advance to M/s. Lakhanpal National Ltd., (hereinafter referred to as "company") has agreed to borrow from ICICI a foreign currency loan of Japanese Yen 17,166,100 which is equivalent to U.S. $76,200 which is referred to as "Dollar Loan" and also a foreign currency loan of Japanese Yen of 96,33,000 or its equivalent in other foreign currencies to an aggregate extent of DM 76,200 ("DM Loan" for short). The Dollar Loan and the DM Loan are collectively referred to as "the loan" in the body of the agreement. The company and ICICI have agreed to the following Heads of Agreement. Clause 2 of the agreement states that the said loan together with interest, additional interest, compound/further interest in case of default, commitment charge, premium on pre-payment or on redemption, costs, charges, expenses and all other monies including any increase as a result of devaluation/revaluation/fluctuations in the rates of exchange of the foreign currencies involved as stipulated in the said Heads of Agreement shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,867 17,570 12. On October 29, 1989 5,867 11,663 13. On April 29, 1990 5,867 5,796 --------------------------------------------------------------------------------- AMORTIZATION SCHEDULE 'B' --------------------------------------------------------------------------------- Date Payment Payment of Principal amount due principal outstanding after each payment DM DM --------------------------------------------------------------------------------- 1. On April 29, 1984 5,867 76,200 2. On October 29, 1984 5,867 70,333 3. On April 29, 1985 5,867 64,466 4. On October 29, 1985 5,867 58,599 5. On April 29, 1986 5,867 52,732 6. On October 29, 1986 5,867 46,865 7. On April 29, 1987 5,867 40,998 8. On Octo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company expressed in the various foreign currencies shall, if necessary, be deemed to be replaced by references to amounts of such other currencies determined as so provided." Clause 5, to the extent it is relevant to us, may be extracted as under: "5. Without prejudice to any of the obligations falling on the Company in terms of the said Heads of Agreement and/or these presents and notwithstanding anything contained to the contrary hereinbefore ICICI shall be entitled at its option to call upon the Company at suitable intervals to make payment to ICICI whether of instalment of principal of the said loan, interest, Commitment charge, or premium on redemption in equivalent rupees in lieu of the US Dollars or DM as the case may be." Clause 5(e) is as follows: "(e) Any difference on account of exchange fluctuations in the rates of foreign currencies involved between the date of actual payment by the Borrower to ICICI and the actual cost to ICICI as referred to in sub-clause (a) above shall be borne by or be given credit to the Borrower." 20. A survey of these provisions makes the following matters clear: (1) The foreign loan with which the machineries are to be purchased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000.00 ---------------------------------------------------------------- Similarly, the Amortization Schedule is revised as far as repayment of DM LOAN is concerned which is provided at page 414 of IVth paper book as under: SCHEDULE III(B) ---------------------------------------------------------------- Date Payment Payment of Principal amount due principal outstanding after each payment ---------------------------------------------------------------- 99,942.37 1. On April 29, 1984 7,697.37 92,245.00 2. " October 29, 1984 7,695.00 84,550.00 3. " April 29, 1985 7,695.00 76,855.00 4. " October 29, 1985 7,695.00 69,160.00 5. " April 29, 1986 7,695.00 61,465.00 6. " October 29, 1986 7,695.00 53,770.00 7. " April 29, 1987 7,695.00 46,075.00 8. " October 29, 1987 7,695.00 38,380.00 9. " April 29, 1988 7,695.00 30,685.00 10. " October 29, 1988 7,695.00 22,990.00 11. " April 29, 1989 7,695.00 15,29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence in exchange". However, this amount had been added by the assessee-company on its on its own in the revised return in view of the provisions of section 43A. The company claimed depreciation of Rs. 86,599 on the amount capitalised during the year as well as in the ANNEXURE'A' LAKHANPAL NATIONAL LTD., BARODA ASSESSMENT YEAR - 1982-83 STATEMENT SHOWING LOAN TAKEN FROM INDUSTRIAL CREDIT INVESTMENT CORPORATION OF INDIA LTD., FOR PURCHASE OF MACHINERY FOR THE ACCOUNTING YEAR 1981 ----------------------------------------------------------------------------------------------- Sr. Nature of loan taken Loan amount as per Loan amount as Loan amount in No. from Industrial Original Agreement per amended Japanese Y Credit Investment with Industrial Agreement with Corporation of Credit Investment Industrial Credit India Ltd. Corporation of Investment India Ltd Corporation of India Ltd ---------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e details of the claim that investment allowance had been claimed on the loss of foreign exchange fluctuation of Rs. 2,43,168 arising to the company in the subsequent accounting periods. The Assessing Officer, following his finding in para 14.3 of his assessment order, where he said that section 43A permits capitalisation only in the accounting year in which the loss took place and as such there is no case for capitalising this amount and allowing depreciation, investment allowance etc. on it, computed the investment allowance allowable which worked out to Rs. 40,32,523 as under: New machinery installed during the year. 68,88,876 Add: (a) 2,75,652 (b) 85,83,764 88,59,416 Rs. 1,57,48,292 Electrical installations installed in plant. Rs. 2,73,297 Four tour expenses capitalised in A.Y. 1980-81 34,353 A.Y. 1981-82 74,148 Rs. 1,08,501 ------------ --------------- Rs. 1,61,30,090 25% thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of loan has to be in terms of the loan arrangement and as such the amount repaid in view of the fluctuation in foreign exchange dates back to the date of Agreement which is prior to the date of installation of plant and machinery. It was also contended that the Assessing Officer had already accepted the difference in exchange fluctuation is a capital expenditure and allowed depreciation thereon. It was submitted for the company that the repayment on account of exchange rate fluctuation was also for the acquisition of capital asset. It was further submitted that the company incurred the liability for exchange rate fluctuation when it started drawing upon the loan account to make the purchase of machinery irrespective of such liability being quantified and disbursed later, it was further submitted that such increased liability was brought into the books of the company when the liability crystallised. However, on that score, it cannot be said that the liability had not been incurred or was incurred after the purchase or installation of machinery. The learned CIT(A) has examined the claim of the company from three angles set out in his impugned order as follows: (1) What should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no restrictions or limitations in the year m which the investment allowance could be allowed, then the claim of the company for its actual cost should be allowed to keep open in view of the totality of payments in subsequent years. However, he felt that the cost has to be ascertained in the year in which the investment allowance is to be actually allowed and not any subsequent period. Ultimately, he felt that there was no justification in interfering with the decision of the Assessing Officer. Therefore, he held as follows: "I would uphold that since the actual cost for the year in question was only the amount which was actually ascertained and paid on account of rate fluctuation, no other amounts can be taken note of for the purpose of investment allowance even if in commercial terms such amount could be considered as the actual cost to the appellant." 22. Now, let us survey the facts relating to assessment year 1983-84 in relation to grant of investment allowance. In para-13 of his order, the Assessing Officer held while making the assessment that the assessee added back an amount of Rs. 1,14,155 as difference in exchange under section 43A. Depreciation of Rs. 18,665 was cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a higher claim of Rs. 42,61,758 said to be arising pit of loss on account of difference in foreign exchange on repayment of loans obtained for purchase of plant and machinery. The same arguments, which were advanced for the immediately preceding assessment year, were advanced before him. However, the CIT(A), following his earlier year's order (assessment year 1982-83), felt no justification in interfering with the order of the Assessing Officer and rejected the claim of the assessee. Thus, aggrieved by the disallowances for assessment years 1982-83 and 1983-84, the matter now stands for our consideration. 23. The latest claim of differential exchange paid for the years from 1982-83 to 1989-90 on loans taken from financial institutions in 1981 for purchase of machinery was explained in a tabular form at page 8 of the first paper book filed by the assessee and it is as follows: -------------------------------------------------------------- Sr. No. Accounting Asst. year Amount (Rs.) year -------------------------------------------------------------- 1. 1982 1983-84 Rs. 4,664 ** 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other unit and for setting up of that unit it had imported plant machinery from Japan. The imported plant machinery was financed by borrowing foreign currency from ICICI. The said foreign currency loan from ICICI was to be repaid by instalments over a period of years. The agreement dated 16-12-81 which the company entered into with ICICI was provided at pages 216 to 237 of paper book from which we have already extracted the relevant portions above. The assessee, on account of fluctuation in the rate of exchange, had to pay additional amount of Rs. 44,37,798 over the period of repayment of loan as per Annexure 'D' appearing at page-8 of the paper book. In view of the stipulation that the assessee shall repay the borrowed fund in the currency in which it had received, the liability to pay additional amount on account of fluctuation in the rate of exchange relates back to the date of borrowal. The liability to pay the borrowed funds in foreign currency arose on receipt of the loan amount and hence the assessee incurred additional liability arising cm account of fluctuation in the rate of exchange on the date of receipt of loan. In the circumstances, the additional liability of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id that the liability did not exist or accrue till the instalments became .... due and payable..." Again, this is an authority for the proposition to indicate what actually is the date on which the liability arises, but it does not deal with any incremental liability due to fluctuation on account of foreign exchange rates. Therefore, in our opinion, the ratio of this case does not apply to the present case. 26. Another decision relied upon was Union Carbide India Ltd v. CIT [1981] 130 ITR 351/5 Taxman 290 (Cal). The portion relied upon is at page 379 of the said decision, which is as under: "It was linked with the actual cost of the machinery or plant to the assessee. The actual cost of the machinery or plant should be the cost on the relevant date. Therefore, on the relevant date, when the contract was entered into it was entered into with the direction to pay back in dollars and whatever was necessary to pay back must be treated as actual cost to the assessee." We have no quarrel with the proposition but in order to find out the actual cost to the assessee, whatever was necessary to pay back in dollars was to be ascertained. In fact, it is this process we have to undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual cost of the asset for the assessment year 1966-67 will be Rs. 1,00,000. The actual cost to be entered in the books, for the assessment year 1967-68, will, however, be Rs. 1,20,000." Therefore, the quoted portion from the Supreme Court's judgment itself clarifies that it is beset with practical problems and the practical difficulties confronted would be got over if one gives effect to the necessary adjustments in the subsequent years instead of re-opening the closed accounts of the earlier years. In fact, the view of the Hon'ble Supreme Court learned towards the alternative method by which the practical difficulties confronted in the first method can be obviated. Our endeavour in this judgment would be to follow the alternative method suggested by the Hon'ble Supreme Court and give effect to it fully. Therefore, the portion of the Supreme Court judgment in Arvind Mills case relied on by the company does not reflect the full truth but only half truth. It does not advance the case of the assessee. 28. Another judgment relied upon by the assessee was Padamjee Pulp Paper Mills Ltd. v. CIT [1994] 210 ITR 97 (Bom.). A portion of the Judgment obtaining at page 101, which is reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have no quarrel with this proposition but, at the same time, it only shows the liability aspect of the problem but does not throw any light how to quantify the incremental liability in discharging the instalments of the foreign loan and in which assessment year the relief under section 43A is to be allowed to the assessee. Therefore, in our opinion, the quoted portion is neither here nor there. 30. The other decisions relied upon are the following: (1) Dempo Steamships Ltd. v. Second ITO [1985] 21 TTJ (Pune) 505. (2) CIT v. Century Enka Ltd. [1992] 196 ITR 447 (Cal.) at page 450. The assessee itself relied upon a portion of the judgment reported at page 450 in that decision which is as follows: "It is common knowledge that the rate of exchange fluctuates every day depending on the conditions prevailing in the International Monetary Market but such fluctuation in conversion cannot be taken into account unless, at the time of actual payment of the liability in foreign currency, there has been, in fact, an additional liability. It is, therefore, necessary to ascertain in every case whether the assessee incurred any additional liability on the date of repayment or not. Only i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Madras Bench of the Tribunal in Southern Asbestos Cement Ltd.'s case. Again, there is no quarrel with this proposition. However, this does not deal with when or in which assessment year the incremental cost is to be considered is the question for which the quoted portion of this judgment did not deal with. We agree with the proposition that investment allowance is allowable on incremental cost. We also agree with the Madras Bench decision of the Tribunal that the incremental cost occasioned by fluctuation in foreign exchange rate will go to augment the 'actual cost' of the asset under section 43(1). We also agree with the conclusion that augmenting of actual cost by the incremental cost occasioned by fluctuations in the rate of foreign exchange contemplated by section 43A(1) is also applicable to section 32A which also talks of actual cost even for the purpose of computing investment allowance under section 32A. It was further contended that section 32A is a provision giving incentive to the business people and such provision should liberally construed and in support of that proposition the following decisions were cited: 1. Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstalled or, if the plant machinery were put to use in the immediately succeeding previous year, then in respect of that previous year. The quantification of the investment allowance is to be made at 25% of the actual cost of the machinery or plant to the assessee. Therefore, the actual cost of the plant machinery is to be determined with reference to the year in which the plant machinery were installed or with reference to the previous year in which it is put to use. The other provisions of section 32A make it abundantly clear that this deduction under section 32A is not allowable in respect of plant machinery for which the deduction by way of development rebate is allowable under section 33. Under sub-section (2) of section 32A together with clause (iii) which are relevant for our purpose, are extracted as under: "(2) The . . . machinery or plant referred to in sub-section (1) shall be the following, namely:- (iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule". There are some important pre-conditions pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1990-91. (a) Amount on fluctuation of exchange rate difference from assessment year 1983- 84 to assessment year 1990-91 Rs. 44,37,798 (b) Investment Allowances 92.6% of Rs. 44,37,798 Rs. 11,09,450 (8) Investment allowance Reserve require @ 75% of Rs. 11,09,450 Rs. 8,32,087 (9) Excess Investment Allowance Reserve created as shown in column (6) above Rs. 10,14,129 ------------- Sub-section (1) of section 43 defines "actual cost" for the purpose of sections 28 to 41 as meaning the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Therefore, it is obvious that section 32A comes in between sections 28 to 41 and the meaning of the words 'actual cost' used in section 32A should carry the same meaning given in section 43(1). The meaning of the word 'paid' for the purpose of sections 28 to 41 is also defined under section 43(2). The expression "paid" is said to mean actually paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... added to the actual cost of the asset as defined under section 43(1) of the Income-tax Act. Further, such enhanced liability should be determined during each previous year especially in a case where equivalent rupee value is to be paid towards each instalment of foreign currency loan which is liable to be repaid on every one of the instalments. Accepting that investment allowance is a one time allowance and one time grant, it may look hard that for determining the actual cost of the plant machinery to the assessee under section 43(a), the fluctuation in foreign exchange on each of the instalment dates in which the instalment is to be paid in foreign exchange is to be considered, and after all the instalments are paid, then only the actual cost is to be determined, for, there may be cases where on some instalment dates falling in accounting years relevant to each of I he-assessment years in which the instalment dates fall, the fluctuation may bring about profits in some years and losses in other years. It is common knowledge that the rupee value in international market is now to be computed with reference to the basket of other foreign currencies and their values in the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 10 lakhs per instalment. But, due to fluctuation in foreign exchange, the rupee value equivalent to the instalment payable in foreign exchange on each of those dates may vary. In some years, the rupee value may gain and in some other years the rupee value may depreciate vis-a-vis the dollar. In the years in which the rupee may devalue vis-a-vis the dollar it may result in appreciation of liability. In some years the instalment liability may also decrease if the rupee value appreciates vis-a-vis the dollar. In the hypothetical example, the ultimate rupee value to be paid on each of the dates of instalment may be as follows: --------------------------------------------------------------------------- Date of Instalment payable Total of the rupee instalment. in dollar. value of the instalment when converted into rupee value on the respective dates of instalments. --------------------------------------------------------------------------- 1-1-82 10 lakhs Rs. 15 lakhs 1-1-83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 1992-93, as Rs. 1,10,00,000 when, in fact, it was purchased at 1 crore $ on 1-1-81. Therefore, in our opinion, the incremental foreign exchange liability should be added to the actual cost every year till the last payment of instalment is made. It is, no doubt, true that investment allowance is to be allowed at 25% of the plant machinery to the assessee either in the year of purchase or in the year of setting up of plant machinery. There may be cases where the 'actual cost' may not be found out exactly either on the date of acquisition of the plant machinery or on the date of its setting up or putting it to use. However, that does not debar the revenue to grant investment allowance on the basis of section 43A, though such investment allowance is only tentative and is liable to be adjusted finally in the last of the assessment years in which the last foreign currency instalment has to be paid at the ruling official rate of exchange between the foreign currency on the one hand and the Indian rupee on the other. The case of the assessee, as we understand, is that the proceedings for assessment year 1982-83 are still pending before the Tribunal. The payment of foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 43A is allowable to the assessee only for assessment year 1982-83 and on the basis of the incremental liability investment allowance can be allowed. However, the whole of Rs. 44,37,798 representing the total of the incremental liability for assessment years 1982-83 to 1989-90 cannot be allowed taking as the actual cost of plant machinery even in assessment year 1982-83 itself. Assessment for each of assessment years is distinct and separate under the Income-tax Act. For ascertaining or while determining the profits loss for the assessment year 1982-83, the cumulative loss due to incremental liability in foreign exchange suffered by the assessee for a number of subsequent assessment years cannot be allowed to be aggregated and adjusted while determining the tax liability for the assessment year 1982-83. While considering the state of affairs of the company for the accounting year 1981 (assessment year 1982-83), there is scope only to know the incremental foreign exchange liability which the assessee has to meet while paying or providing for the instalment which falls due on a date falling in the accounting year under its agreement with ICICI. But, the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion was whether investment allowance was allowable only on that figure. The Tribunal held in favour of the assessee and the same was confirmed by the Hon'ble Calcutta High Court. If the correct law was that the incremental liability of 1978-79 should not be considered for investment allowance separately but the said incremental liability should be taken to form part of actual cost as on the date of purchase of plant machinery as on the date of purchase itself and if the incremental liability should not be separately considered for investment allowance, the Hon'ble High Court would have stated so. However, they have granted investment allowance on the incremental liability which arose for one assessment year. This alternative argument of the company was also supported by the decision of the Madras Bench of the Tribunal in Southern Asbestos Cement Ltd.'s case. In that case, the Tribunal was considering the incremental liability in foreign exchange for assessment years 1985-86 to 1987-88. The Tribunal considered the real meaning of the concept 'actual cost' and the impact of section 43A while determining the same. The following is what they have held: "'Actual cost' has both a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the incremental cost arises provided, of course, that the assessee created a suitable reserve for this purpose. The appeal was allowed." So also, the Ahmedabad Bench decision rendered in the case of Maneklal Harilal Spg. Mfg. Co. Ltd., a copy of which is provided at page 232 of paper book, also supports the alternative contention. Unfortunately, at the fag end of the arguments, our attention was drawn to the latest Gujarat High Court decision in CIT v. Windsor Foods Ltd. [1998] 99 Taxman 355 (Guj.). In that case, it is stated that the investment allowance is only a one-time allowance. It should be allowed cither on the date when the plant machinery was acquired or on the date when it was first put to use even if it is put to use in the immediately succeeding previous year. When once the investment allowance is determined with reference to the above dates, it is unalterable and it is not affected by the incremental foreign exchange liabilities under section 43A(1). Since it is a Gujarat High Court decision, we are bound by the same and, therefore, under the circumstances, we are unable to provide relief to the assessee company even though the alternative contention put forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year, and not at the end of the accounting year or any other rate during the interim period. The income-tax authorities did not consider all these aspects before applying the provisions of section 43A of the Act. Therefore, considering all these aspects and in the absence of particulars, the Tribunal gave certain guidelines for the purpose of applying section 43A. The guidelines were reasonable on the facts and justified in law". Thus, the Madras High Court was of the considered opinion that the first date of the accounting year relevant to the assessment year should be taken to be the date on which the foreign exchange fluctuation is to be ascertained. The concept of 'actual cost' is relevant to determine not only investment allowance but also additional depreciation, development rebate, etc. However, the Gujarat High Court in Windsor Foods Ltd.'s case took the view that section 32A is a one-time allowance and it is not an allowance which is recurring, that is to say, an allowance which is required to be calculated year after year. Therefore, the actual cost of machinery or plant in the previous year in which it is installed and first put to use would be the basis of working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the change in rate of exchange takes effect. The Tribunal was, therefore, clearly in error in holding that the assessee was entitled to deduction of investment allowance on the amount of Rs. 80,414 being the additional liability that arose due to fluctuation in foreign exchange rate in respect of the payments of outstanding instalments of machinery. Therefore, given its full play, the provision of section 43A(1), notwithstanding the specific provision regarding development rebate made in sub-section (2) will not have any impact on the full amount of the investment allowance already quantified on the basis of the actual cost in the relevant previous year which was much prior to the year in which the additional liability arose due to fluctuation in the exchange rate.- CIT v. Widia (India) Ltd. [1991] 97 CTR (Kar.) 218 : [1992] 193 ITR 475 (Kar.) : TC 29R. 483 dissented from : CIT v, Motor Industries Co. Ltd. [1988] 173 ITR 374 (Kar.) : TC 29R.595 and CIT v. Surama Tubes (P.) Ltd. [1993] 201 ITR 124 (Cal.) distinguished. There arises no doubt as regards the interpretation of the provisions of section 32A(1) and section 43A. The language of these provisions is clear enough to warra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1982-83, on a sum of Rs. 37,27,823, additional depreciation under section 32(i)(iia) was claimed on the ground that the plant machinery came into contact with corrosive chemicals. The Assessing Officer denied the claim on the ground that Ammonium Chloride and Zinc Chloride, which chemicals were only salts, could not have corrosive effect especially when these machineries have been specifically designed as anti-corrosive and chemically resistant construction. Thus, additional depreciation claimed on the machineries worth Rs. 40,03,475 for the assessment year 1982-83 was denied. Further, the Assessing Officer stated that the following three machineries, which were also among the machineries claimed to be coming into contact with corrosive chemicals, were imported from Matsuishita Electric Trading Co. Ltd., Osaka, Japan: (a) Bobbin Tamping Equipment for UM-1 Rs. 27,82,398 (b) Bobbin Tamping Machine for UM-3 Rs. 2,85,315 (c) Agitator with special electrolyte spraying for Rs. 6,60,110 cooking sealing ---------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... training for UM - 3 cell manufacturing. 1978 1979-80 24,594 For increase in paid capital. 1979 1980-81 10,000 For import of plant machinery. ----------------------------------------------------------------------------------- The claim arose in the following circumstances. During the assessment proceedings for assessment year 1982-83, the assessee company had claimed depreciation of Rs. 53,675 on foreign tour expenses or Rs. 2,58,468 which, according to it, were capitalised in the following assessment years: 1976-77 : Rs. 7,949 1978-79 : Rs. 98,686 1979-80 : Rs. 34,353 1981-82 : Rs. 92,886 On verification of records while going into the merits of this claim, the Assessing Officer came across records for earlier years and there he found that a sum of Rs. 24,814 was capitalised in the assessment year 1979-80 by relating the visit to increase the share capital and, therefore, on that ground the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of each case. We find, after reading the Assessing Officer's order as well as the CIT(A)'s order for assessment year 1982-83, that the Assessing Officer had given cogent reasons for disallowing capitalisation of foreign tour expenses. In fact, for the assessment year 1980-81, the company had claimed Rs. 10,000 only for foreign tour expenses. However, the Assessing Officer at para 14.6 of his assessment order was generous to allow Rs. 34,353 for assessment year 1980-81 and Rs. 74,138 for assessment year 1981-82 for capitalisation and it is significant that depreciation, investment allowance, etc., is being allowed on the said total sum. It is also stated that the machinery was acquired and installed during the year relevant to assessment year 1982-83. We are unable to find any further point in favour of the assessee. We agree with the lower authorities for not considering certain foreign tour expenses as not eligible for capitalisation. In this result, this ground is rejected. 39. Now, let us take ground No. 6 in assessment year 1982-83. The company seems to have claimed loss of Rs. 15,153 on the demolished building but the Assessing Officer, while computing the income of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were covered by section 80VV being incurred in respect of proceedings before the income-tax authorities and in court relating to the determination of liability under the Income-tax Act. Therefore, he allowed only Rs. 5,000 and disallowed the rest. The CIT(A) has dealt with this ground at para 7 of his order. It was contended that the fees for discussion and preparation of return and sur-tax return for which a sum of Rs. 7,500 and a further sum of Rs. 1,600 for getting written opinion for payment of bonus cannot be included under the provisions of section 80VV. It was further contended before him that the proceedings started only after filing the returns. Reliance was placed upon the Delhi Tribunal decision in K.V. Bombay v. ITO [IT Appeal No. 2529 (Bom.) of 1978] where it was held that consultation prior to the filing of return was not covered under section 80VV of the Act. However, the CIT(A) held that the payment of legal advice for preparation of the return is, in any case, ultimately in respect of proceedings before the income-tax authority. Similar is the view with regard to legal advice for preparation of sur-tax return and the fees paid for that purpose. The ld. representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure incurred in connection with surtax assessment would not be covered by section 80VV. Similarly, any expenditure incurred in connection with any matter other than proceedings before the income-tax authority or the Tribunal or any Court would not be covered by the aforesaid provision, even if such matter was in connection with the Act. Thus, the Gujarat High Court went to the extent of holding that the expenditure incurred for surtax assessment and fees paid for attending matters other than proceedings before the income-tax authority or the Tribunal or any Court was not hit by section 80VV. 43.5 The next decision relied on was ITO v. Shilpi Advertising Ltd. [1989] 44 Taxman 363 (Ahd.) (Mag.). The Tribunal took the view in that case that if the payment was primarily for obtaining secretarial assistance in taxation, accounting and banking matters and not for representation before the income-tax authorities, it would not be hit by that section. 43.6 Another decision cited was the Bombay Bench-C of the Tribunal rendered in K.V. Bombay's case, a copy of which is furnished at page 370 of the paper book. In that case, the matter was argued threadbare. One of the questions which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, in our the second item of Rs. 4,500 for attending the Supreme Court in respect of hearing regarding 80J comes within the teeth of section 80VV. Section 80VV says that in computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any income-tax authority or the Appellate Tribunal or any Court relating to the determination of any liability under this Act, by way of tax, penalty or interest. In the proviso under that section, it is stated that no deduction shall, in any case, exceed in the aggregate Rs. 5,000. Therefore, upto to Rs. 5,000, the expenditure, even if it is covered by section 80VV, can be allowed. This matter is to be looked into by the Assessing Officer, and if not allowed by the Assessing Officer earlier, it should be allowed, in which case, there should not be any disallowance for Rs. 4,500. 44.2 The third item is said to have been incurred for discussion regarding the return of income and preparing the same. This expenditure was incurred prior to the filing of the income-tax return and, therefore, is not covered by section 80VV. 44.3 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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