Income Tax Appellate Tribunal - Delhi
Munjal Showa Ltd. vs Deputy Commissioner Of Income Tax on 26 June, 2003
Equivalent citations: (2005)94TTJ(DELHI)227
ORDER
Keshaw Prasad, A.M.
1. Both the appeals have been directed by the assessee. While the appeal for asst. yr. 1993-94 is directed against the order of the CIT(A), dt. 2nd Dec., 1996, the appeal for asst. yr. 1994-95 is directed against the order of the CIT(A), dt. 5th Sept., 1997. As the issues in both the appeals are common, the appeals are being disposed of by a consolidated order. For the sake of convenience, we will first take up the appeal for asst. yr. 1993-94.
2. Ground Nos. 1 and 2 challenge the disallowance of Rs. 38,519 representing depreciation relatable to the cost of assets as enhanced due to fluctuation in foreign exchange rates.
3. We find that this issue was adjudicated by the Tribunal in assessee's own case in the asst. yr. 1992-93 and vide its order in ITA No. 1294/Del/1996, the Tribunal had directed the allowance of depreciation. Concurring with the same, we direct the AO to allow depreciation on the enhanced value of the cost of assets due to fluctuation in foreign exchange rates. This ground of appeal is, therefore, allowed.
4. Ground No. 3 raised by the assessee is against the disallowance of Rs. 9,15,981 sustained by the, CIT(A) being 1/5th of the total deferred revenue expenditure amounting to Rs. 45,79,906.
Briefly, the facts of the case are that the appellant is engaged in the manufacture/sale of automobile components. It also supplies the other parts manufactured by the other concerns. During the relevant previous year, the appellant had incurred an expenditure of Rs. 45,79,906 on account of foreign technicians' fees and designs, and drawings fees paid to the foreign collaborators in connection with the development of new models of front forks, shock absorbers and structs. Similar expenditure incurred in the past had been treated as revenue expenditure in the books of account and allowed as such by the Revenue,
5. In the year under appeal, it was decided by the appellant that the benefit arising from such expenditure, though on revenue account, will be availed in the future years and, therefore, it was decided to treat the expenditure as deferred revenue expenditure. The appellant debited only Rs. 9,15,981 out of the aforesaid expenditure in its books and carried forward the balance Rs. 36,63,925 in the balance sheet as deferred revenue expenditure. However, in its return of income the appellant had omitted to claim the entire Rs. 45,79,906 as revenue expenditure.
6. The AO held that there was no concept of deferred revenue expenditure and on that basis disallowed the sum of Rs. 9,15,981 claimed in the P&L a/c for the year.
7. The assessee preferred an appeal before the CIT(A). Before him, the deduction of the entire amount was claimed being in the nature of revenue expenditure. However, the CIT(A) disallowed the claim of the assessee by holding that the entire expenditure was capital in nature and, therefore, the entire amount was disallowable. The assessee is in appeal before us.
8. It is argued by the learned counsel that the appellant paid following amounts to Showa Manufacturing Co. Ltd. on account of technical guidance fee and payment for design and drawing charges :
Technical fee Rs. 32,09,598
Designs and drawing charge Rs. 13,70,307
________________
Rs. 45,79,905
________________
9. The technical fee of Rs. 32,09,598 comprised of the fee paid to Showa Manufacturing Co. Ltd. and also the expenses on travelling and stay of Japanese technicians.
10. The appellant is engaged in the manufacture of shock absorbers for use in automobiles in collaboration with and on the basis of know-how acquired from a Japanese company. The appellant engaged services of foreign technicians to train its personnel in the use of imported know-how and in the understanding and improvement of drawings and designs acquired for the purpose of use in its own manufacturing facility from the foreign company. The amount had been paid in terms of an agreement entered into between appellant-company and Showa Manufacturing Co. Ltd. @ US $ 250 per day per person provided by Showa Manufacturing Co. Ltd., Japan. The expenses on stay and travel of Japanese technician visiting India were also borne by the appellant-company and included in technical fee. The expenditure on this account only helps the appellant in running its day-to-day business more efficiently and same does not result in any advantage of an enduring nature. For this purpose, the expenditure on this account is a revenue expenditure and not capital expenditure.
11. Payment for design and drawing charges has been made for design and drawing for shock absorbers for few models of two wheelers; the payment is again a part of day to day business. The payment on account of design and drawings has been allowed in full in subsequent years.
12. It has been held by the Courts repeatedly that where the expenditure is on obtaining access to technical knowledge, the expenditure is of the nature of revenue expenditure. The appellant has merely right to use these drawings and designs.
13. Reliance in regard to aforesaid claim of Rs. 45,79,906, of the appellant placed on the following decisions :
(i) IAC v. Rollatainers Ltd. (1987) 23 ITD 440 (Del)
(ii) Dy. CIT v. Metalman Auto (P) Ltd. (2001) 73 TTJ (Chd) 961 : (2001) 78 ITD 327 (CM)
(iii) India Petrochemicals Corporation Ltd. v. Dy. CIT (2002; 74 TTJ (Ahd) 281 : (2002) 81 ITD 263 (Ahd)
(iv) Shriram Refrigeration Ind. Ltd. v. CIT (1981) 127 ITR 746 (Del)
(v) Triveni Engineering Works Ltd. v. CIT (1982) 136 ITR 340 (Del)
(vi) CIT v. Bhai Sunder Dass & Sons (P) Ltd. (1986) 158 ITR 195 (Del)
(vii) IAC v. Bajaj Tempo Ltd. (1996) 55 TTJ (Pune)(SB) 43 : (1996) 218 ITR 147 (Pune)(SB)
(viii) CIT v. IAEC (Pumps) Ltd. (1998) 232 ITR 316 (SC)
(ix) CIT v. Wavin (India) Ltd. (1999) 236 ITR 314 (SC)
(x) SRP Tools Ltd. v. CIT (1999) 237 ITR 684 (Mad)
(xi) CIT v. Southern Pressings (P) Ltd. (2000) 242 ITR 67 (Mad).
14. Without prejudice to aforesaid in regard to design and drawing charges, it is submitted that in case expenses on design and drawing charges not allowed in full directions may be given to allow depreciation thereon in view of following decision :
Scientific Engineering House v. CIT (1986) 157 ITR 86 (SC).
Learned Departmental Representative supported the order of the CIT(A).
15. We have considered the rival submissions. The AO has treated the expenditure as deferred revenue expenditure and allowed 1/5th of the deduction in the year under consideration. The balance amount was allowable in the subsequent years in the equal proportion. In other words, the AO has treated the expenditure to be revenue expenditure but the CIT(A) has treated the entire expenditure as capital expenditure. Admittedly, the payment to Showa Manufacturing Co. Ltd. was on account of technical guidance fee and design and drawing charges. Such expenditure included travelling and stay of Japanese technicians. Whether by incurring such expenditure any long enduring benefit has been obtained or not has to be examined afresh. We, therefore, set aside this issue and restore back to the file of the AO to examine various clauses of the agreement entered between the assessee-company and Showa Manufacturing Co. Ltd. and come to a conclusion whether the expenditure was revenue expenditure or capital expenditure. This ground of appeal is allowed for statistical purposes.
16. Ground No. 4 raised by the assessee is against confirming the disallowance of Rs. 18,93,880 made by the AO on account of being interest on moneys borrowed for acquisition of plant and machinery. The assessee incurred an interest expenditure of Rs. 18,93,880 on account of borrowed funds utilised for purchase of plant and machinery. The appellant while capitalising the expenditure in its books claimed deduction for the same under Section 36(1)(iii) of the Act while computing its taxable income. However, the AO held that since the borrowed funds were utilised for the purposes of purchasing plant and machinery, it followed necessary corollary that interest on such fund had to be capitalised. He, therefore, disallowed the deduction of interest, On appeal, the CIT(A) also confirmed the action by the AO. The assessee is in appeal before us against the findings of the CIT(A).
17. Learned counsel stated that under Section 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed for the purposes of business or profession can be claimed as deduction in computing the income from business. Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT (1966) 60 ITR 52 (SC), while considering the provisions of Section 10(2)(xv) of the Act, 1922, had observed 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 asset. The Hon'ble Court held that it was rightly held that the purpose for which the loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure. It was stated that in the case of running business interest on money borrowed for purposes of business is revenue expenditure notwithstanding the fact that the moneys borrowed have been spent for acquiring plant and machinery for the same business or defraying capital expenditure. The moneys could be said to be borrowed for the purposes of the business when the cash is utilised for purchasing or acquiring a capital asset such as land, building or machinery to be used in a business which is being carried, on. While relying on the decision of Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj) and the decision of Hon'ble Bombay High Court in the case of Calico Dyeing & Printing Works v. CIT (1958) 34 ITR 265 (Bom), the learned counsel stated that where there was a borrowing for the purposes of business, the interest paid on such borrowing becomes eligible for deduction whether the capital is invested in order to acquiring a revenue asset or a capital assets. The learned counsel stated that since the moneys had been borrowed for purposes of an on-going business, the interest payable in relation thereto would be admissible revenue deduction irrespective of the fact that moneys borrowed have been utilised for meeting capital expenditure. The further reliance was placed on the decisions Prem Spinning & Weaving Mill Co. Ltd. v. CIT (1975) 98 ITR 20 (All), Addl. CIT v. Aniline Dyestuffs & Pharmaceutical (P) Ltd. (1982) 138 ITR 843 (Bom), Kanhiram Ram Gopal v. CIT (1988) 170 ITR 41 (MP), CIT v. Hindustan Machine Tools Ltd. (1989) 175 ITR 212 (Kar) and Chief CIT v. Senapathy Whitely Ltd.
18. The learned counsel further stated that the fact that the appellant had capitalised interest in its books would not bar the appellant from claiming the same as revenue expenditure under the IT Act. The learned counsel, therefore, argued that deduction claimed by the assessee deserves to be allowed. On the other hand, learned Departmental Representative supported the order of the CIT(A).
19. We have considered the rival submissions. It is an admitted position that the appellant-company is engaged in the manufacturing process. It has obtained certain loans from which the plant and machinery was purchased. Merely because plant and machinery was purchased from such borrowed fund will not make the borrowed fund as capital assets. Section 36(1)(iii) provides for deduction of interest paid in respect of capital borrowed for the purposes of the business or profession. When a borrowed fund is utilised for the purposes of acquisition of plant and machinery, it is also utilised for the purposes of business or profession. In the cases mentioned earlier, various Courts including the Hon'ble Supreme Court have taken the view that if the amount was borrowed for the purposes of business, interest on the same was allowable deduction under Section 36(1)(iii) of the Act irrespective of the fact whether such borrowed fund was utilised for acquiring a capital asset or the same was utilised as a working capital. Respectfully following the decisions mentioned above, we hold that the CIT(A) was not justified in disallowing the claim of the assessee. The addition sustained by the CIT(A) is deleted.
20. As regards the objection of the CIT(A) that the amount utilised in the purchase of the plant and machinery has been capitalised will not alter the situation. Under Section 36(1)(iii), one has to see whether the amount borrowed was for the purposes of business or not. The business includes the purchase of capital assets also. Without plant and machinery, there cannot be any business. We, therefore, hold that the addition sustained by the CIT(A) is not justified and stands deleted.
21. In Ground No. 5, the assesses has challenged the addition of profit on cancelling of forward work contract. The appellant purchased certain machinery for its plant at Gurgaon, which was financed by means of foreign currency loan taken from ICICI during the accounting year 1986-87. Subsequently, the appellant in July, 1990, took forward cover in respect of the foreign exchange liability for repayment of loan as also for the payment of future interest on loan.
22. The Reserve Bank consequent upon introduction of Liberalised Exchange Rate Management Scheme (LERMS) and with a view to creating greater depth in foreign exchange market, and to enable market participants to have greater flexibility, issued the instructions to the authorised dealers--Circular No. 22, dt. 27th March, 1992, permitting the customers to cancel forward contract.
23. The appellant cancelled the forward contract in October, 1992, pursuant to the aforementioned circular issued by the Reserve Bank. The cancellation of contracts resulted in the appellant realising about Rs. 22,76,671 as profit.
24. The profit on cancellation of forward contract held for payment of principal of loan had been treated as capital receipt by appellant not chargeable to tax.
25. However, the AO held that the income has arisen in the course of business and has direct nexus with the business carried on by the assessee. The AO, therefore, treated the profit as business profit. On appeal, the CIT(A) held that the profit earned by the assessee due to cancellation of forward contract to foreign currency was business receipt and alternatively the same was speculation profit exigible to tax. The assessee is in appeal before us.
26. It is argued by the learned counsel that the entire transaction was for the purposes of acquisition of fixed assets and appellant had only as a prudent businessman cancelled the forward cover agreement which had resulted in a lower cost of acquisition of the fixed assets.
27. It is settled position that a gain arising from a fixed capital is a capital receipt not chargeable to tax. It is taxable as revenue item when it is referable to circulating capital or stock-in-trade. The fixed capital is what the owner turns to project by keeping in its own possession. Circulating capital is what he makes profit of by parting with and letting it change its masters.
28. The aforesaid contention is supported by following judicial precedents :
(i) CIT v. Tata Locomotives & Engineering Co. Ltd. (1966) 60 ITR 405 (SC)
(ii) CIT v. Mahindra & Mahindra Ltd. (1973) 91 ITR 130 (Bom)
(iii) Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC)
(iv) Union Carbide India Ltd. v. CIT (1981) 130 ITR 351 (Cal)
(v) Triveni Engineering Works Ltd. v. CIT (1985) 156 ITR 202 (Del)
(vi) CIT v. Calcutta Electricity Supply Corporation Ltd. (1987) 166 ITR 797 (Cal)
(vii) EID Parry Ltd. v. CIT (1988) 174 ITR 11 (Mad)
(viii) Gujarat Narmada Valley Fertilisers Ltd. v. Dy. CIT (2001) 73 TTJ (Ahd) 787.
29. Regarding treating the profit as speculation profit, the learned counsel stated that Section 43(5) of the Act defines "speculative transaction" to mean a transaction in which a contract for the purpose of sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
30. The object of such transaction would be to purchase or sell commodities or shares at an agreed price at a future date with a view to earning from such transaction.
31. Foreign currency or any currency is neither commodity nor shares. The Sale of Goods Act, specifically excludes cash from the definition of goods. Besides, no person other than authorised dealers and money changers are allowed in India to trade in foreign currency, much less speculate. Section 8 of the Foreign Exchange Regulations Act, 1973, provides that except with prior general or special permission of the RBI, no person other than an authorised dealer shall purchase, acquire, borrow or sell foreign currency.
32. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares.
33. The definition of "speculative transaction", will not apply to a situation where the purpose of entering a forward contract was to hedge/safeguard against any loss on account of repayment of principal amount of the loan; cancellation of the contract was identical to that object and consequently any loss/gain arising from such cancellation is directly related to repayment of the loan.
34. Further, attention is also drawn to proviso (c) to Section 43(5) of the Act which excludes a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing, etc. to guard against loss which may arise in the ordinary course of his business to such member from the definition of speculative transaction.
35. On the other hand, learned Departmental Representative stated that the foreign currency was a commodity and not cash. The reliance was placed on the decisions Hindustan Trading Corporation v. CIT (1986) 160 ITR 15 (Guj), Regent Estates Ltd. v. CIT (1963) 48 ITR 162 (Cal) and CIT v. Bharat Heavy Electricals Ltd. (1999) 239 ITR 756 (Del), for the proposition that foreign exchange loss was a revenue loss. By the same analogy, foreign exchange gain was revenue profit.
36. We have considered the rival submissions. Admittedly, the foreign contract was entered in connection with safeguarding the fluctuation in foreign currency for purchase of plant and machinery. Admittedly, the loan was taken for the purchase of capital assets. Thus, any gain connected with the assets will result into capital receipt. The Hon'ble Supreme Court in the case of Sutlej Cotton Co. Ltd. (supra) at p. 13 of the report has observed as under :
"The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the" other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature."
37. Hon'ble Delhi High Court in the case of Triveni Engineering Works (supra) followed the same. The Ahmedabad Bench of the Tribunal in the case of Gujarat Narmada Valley Enterprises (supra) at p. 795 of the report has held as under :
"After considering the rival submissions we do not have any hesitation in holding that the receipt by way of gain on cancellation of foreign exchange contracts is a capital receipt which is not liable to tax in view of the clear pronouncement of the apex Court in (1993) 201 ITR 800 (SC) (supra), (1979) 116 ITR 1 (SC) (supra), CIT v. Tata Locomotive & Engg. Co. Ltd. (1966) 60 ITR 405 (SC) (supra) and CIT v. Canara Bank Ltd. (1967) 63 ITR 328 (SC). Since it is admitted by the assessee that the foreign exchange contracts were related to the acquisition of plant and machinery (as indicated in the alternative plea raised in the ground of appeal vide para 8 above), it is open to the AO to make necessary adjustments to the cost of acquisition/written down value (WDV) of the plant and machinery to which the said receipt pertains and to make consequential adjustments to the depreciation granted. However, before doing so, the AO should give the assessee a reasonable opportunity of being heard in this connection."
38. In view of the decisions mentioned above, we hold that the amount received by the assessee on account of forward contract in foreign currency was a capital receipt and not exigible to tax. Ground of appeal is accordingly allowed.
39. Ground No. 6 related to the short deduction under Section 80-I of the Act. While allowing deduction under Section 80-I of the Act, the AO reduced the following amounts from business profit:
Rs.
Insurance claim 11,43,751
Interest from supplier etc. 3,53,020
Miscellaneous receipts 4,25,648
Rent 6,000
_______________
19,28,419
_______________
40. On appeal, the CIT(A) confirmed the action of the AO against which the assessee is in appeal before us: The learned counsel stated that the detailed nature of each receipt has been given to AO, a copy of which is also placed at pp. 45 to 48 of the paper book. It was stated that admittedly the deduction under Section 80-I was allowable on the profit and gains derived from an industrial undertaking. He stated that the details of insurance claimed have been furnished at p. 46 of the paper book. All these incomes were directly derived from the industrial undertaking. Similarly, the details of interest earned by the assessee has been placed at p. 47 of the paper book. The entire interest earned by the assessee was in the nature of business income and should have been considered by the AO as business profit derived from the industrial undertaking. The learned counsel also stated that the details of miscellaneous expenses have been furnished at p. 48 of the paper book. It was stated that Bombay High Court in the case of CIT v. Ahmedabad Electricity Co. Ltd. (1993) 203 ITR 521 (Bom) held that the assessee was entitled to deduction under Section 80-I of the Act on hire charges of meters, transformers, etc., interest on call and fixed deposits, profits on exchange fluctuation.
41. Further reliance is also placed on following decisions:
(i) CIT v. Madias Motors Ltd.
(ii) Ashok Leyland Ltd. v. CIT (1997) 224 ITR 122 (SC)
(iii) Rollatainers Ltd. v. CIT in ITA No. 2979/Del/1993, (2000) 69 TTJ (Del) 8
(iv) CIT v. Universal Radiators (P) Ltd. (1981) 128 ITR 531 (Mad)
(v) CIT v. Rane (Madias) Ltd. (1999) 238 ITR 377 (Mad)
(vi) CIT v. Buckau Wolf New India Engg. Works Ltd. (1991) 187 ITR 464 (Bom)
(vii) Dy. CIT v. Transpower (P) Ltd. (2001) 72 TTJ (Gau) 867 : (2002) 80 ITD 1 (Gau)
42. However, regarding rent, the learned counsel stated that the same was not business profit as the same was not derived from the industrial undertaking.
43. We have considered the rival submissions. Deduction under Section 80-I of the Act was allowable on the profit and gains derived from an industrial undertaking. We have, therefore, examined the details of expenses under each head.
Insurance claims : Rs. 11,43,751 :
44. This claim is basically a part of repair and maintenance. In fact, it is reimbursement of repair and maintenance incurred by the assessee on behalf of insurance company. Since repair and maintenance incurred by the assessee on behalf of insurance company constitute part of business expenditure so insurance claim obviously constitutes income derived from industrial undertaking.
Interest received : Rs. 3,53,020 :
45. Rs. 73,463 is related to interest on deposit which has already been reduced for the purpose of computing deduction under Section 80-I. Balance interest of Rs. 2,79,557 is received from suppliers on early payment of raw material cost. It is also profit related to the business. This view also finds support from the decision in the case of English Electric Co. of India Ltd. v. CIT (1987) 168 ITR 513 (Mad).
Miscellaneous Receipts : Rs. 4,25,648:
46. Miscellaneous receipts are mainly on account of sundry balances of suppliers written off and discount received from various parties. Since this amount was earlier booked as expenses at the time of transaction, so this amount also constitutes part of business income.
47. We, therefore, hold that the CIT(A) was not justified in disallowing the deduction under Section 80-I of the Act on the insurance claim. Similarly, except the interest of Rs. 73,463, the balance interest was in the nature of business income and the AO is directed to allow deduction under Section 80-I of the Act on such income. Same is the case with the miscellaneous receipt. The AO is directed to treat such income as derived from industrial undertaking and allow deduction under Section 80-I of the Act accordingly.
48. As regards rent, the same cannot be treated as business profit and the CIT(A) has rightly disallowed the claim of deduction under Section 80-I of the Act on this account. This ground of appeal is partly allowed.
49. Ground No. 7 and 8 have not been pressed, hence the same are dismissed.
50. The appeal filed by the assessee is partly allowed.
51. Now, we will take up the appeal for asst. yr. 1994-95.
52. Ground No. 1 related to the enhanced depreciation with reference to the enhancement of cost due to exchange rates fluctuation.
53. We have dealt with this issue in ground Nos. 1 and 2 in the appeal for asst. yr. 1993-94, and in view of our findings therein, the claim of the assessee is allowed. This ground of appeal is allowed.
54. Ground No. 2 raised by the assessee is against CIT(A)'s orders confirming the disallowance of Rs. 6,79,856 and Rs. 7,87,063 representing technical fee expenses and design and drawing fee expenses.
55. We have adjudicated this issue in the asst. yr. 1993-94 and in view of our findings therein, the issue is set aside and restored back to the file of the AO to examine the issue afresh keeping in view the agreement entered into between the assessee-company and Showa Manufacturing Co, Ltd. This ground of appeal is allowed for statistical purposes.
56. Ground No. 3 relates to the deduction under Section 80-I of the Act.
57. We have adjudicated this issue in the asst. yr. 1993-94 and in view of our findings therein, the AO is directed to allow deduction under Section 80-I of the Act keeping in view our directions for asst. yr. 1993-94. This groups of appeal is partly allowed,
58. In the net result, both the appeals are allowed in part.