Case Law Details
Brief of the Case
Calcutta High Court held In the case of CIT vs. M/s Britannia Industries Ltd. that bank charges claimed by the assessee are not relatable to the fixed assets. Bank charges are payable in consideration of the risk undertaken by the bank. Therefore, it is in the nature of a fee for the guarantee provided by the banker. So, the consideration paid by the assessee to the authorized dealer of foreign exchange, in order to obtain protection from fluctuation of foreign exchange rates is revenue expenditure.
Facts of the Case
In this case, the assessee company took a foreign currency loan of US$ 10 million in the year 1995. The loan was utilized for incurring capital expenditure for acquisition of plant and machinery. The loan was to be repaid in two installments with interest. In order to ensure availability of foreign currency at a pre-determined rate, the assessee enters into a forward contract to the bank to obtain the foreign currency on a specific date at a specified rate. For obtaining this facility sum of Rs.1, 78, 08,000/- was paid to the State Bank of India and has been debited as bank charges in the accounts of the assessee. The Commissioner has disallowed sum of Rs.1,78,08,000/- being bank charges paid by the assessee company in connection with repayment of a loan of US $ 10 million.
Contention of the Assessee
The ld counsel of the assessee relied on the judgment of the Andhra Pradesh High court in the case of CIT v. AkkamambaTextiles Ltd. reported in (1979) 117 ITR 294 wherein it was held that guarantee commission paid by the assessee was a revenue expenditure.
Contention of the Revenue
The ld counsel of the revenue submitted that the expenditure should be added to the cost of acquisition of the capital assets under section 43A. He in support of his submission relied on Explanation 3 to section 43A and a judgement of the Apex Court in the case of Assistant Commissioner of Income Tax v. Elecon Engineering Co. Ltd. reported in (2010) 322 ITR 20 (SC).
He also submitted that the bank charges which are sought to be treated as revenue expenditure is not on account of a guarantee commission. Therefore, the judgement of Andhra Pradesh High Court which is relied upon by the assessee has no manner of application.
The followings questions presented at the time of appeal:
- Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal has erred in allowing expenditure of Rs.46,26,552/- on development of machineries as revenue expenditure though the machineries developed were neither used for the business of the assessee nor sold ?
- Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal has erred in failing to adjudicate upon the question of allowance of provision of Rs.21,70,93,280/- for advertisement under the erroneous impression that it was covered by the remand report submitted by the Assessing Officer ?
- Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal has erred in allowing bank charges of Rs.1,78,08,000/- paid to guard against fluctuations in the foreign exchange rate for payment of loan taken for import of machineries as revenue expenditure contrary to the specific provisions of Explanation 3 to section 43A of the Income Tax Act, 1961 ?
Held by CIT (A)
CIT (A) held that expenses were allowable under section 37 as the project was abandoned and the cost of such abandoned project was an allowable revenue expense as per decision of the B. Nagireddy v. CIT reported in 194 ITR 451. Also the sales of spare parts were not possible in the market since the assessee company did not want the technology information to its competitors. It is submitted by the assessee that separate charges for the value of these parts has not been made in the accounts and therefore, the original expense is allowable in full as per decision cited above.
Held by ITAT
The ITAT upheld the order passed by CIT (A) in respect of question no. 1. Question no. 2 was remanded back to AO.
Held by High Court
The question no. 1 which related to expenditure incurred on the development of machineries basically is a question of fact and when ITAT has concurred with the views expressed by the CIT (A), we do not want to interfere with the said view as the view taken by them is a possible view. Therefore, the question is answered in the negative and against the revenue.
The second question which is related to provision for advertisement, itself suggests that it is directed against that part of the order by which ITAT remanded the matter to the assessing officer. Therefore, the question need not be answered. The assessing officer is directed to expedite the process considering that the matter has already been delayed.
In respect of third question, we are of the opinion that Explanation 3 relied on by ld counsel of the revenue, explains only the addition or deduction to the actual cost of the asset. The Explanation does not touch the point as regards the fee payable or the consideration payable to an authorized dealer under Section 2 of the Foreign Exchange Regulation Act, 1947. Bank charges claimed by the assessee are not relatable to the fixed assets. Bank charges are payable in consideration of the risk undertaken by the bank
Therefore, it is in the nature of a fee for the guarantee provided by the banker which was also confirmed by Andhra Pradesh High Court in the case of CIT v. Akkamamba Textiles Ltd. reported in (1979) 117 ITR 294 that guarantee commission paid by the assessee was a revenue expenditure. We are of the opinion that the consideration paid by the assessee to the authorized dealer of foreign exchange in order to obtain protection from fluctuation of foreign exchange rates is a revenue expenditure and the view taken by the learned Tribunal is correct. Therefore, the third question is answered in the negative and against the revenue.Accordingly, appeal dismissed.
