HIGH ENERGY BATTERIES INDIA LTD,CHENNAI vs. ITO CORPORATE WARD 2 (3), CHENNAI

आयकर अपीलीय अिधकरण, ’सी’ �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी धु�ु� आर.एल रे�ी, �ाियक सद� एवं �ी जी. मऺजुनाथा, लेखा सद� के सम� Before Shri Duvvuru RL Reddy, Judicial Member & Shri G. Manjunatha, Accountant Member आयकर अपील सं./I.T.A. No. 1258/Chny/2018 िनधा�रण वष�/Assessment Year: 2012-13 High Energy Batteries India Ltd., The Income Tax Officer, No. 13, Esvin House, Old Vs. Corporate Ward 2(3), Mahabalipuram Road, 121, Mahatma Gandhi Road, Chennai 600 096. Chennai 600 034. [PAN:AAACH1479H] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri G. Baskar, Advocate ��थ� की ओर से/Respondent by : Shri AR.V. Sreenivasan, Addl. CIT सुनवाई की तारीख/ Date of hearing : 22.10.2020 घोषणा की तारीख /Date of Pronouncement : 04.12.2020 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 6, Chennai, dated 30.01.2018 relevant to the assessment year 2012-13. The assessee has raised the following grounds: 1.1 The Commissioner of Income Tax (Appeals) erred in confirming the action of the AO in allowing only depreciation @15% on Bolero Van as against the claim by the Appellant that it should be totally allowed as an expenditure. 1.2 The Commissioner of Income Tax (Appeals) failed to note that since the vehicle is being used for research and development its entire cost is entitled for 100% deduction u/s.35(1)(iv) of the Income Tax Act.

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1.3 The view of the Commissioner of Income Tax (Appeals) that there is no provision in the depreciation schedule for 100% depreciation on Bolero van is misplaced and is an incorrect interpretation of the provisions of the Income Tax Act. 2.1 The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.14,46,000 being the loss on Silver futures. 2.2 The Commissioner of Income Tax (Appeals) erred in disposing of the related grounds in a summary manner without adverting to the detailed submissions made before him. 2.3 The Commissioner of Income Tax (Appeals) went wrong in relying on the decision of the Supreme Court in the case of Woodword Governor Private Ltd. which is not applicable to the facts of the present case. 3.1 The Commissioner of Income Tax (Appeals) went wrong in remanding the issue relating to the disallowance u/s.14A r.w. Rule 8D when all the facts are there on record. 3.2 The Commissioner of Income Tax (Appeals) ought to have totally deleted the disallowance u/s.14A of the Income Tax Act.” 2. Brief facts of the case are that the assessee filed its return of income for the assessment year 2012-13 on 21.09.2012 admitting NIL income. The return filed by the assessee was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short]. Subsequently, the case of the assessee was selected for scrutiny and against statutory notices, the assessee filed various details. On perusal of the details furnished by the assessee and considering various submissions made during the course of assessment proceedings, the Assessing Officer completed the assessment under section 143(3) of the Act by assessing

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the total income of the assessee at ₹.69,76,140/- after making various disallowances.

2.1 With regard to the claim of depreciation, on verification of the fixed assets schedule in respect of R & D Unit, the Assessing Officer noted that the assessee has claimed deduction of depreciation @ 100% under section 35(1)(iv) of the Act of ₹.7,34,340/- representing the cost of purchase or vehicle “Bolero”. Since the MUV is not a scientific apparatus or a plant & machinery which is put to use inside the R & D Unit, the Assessing Officer was of the opinion that the claim of 100% is untenable. Thus, as per normal fixed asset schedule, by allowing depreciation @ 15%, the Assessing Officer disallowed the balance of ₹.6,27,189/- and brought to tax. On appeal, after considering the submissions of the assessee, the ld. CIT(A) confirmed the disallowance.

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allowing 100% depreciation. On the other hand, the ld. DR dutifully supported the orders of authorities below.

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personnel connected to the research & development and therefore, the claim of the assessee is liable to be allowed. We find force in the arguments of the ld. Counsel. We have perused decision in the case of CIT v. Smith Kline & French (India) Ltd. (supra), wherein, the Hon’ble Karnataka High Court has observed as under: The facts which are necessary for the purpose of answering the question, are as follows: During the assessment year, the assessee claimed deduction under section 35(1 )(iv) of the Act. It reads: "35. Expenditure on scientific research.- (1) In respect of expenditure on scientific research, the following deductions shall be allowed:- (i) to (iii) ****** (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2):" The particular item of expenditure in respect of which the benefit was claimed was purchase of two buses valued at Rs. 2,83,310. The assessee claimed that this was a capital expenditure incurred for the purposes of facilitating research. The claim was made on the ground that the buses were used to transport the research personnel and was not related to the business of the assessee other than scientific research. The ITO was of the view that this was a conveyance which the assessee was required to provide in respect of its employees and it was the normal transportation expenses, and the mere fact that scientific research personnel were carried in those buses did not convert the transport expenses into expenditure on scientific research. The Commissioner (Appeals), however, accepted the plea of the assessee. He was of the view that the expenditure incurred in purchasing the buses could be treated as expenses for prosecution of scientific research and the distinction as sought to be made out by the IAC was not correct. He was also of the view that all expenditures which are necessary for the purpose of carrying on scientific research, whether directly or indirectly, so long as they are used only for scientific research, should come within the purview of 'expenditure on scientific research'. The Tribunal concurred with the view of the

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Commissioner (Appeals). In coming to the conclusion, the Tribunal relied on the definition of the words 'scientific research' given in section 43(4)(i) of the Act as also the Explanation given under section 43(4)(ii), which read as under: "4. 'Scientific research' means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries,- (i) ******* (ii) references to expenditure incurred on scientific research include all expenditure incurred for the prosecution, or the provision of facilities for the prosecution, of scientific research, but do not include any expenditure incurred in the acquisition of rights in or arising out of, scientific research;" The Tribunal rejecting the contention held that they did not see any force in the contention of the department, in view of the clear provisions contained in section 43(4)(i) and 43(4)(ii) extracted above. Thereafter, at the instance of the revenue, the reference has been made. 2. Shri Srinivasan, the learned counsel for the revenue, contended that the type of expenditures which could be allowed must be those strictly intended for the prosecution of scientific research or facilities for the prosecution bf scientific research, and the buses meant for providing conveyance to the scientific personnel to travel from their respective residences to the factory, cannot be regarded as a facility for the prosecution of scientific research. Sri Sarangan, the learned counsel for the assessee, however, submitted that the language used in the explanation was very wide and every capital expenditure incurred which facilitates the prosecution of scientific research, falls within the definition of the explanation and, consequently, the benefit of section 35(1)(iv) would be attracted. 3. As stated earlier, the two authorities, namely, the Commissioner (Appeals) and the Tribunal have taken the view that the buses in question were facilities for the prosecution of scientific research and, therefore, the assessee was entitled to the benefit of section 35(1 )(iv). We find no reasons to take a different view. 4. Accordingly, we make the following order: The question referred for our opinion is answered in the affirmative and against the revenue.”

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4.1 The ld. DR could not controvert the above decision of the Hon’ble Karnataka High Court. Respectfully following the above decision in the case of CIT v. Smith Kline & French (India) Ltd. (supra), the claim of 100% depreciation under section 35(1)(iv) of the Act stands allowed.

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5.1 On being aggrieved, the assessee is in appeal before the Tribunal. Besides, relying upon various case law, the ld. Counsel for the assessee has submitted that the above issue is squarely covered in favour of the assessee by the decision of the Apex Court in the case of CIT v. Woodward Governor India P. Ltd 312 ITR 254 as well as the decision of the Hon’ble Jurisdictional High Court in the case of Indian Additives Ltd. v. ACIT in T.C.A Nos. 349 & 350 of 2008 dated 02.11.2018 , wherein it was held that “Loss” suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Act and prayed for reversing the orders of authorities below. On the other hand, the ld. DR dutifully supported the orders of authorities below.

5.2 We have considered the rival submissions and gone through orders of authorities below including the paper books filed by the assessee. On the claim of loss on commodities trading in silver futures, after considering the submissions of the assessee as well as by holding that the facts and circumstances in the case of CIT v. Woodward Governor India Pvt. Ltd. (supra) are different from the facts and circumstances of the assessee’s case and in view of the CBDT Instruction No. 03/2010, which provides that MTM losses on foreign derivatives being the difference between the purchase price and the values as on the valuation date, is a notional loss

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and is contingent in nature, the ld. CIT(A) confirmed the disallowance on marked to market losses on silver futures claimed by the assessee.

5.3 First of all, it is relevant to state that in the case of CIT v. Woodward Governor India (P.) Ltd. (supra), the Hon’ble Supreme Court has observed and held that the assessee debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transactions towards revenue items as on the last day of the accounting year. In this case, the Assessing Officer held that the liability as on the last date of the previous year was not an ascertained but a contingent liability. Resultantly, the same was added back to the total income, which was confirmed by the CIT(A). However, on further appeal, the Tribunal held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year was deductible. The said order of the Tribunal was upheld by the Hon’ble High Court. On further appeal by the Department, the Hon’ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible under section 37(1) of the Act. It further observed that an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be

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recognized in profit and loss account for reporting period. From the judgment of the Hon’ble Supreme Court, it can be clearly deduced that unrealized loss due to foreign exchange fluctuation in foreign currency transactions on revenue item as on the last date of the accounting year is deductible.

5.4 Similar issue was further considered by the Hon’ble Supreme Court in the case of Oil & Natural Gas Corporation Ltd. v. CIT 322 ITR 180. In this case, the assessee a public sector undertaking was engaged in the capital intensive exploration and production of petroleum products for which it had to heavily depend on foreign loans to cover its expenses, both capital and revenue and for payment to non-resident contractors in foreign currency for various services rendered. The assessee made three types of foreign exchange borrowings i.e. (i) on revenue account; (ii) on capital account, and (iii) for general purposes. Some of the loans became repayable in the relevant accounting year and the date of payment of some loans fell after the end of the relevant accounting year. The assessee revalued its foreign exchange loans in foreign exchange on revenue account, on capital account and for general purposes outstanding as on 31.03.1991, and claimed the differences between their respective amounts in Indian currency as on 31.03.1990 and 31.03.1991 as revenue loss under section 37(1) in respect of loans used in revenue account. The assessee also treated the similar difference in foreign exchange as an increased liability u/s 43A. The

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Assessing Officer allowed the deduction claimed u/s 37(1), taking into consideration the increased foreign exchange liability and repaid in the accounting year for the purpose of depreciation. He did not however, allow the claim for foreign exchange loss on loans both in relation to capital as well as revenue account which were outstanding on the last day of accounting year. On appeal, the CIT(A) affirmed the view of AO in relation to deduction u/s 37 of the interest on loans outstanding on the last day of the accounting year but allowed the benefit of increased liability for computation u/s 43A in relation to loss outstanding on the last day of the accounting year. Hence, the assessee as well as department took the matter in appeal to the Appellate Tribunal. The Tribunal held that the loss claimed by the assessee on revenue account was allowable u/s 37(1) and also rejected the appeal of the department and held that the assessee was entitled to adjust actual cost on imported assets acquired in foreign currency on account of fluctuation in the rate of exchange in terms of section 43A. On appeal by the department, the Hon’ble High Court reversed the decision of the Tribunal on both the issues. On further appeal to the Hon’ble Supreme Court, the decision of Hon’ble High Court was reversed and it was held that (a) that the loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet was allowable as an expenditure u/s 37(1), and (b) that the assessee was entitled to adjust the

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actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each of the relevant balance sheet dates, pending actual payment of the liability u/s 43A, prior to its amendment by Finance Act, 2002.

5.5 In view of above decisions, it is clear that the loss due to foreign exchange fluctuation in foreign currency transactions in derivatives has to be considered on the last date of accounting year and it is deductible under section 37(1) of the Act. Accordingly, we set aside the orders of authorities below and direct the Assessing Officer to allow the loss claimed by the assessee.

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brought to tax. On appeal, the ld. CIT(A) remitted the matter back to the file of the Assessing Officer.

6.1 On being aggrieved, the assessee is in appeal. By reiterating the submissions as made before the ld. CIT(A), the ld. Counsel for the assessee prayed for deleting the disallowance made under section 14A of the Act, since the assessee has utilized the term loans for the purpose of acquisition of fixed assets and no portion of the borrowed funds have been utilized for making investments yielding tax free income. On the other hand, the ld. DR submitted that the power of the ld. CIT(A) to ‘set aside’ has been deleted from section 251(1)(a) of the Act w.e.f. 01.06.2001.

6.2 We have heard the rival contentions. On perusal of the assessment order, we find that against the disallowance made under section 14A of the Act, the Assessing Officer has not stated any exempted income having earned by the assessee in the assessment year under consideration. The ld. Counsel for the assessee has also not filed any details with regard to the quantum of exempt income earned by the assessee. Accordingly, we direct the Assessing Officer to verify as to whether the assessee has earned any exempt income or not and in case, if no exempt income is found, then the Assessing Officer is directed to delete the addition made under section 14A of the Act in view of various decisions including the decision in the case of

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CIT v. Chettinad Logistics (P) Ltd. [2017] 248 taxman 55 (Mad) as well as the decision of the Hon’ble Supreme Court published in [2018] 257 Taxman 02. Thus, the ground raised by the assessee is allowed for statistical purposes.

Sd/- Sd/- (G. MANJUNATHA) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, 04.12.2020 Vm/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु� (अपील)/CIT(A), 4. आयकर आयु�/CIT, 5. िवभागीय �ितिनिध/DR & 6. गाड� फाईल/GF.