Interest on deposits made compulsorily to get BG is not income; Fee paid to RoC is capital expenditure and loss on account of exchange rate fluctuation is admissible deduction – ITAT

NEW DELHI, JAN 14, 2007 : SEVERAL issues are decided in these appeals.

Confirming the addition of Rs. 5,25,386/- being interest credited to pre-operative expenses (pending capitalization) , to the income of the appellant.

The Assessing Officer on perusal of schedule D to pre-operative expenses (pending allocation) attached to the balance sheet has found that a sum of Rs. 5,25,385.87 was credited to these pre-operative expenses on account of interest received. This amount was not offered for taxation by the assessee as its income, the assessee was, therefore, asked to show cause as to why this amount should not be treated as income in view of the of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (2002-TIOL-489-SC-IT-LB) . The assessee in its reply submitted that out of total interest amounting to Rs.5,25,385. 87, Rs.3,42,891. 14 had been received on account of fixed deposit kept with the bank as margin money against the letter of credit issued for import of capital goods. Balance Rs. 1,82,494.73 had been received on account of fixed deposit kept with the bank as margin money against bank guarantee, etc. the assessee further submitted that the purpose of keeping the deposits with the bank was to facilitate the import of capital goods and not to earn interest income. As per the assessee, as the production of the company had started after the close of financial year 1997-98, the said interest income of Rs.5,25,385. 37 had rightly been credited to pre-operative expenses. However, the said submissions of the assessee did not find tenable by the Assessing Officer. He observed that in view of the decision of the Hon’ble Supreme court in the case of M/s Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) the interest received by the assessee from deposits kept with the banks is the income of the assessee chargeable under the head “Income from Other sources” and cannot be adjusted against pre-operative expenditure as business of manufacturing had not commenced during F.Y. 1997-98. Accordingly, he added the sum of Rs.5,25,386 to the income of the assessee.

On appeal, the CIT(A) has confirmed the addition.

The Tribunal agreed with the assessee that this is not a case where the assessee had made deposit of surplus money lying idle with him in order to earn interest. This is a case where the amount of interest earned from fixed deposit was due to compulsorily keeping the funds with the bank as margin money against the letter of credit issued for import of capital goods and for bank guarantee. This issue is squarely covered by the decision in the case of Karnal Cooperative Sugar Mills Ltd. So the Tribunal held that Revenue was not justified to make the impugned addition and so deleted the same.

The next issue relates disallowing Preliminary expenses pertaining to fee paid by the appellant to Registrar of Companies for increase in the Authorised Capital and claimed at Rs.2,09,862.

An amount of Rs.20,98,620/ – was paid by the assessee to Registrar of Companies in connection with the increase in the authorized capital of the company and claimed deduction u/s 35D of the Act. The Assessing Officer negatived the claim of the assessee and the CIT(A) confirmed the disallowance.

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The tribunal observed that the issue is covered against the assessee by the decision of jurisdictional High Court in the case of CIT Vs Hindustan Insecticides Ltd wherein it was held that the expenditure on account of fees paid by the assessee to the Registrar of Companies for increasing the authorized share capital of the company was capital expenditure and so the appeal is rejected on this ground.

The next issue is the disallowance of Rs.2,59,02,013/ – being the loss on account of exchange fluctuations accounted for in the books of the appellant on accrual basis.

An amount of Rs.3,69,26,565/ – was found debited to the Profit & Loss account for the year ended 31.3.98 on account of foreign exchange fluctuations. The assessee was, therefore, asked to file the details of these expenses. The assessee filed the same on 16.01.2001. On perusal of the details, the Assessing Officer found that out of Rs.3,69,26,565/ -, Rs. 1,10,24,552/ – was on account of transactions, payments for which were made during the year ended 31.3.1998. The balance of Rs. 2,59,02,013/ – was provided on account of the accrual of liability as at the year end on account of exchange fluctuations. The assessee was, therefore, asked to show cause as to why the exchange fluctuations loss of Rs. 2,59,02,013/ – being on provisional basis should not be disallowed on the ground that it was a notional loss and not a real loss. The Assessing Officer, after having considered the reply of the assessee disallowed the claim of loss of Rs.2,59,02,013/ – made on account of exchange fluctuation. On appeal the CIT(A) has confirmed the same.

The Tribunal saw that this issue is covered in favour of the assessee by the decision of Special Bench of ITAT, Delhi in the case of ONGC vs. DCIT and also in the case of DCIT vs. MarutiUdyog Ltd. wherein it has been held that the additional liability incurred by the assessee on account of variation in foreign exchange rate was an allowable trading liability where borrowed fund was utilized to meet the needs of the working capital. In that view of the matter this ground of appeal of the assessee is allowed.

The next issue is disallowance of Rs.22,91,288/ – being the expenses claimed by the appellant as revenue and relating to its trading activities.

On perusal of the revised return, the Assessing Officer found that the assessee had claimed an amount of Rs. 1,71,82,699. 82 as expenses of revenue which had not been claimed in the original return filed by it. It was further observed that in the balance sheet as at 31.3.1998 these expenses were shown as part of pre-operative expenditure (pending capitalization) and not charged to Profit & Loss account for the year ended 31.3.1998. On being asked the assessee submitted that these expenses were wrongly shown as pre-operative expenses in the balance sheet as at 31.3.1998. The mistake was subsequently detected while preparing the balance sheet as at 31.3.1999. These expenses were then charged to Profit & Loss Account for the year ended 31.3.1999 and not capitalised. The assessee submitted that when this mistake was found the return for the assessment year under consideration was revised and the expenses were claimed. Return of income was revised subsequent to the signing of balance sheet as at 31.3.1999. The assessee was, therefore, asked to submit details of all these expenses and produce evidence to substantiate that these are revenue expenses. The Assessing Officer vide order sheet entry dated 15.3.2001 was specifically asked to bring a certificate from its Statutory Auditors that all these expenses were attributable to trading activities carried on by the company. The assessee vide its letter dated 23.3.2001 had filed a certificate from S.R. Batliboi & Associates, its Statutory Auditors confirming that these indirect overheads incurred by the assessee were attributable to the trading activities of the assessee and thus were charged to profit & loss account for the year ended 31.3.1999 and not capitalised.

The Assessing Officer on perusal of the details of these expenses filed by the assessee had found that the expenses were primarily incurred on the salary of Korean employees and the staff attached to them, their rent their traveling and conveyance, the staff welfare expenses incurred on them and other related administrative expenses. The Assessing Officer, after having considered the submissions made by the assessee and documents produced was of the opinion that the involvement of GM Production in installation of manufacturing facilities could not be ruled out. In view thereof, he disallowed half of the expenses attributable to GM, Production and the staff i.e. 50% of Rs.45,82,576/ – as expenses relating to setting up of manufacturing facilities.

The Tribunal observed, “the Assessing Officer appears to have merely presumed the involvement of GM Production in manufacturing facilities in assessee’s factory. The said presumption is not based on any material on record. Thus, the action of the Assessing Officer is merely based on surmises and conjectures. In the case of Vinay Kumar Modi, the Delhi High Court has held that addition made on mere conjectures and surmises are not sustainable. Therefore this addition is deleted.

Addition of excise duty to total turnover for computing the deduction under Section 80 HHC:

The Tribunal noted that this issue squarely covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of CIT Vs Lakshmi Machine Works (2007-TIOL-72- SC-IT) wherein the Apex Court had observed,

“Section 80HHC of the Income-tax Act, 1961, is a beneficial section: it was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. Just as commission received by the assessee is relatable to export and yet it cannot form part of “turnover” for the purposes of section 80HHC, excise duty and sales tax also cannot form part of “turnover”. Just as interest, commission, etc., do not emanate from the “turnover” so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded. Commission, interest, rent, etc. do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the “total turnover”. If so, excise duty and sales tax also cannot form part of the “total turnover” under section 80HHC(3).

One cannot interpret the words “total turnover” with reference to the, definition of the word “turnover” in other laws like the central sales tax or as defined in accounting principles. Excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government.

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