Madras High Court
M/S.Tube Investments Of India Ltd vs The Joint Commissioner Of Income Tax on 21 March, 2014
Author: T.S.Sivagnanam
Bench: Chitra Venkataraman, T.S.Sivagnanam
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 21 .03.2014 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Appeal) No. 1 of 2007 --- M/s.Tube Investments of India Ltd., 'Tiam House', 28, Rajaji Salai, Chennai 600 001. ... Appellant -vs- The Joint Commissioner of Income Tax, Special Range-I, 121, Nungakambakkam High Road, Chennai 600 034. ... Respondent Tax Case (Appeal) filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal Chennai Bench 'B', dated 21.07.2006, in I.T.A.No.1766/Mds/2000. For petitioner : Dr.Anita Sumanth For Respondent : Mr.T.Ravikumar J U D G M E N T
T.S.SIVAGNANAM, J.
This appeal by the assessee is directed against the order passed by the Income Tax Appellate Tribunal (Tribunal) in I.T.A.No.1766/Mds/2000, for the assessment year 1996-97 and the appeal has been admitted on the following substantial questions of law:-
1.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the disallowance of the interest and the additional expenditure incurred on account of exchange fluctuation?
2.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in invoking Section 43A to disallow the appellant's claim?
3.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal erred in law in not dealing with the alternate contention of the appellant raised without prejudice to its primary contention, that the denial of deduction in any event ought to be restricted to the amounts spent by the appellant on acquisition of capital asset using other sources of income and not to the entire amount of foreign exchange loan?
4.Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal erred in law in holding that the expenditure incurred by the appellant towards fees paid the ROC, printing and postage in respect of a bonus issue that did not result in an expansion of the capital base was not an allowable expenditure?
2. Among the questions framed, questions 1&2 could be taken up together; question No.3 is an alternate plea; and question No.4 relates to expenditure incurred by the assessee towards fees paid to the Registrar of Companies, printing and postage in respect of bonus issue, whether was allowable expenditure.
3. It is agreed by the Revenue that the question No.4 is covered against the Revenue in the light of the decision in the case of Commissioner of Income-tax v. General Insurance Corporation reported in [2006] 286 ITR 232 and Commissioner of Income-tax v. Dalmia Investment Co. Ltd. reported in [1964] 52 ITR 567, accordingly the question No.4, is answered in favour of the assessee and against the Revenue.
4. The assessee a public limited company is engaged in manufacture of bicycles, cycle accessories, cycle dynamo lamps, steel tubes and strips.
5. For the assessment year 1996-97, the assessee filed the return of income admitting a total income of Rs.6,84,04,240/-. The return was accepted under Section 143(1)(a) of the Income Tax Act (Act) and refund including interest was granted to the assessee. Thereafter, the case was taken up for scrutiny by issuing notice under Section 143(2) of the Act and the assessment was finalised by order dated 18.03.1999. Though there were seven issues on which the assessment was taken up for scrutiny and finalised by order of assessment dated 18.03.1999, in this appeal we are concerned only with two issues viz. (i) exchange fluctuation loss and expenditure incurred and (ii) on bonus share which issue has been already decided supra in favour of the assessee.
6. Regarding the exchange fluctuation loss, the Assessing Officer rejected the claim of the assessee for allowance of exchange fluctuation as a Revenue item, as the assessee failed to prove "one to one" relationship by producing materials. It was further pointed out that in the normal course, the assessee will be entitled for depreciation allowance on the amount capitalized but as the entire amount represents capital work-in-progress, no depreciation can be allowed on the same and accordingly, disallowed Rs.7,71,51,274/-, as being a wrong claim made by the assessee.
7. The assessee preferred appeal before the Commissioner of Income Tax (Appeals) contending that they had availed two foreign exchange loans totaling 17.5 M$, in the last quarter of 1994 to help the company enhance its export effectiveness and the Assessing Officer failed to appreciate the purpose of the loan, which was to give a thrust to the export development programme which involved investing in modernization of the existing facilities and also to meet working capital needs to support exports at a higher level of operations and it was only for these reasons, the foreign exchange fluctuation was claimed as Revenue deduction. It was further contended that the Assessing Officer erred in capitalizing the fluctuation as part of the cost of plant and machinery. It was further contended that the assessee had availed Global Deposit Receipt (GDR) during May 1994, and raised a sum of Rs.151 crores and these proceeds were sufficient to meet the capital expenditure. It was further contended that pending utilisation of the loan for raw material imports for the export thrust programme, the amounts were deployed in the inter-corporate market and also utilized in reducing over draft balance. Consequently, the assessee had earned interest/reduced the interest payable thereby increasing profitability which has been suitably taxed. It was further contended that the assessee should have been allowed to capitalize the interest to the tune of Rs.25,90,791/-, and exchange fluctuation thereon being Rs.9.59 lakhs as revenue deduction.
8. The first Appellate Authority sustained the order of the Assessing Officer, by order dated 13.09.2000. It was pointed out that initially the assessee contended that provisions of Section 43A are not applicable to their case, since from the loan obtained with the permission of the Reserve Bank of India, no capital goods were imported and the assessee has repaid the loan not from exports proceeds and the amount borrowed was invested in earning interest and the interest income was offered to tax. During the course of hearing the appeal, the assessee took another plea stating that it was money generated out of GDR issue which had funded the capital expenditure and that the foreign exchange loan had been used only for Revenue purpose. After taking note of the contentions raised, the Commissioner of Income Tax (Appeals) held that it will not be proper to disbelieve what has been printed in the balance sheet for the public at large and the share holders in particular in terms of the note 12 and the arguments advanced by the assessee are factually contrary to note 12 in the printed balance sheet.
9. Aggrieved by the order passed by the first Appellate Authority, the assessee preferred appeal to the Tribunal. The Revenue also preferred appeals in respect of the order passed by the first Appellate Authority, which was against the Revenue and all the appeals for the assessment years 1993-94 to 1996-97 were taken up together and in this appeal, we are concerned with the assessment year 1996-97.
10. The Tribunal held that once it is established that the foreign loan was utilized for the purchase of capital equipment and the purpose of sanction of loan and the approval of RBI was for the purchase of capital asset, the foreign exchange loss is also to be treated as capital in nature and no way connected with the Revenue and the Tribunal relying on the decision of the Hon'ble Supreme Court in the case of CIT vs. Tata Locomotive and Engineering Co Ltd., reported in [1996] 60 ITR 405, dismissed the appeal. Challenging the same, the assessee has preferred the present appeal, which has been admitted on the substantial questions of law referred above.
11. Dr.Anita Sumanth, learned counsel for the assessee while reiterating the stand taken before the first Appellate Authority and the Tribunal, submitted that the Tribunal erred in concluding that Section 43A of the Act applies to the case of the assessee, when no capital asset was acquired using the foreign exchange loan. It is further submitted that the component of foreign exchange is nothing but a consideration for the loan availed of and would therefore, partake, the same character as the interest paid thereon both of which are Revenue in nature and deduction should have been allowed. It is further submitted that the foreign exchange fluctuation was eligible for deduction to the extent to which it admittedly did not source the acquisition of any capital asset. By referring to the applications submitted by the assessee before the RBI under the Foreign Exchange Regulation Act, 1973, it is submitted that the purpose of the loan was for financing capital expenditure on modernization and expansion and enhancing export capability and for financing export operations. It is further submitted that the RBI by order dated 21.09.1994, accorded approval for raising foreign currency loan of US$ 5000000 for the purpose of financing capital expenditure on modernization and expansion and the period of loan was for two years from 1994 to 1996; principal repayable in four equal semi-annual installments, the first repayment to be made six months after the disbursement of the loan and the interest repayable in half early installments. It is submitted that the assessee raised a sum of Rs.151 crores by issue of GDR and the proceeds were used to meet its capital requirement and as such the foreign exchange loan equivalent to Rs.54 crores was invested in inter-corporate deposits which earned interest and the interest income has been offered to tax. Therefore, it is submitted that the amount of Rs.763 lakhs (inclusive of Rs.35.50 lakhs towards interest capitalized) is entirely Revenue in nature and should therefore be allowed as such. In the alternative it is submitted that even assuming without admitting that the foreign exchange loan was utilized for acquisition of imported machinery, treating the entire fluctuation as being relatable to imported machinery is not justified. In other words it is contended that the denial of deduction ought to have been restricted to the amounts spent by the assessee on acquisition of capital asset using other sources of income and not the entire amount of the foreign exchange loan. The learned counsel extensively referred to the printed balance sheet published in the assessee's annual report 1995-96.
12. Mr.T.Ravikumar learned Senior Standing counsel appearing for the Revenue submitted that the RBI granted permission for raising foreign exchange loan of US$ 50lakhs from Standard Chartered Bank, Bahrain subject to the conditions stipulated in the order dated 21.09.1994. The purpose of the loan was for financing capital expenditure on modernization and expansion, the rate of interest being floating at 1.5% per annum over six months, London Inter Bank Offered Rate (LIBOR), the period of the loan was for two years, 1994-96. It is further submitted that the terms of repayment has been mentioned in the order with a specific condition that the amount drawn from the loan should be utilized for the purpose approved and strictly subject to the terms and conditions stipulated in the letter of approval. It is further submitted that the loan and interest have to be repaid/paid only from out of the net foreign exchange earnings of the borrower entity and not from any other source of the group earnings . It is further submitted that in terms of the conditions stipulated by the RBI, the assessee executed a loan agreement and is bound by the terms and conditions of the agreement. Reliance was placed on the decision of the Hon'ble Supreme Court in the case CIT vs. Woodward Governor India Private Ltd., reported in 312 ITR 254 and the decision of the Delhi High Court in the case of Jay Engineering Works Ltd., vs. CIT reported in 2003 132 Taxman 69 and the decision of the Division Bench of this Court in the case of CIT vs. ELGI Rubber Products Ltd, reported in [1996] 219 ITR 109. By referring to these decisions, it is submitted that the amount paid due to fluctuation in the exchange rate is capital expenditure and not allowable as Revenue expenditure.
13. In reply, the learned counsel appearing for the assessee placed reliace on the decision of the Hon'ble Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras, reported in [1966] 60 ITR 52, and submitted that amounts was not in the nature of capital expenditure and was laid out exclusively for the purpose of the assessee's business and therefore allowable as a deduction. That the act of borrowing money was incidental to the carrying on of business and the loan obtained was not an asset or an advantage of enduring nature and it was irrelevant to consider the object with which the loan was obtained. Further reliance was placed on the decision of the Division Bench of this Court in the case of Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras), and submitted that the very nature of expenditure would justify the claim of the expenditure as Revenue expenditure. By referring to the letter of approval given by RBI, it is submitted that the expression "expansion" used in the letter of approval with reference to the purpose of the loan is not solely meant for capital expenditure. Further, it is submitted that utilisation of the foreign currency may not be the only test for considering the allowability of the expenditure. Referring to Section 43A of the Act, it is submitted that it has to relate specifically to an asset and the Revenue has set down two instances of import machinery and there is no other import and at best Section 43A would have applicability only to that extent being a sum of about Rs.7.2 crores. Consequently, the other expenditures are allowable as deduction as expended for the purpose of business. Therefore, it is submitted that Section 43A would stand attracted only to that part of the amount expended for the purchase of import machinery and not to the entire amount. It is further submitted that the decision of the Division Bench of this Court in the case of CIT vs. ELGI Rubber Products Ltd, (supra), will not apply to the factual matrix of the assessee's case.
14. Heard the learned counsels appearing for the parties and perused the materials placed on record.
15. The facts of the case have been set out in extenso in the preceding paragraphs. At the time when the appeal was heard by the first Appellate Authority, the assessee appears to have taken a different stand than the stand taken at the time of filing the appeal by stating that the money generated out of GDR issue had funded the capital expenditure and that the foreign exchange loan had been used only for Revenue purpose. The first Appellate Authority while concurring with the view taken by the Assessing Officer pointed out that the value of capital goods imported during the accounted year 1995-96 was Rs.3,41,42,000/- and during the current year was Rs.3,59,73,000/- and the Assessing Officer was justified in capitalizing the exchange fluctuation in respect of the imported machinery totaling Rs.7,01,15,000/- by invoking Section 43A of the Act by placing reliance on the decision of this Court in the case of CIT vs. ELGI Rubber Products Ltd, (supra). In note 12 of the printed balance sheet, it has been stated that (a) capital work in progress includes exchange fluctuation of Rs.736.01 lakhs and interest Rs.35.50 lakhs respectively; (b) the increase in rupee liability on account of outstanding foreign currency loan utilized in respect of acquisition of plant and machinery based on the exchange rate applicable on the date of balance sheet is Rs.537.58 lakhs (included in capital work in progress). As this relates to borrowed funds, the same has been considered in computing the provision for tax. By referring to note 12 of the printed balance sheet, the first Appellate Authority accepted the view of the Assessing Officer with regard to the applicability of Section 43A of the Act. The contention raised by the assessee that no capital goods were imported against the RBI approved loan and loan had been paid not from export proceeds was rejected, as being contrary to note 12 of the balance sheet. The Tribunal pointed out that under Schedule 14 of the balance sheet, the assessee has spelt out its accounting policy regarding foreign exchange difference on account of foreign currency transaction, which states that exchange difference arising from foreign currency transaction are dealt with in profit and loss account or capitalized where they relate to fixed asset. Plant and machinery acquired through foreign currency loans are capitalized at the rate prevalent at the time of purchase. In view of the said admission in the balance sheet, the Tribunal affirmed the view taken by the Assessing Officer that the claim of the assessee regarding exchange fluctuation was never held to be Revenue, as the claim was not supported by any material brought on record and therefore to be treated as capital. By referring to the decision of the Hon'ble Apex Court in the case of CIT vs. Tata Locomotive and Engineering co Ltd., (supra) the Tribunal pointed out that if capital asset is purchased, capitalizing as capital work in progress, the nature of the same is to be treated as capital and if no assets are purchased as regards the principal devaluation of gains and loss due to devaluation, the allowance of loss on devaluation, if any, arising on the loans obtained for purchase of assets will certainly be in capital account and covered by Section 43A of the Act. It was further pointed out that if any part of the loan is not used for the purpose of purchase of assets, the corresponding loss has to be allowed as capital and not Revenue as the gains are not treated as Revenue income following the principles laid down by the Hon'ble Apex Court in CIT vs. Tata Locomotive and Engineering co Ltd., (Supra).
16. The frequent issue, which arises for consideration is regarding the computation of business income, whether as particular expenditure is revenue or capital. In the long line of decision of the Hon'ble Supreme Court and this Court certain principles have been formulated, nevertheless each case has to be decided on the facts and circumstances as to whether a particular expenditure is allowable as a permissible deduction. The Hon'ble Supreme Court in the case of Abdul Kayoom (K.T.M.T.M.) v. Commissioner of Income-tax, reported in [1962] 44 ITR 689, held that none of the tests is either exhaustive or universal, each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. It was pointed out that in deciding such cases, one should avoid the temptation to decide cases by matching the colour of one case against the colour of an another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. It was held that what is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relationship, inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In the case of Commissioner of Income-tax v. Ashok Leyland Ltd. reported in [1969] 72 ITR 137 (Mad), which was affirmed by the Hon'ble Supreme Court in [1972] 86 ITR 549 (SC), it was pointed out that the clear-cut dichotomy cannot be laid down in the absence of a statutory definition of "capital" and "revenue expenditure". It was held that the word "capital" connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise and this distinction, though candid is susceptible to modification under peculiar and distinct circumstances. Therefore, it was held that the facts of each case, the attendant circumstances revolving round the expenditure, the aim, object and purpose of the same, their impact on the assessee, particularly in matters relating to the future of the assessee's trade and business, whether it could be sustained on ordinary canons of commercial expediency simpliciter, whether it is a step-in-aid of future expansion or prolongation of life of an existing business, whether it is to secure an enduring benefit, whether the expenditure constitutes conceivable nucleus to form the foundation for posterior profit earning, whether the expenditure could be viewed as an integral part of the conduct of the business and potential future and these were all held to be the main incidents, which have a bearing on the decision whether, in a given case, the expenditure is capital or chargeable to revenue. Thus, it was held that an objective application of a judicial mind to the facts of each case is necessary.
17. Therefore, we would be required to examine the facts of the case on hand minutely to ascertain the aim, object, purpose and true nature of the expenditure from the documents and surrounding circumstances. The burden of proving that the expenditure was Revenue in nature is on the assessee [Lakshmiratan Cotton Mills Co. Ltd. v. Commissioner of Income-tax reported in [1969] 73 ITR 634 (SC)].
18. In the decision reported in [2009] 312 ITR 0254 (Commissioner of Income-tax v. Woodward Governor India P. Ltd.) the Supreme Court considered the allowability of expenditure arising out of fluctuation in rate of exchange. Referring to Accounting Standards 11, the Supreme Court pointed out that paragraph 9 of AS-11 recognises exchange differences as income or expenses in the period in which they arise. Paragraphs 10 and 11 deal with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A of the 1961 Act. Referring to Section 43A (1) opening with the non-obstante clause, the Supreme Court pointed out that Section 43A(1) applies where, as a result of change in rate of exchange, there is an increase or reduction in the liability of the assessee in terms of Indian Rupee to pay the price or any asset payable in foreign exchange or to repay the money in foreign currency taken specifically for the purpose of acquiring an asset. Section 43A, as it stood originally, would have application in a case where an asset is acquired and the liability existed before the change in the exchange rate takes place. Adjustments in the cost are thus made depending on the fluctuation in the currency rate. Thus the cost of the equipment assumes significance in the matter of working out the depreciation allowance. Referring to the amendment to Section 43A by the Finance Act of 2002, the Supreme Court pointed out that Under the unamended section 43A, adjustment to the actual cost took place on the happening of change in the rate of exchange and the Section did not require as a condition that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation, whereas, under the amended section 43A, the adjustment in the actual cost is made on actual payment. Thus the Section applies where as a result of change in the exchange rate there is a reduction or increase in the liability, that the adjustment of increase or decrease in the liability relating to acquisition of asset on account of the exchange rate fluctuation is reflected as part of the actual cost of the asset acquired in foreign currency and the depreciation is to be allowed accordingly.
19. Learned Standing Counsel appearing for the Revenue placed reliance on this decision only to re-emphasize the fact that as far as the assessee was concerned, it had no doubt purchased machinery in foreign exchange to the extent of Rs.7.01 crores in all during the Accounting Year 1995-96 and 1996-97. To the extent of exchange fluctuation, the actual cost of the purchase of machinery thus would include the exchange fluctuation. This would be so for the purpose of finding out the actual cost for the purpose of depreciation. As far as the balance of amount which had been borrowed is concerned, there is no denial of the fact that under the Reserve Bank of India Scheme, the approval was issued sanctioning the loan for the purpose of capital expenditure and modernization and expansion. There is no denial of fact that the amount drawn from the loan should be utilized for the purpose approved and strictly subject to the terms and conditions stipulated by the Reserve Bank of India vide their letter dated 21st September, 1994. It is also not denied by the assessee that the loan and interest thereon have to be repaid/paid only from out of the net foreign exchange earnings of the borrower entity and not from any other source and/or the group earnings, as per the schedule of repayment/payment indicated in the application. The assessee also does not deny the fact that the repayment of the loan which includes interest should be made through the authorized dealer only. Thus, when the object and the purpose of loan clearly points out to the purpose of the loan given as for capital expenditure on modernization and expansion, the fact that the exchange fluctuation had been added on to the cost under Section 43-A(1), however, does not, lead to the inference that as far as the balance amount is concerned, the interest payment difference on exchange fluctuation would fall under Revenue head.
20. As rightly pointed out by the learned Standing Counsel appearing for the Revenue, the assessee, does not, dispute the fact that the loan borrowed was only for capital purpose; however, learned counsel appearing for the assessee hastens to add that the balance of amount had, in fact, been invested in inter corporate deposits and the income thereon had been offered for assessment. We do not think that such application of the money in violation of terms of loan would help the assessee to claim the repayment/interest payment suffering exchange fluctuation as revenue expenditure.
21. It is seen from the reading of the balance sheet that the increase in the liability on account of the outstanding foreign currency loan utilized in respect of acquisition of plant and machinery to the tune of Rs.537.58 lakhs was included in the capital work in progress. The assessee admits that the expenditure on capital work in progress was to the tune of Rs.5227.35 lakhs as against Rs.1282 lakhs as on 31st March, 1995. Though the purpose of loan is one for capital expenditure on modernization and expansion, the contention of the assessee is that the balance amount had, in fact, being kept in deposits, which is also for business purpose only. As pointed out by the Tribunal, the assessee, does not, deny the fact that there was no one to one correlation on the amount invested in inter corporate deposits and the loan amount taken. In the face of such a finding and in the face of the object of securing the loan for financing the capital expenditure of modernization and expansion, we do not find any merit in the contention of the assessee that the deposits kept were also for business purposes and hence, the difference in exchange rate merited to be allowed as revenue expenditure. The terms of payment of the principal show that the loan thus taken was to be repaid in four equal semi-annual instalments, the first being made six months after the disbursement of the loan. Half-yearly interest (floating) at 1.5% per annum over six months was also stipulated. Thus on facts found and the purpose of the loan taken as represented by the assessee, we do not find any ground to uphold the contention of the assessee that the difference in the interest on the balance of principal amount on account of exchange fluctuation to be treated as revenue expenditure.
22. Learned counsel appearing for the assessee placed reliance on the decision of the Karnataka High Court reported in (1986) 162 ITR 163 (Periyar Chemicals Ltd. V. Commissioner of Income-tax). The said decision refers to the issue of exchange fluctuation. The company therein imported machinery from Germany, for which, it availed foreign currency loan from a German company through Industrial Credit and Investment Corporation of India Ltd. At the time when the loan was taken, the exchange rate was Rs.2,258 for one Deutsche Mark. The assessee paid an instalment of 1,13,700 Deutsche Marks during the accounting year ending on June 30, 1975. On account of the fluctuation in the exchange rate, the assessee had to pay Rs.2,40,574/- as against the instalment payable at Rs.1,68,737/-. The assessee debited the excess amount of Rs.81,837/- as revenue deduction. The Tribunal rejected the assessee's contention and held that the secured and unsecured loans and the work-in-progress formed part of the capital employed for determining the deduction allowable under Section 80J. On a reference, the Kerala High Court held that the extra expenses incurred for repayment of the loan raised for the purpose of payment of price of the capital goods purchased from Germany was not of the nature of revenue expenditure and could only be treated as capital expenditure. In this, the High Court referred to the decision of the Calcutta High Court reported in (1981) 130 ITR 351 (cal) (Union Carbide India Ltd. V. CIT) and held that extra expenses incurred was liable to be treated as capital expenditure.
23. Similar view was taken by the Division Bench of the Andhra Pradesh High Court in the case of Mopeds India Ltd., (No.1) vs. CIT reported in [1988] 172 ITR 552, and following the said decision, the Division Bench of this Court in the case of CIT vs. ELGI Rubber Products Ltd, (supra) held that the additional amount paid by the assessee therein to ICICI due to the fluctuation in the exchange rate constituted capital expenditure.
24. We hold that given the object of the loan taken, the above said decisions will have relevance in deciding the issue against the assessee.
25. Learned counsel appearing for the assessee placed heavy reliance on the decision of the Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras reported in [1966] 60 ITR 52, as well as the case of Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras).
26. As far as the the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras reported in [1966] 60 ITR 52, is concerned, the said decision related to the expenditure incurred in raising a loan from Industrial Finance Corporation of India. The assessee contended that the loan was applied wholly and exclusively for the purpose of business, hence, was an admissible deduction under Section 10(2)(xv) of the 1922 Act. The Supreme Court pointed out that a loan may be intended to be used for the purchase of raw-material when it is negotiated, but the company may after raising the loan change its mind and spend it on securing capital assets; it posed the question, as to whether the purpose at the time the loan was negotiated was to be taken into consideration or the purpose for which it was actually used. In the accounting year the purpose was to borrow and buy raw-material, but in the assessment year the company found it unnecessary to buy raw-material and spent it on capital asset, in such an event, the Supreme Court agreed with the decision in the case of Nagpur Electric Light and Power Co. vs. Commissioner of Income-Tax reported in (1931) 6 ITC 28 that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure. Thus, the Supreme Court held that the loan obtained was not an asset or advantage of an enduring nature; that the expenditure was made for securing the use of money for a certain period and that it was irrelevant to consider the object with which the loan was taken.
27. The second decision on which heavy reliance placed by the learned counsel appearing for the assessee was on Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras). There the company imported some items of machinery for the purpose of business on deferred payment terms. For assuring the due payment of the instalments, the assessee obtained guarantee executed by the Bank in favour of the sellers of the machinery and the Bank charged commission at a percentage of the amount guaranteed. The Commission, calculated at 1% on the outstanding balance and also of commission guaranteed on the additional liability consequent on devaluation of the Indian rupee, came to a sum of Rs.33,238.28. For the assessment year 1968-69, on a question of deductibility on the said amount, this Court held that payment of guarantee commission was an expenditure incurred in the course of carrying on business and being related to the business, it could be viewed as an integral part of the conduct of the business and hence, revenue expenditure. The acquisition of machinery on instalment terms was only a business exigency and the very nature of the expenditure and the time at which it had been incurred would justify the claim of the expenditure as revenue expenditure. This Court pointed out that the interest paid on loans borrowed for purchase of machinery and plant could be capitalised in cases, (a) where the business of manufacture was newly set up or (b) where the assessee had carried out a new expansion. This Court pointed out that the principle of capitalisation was not to be confined to a newly started business and it applied to a new business or a new unit of an existing business and the appropriate tests for a decision have to be looked at in the background of the facts of the case. On facts, this Court held that the expenditure was incurred in the course of carrying on the business. The commission was closely related to the business and hence it could be viewed as an integral part of the conduct of the business and would be a revenue expenditure. Thus the nature of the expenditure and the time at which it had been incurred would justify the claim of the expenditure as revenue expenditure.
28. This Court further observed that the expenditure incurred for the purchase of machinery was undoubtedly capital expenditure, for it brought in an asset of enduring advantage. But the guarantee commission stands on a different footing and that by itself, it did not bring into existence any asset of an enduring nature; nor did it bring in any other advantage of an enduring benefit. The acquisition of machinery on instalment terms was only a business exigency. This Court opined that if interest paid on a credit purchase of machinery could be held to be revenue expenditure, the guarantee commission paid to a bank for obtaining easy terms for acquisition of machinery could not be treated differently.
29. The reliance placed on the above two decisions have to be seen on the facts of the case, which we have already noted. With the stringent terms of loan availed, particularly with reference to the purpose of the loan, in the absence of one to one correlation between the loan amount and the inter-corporate deposits as pointed out by the Tribunal, we do not find that the assessee could safely draw support from the above decisions.
30. Unlike the present case on hand, the assessee in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras, reported in [1966] 60 ITR 52 obtained a loan of Rs.40.00 lakhs from the Industrial Finance Corporation of India. The loan was utilised to pay off a prior debt of Rs.25 lakhs due to another company and according to the report of the Directors, the balance of the amount was utilised for working funds. The assessee pointed out that what was secured was a loan and the expenditure was not in the nature of capital expenditure and hence the same was expended wholly and exclusively for the purpose of the business of the company.
31. In the background of the facts thus found, with no clause or the purpose stipulated on the loan taken, the subsequent treatment by the assessee on the loan amount in the decided case and the observation of the Apex Court, hence, cannot be taken advantage of by the assessee, particularly in the context of the clear terms under which the loan was granted.
32. Learned counsel appearing for the assessee hastened to add that the Reserve Bank of India had not taken serious note about the use to which the balance of amount was put into use. We may point out herein that the assessee had not proved the one to one correlation between the forex loan taken and the application of funds in the form of inter-corporate deposit. The Assessing Officer clearly pointed out that by post-mortem analysis of the sources and application of funds, the assessee could not prove a different version of the story and after a lapse of three years, the assessee could not change what had happened earlier by a mere statement of fund flow. This was reiterated by the Tribunal too in its order.
33. We agree with the Tribunal's view finding that the assessee had failed to support its contention through any concrete evidence. The assessee in its accounts admitted the foreign exchange loan as capital for acquisition of machineries and assets and accordingly the scheme was capitalised. The Tribunal pointed out that there was no evidence that the funds were utilized for the purpose other than what was stated in the annual accounts. It further pointed out that in the cash flow statement and the balance sheet, the assessee could not point out that the assessee had obtained the foreign loan with the approval of the RBI for financing export operations meant for inter-corporate investments.
34. With the distinct features thus seen, this Court holds that the decisions of the Supreme Court in the case of India Cements Ltd., vs. Commissioner of Income Tax, Madras, reported in [1966] 60 ITR 52 and this Court in the case of Sivakami Mills Ltd., vs. Commissioner of Income Tax, Madras, reported in [1979] 120 ITR 211 (Madras) are distinguishable on facts and hence are not of any assistance to the assessee.
35. As pointed out by the learned Standing Counsel appearing for the Revenue, the assessee was irrecoverably bound by the terms of the approval by its conduct in signing the loan agreement, which clearly stipulates that the condition set out shall be strictly complied with. Several restrictions have been made and spelt out in the conditions. In terms of clause 11 of the letter of approval, the assessee was bound to submit quarterly statements duly supported by invoices in original such as exchange control, copies of bills of entry and copies of the import licences endorsed for C.I.F., value of the machinery, debit note, etc., positively by the end of the month following the quarter to which the statement relates, till the loan is fully utilised. Thus, having been bound over by such conditions, coupled with the purpose of the loan namely, financing capital expenditure on modernization and expansion, we have no hesitation to hold that the expenditure was capital in nature.
36. We do not agree with the alternate plea raised by the learned counsel for the assessee that the denial of deduction in any event ought to be restricted to the amounts spent by the assessee on acquisition of capital assets using other sources of income and not to the entire amount of foreign exchange loan. We support such conclusion with the following reasons:-
The learned counsel appearing of the assessee would contend that the only capital goods imported during 1995-96, is to a value of Rs.3,41,42,000/-, and during the current year was Rs.3,59,73,000/-, in all Rs.7,01,15,000/- and in such circumstances, the entire amount cannot be capitalized as per the provisions of Section 43A of the Act. The Assessing Officer pointed out that the assessee was trying to explain away his claim by way of an alternative arguments and it would be rather strange for the assessee to avail a foreign exchange loan and place such funds in intercorporate deposits and other investments and this stand was clearly contrary to the purpose for which the assessee applied for permission to the RBI and the purpose for which, the foreign exchange loan was approved by the RBI. After noticing the accounting policy of the assessee as spelt out in the printed balance sheet in Schedule 14 which stated that exchange difference arising from foreign currency transactions are dealt with in profit and loss account or capitalized, where they relate to fixed assets and plant and machinery acquired through foreign currency loans are capitalized at rate prevalent at the time of purchase, the Assessing Officer took note of the Director's report which pointed out that substantial modernization and expansion was made during the earlier year and the current year, construction work in respect of the export oriented unit was in progress and the trial production was expected to commence during June 1997 and full scale stabilization was expected by the end of 1996-97. Further, the assessee had commissioned its new tube plant at Shirwal, Maharashtra. As already pointed out in the notes to the accounts in paragraph 12 that capital work-in-progress includes exchange fluctuation of Rs.736.01 lakhs and interest Rs.35.50 lakhs and the increase in rupee liability on account of outstanding foreign currency loan utilized in respect of acquisition of plant and machinery based on the exchange rate applicable on the date of balance sheet is Rs.537.58 lakhs including capital work in progress. After taking into consideration, the total value of the imported machinery, the Assessing Officer held that it has to be capitalized as per Section 43A of the Act following the decision in the case of CIT vs. ELGI Rubber Products Ltd, (supra).
37. Thus, it was pointed out that the material issue would be to prove one to one relationship which was not proved by the assessee. After noticing the above findings recorded by the Assessing Officer, the first Appellate Authority noted the conduct of the assessee in accepting that it had raised the foreign loan as per scheme and it accepted that it had put up the application for the utilisation of the loan for the specified purpose for which the loan had been actually meant, it admitted the utilisation of the loan in accordance with the RBI scheme for acquisition of plant and machinery in the notes to the accounts and subsequently, reversed its stand by claiming that it had not complied with the terms of the RBI approval and it did not utilize the loan for import of plant & machinery, but had utilised it for other revenue purposes, that the loan was paid off from the funds other than export proceeds. This statement made by the assessee was outrightly rejected by the Appellate Authority in the light of the version given in the printed balance sheet in terms of note 12. Further, the first Appellate Authority disbelieved the stand taken by the assessee that the investments were made in tax free bonds from the money received from GDR and hence, no interest had accrued and it was held that it is hard to believe that the GDR money was utilised for liquidating the foreign loan. Further, the first Appellate Authority pointed out that in the case of M/s.TI Diamond Chain Ltd., which is a sister concern of the assessee an identical facts situation arose and the Appellate Authority confirmed the addition by order dated 31.01.2000. The Tribunal while confirming the findings rightly pointed out that the claim of the assessee regarding exchange fluctuation is never held to be revenue, as it is not supported by any material on record and hence, the same was treated only as capital. Further, it was pointed out that there is no evidence that the funds were utilised for the purpose other than what is stated in the annual accounts and from the cash flow statement and the balance sheet and the assessee was unable to point out that the assessee obtained foreign loan with the approval of the RBI for financing export operations, which were meant to be inter-corporate investments. In the light of the above factual situation, the alternate plea raised by the assessee is not sustainable and hence rejected.
38. In the result, the Question Nos.1 to 3 are answered against the assessee and the question No.4 is answered in favour of the assessee and the Tax Case (Appeal) is allowed in part. No costs.
(C.V.,J) (T.S.S.,J) 21 .03.2014 pbn Index :Yes Internet:Yes CHITRA VENKATARAMAN, J. and T.S.SIVAGNANAM, J. pbn To 1.The Income Tax Appellate Tribunal Chennai Bench 'B', Chennai
2.The Commissioner of Income Tax (Appeals) V, 121, Mahatma Gandhi Road, Chennai 600 034.
3.The Joint Commissioner of Income Tax Special Range-I, Chennai.
Tax Case (Appeal) No.1 of 200721.03.2014