SHIN-ETSU-POLYMER INDIA P. LTD.,CHENNAI vs. DCIT CORPORATE CIRCLE 6(2), CHENNAI

1. The order of The Commissioner of Income Tax (Appeals) - 15, Chennai dated 26.06.2018 in I.T.A.No.430/2013-14/CIT(A)-15 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.

The Registry has noted delay of 134 days in appeal for AY 2012- 13, the condonation of which has been sought by Ld. AR on the strength of affidavit of authorized representative of Assessee Company. It has been submitted that the impugned order was misplaced by accounts department which led to delay in the appeal. Though Ld. DR opposed condonation of delay, the bench deems it fit to condone the delay and admit the appeal for adjudication on merits.

The Ld. AR advanced argument to submit that there is vital difference between set-up of business and commencement of business. Once the business is set-up, the expenditure would be allowable to the assessee as routine business expenditure. The Ld. Sr. DR controverted the arguments of Ld. AR and supported the impugned order. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. Proceedings before lower authorities 4.1 The assessee being resident corporate assessee is stated to be engaged in manufacturing of cellular phone keypads. During assessment proceedings, it transpired that in the statement of computation of total income, the assessee claimed deduction of Rs.232.21 Lacs towards pre- operative expenses. However, the same were not debited to Profit & Loss Account. The assessee commenced business in the month of January, 2009 and accordingly, Ld. AO held that claim could only be made for expenditure incurred post that date. The Ld. AO supported the same by observing that the assessee claimed another deduction u/s 35D for Rs.4.11 Lacs in the Profit & Loss Account. The Ld. AO held that in such a case, no other deduction could be allowed to the assessee. The aforesaid expenditure was incurred before commencement of business and therefore, the same would not be allowable to the assessee. The expenditure so claimed has been tabulated in para 2.2 of the order. Upon perusal of the same, Ld. AO held that the entire expenditure was revenue in nature and the same could not be capitalized under block of assets. The same would also not be allowable u/s 30 to 37 of the Act as the entire amount was incurred prior to commencement of business. 4.2 The assessee defended the same on the ground that the assessee started commercial production during December, 2008 but it could not be said that it was not in operation for earlier period. The said expenditure qualifies for deduction u/s 37(1) since the same was revenue in nature., It was also submitted that the expenditure was debited as pre-operative expenditure but no depreciation was claimed u/s 32. However, rejecting the same, Ld. AO disallowed the expenditure so claimed by the assessee. 4.3 Another disallowance was on account of forex loss. The assessee claimed forex loss of Rs.246.04 Lacs on reinstatement of creditors at year end. Out of that, amount of Rs.208.53 Lacs pertained to forex loss incurred prior to commencement of business operations i.e., from 01-04- 2008 to 31-12-2008 whereas remaining loss of Rs.45.34 Lacs was incurred for the period from 01-01-2009 to 31-03-2009. The Ld. AO held that loss pertaining to period prior to commencement of business operations could not be allowed. After adjusting amount of Rs.15.63 Lacs as credited by the assessee in the Profit & Loss Account, the net amount of Rs.192.90 Lacs was disallowed. 4.4 During appellate proceedings, the assessee, inter-alia, submitted that since the assessee was a manufacturing company, it had taken time to commence commercial activity by installing machineries, conducting trial run before commencement of commercial operation in the month of January, 2008. During setting-up of the business, the assessee incurred various expenses which were of revenue in nature. The expenditure was required to commence the commercial activity as without incurring such expenses, the production could not have been achieved. The expenditure being revenue in nature would qualify for deduction u/s 37(1). 4.5 The Ld. CIT(A) noted that the assessee was incorporated on 10- 01-2007 and it had commenced manufacturing during January, 2009. Since the expenditure was incurred prior to commencement of manufacturing, Ld. AO rightly disallowed the same. The assessee claimed separate deduction u/s. 35D. Therefore, the action of Ld. AO was upheld. The disallowance of loss on account of forex loss was also upheld. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 5. From the facts, it emerges that the assessee was incorporated on 10-01-2007 and it had commenced manufacturing during January, 2009. However, there is vital difference between set-up of business and commencement of business. Once the business is set-up, the expenditure incurred thereafter could not be held to be pre-operative expenses and if the same are revenue in nature, the same would be allowable to the assessee. The undisputed fact is that though the assessee has capitalized the expenditure in the books of accounts, it has claimed the deduction thereof in the computation of income. The Ld. AO has accepted that the expenditure is revenue in nature. The assessee has claimed that no depreciation has been claimed against the said expenditure. If the disallowance is upheld, the deduction of impugned expenditure would never be allowed to the assessee which is unjustified. The claim u/s 35D is for specific expenditure only. Therefore, we would hold that the impugned expenditure would be fully allowable to the assessee subject to verification by Ld. AO that the assessee has not claimed any depreciation on the same and this expenditure has not been claimed in any of the other years. We order so. This ground stand allowed for statistical purposes.

So far as the issue of forex loss is concerned, we find that this issue has been restored back by Tribunal in assessee’s own case for AY 2011-12 vide dated 06-10-2020. Therefore, to enable revenue take a consistent stand, this issue is restored back to the file of Ld. AO on similar lines. This ground as well as the appeal stand allowed for statistical purposes.

In AY 2012-13, the grievance of the assessee is two-folds i.e., (i) disallowance of forex loss; (ii) Disallowance of bad-debts. The Ld. AO disallowed net unrealized forex loss for Rs.114.37 Lacs which was upheld by Ld. CIT(A). This issue, as in AY 2009-10, stands restored back to the file of Ld. AO on similar lines. This ground stand allowed for statistical purposes.

The disallowance of bad-debts stem from the fact that the assessee made payment for expenses against corporate cards given to managerial personnel to incur expenditure on behalf of the company. Since the payment was made to bank but the bills were not received, the same was written-off as bad-debts. The Ld. AO, invoking the provisions of Sec. 36(2), denied the same on the reasoning that debts were not offered as income. The assessee made advance to employees for travel, pooja, etc. which were lying unsettled for a long time and hence, written- off. However, in the absence of requisite details forthcoming from the assessee, the same was disallowed. The Ld. CIT(A) upheld the disallowance.

We find that the impugned expenditure is routine business expenditure and arising in the ordinary course of business. Though the assessee may have wrongly claimed the same as bad-debts, the same are allowable u/s 37(1). Therefore, we direct Ld. AO to delete the disallowance of Rs.5.47 Lacs. The appeal stands allowed for statistical purposes. 10. Both appeals stand allowed for statistical purposes. Order pronounced on 11th August, 2023. Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा ! / VICE PRESIDENT लेखा सद( / ACCOUNTANT MEMBER चे3ई Chennai; िदनांक Dated : 11-08-2023. DS आदेशकीAितिलिपअ%ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयु</CIT 4. िवभागीय�ितिनिध/DR 5. गाडAफाईल/GF