Income Tax Appellate Tribunal - Hyderabad
M/S Bhagyanagar India Ltd, ... vs Assessee on 20 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA Nos. 99 & 1435/HYD/2012
Assessment Years: 2008-09 & 2009-10
M/s Bhagyanagar India Ltd., ... Appellant
Secunderabad.
(PAN - AAACB8963C)
Vs.
Dy. Commissioner of Income-tax, ...Respondent
Circle - 1(3), Hyderabad.
Appellant by : Shri K.C. Devadas
Respondent by : Smt. Amisha S. Gupt
Date of Hearing : 20/03/2013
Date of Pronouncement : 10/05/2013
ORDER
PER ASHA VIJAYARAGHAVAN, J.M.:
Both these appeals preferred by the assessee are directed against separate orders of CIT(A)-II, Hyderabad for the assessment years 2008-09 and 2009-10. Since common issues are involved in these appeals, they were clubbed and heard together, therefore, a common order is passed for the sake of convenience.
2ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
ITA NO. 99/Hyd/2012 for AY 2008-09
2. Ground No. 1 is general in nature and therefore no adjudication is required by us.
3. Ground No. 2 is regarding disallowance of Rs.63,32,210/- being amortization of expenses u/s.35D in relation to expenditure incurred on issue of FCCB bonds. The assessee had claimed Rs.63,32,210/- under Section 35D as amortization of expenditure on issue of FCCB Bonds. The assessing officer disallowed on the following grounds:-
a) FCCB is not an issue for public subscription. Only 150 FCCBs were issued by the assessee to overseas institutional investors. Hence, the requirement laid down in clause (c) of Sub-section (2) of Section 35D is not met. Without prejudice to this :
b) Whether the expenses of Rs.3,16,63,058/- incurred for issue of FCCBs and adjusted from share premium account during F.Y 06-07 are incurred for the items specified in 35D(2)(c) is not known.
c) The Capital is not raised against setting up or expansion of any specific undertaking,
d) The investment in infrastructure or amounts lying in bank cannot be treated as expenditure met on any project.
e) As cost of the projects is not specified, it is difficult to determine the cap specified in Section 35D(3).3
ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
4. The assessee has claimed that in the alternative, the entire expenditure should be allowed under Section 37, if the claim under Section 35D is not allowed. The AO rejected both the contentions and disallowed the sum of Rs.63,32,210/- being 1/5 th of the total expenditure of Rs.3,16,63,058/- incurred by the Assessee on issue of FCCB claimed by the assessee.
5. Aggrieved, the assessee has come up on appeal before CIT(A). Before CIT(A), the assessee submitted that "offering Circular" known as prospectus in India clearly specified that the FCCB was raised to fund the cost of expansion. Reimbursement of expenses incurred for wind power project and modernization of the company's facilities. It is also observed that capital is not raised against setting up or expansion of any specific undertaking, investment in infrastructure or amounts lying in bank cannot be treated as expenditure met on any project. As the cost of the project is not specified, it is difficult to determine the cap specified in Section 35D(3). The CIT(A) confirmed the order of the AO holding that conditions specified in 35D are not satisfied in the appellant's case and hence confirmed the disallowance of claim under Section 35D.
6. As regards the claim under Section 37(1) the CIT(A) held that it is open to the assessee to claim the expenditure in the year in which it was incurred but it was a conscious act on the part of the assessee not to claim such expenditure in the year 4 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
in which it was incurred. The expenditure was not debited to the profit and loss account but met out of the share premium account. It is a fact that expenditure was not debited to the profit and loss account and therefore cannot be allowed under Section 37(1). The CIT(A) confirmed the order of the AO and disallowed the claim of deduction of Rs.6332210/-.
7. Aggrieved the assessee is on appeal before us. Before us the assessee furnished the details of the expenditure incurred in relation to the FCCB bonds (Page 8 of the Paper Book) we find that the entire expenditure was incurred in the previous year relevant to the assessment year in appeal viz., 2008-09. the assessee had given particulars of the fixed assets acquired for various projects and computed permissible limit of 2.5% of the total capital employed at 316.93 lakhs. It is therefore the contention of the assessee that total expenditure incurred at Rs.316.93 lakhs was well within the limit prescribed under Section 35D and therefore should be allowed to be amortized under that Section . The assessee had claimed 1/5 th of the expenditure under the impression that they will be entitled to deduction u/s.35D.
8. We have heard both the parties and perused the record. There appears to be basic doubt in the mind of the AO whether FCCB was in fact obtained by the assessee in respect of expenditure on expansion of any specific undertaking. Prospectus on issue on FCCB bond has not been provided to us and hence we are not in a position to decide whether the 5 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
Bonds were issued for funding expansion of any undertaking as contemplated under section 35D.
9. However, we find that alternate claim of the assessee regarding the claim of entire expenditure under Section 37 merits consideration. If the expenditure has been incurred for the purpose of business of the assessee and if it is not in the nature of capital expenditure or personal expenditure, the same is allowable under Section 37. Merely because in the accounts the assessee has set off all these expenditure against the share premium or assessee has not debited any amount in its profit and loss will not prevent the assessee to claim expenditure which is otherwise allowable under the Incometax Act.
10. We find that even if Section 35D is applicable to the instant case, expenditure on issue of debentures which is otherwise allowable u/s 37, will be allowable in full and the expenditure need not be amortised. The Calcutta High Court in CIT Vs East India Hotel reported in 252 ITR 860 and the Delhi High Court in the case of CIT Vs Thirani Chemicals Ltd reported in 290 ITR 196 (Del) have held that expenditure on issue of bonds allowable under Section 37 by applying the ratio of the Supreme Court in the case of India Cements Ltd reported in 60 ITR 52, even in cases where debentures were issued for funding expansion of an undertaking and hence the expenditure attracted provisions of sec 35D. In these decisions they have referred to clarification issued by the Board in its Circular No.56 dated 19.03.1971 wherein they 6 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
have clarified that provisions for amortization is not intended to supersede any other provisions of the Income tax law well under which such expenditure is admissible as a deduction or a deduction is allowable by the virtue of the decision of the Supreme Court in the case of India Cements Limited. Expenditure on issue of debentures and convertible bonds have been held to be revenue expenditure in the following cases.
1. CIT Vs Secure Meters - 321 ITR 611 (Raj) (Confirmed in CIT Vs M/s Secure Meters Ltd 2009-TIOL- 93-SC-IT)
2. ITC Hotels Ltd., 334 ITR 109 Ker.
3. South India Corporation (Agencies),290 ITR 217 Mad.
11. Respectfully following the said decisions, we accept the alternate plea of the assessee that the entire expenditure of Rs.316.93 lakhs incurred in issue on debenture is an allowable deduction. We set aside the matter to the file of the AO for the limited purpose to verify whether the expenditure incurred by the assessee was relatable to the issue of debentures and the expenditure accrued this year. If it is so, the expenditure is to be allowed u/s 37 of the IT Act. This issue is considered as allowed for statistical purposes.
12. Ground No. 3 is regarding disallowance of loss arising on account of foreign exchange fluctuation of Rs.10,46,176. The CIT(A) has found it as a fact that exchange fluctuation has arisen on account of redemption of funds kept abroad in fixed deposits. As a result of the same the liability on the loans got enhanced, by Rs.10,46,176/- on account of exchange fluctuation. The CIT(A) has also observed factually that 7 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
fluctuation has been arisen in connection with loans utilised for the purpose of investment in fixed assets and hence loss arising on account of foreign exchange fluctuation is a capital expenditure.
13. Aggrieved the assessee is on appeal before us.
14. We have heard the parties and perused the record. Profit and loss arising on exchange fluctuation in respect of loan taken will constitute capital or revenue expenditure depending on the purpose for which the loan has been utilized. As held by the Supreme Court in the case of ONGC Vs CIT reported in 322 ITR 180 has held that loss on exchange fluctuation in respect of loans acquired for revenue purpose is an allowable deduction.
15. However if the loans are utilized for acquiring capital assets, the loss will be capital expenditure, subject to application under section 43A in respect of imported assets in which case the value of the asset will get enhanced by the increase in loan liability on account of exchange fluctuation. As this matter has not been looked into, we remit the matter back to the file of AO to verify the purpose for which these loans were utilized and accordingly treat the loss on foreign exchange as capital or revenue as the case may in line with the decisions of the Apex Court in the case of ONGC Limited Vs
- 322 ITR 180 and Woodward Governor India Limited reported in 312 ITR 254. Therefore this issue of the Assessee's appeal is treated as allowed for statistical purpose.
8ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
16. Ground No. 4 is regarding exclusion of Annual maintenance Charges of Rs.20,28,125/ received by the Assessee, in computing relief under Section 80IB. The assessee had supplied CDMA Phones to BSNL and the annual maintenance charges is part and parcel of the purchase order entered into by the BSNL.
17. It is the contention of the assessee that Annual maintenance Charges are inextricably connected with the manufacture and sale of CMDA Phones and should be considered as part of the income entitled to relief under Section 80IB. The AO and the CIT(A) has held that AMC is a separate stream of income and is not connected to the main activities of manufacture and sale of goods by the assessee. This service is rendered after the sale of goods has been completed. The AMC services can be provided independent of the sales also. Hence providing Annual maintenance Services cannot be considered as connected in the first degree with the activity of manufacture and sale of goods. Section 80IB is available only for profit derived from business of manufacture of goods and therefore it is not applicable to income derived from any ancillary activities/ services.
18. In the circumstances we are of the opinion that AO and CIT(A) have rightly concluded that AMC charges of Rs.20,28,125 should be excluded for the purpose of computing 9 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
relief under Section 80IB.The Appeal of the Assessee on this issue is dismissed.
19. Ground No. 5 is regarding disallowance under Section 14A. In the assessment year under appeal Rule 8D is applicable. However, the AO has himself accepted that there is no direct interest or other expenditure incurred for earning the exempted income. He has only disallowed indirect interest expenditure of Rs. 27,23,654/- in proportion of investment to total assets and 0.5% of administrative expenses.
20. As regards indirect interest expenditure, if it can be proved that the entire borrowals, on which interest expenditure has been incurred during the year, has been applied for the purpose of the business, then no part of the borrowals can be taken to be indirectly applied for investments. Therefore if the entirety of borrowals can be established to have been utilised for the purpose of business and therefore could not have been used for the purpose of investment, then there can be disallowance even in respect of indirect interest expenditure. This point has not been examined by the lower authorities.
21. We therefore set aside this issue to the files of the AO to rework the disallowance under Section 14A after examining whether the borrowals on which interest payable in the current year, has been utilized only for the purpose of business or could any part of it have been utilized for fresh investments during the year. Thereafter the AO may rework the disallowance of indirect expenditure interest that may have 10 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
been utilised for making investments which earns interest free income in accordance with law after giving reasonable opportunity to the Assessee. In the circumstances this ground of appeal regarding disallowance u/s.14A is treated as allowed for statistical purposes.
22. In the result, the Appeal of the Assessee being ITA No. 99/Hyd/2012 is Partly allowed for statistical purposes.
ITA NO. 1435/Hyd/2012 for AY 2009-10
23. Ground No. 1 is general in nature.
24. Ground No. 2 regarding sustaining addition of Rs. 63,32,610/- being amortization of expenses u/s 35DF of the IT Act, 1961 in relation to expenditure incurred of FCCB bonds, has not been pressed by the learned counsel at the time of hearing before us, therefore, this ground is dismissed as not pressed.
25. Ground no. 3 is directed against the action of the CIT(A) in confirming the disallowance u/s 14A of the Act at Rs. 39,42,577/-.
26. Similar issue has been decided by us in ITA No. 99/Hyd/2012 vide paras 19 to 21 wherein we have set aside the issue to the file of the Assessing Officer for fresh consideration. Respectfully following the conclusions drawn 11 ITA NOS. 99 & 1435/Hyd/2012 M/s Bhagyanagar India Ltd.
therein, we remit this issue also to the file of the Assessing Officer with identical directions.
27. In the result, this appeal being ITA No. 1435/Hyd/2012 is partly allowed for statistical purposes.
28. To sum up both the appeals under consideration are partly allowed for statistical purposes.
Pronounced in the open court on 10/05/2013.
Sd/- Sd/-
(CHANDRA POOJARI) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 10 th May, 2013.
kv
Copy to:-
1) M/s Bhagyanagar India Ltd., C/o M/s Sekhar & Co.,
133/4, R.P. Road, Secunderabad.
2) DCIT, Circle - 1(3), Aayakar Bhavan, Basheerbagh
Hyderabad.
3) The CIT (A)-II, Hyderabad
4) The CIT-I, Hyderabad
5) The Departmental Representative, I.T.A.T.,
Hyderabad.
Descri ption Date I ntls
S.No
1. Draft dictated on Sr. P.S./P.S
2. Draft place d bef ore author Sr. P.S/P S
Draft propose d & placed bef ore the JM/AM
3 second M em ber
4 Draft discusse d/appr ove d by secon d JM/AM
M em ber
5 Appr oved Draft comes to the Sr. P.S./P.S
Sr.P.S./PS
12
ITA NOS. 99 & 1435/Hyd/2012
M/s Bhagyanagar India Ltd.
6. Kept for pronounce ment on Sr. P.S./P.S.
7. Fi le sent to the Bench Cle rk Sr. P.S./P.S
8 Date on w hic h file goes to the Head
Cler k
9 Date of Dis patch of order