Loading judgment…
No AI summary yet for this case.
This appeal takes exception to the judgment and order dated 2.4.2008 passed by the Division Bench of the High Court of Karnataka at Bengaluru in I.T.A. No. 633/2004. 2. Briefly stated, the appellant company submitted returns of income on 29.11.1997 for the assessment year 19971998, mentioning loss of income, amongst others, owing to exchange fluctuation of Rs.1,10,53,909/. After processing the return under Section 143(1)(a) of the Income Tax Act, 19611, the assessment was completed on 16.3.2000. As against the loss declared by the appellant due to exchange fluctuation, the assessment was concluded by 1 for short, “the 1961 Act” Digitally signed by NEETU KHAJURIA Date: 2022.04.13 18:10:30 IST Reason: Signature Not Verified
2 positive taxable income. Against that decision, the matter was carried in appeal by the appellant before the Commissioner of Income Tax (Appeals)2 and eventually, by way of appeal before the Income Tax Appellate Tribunal3 being I.T.A. No. 795 (Bang)/2000. 3. In the appeal before the ITAT, the appellant not only claimed deduction in respect of loss of Rs.1,10,53,909/ arising on account of exchange fluctuation, but also set up a fresh claim in respect of revenue expenses to the tune of Rs.2,46,04,418/, erroneously capitalised in the returns. The ITAT entertained this fresh claim set forth by the appellant and recorded in its judgment that the department’s representative had no objection in that regard. 2 for short, “CIT(A)” 3 for short, “ITAT” 4 (1997) 7 SCC 489
3 fluctuation can be regarded as revenue expenditure or capital expenditure incurred by the appellant, and answered the same in favour of the appellant by holding that it would be a case of expenditure on revenue account and an allowable deduction. The ITAT answered the same in the following words: “….. So far as the argument whether the impugned expenditure or loss is revenue or capital in nature we find that the funds borrowed were utilised for the purposes of regular finance business carried on by the assessee. Such an income has also been offered for taxation and accepted by the department. Quantification of exchange fluctuation loss has been done as per rule 115 of the I T Rules. Said rule must be applied in computing the total income of the assessee had held by the Supreme Court in CIT vs. Chowgule Co Ltd. – 218 ITR 384. Further the exchange fluctuation loss is an expenditure incidental to carrying on of business and comes within the purview of section 37 of the Act as the same is incurred wholly and exclusively for the purposes of business. It is nobody’s case that the funds borrowed in foreign exchange have been diverted for nonbusiness purposes. In such a case the decision of the Supreme Court in India Cement Case (supra) fully covers the issue in favour of the assessee. We also find that in this case, assessee’s claim satisfies all the tests laid down by Supreme Court in 124 ITR 1 extracted supra. In this case entire borrowal of loan and the utilisation of the same, is in trading operations of the company more profitably and the fixed capital in this case is untouched. Hence the expenditure is on revenue account and allowable. We also find the loss incurred by the assessee cannot be treated as contingent in nature as the loss on account of foreign exchange fluctuation has been quantified in terms of rule 115 of IT Rules and further the liability is real as per terms of the agreement with CDC. Just because the liability is payable in future does not covert the actual liability into contingent liability as held by the Supreme Court in Calcutta Co Ltd. vs. CIT – 37 ITR 1 and Bharat Earth Movers Ltd. vs. CIT – 245 ITR 428. Similar view has been expressed by ITAT special bench in ONGC case 83 ITR 51 (SB). Looking from any angle the claim on this issue is allowable. Accordingly,
4 we allow the entire claim of Rs.3,56,57,727/. We direct the AO to do so. This issue is held in favour of the assessee.” (emphasis supplied)
The matter was carried before the High Court by the department. Amongst others, following questions were formulated for consideration as substantial questions of law concerning subject deduction claimed by the appellant. The same read thus: “(3) Whether on facts and in the circumstances of the case, the Tribunal is justified in deleting the disallowance of claim to the tune of Rs.1,10,53,509/ for the assessment year 199798 in respect of exchange fluctuation that was made by the Assessing Officer? (in ITA No. 633/2004 only). (4) Whether on facts and in the circumstances of the case, the Tribunal is justified in allowing the additional claim of Rs.2,46,04,418.00 for the assessment year 199798 holding that the capitalisation of the said sum is to be treated as revenue expenses? (in ITA No. 633/04 only).” The High Court vide impugned judgment has reversed the view taken by the ITAT, mainly observing that the ITAT had not recorded sufficient reasons in support of its conclusion and in any case, the conclusion was without any basis.
We have heard Mr. S. Ganesh, learned senior counsel for the appellant and Mr. Vikramjit Banerjee, learned Additional Solicitor General appearing for the respondent.
5
The broad undisputed relevant facts, as can be culled out from the record are that the appellant entered into a loan agreement with one Commonwealth Development Corporation having its registered office at England in the United Kingdom, for borrowing amount to carry on its project described in Schedule 1 to the agreement for expanding its primary business of leasing and hire purchase of capital equipment to existing Indian enterprises. Schedule 1 of the agreement reads thus: “SCHEDULE 1 (referred to in Recital A) Description of the Project The Project consists of the financing by the Company of the acquisition of plant, machinery and equipment to be used in its leasing business in accordance with the applicable laws and regulations of India and the Company’s Memorandum and Articles of Association.” India Cements Ltd.7, which reads thus: “7.….. where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which it makes a profit, is deductible from the receipts of the business to ascertain taxable income. ….. xxx xxx xxx 16. ….. the loan obtained is not an asset or advantage of an enduring nature….. the expenditure was made for securing the use of money for a certain period … and it is irrelevant to consider the object with which the loan was obtained. ….. 17. ….. the act of borrowing money ….. was not incidental to the carrying on of a business. …..” Similarly, the exposition in the case of Empire Jute Co. Ltd.8 is also extracted by the ITAT, which reads thus: “5.….. it is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. ….. xxx xxx xxx 8. ….. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring 6 (1980) 4 SCC 25 7 supra at footnote No. 5 8 supra at footnote No. 6
8 benefit may break down. It is not every advantage of enduring nature, acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. ….. xxx xxx xxx 11. ….. “What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted is the process.” The question must be viewed in the larger context of business necessity or expediency. …..” (emphasis supplied) 9. the “assessing authority”, but not impinge upon the plenary powers of 10 [2006] 284 ITR 323 11 supra at footnote No. 4 12 supra at footnote No. 10 13 (2010) 4 SCC 482
11 decision is on the question of application of Section 43A of the 1961 Act. Accordingly, the exposition in this decision will be of no avail to the fact situation of the present case. For, we have already noticed that the appellant had not acquired any asset from any country outside India for the purpose of his business.
In view of the above, this appeal ought to succeed. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order accordingly.
As a result of allowing the entire claim of the appellant to the tune of Rs.3,56,57,727/ being revenue expenditure, suitable amends will have to be effected in the final assessment order passed by the assessing officer for the concerned assessment year, thereby treating the consequential benefits such as depreciation availed by the appellantassessee in relation to the stated amount towards exchange fluctuation related to leased assets capitalised (being Rs.2,46,04,418/), as unavailable and nonest.
12
The appeal is allowed in the above terms with no order as to costs. Pending interlocutory applications, if any, stand disposed of. ..……………………………J. (A.M. Khanwilkar) ………………………………J. (Abhay S. Oka) ………………………………J. (C.T. Ravikumar) New Delhi; April 12, 2022. 13 ITEM NO.104 COURT NO.3 SECTION IV-A S U P R E M E C O U R T O F I N D I A RECORD OF PROCEEDINGS Civil Appeal No(s). 6677/2008 WIPRO FINANCE LTD. Appellant(s) VERSUS COMMISSIONER OF INCOME TAX Respondent(s)
WITH SLP(C) No. 9274/2009 (IV-A) C.A. No. 2666/2011 (IV-A) C.A. No. 7906/2009 (IV-A) C.A. No. 2696/2010 (IV-A)
Date : 12-04-2022 These matters were called on for hearing today. CORAM : HON'BLE MR. JUSTICE A.M. KHANWILKAR HON'BLE MR. JUSTICE ABHAY S. OKA HON'BLE MR. JUSTICE C.T. RAVIKUMAR For Parties: Mr. S. Ganesh, Sr. Adv. Mr. Tejveer Bhatia, Adv. Mr. K.R. Pradeep, Adv. Mr.Rohan Swarup, Adv. Mr. Gaurav Sharma, Adv. Mr. Abhinav Mukerji, AOR Ms. Archana Sahadeva, Adv. Ms. Pragati Agrawal, Adv. Mr. Vikramjit Banerjee, Adv. Mr. Arijit Prasad, Sr. Adv. Mr. Shailesh Madiyal, Adv. Mr. Siddhartah Sinha, Adv. Mr. Jauhri Prakash, Adv. Mr. Tathagat, Adv. Mr. Nring C. Zehiang, Adv. Mr. Abhishek Mahajan, Adv. Mr. Prashant Rawat, Adv. Mr. O.P. Shukla, Adv. Mr. Kumar shashank, Adv. Mr. Raj Bahadur Yadav, AOR
14 Mr. Preetesh Kapur, Sr. Adv. Mr. Senthil Jagadeesan, AOR Ms. Sonakshi Malhan, Adv. UPON hearing the counsel the Court made the following O R D E R
Civil Appeal No. 6677/2008
The appeal is allowed in terms of the signed reportable order. Pending applications, if any, shall stand disposed of. SLP(C) No. 9274/2009, C.A. Nos. 2666/2011, 7906/2009 and 2696/2010.__________________________ It is agreed that these matters involve different questions than the leading case (C.A.No.6677/2008), listed today. Hence, de-linked. List these matters next week. (NEETU KHAJURIA) COURT MASTER (VIDYA NEGI) COURT MASTER (Signed reportable order in C.A. No.6677/2008 is placed on the file.)