[Citation -2005-LL-0722-6]

Citation 2005-LL-0722-6
Court ITAT
Relevant Act Income-tax
Date of Order 22/07/2005
Assessment Year 1992-93
Judgment View Judgment
Keyword Tags mercantile system of accounting • approved superannuation fund • deferred revenue expenditure • public sector undertaking • recognised provident fund • entertainment expenditure • rate of foreign exchange • disallowance of interest • approved gratuity fund • ascertained liability • additional liability • income from business • method of accounting • competent authority • gross total income • accounting policy • tax-free interest • tax audit report • foreign currency • welfare expenses • municipal limits • power generation
Bot Summary: The learned counsel for the assessee has argued only the disallowance of the provision of Rs. 211.24 lakhs. The contention of the learned counsel for the assessee before us is that factually no expenditure had been incurred by the assessee for earning the dividend income or the tax-free interest income. In executing the contract, the funds of the assessee to the extent of Rs. 24 lakhs became blocked. The assessee s claim is allowed only to the extent of Rs. 126.06 crores out of Rs. 145.85 crores. Expenses Rs. 2 lakhs Rs. 33 lakhs The contention before us is that the above amounts were incorporated in the accounts as per the directions of the CAG and the same had to be followed by the assessee and there was little choice in the matter. Interest: The assessee has received interest as under : From various banks for short-term and time Rs. deposit 5,74,06,000 Rs. From others 4,04,88,000 Rs. Under s. 244A of the IT Act 1,99,54,000 Rs. From various other sources 13,33,21,000 In the case ofCIT vs. Kantilal Chhotalal 163 CTR 476 : 246 ITR 439, the Bombay High Court held that receipts which do not form part of sale proceeds cannot come within the ambit of total turnover, a fte r examining the object for which the amendment to the section was introduced. The learned counsel for the assessee frankly stated that the CIT(A) has followed the order of the Tribunal in the assessee s own case and since his decision is in conformity with the judgment of the Hon ble Supreme Court in the case ofMadras Industrial Investment Corporation Ltd. vs. CIT 139 CTR 555 : 225 ITR 802, no further relief is due.

R.V. EASWAR, VICE PRESIDENT This appeal by assessee relates to asst. yr. 1992-93 for which previous year ended on 31st March, 1992. 2 . assessee is public sector undertaking engaged in manufacture of power generating equipments and other heavy industrial items. assessee-company carries out projects for various State Governments and other public sector undertakings and is also involved in setting up of power plants in India as well as abroad. 3 . assessee has obtained permission of COD to pursue appeal and copy of approval of COD has been placed on record vide order-sheet entry dt. 28th Aug., 2002. 4. We shall proceed to dispose of appeal ground-wise. first ground which relates to disallowance of provision for non- moving stock, is in two parts. first part relates to provision of Rs. 50.66 crores which is total amount claimed, and second part relates to provision of Rs. 211.24 lakhs. Both provisions relate to non-moving stock. learned counsel for assessee has argued only disallowance of provision of Rs. 211.24 lakhs. Our attention was drawn to page Nos. 3 and 4 of paper book which relates to this provision. Page No. 3 is extract from Sch. 18 to balance sheet as on 31st March, 1992. total provision made in respect of non-moving stock with reference to various centres is shown therein. Page No. 4 contains brief note regarding procedure followed by assessee for charging of non-moving stores. plea of assessee is that provision is made after following well established procedure. It would be better to reproduce note which is as below : "Procedure for charging off surplus stores (non-moving stores) non-moving material refers to material for which no issue has taken place during preceding financial year. For purpose of taking action to liquidate non-moving materials, material for which there has been no issue in last two financial years is taken as non-moving material. Material Planning Department is circulating list of non-moving materials to all product managers, sister units of BHEL and also other public sector units. task force committee (product-wise) is formed every year to liquidate non-moving inventory. task force committee goes through list of non-moving materials and tries to utilise materials as far as possible. If any of material is not usable, then it is checked whether there is any usage in immediate future. task force committee also identifies materials which are surplus for which there is no requirement and recommends for disposing of items. B s e d on above recommendation, approval of competent authority is obtained to charge off items after which materials are transferred to disposal ward and its value is charged off in books." 5 . learned counsel for assessee submitted that effect of provision is only that closing stock is being valued on basis of principle "cost or market price, whichever is lower" and since this method has been followed for several years in past and on basis of established procedure, same has to be accepted. It is also pointed out that assessee is public sector undertaking and its accounts are subject to scrutiny by C&AG and, therefore, thebona fidesof procedure cannot be doubted. It is argued that in these circumstances, claim should be allowed. 6. On behalf of Department, contention advanced is that claim is only provision based on internal procedure and in absence of any evidence for realisable value of stock, it cannot be acted upon. Reliance is also placed on orders of IT authorities. 7. On careful consideration of matter, we are of view that having regard to procedure followed by assessee, genuineness or thebona fidesof claim cannot be doubted. note extracted above indicates that only when all efforts to dispose of material fails, committee recommends write off in books of account. No defect in procedure, adopted by assessee has been pointed out. As rightly pointed out on behalf of assessee, accounts are subject to scrutiny not only by statutory auditors but also by C&AG. In these circumstances, thebona fidesof procedure or genuineness of claim cannot be doubted. Even on merits, when stock of materials is actually found to be dead stock from which nothing can be realised because of total absence of any demand therefor, its value falls drastically. This has been taken note of by committee formed for recommending whether any item represents dead stock. We are, therefore, of view that assessee s claim requires to be accepted. Accordingly, we direct AO to allow deduction in respect of provision of Rs. 211.24 lakhs. disallowance of balance of claim is upheld and ground is partly allowed. 8 . Ground No. 2 relates to disallowance of entertainment expenditure of Rs. 51.88 lakhs. details of claim are given at p. 6 of paper book. exact amount is Rs. 51,87,674. IT authorities have allowed 10 per cent of entertainment expenses as attributable to staff. plea before us is this is too low. We find force in plea. We accordingly direct AO to allow 30 per cent of entertainment expenditure as relatable to staff. ground is accordingly allowed. 9. Ground No. 3 is directed against disallowance of interest paid to IT Department under provisions of IT Act. This does not constitute lawful deduction in computing business income of assessee. Accordingly, claim is rejected and ground is dismissed. 10. Ground No. 4 is that CIT(A) erred in not considering Rs. 43.66 lakhs being opening balance of scrap value for allowing same in this year, as it was added and disallowed in asst. yr. 1991-92. learned counsel for assessee stated before us that based on order of Tribunal for asst. yr. 1991-92, CIT(A) has given relief as prayed for and, therefore, nothing survives for decision by us. Accordingly, we dismiss ground. 11. Ground No. 5 relates to disallowance of Rs. 14.87 lakhs being expenditure on clubs maintained by company for employees. It is contended that expenditure is in nature of staff welfare expenses and it is not in nature of expenditure for subscription to social clubs or other recreation clubs. Our attention is drawn to pp. 27 to 34 of paper book. We find therefrom that assessee has townships at various manufacturing units across country. Since factories are situated outside municipal limits of town or city, townships are also outside city limits. Large number of employees of assessee live in these townships. assessee provides recreational facilities to employees living in townships as welfare measure. This is essential for improving work efficiency and cordial relationship with them. townships have facilities such as schools, hospitals, shopping centres and recreational clubs. These institutions are managed by independent boards or committees of representatives of employees. What assessee does is to reimburse net expenses of clubs and recreation centres after taking note of recovery from employees. This is debited under head staff welfare expenses . 12. In tax audit report prepared under s. 44AB, payment has been described as "payments to clubs". This remark does not bring out difference between expenditure in question and subscription or contribution paid to outside clubs. membership fees paid to outside clubs are different in character from character of expenditure in question. Therefore, by way of clarification in note to tax audit report, auditors have clarified that expenditure relates to clubs which are run and maintained for and by employees of assessee-company. In note, it has also been stated that company has been giving complete break-up of expenditure to IT authorities. This is supported by letter dt. 4th March, 1996 written by assessee to CIT(A). nature of activities carried on in clubs at different centres such as Bhopal, Bangalore, Trichy, Hardwar, etc., has been given in this letter. At p. 32, break-up of expenditure of Rs. 14,87,000 has been given from which it is seen that major expenditure relates to Bhopal (Rs. 14,50,000). break-up for expenditure of Bhopal at p. 33 of paper book shows salient features of expenditure in addition to what has been stated above. They are : (i) Payment has been made to sport clubs as matching grant based on subscription plus electricity charges. subscription plus electricity charges. (ii) Payment to others are made on basis of recommendation of heads of Departments. (iii) These institutions are managed through separate managing committees comprising of elected members. Sometimes, nominees of company also find place in committees but only to supervise activities and utilisation of grants. clubs are maintained only for use of employees and their dependants and only for sports and games. In light of foregoing discussion, we have no doubt in holding expenditure in question is allowable under s. 37(1) of IT Act. It seems to us that expenditure has been rightly characterised as staff welfare expenses. Promoting sports and games in which employees of assessee-company exclusively participate is certainly in interests of assessee s business. It keeps morale of employees high. That in turn helps in smooth functioning of company and also improves efficiency of employees. All this is ultimately for benefit of assessee-company. It should also be kept in mind that such facilities are needed to be provided by company also in view of fact that employees live in townships which are away from main town/cities and if employees are to engage themselves in such recreational activities, they may have to incur considerable expenditure and trouble in addition to time. All this is avoided. expenditure in question, in our opinion, falls to be considered in light of judgment of Supreme Court inCIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC). Accordingly, we direct AO to allow expenditure as deduction. ground is allowed. 1 3 . Ground Nos. 6 and 7 are directed against decision of IT authorities to apportion part of expenditure incurred by assessee against dividend income and thereby reducing deduction available under s. 80M of Act and their action in apportioning part of expenditure against tax-free interest income from bonds. expenditure apportioned is Rs. 1 lakh and 2 lakhs, respectively. contention of learned counsel for assessee before us is that factually no expenditure had been incurred by assessee for earning dividend income or tax-free interest income. It is submitted that all that assessee did was to send dividend and interest warrants to bank for encashing. On other hand, learned CIT, Departmental Representative strongly supported orders of Departmental authorities and cited judgment of Hon ble Supreme Court in case ofCIT vs. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC)and submitted that ratio of judgment would apply. After hearing both sides and after going through orders of Departmental authorities and in light of judgment cited above, we are of view that they were justified in estimating some expenditure as having been incurred by assessee in earning dividend and tax-free interest. amount apportioned is also reasonable. We accordingly, confirm their action and dismiss ground. 14. Ground No. 8 is directed against disallowance of Rs. 4,76,57,787 by invoking s. 40A(9) of Act. amount represents payment made by assessee to Central Schools (Kendriya Vidyala), BHEL Schools and other educational institutions. assessee contended before IT authorities that aforesaid section is not applicable to payments, which according to it were allowable under s. 37(1) of IT Act. contention did not find favour with IT authorities and hence, present ground. 15. learned counsel for assessee drew our attention to p. 45 of paper book and submitted that assessee s factories are located at considerable distance from towns/cities. It, therefore, becomes necessary for assessee to put-up townships where employees reside. Because of distance children of employees find it difficult to go to cities or towns for studies. Therefore, assessee as welfare measure puts up schools for purpose of children of employees, though, some outside children are also admitted. For example, BHEL township is located 33 kms. away from Hyderabad City, 20 kms. from Jhansi city, 13 kms. from Thiruchirapalli, etc. detailed write-up on this point is placed at pp. 37 to 41 of paper book. break-up of expenditure as given in p. 50 of paper book is as below : Trichy Arivalayam 1,15,873 H.E. Education Society Bhopal 1,54,08,000 Bhopal 1,54,08,000 Rashtriya Bhasha Patrachar Samiti BHEL Shiksha Mandal 5,000 Grant of BHEL Education Jhansi 12,50,000 Society HEEP, Central School 77,01,000 Hardwar Schools run by BHEL 2,03,07,000 Education Management Board Delhi Public School 5,00,000 ARP Staff Club 914 4,76,57,787 16. contention before us is that s. 40A(9) is not attracted at all and that expenditure is allowable under s. 37(1). It is clarified that assessee does not contribute to educational institutions, but meets expenditure incurred in running them, thus subsiding education cost of children of employees. It is contended further that s. 40A(9) was introduced by Finance Act, 1 98 4, with retrospective effect from 1st April, 1 98and that it was introduced to curb undesirable practice of corporate bodies of making large contributions to so-called welfare funds and at same time keeping utilisation of welfare funds discretionary and subject to no discipline. Our attention was drawn to speech of Hon ble Finance Minister reported in(1 98 4) 39 CTR (TLT) 35 : (1 98 4) 146 ITR (St) 65at p. 68, wherein there is reference to object for which section was introduced. provisions of Finance Act, 1 98 4, were explained by Board s Circular No. 387 [(1 98 4) 43 CTR (TLT) 3 : (1 98 5) 152 ITR (St) 1]. Paras 16.1 and 16.2 of circular are as under : "16.1 Sums contributed by employer to registered provident fund, approved superannuation fund and approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on welfare of employees is also allowed as deduction. Instances have come to notice where certain employers have created irrecoverable trusts, ostensibly for welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to trustees to utilise trust property in such manner as they may think fit for benefit of employees without any scheme or safeguards for proper disbursement of these funds. Investment of trust funds has also been left to complete discretion of trustees. Such trusts are, therefore, intended to be used as vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to employer in form of deposits or investment in shares, etc. 16.2 With view to discouraging creation of such trusts, funds, companies, AOP, societies, etc., Finance Act has provided that no deduction shall be allowed in computation of taxable profits in respect of any sums paid by assessee as employer towards setting up or formation of or as contribution to any fund, trust, company, AOP, BOI, or society or any other institution for any purpose, except where such sum is paid or contributed (within limits laid down under relevant provisions) to recognised provident fund or approved gratuity fund or approved superannuation fund or for purposes of land to extent required by or under any other law." 17. Our attention was also drawn to judgment of Kerala High Court in case ofCIT vs. Travancore Cochin Chemicals Ltd. (2000) 161 CTR (Ker) 124 : (2000) 240 ITR 284 (Ker)and that of Bombay High Court in case ofCIT vs. Bharat Petroleum Corporation Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252 ITR 43 (Bom). It was submitted that in judgment of Kerala High Court, facts are identical and their Lordships have referred to speech of Hon ble Finance Minister and held that s. 40A(9) of Act does not apply to payments made to school in which children of employees are studying. Such payments have been considered as amounts spent for welfare of employees and were held deductible under s. 37(1) of IT Act. Referring to judgment of Hon ble Andhra Pradesh High Court in case ofRaasi Cements Ltd. vs. CIT (2005) 1 98 CTR (AP) 179 : (2005) 275 ITR 579 (AP), decision which supports Department, learned counsel for assessee submitted that in this case, fund was maintained by employer himself submitted that in this case, fund was maintained by employer himself and, therefore, there was discretion in him to use fund as he pleased and further that it was not case of contribution made directly to school as staff welfare measure. He submitted that in any case, where two views have been taken by different Courts, view in favour of assessee should be followed, in absence of any judgment of jurisdictional High Court and for this submission cited judgment of Supreme Court in case ofCIT vs. Kulu Valley Transport Co. (P) Ltd. (1970) 77 ITR 518 (SC)and judgment inCIT vs. Podar Cements (P) Ltd., Etc. (1997) 141 CTR (SC) 67 : (1997) 226 ITR 625 (SC). 1 8 . On other hand, learned CIT, Departmental Representative submitted that language of section is clear and if that is so, it is not permissible to look into object of section. If assessee s case is caught within plain language of section, disallowance has to be sustained without looking into extraneous considerations such as object of section, purpose of expenditure and so on. He, therefore, contended that disallowance should be sustained. 19. We have carefully considered rival submission. There is no dispute about fact that expenditure was incurred by assessee for purpose of running schools, established for children of its employees. It is common ground that no fund as such has been created by assessee into which contributions are made on regular basis. It is clear that amount spent by assessee on various schools were spent with basic idea of subsiding cost of education of children of employees of assessee. assessee was interested in children of employees getting proper education and training in standard schools. It is thus purely staff welfare measure. 20. So far as s. 40A(9) is concerned, having regard to speech of Hon ble Finance Minister and judgments of Kerala and Bombay High Courts cited above, which are clearly in favour of assessee s claim, we hold that provision is inapplicable. judgment of Andhra Pradesh (High Court) is distinguishable because in that case fund was maintained by employer and thus he was able to exercise control over same. Thus, case fell squarely within mischief which was sought to be remedied by amendment. case before us, is however different. assessee has no control over any fund. These are expenditure incurred in running schools for purpose of enabling them to provide educational facilities to children of employees at subsided cost. We are, therefore, of view that payments do not fall within s. 40A(9) of Act. AO is directed to allow amount as deduction under s. 37(1) of Act. 21. Ground No. 9 relates to disallowance of Rs. 396.52 lakhs to value of stock. At time of hearing, it was clarified that disallowance was actually deleted by CIT(A) and, therefore, assessee has no grievance. Accordingly, ground is dismissed. 22. Ground No. 10 is directed against addition of Rs. 67.8 lakhs on ground that price escalation has not been accounted for to that extent. learned counsel for assessee drew our attention to p. 34 of printed accounts which laid down accounting policy for price escalation. It was stated therein (note 10) that generally, in case of price escalation on contract of sales and services where basis of price escalation has been agreed, income is taken on billing or accrual, to extent latest indices are available, otherwise, it is reckoned on acceptance/receipt. amount in question represents price escalation which is not agreed to by customer. escalation is raised by assessee unilaterally. It was clarified before us, that wherever escalation is accepted by customer, there would be no problem and amounts actually received, in accordance with bill, are taken credit for. question is whether it can be said that income accrues to assessee when escalation has not been accepted by other party. In our opinion, it cannot. There is no acceptance of escalated price by other party and, therefore, assessee has not obtained right to receive same. In absence of any right, income cannot be said to have accrued to assessee. It is also worth- noting from brief note given at p. 73 of paper book that method followed by assessee for long has been accepted by Department. We, therefore, agree with assessee s stand to delete addition. 23. Ground No. 11 is directed against disallowance of deduction under s. 80G of Act. perusal of receipts issued by donee institutions shows that they do not contain any details regarding approval granted to them under s. 80G. Therefore, claim for deduction is held rightly rejected. ground is dismissed. 24. Ground No. 12 is directed against directions issued by CIT(A) in para 16 of his order relating to deduction under s. 80-I in respect of turret casting project at Hardwar [wrongly mentioned in order of CIT(A), as Hyderabad]. CIT(A) has directed AO to re-examine calculation for allocating proportionate profit after taking into account entire expenditure as well as entire income of each project. After hearing both sides, we see no reason to interfere. We confirm directions of CIT(A) and dismiss ground. 25. Ground No. 13 is directed against disallowance of Rs. 8,15,64,200 being amount of loose tools charged off. It appears that as per policy of company loose tools costing below Rs. 10,000 are charged to P&L a/c, since they are normally consumed in year of issue itself. This practice has been consistently adopted by assessee for long and also accepted by Department. consumption of loose tools are necessary for company s operations which involve manufacture and supply of complex power generation equipment. Even accounting practice recognises charging off of value of loose tools. In light of fact that practice has been adopted consistently by assessee in past and has also been accepted by Department, we see no reason for making departure for year in appeal. facts are not in dispute and it is also not in dispute that they are same for year under appeal, as in years in which claim was accepted by Department. We, therefore, delete disallowance and allow ground. 2 6 . Ground No. 14 is in 5 parts. gist of ground is that Departmental authorities were not justified in disallowing liability on account of exchange rate fluctuations. Though several sub-grounds have been taken, what was argued before us was disallowance of Rs. 145.85 crores and Rs. 268.16 crores. Out of amount of Rs. 268.16 crores, sum of Rs. 47.16 crores has been debited to P&L a/c and balance has been treated as deferred revenue expenditure. amount of Rs. 145.85 crores has been provided in P&L a/c as liability. perusal of orders of Departmental authorities shows that they have treated liability to be contingent and have, therefore, disallowed same. It is claimed before us that liability which arose on account of exchange rate fluctuation was in respect of purchase of raw materials from abroad and thus liability was on account of revenue expenditure and that only question is whether liability is contingent. subsidiary question that arises in respect of amount treated as deferred revenue expenditure, is whether fact that assessee treated liability on deferred basis can go against its claim. In this connection, we note from p. 50 of printed account of assessee that note No. 7 is as under : "7. liability on outstanding foreign loans has increased by Rs. 40,332 lakhs in 1991-92 (previous year Rs. 9,720 lakhs) on account of (a) normal creeping depreciation on Indian rupees 12,903 lakhs; (previous year Rs. 9,720 lakhs); (b) adjustments in value of Indian rupee vis-a-vis foreign currencies on 1st and 3rd July, 1991, Rs. 16,476 lakhs and (c) introduction of partial convertibility of Indian rupee w.e.f. 29th Feb., 1992, Rs. 10,953 lakhs. Whereas creeping depreciation of Indian rupee is regarded as normal and, therefore, fully charged to 1991-92 account, impact of devaluation and partial convertibility of rupee has been treated as extraordinary items. Normal exchange variation of Rs. 12,930 lakhs has been fully charged to P&L a/c in 1991-92 according to past practice. Out of extraordinary items, totalling to Rs. 27,429 lakhs, Rs. 613 lakhs relating to loans utilised for purchase of equipment has been capitalised and depreciation has been charged over residual life of asset and remaining amount of Rs. 26,816 lakhs has been deferred over repayment period of loans in ratio of loan balance outstanding in beginning of year. Accordingly, Rs. 4,716 lakhs has been charged to 1991-92 accounts." 27. It is submitted that this note shows that whatever liability which relates to loans taken for purchase of equipment on capital goods has not been claimed as deduction and deduction claimed is only in respect of liability on account of loans taken for purchase of revenue items. 28. It is also pointed out that this issue has earlier come up for decision in assessee s own case before Hon ble Delhi High Court reported in213 ITR 756 (sic). In this decision, it was held, following judgment of Hon ble Supreme Court inSutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC), that additional liability on account of purchase of raw materials in foreign country arising due to fluctuation in rate of foreign exchange was deductible under s. 37(1) of Act. It is contended that judgment is on all fours with facts of present case and, therefore, it should be held that additional liability claimed by assessee as deduction is allowable as deduction. 2 9 . contention of learned CIT, Departmental Representative, however, was three-fold. He first contended that amount of liability which has been treated as deferred revenue expenditure cannot be allowed as deduction because, assessee itself is of opinion that benefit of liability would enure to it for more than one year. This objection cannot be sustained because it is settled law that manner in which accounting entries are made in assessee s books of account is not decisive of treatment to be given in income-tax assessments. Reference in this connection, may be made to judgment of Hon ble Supreme Court in case ofTuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC), wherein it has been held that accounting practice cannot override provisions of IT Act and that question whether certain deductions are permissible in law or not has to be decided according to principles of law and not in accordance with accounting practice. 3 0 . second contention of learned CIT, Departmental Representative was that only when amount of additional liability is remitted can deduction be allowed and before that point of time, liability continues to remain contingent. This objection cannot be upheld because Hon ble Supreme Court inSutlej Cotton Mills(supra) has clearly held that liability on account of fluctuations in foreign exchange rates is real liability and not merely contingent. If assessee were to remit amount on last day of accounting year, day on which liability in terms of money is reckoned, it would have to pay additional amount. Thus, liability is reckoned, it would have to pay additional amount. Thus, liability is ascertained liability and not contingent in any way. contention that it can be allowed only when it is actually remitted overlooks position in law that income from business must be computed in accordance with method of accounting regularly followed by assessee. It is apparent that assessee is following mercantile method of accounting and in such case, any ascertained liability arising out of revenue items has to be allowed as deduction. 31. third objection is that loans are all on capital account and if so, any increase in indebtedness cannot be allowed. Reliance for this submission is placed on judgment of Hon ble Calcutta High Court in case ofCIT vs. International Combustion (I) (P) Ltd. (1 98 2) 29 CTR (Cal) 35 : (1 98 2) 137 ITR 184 (Cal)andBestobell (India) Ltd. vs. CIT (1979) 117 ITR 789 (Cal). perusal of these two judgments shows following position. In case ofBestobell(supra), assessee was executing contract awarded by Government of India. In executing contract, funds of assessee to extent of Rs. 24 lakhs became blocked. assessee approached its parent company in UK for loan of Rs. 5 lakhs in foreign currency which was given. loan was not repaid by assessee at expiry of stipulated period n d on account of foreign exchange rate variations due to devaluation, assessee had to arrange for Rs. 7.87 lakhs for repayment of loan. difference of Rs. 2,87,692, after certain adjustments, was claimed as deduction in return. It was held by Hon ble Calcutta High Court that extra amount payable was not expenditure incurred for securing use of money and was not allowable under s. 37(1) of Act. It was further held that if as result of devaluation, assessee had to pay less to creditors surplus cannot b e taxed as it would be capital receipt and, therefore, loss on account of extra payment was not allowable as revenue loss. It will be seen that facts of this case are quite different from facts of present case. In present case claim is that loans were taken for purpose of acquiring raw material which were allowable as revenue expenditure. additional liability is, therefore, allowable as revenue expenditure. In case ofInternational Combustion(supra), it was held, distinguishing earlier judgments inBestobell(supra), that in case of assessee following mercantile system of accounting appreciation of outstanding liability arising on revenue account, due to devaluation of Indian rupee is allowable as loss. This decision actually supports proposition canvassed on behalf of assessee. In case before Hon ble Calcutta High Court liability was incurred in course of business on account of purchase of goods which were stock-in-trade. In case before us claim is that liability was incurred on account of purchase of raw material which are undisputedly revenue items. Therefore, it is not case of mere indebtedness as in case ofBestobell(supra). 32. learned counsel for assessee drew our attention again to p. 50 of paper book to contend that purpose of loans need not be looked into by IT authorities again since admittedly they were taken for acquiring raw materials. perusal of para 21 of order of CIT(A) shows that so far as amount of Rs. 268.16 crores is concerned, there is reference in assessment order at p. 33 to note 10 attached to statement of taxable income that loans were taken for purpose of making payment for import o f raw materials/components. Actually, out of total liability of Rs. 274.29 crores, part of which was on account of devaluation of Indian rupee in July, 1991 and part on account of convertibility of rupee w.e.f. February, 1992, sum of Rs. 6.13 crores represented liability on account of capital items. balance of Rs. 268.16 crores represents purchase of raw materials. With regard to claim of Rs. 145.85 crores what we find from p. 28 of assessment order is that only Rs. 126.06 crores represents purchase of raw material and components. Therefore, assessee s claim is allowed only to extent of Rs. 126.06 crores out of Rs. 145.85 crores. As regards Rs. 268.16 crores, entire amount is allowable since it represents additional liability in respect of loans taken for purchase of raw material and components. ground is thus allowed partly. 33. Ground No. 15 is directed against disallowance of following items of expenses aggregating to Rs. 47.73 lakhs on ground that they relate to prior period, not accrued or ascertained during relevant counting year: (1) Rs. 31.58 Water charges Hyderabad lakhs Consumption of raw (2) Power Rs. 9.75 (2) Power material Rs. 9.75 group lakhs & components Installation charges of (3) Corporate transfer, Rs. 2.43 office lakhs Noida Township Alternatively, it is contended that directions may be given to AO to allow above amounts as deductions in relevant earlier assessment year. 34. On careful perusal of matter and having regard to findings of CIT(A) in para 22 of his order, which are not controverted before us, on behalf of assessee, we hold claim cannot be accepted. findings of CIT(A) are that dispute with regard to aforesaid expenditure were settled in earlier years and that there is no evidence to show that they were settled in relevant accounting year. We therefore, uphold orders of IT authorities. prayer for directions for earlier years is also rejected since Tribunal cannot issue directions in respect of assessment years not before it. ground is accordingly dismissed. 35. Ground No. 16 is directed against disallowance of Rs. 61 lakhs in assessment representing adjustments made on basis of observations of C&AG. However, before us, claim was confined to Rs. 33 lakhs representing following : (1) Hyderabad Payment to collaborators Rs. 29 lakhs (2) Hyderabad R&D cess Rs. 1 lakh (3) R&D cess Rs. 1 lakh (4) Others Misc. expenses Rs. 2 lakhs Rs. 33 lakhs contention before us is that above amounts were incorporated in accounts as per directions of C&AG and, therefore, same had to be followed by assessee and there was little choice in matter. We find that this issue has been dealt with in para 24 of CIT(A). ground on which disallowance has been made and sustained is that there were no details furnished by assessee during appellate proceedings. Even before us, only ground taken is that amounts were incorporated in accounts on basis of directions of C&AG and our attention was not drawn to any details in this behalf. Though it may be true that assessee had no choice in matter except following directions of C&AG, it should be able to give details of claim which is minimum requirement. In absence of any details either before IT authorities or before us, disallowance appears to us, to be justified. We sustain same and dismiss ground. 36(a) Ground No. 17 relates to computation of deduction under s. 80HHC. dispute, as was explained before us, is in respect of two areas only. first issue is whether CIT(A) was right in sustaining disallowance of part of claim, on ground that approval of CIT, in respect of inward remittance of Rs. 19,54,95,086 was not obtained, is correct. This amount was not brought into India during relevant year of account. There was no approval or permission from CIT concerned for bringing remittance into India after year of account. In such circumstances, we confirm decision of CIT(A). (b) second issue is against decision of Departmental authorities to increase figure of total turnover by Rs. 125.25 crores by including miscellaneous income such as interest and other revenues. contention is that such receipts do not form part of total turnover and hence, have to be excluded. Such receipts are as under : (1)Rs. 14,28,66,000 contention is that this represents internal adjustments on notional basis under which one Department of assessee charges for work rendered to any Department. This is not actual receipt constituting part of assessee s turnover. It is accordingly, directed to be excluded from total turnover. (2)Interest: assessee has received interest as under : (a) From various banks for short-term and time Rs. deposit 5,74,06,000 Rs. (b) From others 4,04,88,000 Rs. (c) Under s. 244A of IT Act 1,99,54,000 Rs. (d) From various other sources 13,33,21,000 In case ofCIT vs. Kantilal Chhotalal (2000) 163 CTR (Bom) 476 : (2000) 246 ITR 439 (Bom), Bombay High Court held that receipts which do not form part of sale proceeds cannot come within ambit of total turnover, fte r examining object for which amendment to section was introduced. question before High Court was whether receipts which have no nexus with export activity can be included in total turnover. Bombay High Court held as follows, at p. 442 of report : "Similarly, prior to 1st April, 1992, there was one more distortion. In most cases, Department used to include receipts whereby total turnover came to b e artificially inflated. This brought down export profits. Prior to 1st April, 1992, export turnover excluded freight or insurance. However, such exclusion was not provided for in total turnover. Therefore, by cl. (ba) of Explanation, total turnover also excluded freight or insurance. reading of cl. (b) and cl. (ba) of Explanation clearly indicates that legislature has brought on par components of export turnover and sale turnover. Both numerator and denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within ambit of above ratio. This is also in view of fact that proration applies to business profits in order to work out export profits. Therefore, numerator and denominator are required to have common element which is sale proceeds. In fact, by proviso in cl. (ba) to Explanation, it is further provided that expression "total turnover" shall have effect so as to exclude s. 28(iiia), (iiib) and (iiic) which refer to,inter alia, profits on sale of licence granted under Import (Control) Order, cash assistance, duty drawback, etc. This exclusion also shows that legislature clearly intended to exclude all receipts which have no nexus with sale proceeds from export activity. Hence, total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature. Therefore, total turnover will not include receipts like labour charges, reassortment charges, etc." Having regard to aforesaid judgment and respectfully following same, we direct AO to exclude above receipts of interest from total turnover. (3)Rs. 85,84,97,250 details of this amount are contained in p. 46 of printed accounts at Sch. 13 thereof. following are items concerned : Rs. in thousand Oxygen/Acetylene sales 629 Scrap sales 4,39,554 Dividend Gross (TDS Rs. 58,399 thousand) 2,36,194 Vehicle hire charges 1,244 Sale/consumption of surplus stores charged off profit on sale of (i) Fixed assets 7,038 (ii) Capital stores 9,284 Others [including grants of Rs. 1,189 thousands (previous year Rs. 1,794 thousands) from Government of India for research and development projects and Rs. nil 4,00,748 (previous year Rs. 19,030 thousands) towards withdrawal of liability for royalty] So far as oxygen, acetylene sales are concerned, they have been rightly included as turnover. inclusion of scrap sales is also correct. Vehicle hire charges however, does not represent turnover and, therefore, is directed to be excluded. profit on sale of fixed assets and capital stores are directed to be excluded since they are not trading assets and cannot be considered as part of total turnover. With regard to item mentioned as others in amount of Rs. 40,07,48,000, there is no break-up available and description of amount in schedule is also not very helpful. There is no explanation for this figure even before us. Therefore, inclusion of this amount in total turnover is confirmed. AO is directed to modify figure of total turnover in accordance with our directions. 37. other contention with regard to s. 80HHC is that AO was wrong in reducing gross total income first by deduction under ss. 80HH, 80HHB and 80-I and granting deduction under s. 80HHC only from balance. contention is that deduction is available from export profits themselves which cannot be reduced by deductions mentioned in aforesaid sections. contention of assessee is supported by language of s. 80HHC(1). T h e deduction contemplated by section is of profits derived by assessee from export of goods or merchandise. section does not authorise adjustments of deductions under ss. 80HH, 80HHB and 80-I from export profits before deduction under s. 80HHC is given. These sections are not concerned with export profits at all. Whatever deduction is computed by applying formula prescribed by s. 80HHC is to be allowed against export profits without such profits being reduced by other deductions. There is no warrant in law enabling AO to do so. We, therefore, accept assessee s contention. This ground is partly allowed. 3 8 . Ground No. 18 is directed against action of CIT(A) in not allowing Rs. 295.50 lakhs being premium actually paid during year on redemption of one set of debentures. learned counsel for assessee frankly stated that CIT(A) has followed order of Tribunal in assessee s own case and since his decision is in conformity with judgment of Hon ble Supreme Court in case ofMadras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC), no further relief is due. Accordingly, ground is dismissed. no further relief is due. Accordingly, ground is dismissed. 39. Ground No. 20 which relates to interest under ss. 234A and 234B are consequential in nature. 4 0 . Ground No. 21 relating to disallowance of guest-house rent is dismissed in absence of any relevant facts. 41. In result, appeal is partly allowed. *** BHARAT HEAVY ELECTRICALS LTD. v. DEPUTY COMMISSIONER OF INCOME TAX
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