| SooperKanoon Citation | sooperkanoon.com/74173 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | Jul-22-2005 |
| Judge | R Easwar, Vice, G Pannu |
| Reported in | (2005)98TTJ(Delhi)565 |
| Appellant | Bharat Heavy Electricals Ltd. |
| Respondent | Deputy Commissioner of Income Tax |
2. The assessee is a public sector undertaking engaged in the manufacture of power generating equipments and other heavy industrial items. The assessee-company carries out projects for various State Governments and other public sector undertakings and is also involved in the setting up of power plants in India as well as abroad.
3. The assessee has obtained the permission of the COD to pursue the appeal and a copy of the approval of the COD has been placed on record vide order-sheet entry dt. 28th Aug., 2002.
4. We shall proceed to dispose of the appeal ground-wise. The first ground which relates to the disallowance of provision for non-moving stock, is in two parts. The first part relates to the provision of Rs. 50.66 crores which is the total amount claimed, and second part relates to the provision of Rs. 211.24 lakhs. Both the provisions relate to the non-moving stock. The learned counsel for the assessee has argued only the disallowance of the provision of Rs. 211.24 lakhs. Our attention was drawn to page Nos. 3 and 4 of the paper book which relates to this provision. Page No. 3 is the extract from the Sch. 18 to the balance sheet as on 31st March, 1992. The total provision made in respect of non-moving stock with reference to the various centres is shown therein. Page No. 4 contains a brief note regarding the procedure followed by the assessee for charging of non-moving stores. The plea of the assessee is that the provision is made after following a weir established procedure. It would be better to reproduce the note winch is as below : A non-moving material refers to a material for which no issue has taken place during the preceding financial year. For the purpose of taking action to liquidate the non-moving materials, the material for which there has been no issue in the last two financial years is taken as a non-moving material.
The Material Planning Department is circulating a list of non-moving materials to all the product managers, sister units of BHEL and also other public sector units. A task force committee (product-wise) is formed every year to liquidate the non-moving inventory. The task force committee goes through the list of non-moving materials and tries to utilise the materials as far as possible. If any of the material is not usable, then it is checked whether there is any usage in the immediate future.
The task force committee also identifies the materials which are surplus for which there is no requirement and recommends for disposing of the items. Based on the above recommendation, approval of competent authority is obtained to charge off the items after which the materials are transferred to disposal ward and its value is charged off in the books." 5. The learned counsel for the assessee submitted that the effect of the provision is only that the closing stock is being valued on the basis of the principle "cost or market price, whichever is lower" and since this method has been followed for several years in the past and on the basis of established procedure, the same has to be accepted. It is also pointed out that the assessee is a public sector undertaking and its accounts are subject to scrutiny by the C&AG and, therefore, the bona fides of the procedure cannot be doubted. It is argued that in these circumstances, the claim should be allowed.
6. On behalf of the Department, the contention advanced is that the claim is only a provision based on an internal procedure and in the absence of any evidence for the realisable value of the stock, it cannot be acted upon. Reliance is also placed on the orders of the IT authorities.
7. On a careful consideration of the matter, we are of the view that having regard to the procedure followed by the assessee, the genuineness or the bona fides of the claim cannot be doubted. The note extracted above indicates that only when all the efforts to dispose of the material fails, the committee recommends the write off in the books of account. No defect in the procedure, adopted by the assessee has been pointed out. As rightly pointed out on behalf of the assessee, the accounts are subject to scrutiny not only by the statutory auditors but also by the C&AG. In these circumstances, the bona fides of the procedure or genuineness of the claim cannot be doubted. Even on merits, when the stock of materials is actually found to be dead stock from which nothing can be realised because of the total absence of any demand therefor, its value falls drastically. This has been taken note of by the committee formed for recommending whether any item represents dead stock. We are, therefore, of the view that the assessee's claim requires to be accepted. Accordingly, we direct the AO to allow deduction in respect of provision of Rs. 211.24 lakhs. The disallowance of the balance of the claim is upheld and the ground is partly allowed.
8. Ground No. 2 relates to disallowance of entertainment expenditure of Rs. 51.88 lakhs. The details of the claim are given at p. 6 of the paper book. The exact amount is Rs. 51,87,674. The IT authorities have allowed 10 per cent of the entertainment expenses as attributable to staff. The plea before us is this is too low. We find force in the plea. We accordingly direct the AO to allow 30 per cent of the entertainment expenditure- as relatable to staff. The ground is accordingly allowed.
9. Ground No. 3 is directed against the disallowance of interest paid to the IT Department under the provisions of the IT Act. This does not constitute a lawful deduction in computing the business income of the assessee. Accordingly, the claim is rejected and the ground is dismissed.
10. Ground No. 4 is that the CIT(A) erred in not considering Rs. 43.66 lakhs being the opening balance of scrap value for allowing the same in this year, as it was added and disallowed in the asst. yr. 1991-92. The learned counsel for the assessee stated before us that based on the order of the Tribunal for the asst. yr. 1991-92, the CIT(A) has given relief as prayed for and, therefore, nothing survives for decision by us. Accordingly, we dismiss the ground.
11. Ground No. 5 relates to the disallowance of Rs. 14.87 lakhs being expenditure on the clubs maintained by the company for the employees.
It is contended that the expenditure is in the nature of staff welfare expenses and it is not in the nature of expenditure for subscription to social clubs or other recreation clubs. Our attention is drawn to pp.
27 to 34 of the paper book. We find therefrom that the assessee has townships at various manufacturing units across the country. Since the factories are situated outside the municipal limits of the town or city, the townships are also outside the city limits. Large number of employees of the assessee live in these townships. The assessee provides recreational facilities to the employees living in the townships as a welfare measure. This is essential for improving the work efficiency and cordial relationship with them. The townships have facilities such as schools, hospitals, shopping centres and recreational clubs. These institutions are managed by independent boards or committees of the representatives of the. employees. What the assessee does is to reimburse the net expenses of the clubs and recreation centres after taking note of the recovery from the employees. This is debited under the head 'staff welfare expenses'.
12. In the tax audit report prepared under Section 44AB, the payment has been described as "payments to clubs". This remark does not bring out the difference between the expenditure in question and subscription or contribution paid to outside clubs. The membership fees paid to outside clubs are different in character from the character of the expenditure in question. Therefore, by way of clarification in the note to the tax audit report, the auditors have clarified that the expenditure relates to the clubs which are run and maintained for and by the employees of the assessee-company. In the note, it has also been stated that the company has been giving complete break-up of the expenditure to the IT authorities. This is supported by the letter dt.
4th March, 1996 written by the assessee to the CIT(A). The nature of the activities carried on in the clubs at different centres such as Bhopal, Bangalore, Trichy, Hardwar, etc., has been given in this letter. At p. 32, the break-up of the expenditure of Rs. 14,87,000 has been given from which it is seen that the major expenditure relates to Bhopal (Rs. 14,50,000). The break-up for the expenditure of Bhopal at p. 33 of the paper book shows the 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.
(ii) Payment to others are made on the basis of the recommendation of heads of the Departments.
(iii) These institutions are managed through separate managing committees comprising of elected members.
Sometimes, nominees of the company also find place in the committees but only to supervise the activities and the utilisation of the grants.
The clubs are maintained only for the use of employees and their dependants and only for sports and games. In the light of the foregoing discussion, we have no doubt in holding the expenditure in question is allowable under Section 37(1) of the IT Act. It seems to us that the expenditure has been rightly characterised as staff welfare expenses.
Promoting sports and games in which the employees of the assessee-company exclusively participate is certainly in the interests of the assessee's business. It keeps the morale of the employees high.
That in turn helps in the smooth functioning of the company and also improves the efficiency of the employees. All this is ultimately for the benefit of the assessee-company. It should also be kept in mind that such facilities are needed to be provided by the company also in view of the fact that the employees live in townships which are away from the main town/cities and if the 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. The expenditure in question, in our opinion, falls to be considered in the light of the judgment of the Supreme Court in CIT v. Malayalam Plantations Ltd. . Accordingly, we direct the AO to allow the expenditure as deduction. The ground is allowed.
13. Ground Nos. 6 and 7 are directed against the decision of the IT authorities to apportion a part of the expenditure incurred by the assessee against the dividend income and thereby reducing the deduction available under Section 80M of the Act and their action in apportioning a part of the expenditure against tax-free interest income from bonds.
The expenditure apportioned is Rs. 1 lakh and 2 lakhs, respectively.
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. It is submitted that all that the assessee did was to send the dividend and interest warrants to the bank for encashing. On the other hand, the learned CIT, Departmental Representative strongly supported the orders of the Departmental authorities and cited judgment of the Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd., and submitted that the ratio of the judgment would apply. After hearing both sides and after going through the orders of the Departmental authorities and in the light of the judgment cited above, we are of the view that they were justified in estimating some expenditure as having been incurred by the assessee in earning the dividend and tax-free interest. The amount apportioned is also reasonable. We accordingly, confirm their action and dismiss the ground.
14. Ground No. 8 is directed against the disallowance of Rs. 4,76,57,787 by invoking Section 40A(9) of the Act. The amount represents payment made by the assessee to the Central Schools (Kendriya Vidyala), BHEL Schools and other educational institutions.
The assessee contended before the IT authorities that the aforesaid section is not applicable to the payments, which according to it were allowable under Section 37(1) of the IT Act. The contention did not find favour with the IT authorities and hence, the present ground.
15. The learned counsel for the assessee drew our attention to p. 45 of the paper book and submitted that the assessee's factories are located at a considerable distance from the towns/cities. It, therefore, becomes necessary for the assessee to put-up townships where the employees reside. Because of the distance the children of the employees find it difficult to go to the cities or towns for studies. Therefore, the assessee as a welfare measure puts up schools for the purpose of the children of the employees, though, some outside children are also admitted. For example, the BHEL township is located 33 kms. away from Hyderabad City, 20 kms. from Jhansi city, 13 kms. from Thiruchirapalli, etc. A detailed write-up on this point is placed at pp. 37 to 41 of the paper book. The break-up of the expenditure as given in p. 50 of the paper book is as below :Trichy Arivalayam 1,15,873Bhopal H.E. Education Society Rashtriya Bhasha 1,54,08,000 Patrachar Samiti BHEL Shiksha Mandal 5,000Jhansi Grant of BHEL Education Society 12,50,000HEEP, Hardwar Central School 77,01,000 Schools run by BHEL Education 2,03,07,000 Management Board Delhi Public School 5,00,000ARP Staff Club 914 16. The contention before us is that Section 40A(9) is not attracted at all and that the expenditure is allowable under Section 37(1). It is clarified that the assessee does not contribute to the educational institutions, but meets the expenditure incurred in running them, thus subsiding the education cost of the children of the employees. It is contended further that Section 40A(9) was introduced by the Finance Act, 1984, with retrospective effect from 1st April, 1980 and that it was introduced to curb the undesirable practice of corporate bodies of making large contributions to so-called welfare funds and at the same time keeping the utilisation of the welfare funds discretionary and subject to no discipline. Our attention was drawn to the speech of the Hon'ble Finance Minister reported in (1984) 146 ITR (St) 65 at p. 68, wherein there is reference to the object for which the section was introduced. The provisions of the Finance Act, 1984, were explained by the Board's Circular No. 387 [(1985) 152 ITR (St) 1}. Paras 16.1 and 16.2 of the circular are as under: "16.1 Sums contributed by an employer to a registered provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction.
Instances have come to notice where certain employers have created irrecoverable trusts, ostensibly .for the 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 the trustees to utilise the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc.
16.2 With a view to discouraging creation of such trusts,, funds, companies, AOP, societies, etc., the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the 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 the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of land to the extent required by or under any other law." 17. Our attention was also drawn to the judgment of the Kerala High Court in the case of CIT v. Travancore Cochin Chemicals Ltd., (2000) 240 ITR 284 (Ker) and that of the Bombay High Court in the case of CIT v. Bharat Petroleum Corporation Ltd., (2001) 252 ITR 43 (Bom). It was submitted "that in the judgment of the Kerala High Court, the facts are identical and their Lordships have referred to the speech of the Hon'ble Finance Minister and held that Section 40A(9) of the Act does not apply to payments made to school in which the children of the employees are studying. Such payments have been considered as amounts spent for the welfare of the employees and were held deductible under Section 37(1) of the IT Act. Referring to the judgment of the Hon'ble Andhra Pradesh High Court in the case of Raasi Cements Ltd. v. CIT , a decision which supports the Department, the learned counsel for the assessee submitted that in this case, the fund was maintained by the employer himself and, therefore, there was discretion in him to use the fund as he pleased and further that it was not a case of contribution made directly to the school as a staff welfare measure. He submitted that in any case, where two views have been taken by different Courts, the view in favour of the assessee should be followed, in the absence of any judgment of the jurisdictional High Court and for this submission cited the judgment of the Supreme Court in the case of CIT v. Kulu Valley Transport Co. (P) Ltd. and theCIT v. Podar Cements (P) Ltd., Etc.
18. On the other hand, learned CIT, Departmental Representative submitted that the language of the section is clear and if that is so, it is not permissible to look into the object of the section. If the assessee's case is caught within the plain language of the section, the disallowance has to be sustained without looking into extraneous considerations such as the object of the section, the purpose of the expenditure and so on. He, therefore, contended that the disallowance should be sustained.
19. We have carefully considered the rival submission. There is no dispute about the fact that the expenditure was incurred by the assessee for the purpose of running the schools, established for the children of its employees. It is common ground that no fund as such has been created by the assessee into which the contributions are made on a regular basis. It is clear that the amount spent by the assessee on various schools were spent with the basic idea of subsiding the cost of education of the children of the employees of the assessee. The assessee was interested in the children of the employees getting proper education and training in standard schools. It is thus purely a staff welfare measure.
20. So far as Section 40A(9) is concerned, having regard to the speech of the Hon'ble Finance Minister and the judgments of the Kerala and Bombay High Courts cited above, which are clearly in favour of the assessee's claim, we hold that the provision is inapplicable. The judgment of the Andhra Pradesh (High Court) is distinguishable because in that case the fund was maintained by the employer and thus he was able to exercise control over the same. Thus, the case fell squarely within the mischief which was sought to be remedied by the amendment.
The case before us, is however different. The assessee has no control over any fund. These are expenditure incurred in running the schools for the purpose of enabling them to provide educational facilities to the children of the employees at a subsided cost. We are, therefore, of the view that the payments do not fall within Section 40A(9) of the Act. The AO is directed to allow the amount as deduction under Section 37(1) of the Act.
21. Ground No. 9 relates to the disallowance of Rs. 396.52 lakhs to the value of stock. At the time of hearing, it was clarified that the disallowance was actually deleted/by the CIT(A) and, therefore, the assessee has no grievance. Accordingly, the ground is dismissed.
22. Ground No. 10 is directed against the addition of Rs. 67.8 lakhs on the ground that the price escalation has not been accounted for to that extent. The learned counsel for the assessee drew our attention to p.
34 of the printed accounts which laid down the 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 the basis of price escalation has been agreed, income is taken on billing or accrual, to the extent latest indices are available, otherwise, it is reckoned on acceptance/receipt. The amount in question represents price escalation which is not agreed to by the customer. The escalation is raised by the assessee unilaterally. It was clarified before us, that wherever escalation is accepted by the customer, there would be no problem and the amounts actually received, in accordance with the bill, are taken credit for. The question is whether it can be said that income accrues to the assessee when the escalation has not been accepted by the other party. In our opinion, it cannot. There is no acceptance of the escalated price by the other party and, therefore, the assessee has not obtained a right to receive the same. In the absence of any right, income cannot be said to have accrued to the assessee. It is also worth-noting from the brief note given at p. 73 of the paper book that the method followed by the assessee for long has been accepted by the Department. We, therefore, agree with the assessee's stand to delete the addition.
23. Ground No. 11 is directed against the disallowance of deduction under Section 80G of the Act. A perusal of the receipts issued by the donee institutions shows that they do not contain any details regarding the approval granted to them under Section 80G. Therefore, the claim for deduction is held rightly rejected. The ground is dismissed.' 24. Ground No. 12 is directed against the directions issued by the CIT(A) in para 16 of his order relating to deduction under Section 80-I in respect of turret casting project at Hardwar [wrongly mentioned in order of the CIT(A), as Hyderabad]. The CIT(A) has directed the AO to re-examine the calculation for allocating proportionate profit after taking into account the entire expenditure as well as the entire income of each project. After hearing both the sides, we see no reason to interfere. We confirm, the directions of the CIT(A) and dismiss the ground.
25. Ground No. 13 is directed against the disallowance of Rs. 8,15,64,200 being the amount of loose tools charged off. It appears that as per the policy of the company loose tools costing below Rs. 10,000 are charged to the P&L a/c, since they are normally consumed in the year of issue itself. This practice has been consistently adopted by the assessee for long and also accepted by the Department. The consumption of loose tools are necessary for the company's operations which involve the manufacture and supply of complex power generation equipment. Even the accounting practice recognises the charging off of the value of the loose tools. In the light of the fact that the practice has been adopted consistently by the assessee in the past and has also been accepted by the Department, we see no reason for making a departure for the year in appeal. The facts are not in dispute and it is also not in dispute that they are the same for the year under appeal, as in the years in which the claim was accepted by the Department. We, therefore, delete the disallowance and allow the ground.
26. Ground No. 14 is in 5 parts. The gist of the ground is that the Departmental authorities were not justified in disallowing the liability on account of exchange rate fluctuations. Though several sub-grounds have been taken, what was argued before us was the disallowance of Rs. 145.85 crores and Rs. 268.16 crores. Out of the amount of Rs. 268.16 crores, a sum of Rs. 47.16 crores has been debited to the P&L a/c and the balance has been treated as deferred revenue expenditure. The amount of Rs. 145.85 crores has been provided in the P&L a/c as a liability. A perusal of the orders of the Departmental authorities shows that they have treated the liability to be contingent and have, therefore, disallowed the same. It is claimed before us that the liability which arose on account of exchange rate fluctuation was in respect of purchase of raw materials from abroad and thus the liability was on account of revenue expenditure and that the only question is whether the liability is contingent. A subsidiary question that arises in respect of the amount treated as deferred revenue expenditure, is whether the fact that the assessee treated the liability on deferred basis can go against its claim. In this connection, we note from p. 50 of the printed account of the assessee that note No. 7 is as under : "7. The 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 the 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 the residual life of the asset and remaining amount of Rs. 26,816 lakhs has been deferred over the repayment period of loans in the ratio of loan balance outstanding in the beginning of the 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 the 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 the assessee's own case before the Hon'ble Delhi High Court reported in 213 ITR 756 (sic). In this decision, it was held, following the judgment of the Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. v. CIT , that the additional liability on account of purchase of raw materials in a foreign country arising due to fluctuation in the rate of foreign .exchange was. deductible under Section 37(1) of the Act. It is contended that the judgment is on all fours with the facts of the present case and, therefore, it should be held that the additional liability claimed by the assessee as deduction is allowable as deduction.
29. The contention of the learned CIT, Departmental Representative, however, was three-fold. He first contended that the amount of liability which has been treated as deferred revenue expenditure cannot be allowed as deduction because, the assessee itself is of opinion that the benefit of the liability would enure to it for more than one year.
This objection cannot be sustained because it is settled law that the manner in which accounting entries are made in the assessee's books of account is not decisive of the treatment to be given in the income-tax assessments. Reference in this connection, may be made to the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT , wherein it has been held that accounting practice cannot override the provisions of IT Act and that the question whether certain deductions are permissible in law or not has to be decided according to the principles of law and not in accordance with the accounting practice.
30. The second contention of the learned GIT, Departmental Representative was that only when the amount of the additional liability is remitted can deduction be allowed and before -that point of time, the liability continues to remain contingent. This objection cannot be upheld because the Hon'ble Supreme Court in Sutlej Cotton Mills (supra) has clearly held that the liability on account of fluctuations in the foreign exchange rates is a real liability and not merely contingent. If the assessee were to remit the amount on the last day of the accounting year, the day on which the liability in terms of money is reckoned, it would have to pay the additional amount. Thus, the liability is an ascertained liability and not contingent in any way. The contention that it can be allowed only when it is actually remitted overlooks the position in law that the income from business must be computed in accordance with the method of accounting regularly followed by the assessee. It is apparent that the assessee is following the mercantile method of accounting and in such a case, any ascertained liability arising out of revenue items has to be allowed as deduction.
31. The third objection is that the loans are all on capital account and if so, any increase in the indebtedness cannot be allowed. Reliance for this submission is placed on the judgment of the Hon'ble Calcutta High Court in the case of CIT v. International Combustion (I) (P) Ltd. and Bestobell (India) Ltd. A perusal of these two judgments shows the following position. In the case of Bestobell (supra), the assessee was executing a contract awarded by the Government of India. In executing the contract, the funds of the assessee to the extent of Rs. 24 lakhs became blocked. The assessee approached its parent company in UK for a loan of Rs. 5 lakhs in foreign currency which was given. The loan was not repaid by the assessee at the expiry of the stipulated period and on account of foreign exchange rate variations due to devaluation, the assessee had to arrange for Rs. 7.87 lakhs for repayment of the loan. The difference of Rs. 2,87,692, after certain adjustments, was claimed as deduction in the return. It was held by the Hon'ble Calcutta High Court that the extra amount payable was not expenditure incurred for securing the use of money and was not allowable under Section 37(1) of the Act. It was further held that if as a result of devaluation, the assessee had to pay less to the creditors the surplus cannot be taxed as it would be capital receipt and, therefore, the loss on account of extra payment was not allowable as revenue loss. It will be seen that the facts of this case are quite different from the facts of the present case. In the present case the claim is that the loans were taken for the purpose of acquiring raw material which were allowable as revenue expenditure.
The additional liability is, therefore, allowable as revenue expenditure. In the case of International Combustion (supra), it was held, distinguishing the earlier judgments in Bestobell (supra), that in the case of an assessee following the mercantile system of accounting the appreciation of outstanding liability arising on revenue account, due to devaluation of Indian rupee is allowable as loss. This decision actually supports the proposition canvassed on behalf of the assessee. In the case before the Hon'ble Calcutta High Court the liability was incurred in the coarse of business on account of purchase of goods which were stock-in-trade. In the case before us the claim, is that the liability was incurred on account of purchase of raw material which are undisputedly revenue items. Therefore, it is not a case of mere indebtedness as in the case of Bestobell (supra).
32. The learned counsel for the assessee drew our attention again to p.
50 of the paper book to contend that the purpose of the loans need not be looked into by the IT authorities again since admittedly they were taken for acquiring raw materials. A perusal of para 21 of the order of the CIT(A) shows that so far as the amount of Rs. 268.16 crores is concerned, there is reference in the assessment order at p. 33 to note 10 attached to the statement of taxable income that the loans were taken for the purpose of making payment for import of raw materials/components. Actually, out of the 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 the rupee w.e.f. February, 1992, a sum of Rs. 6.13 crores represented liability on account of capital items. The balance of Rs. 268.16 crores represents purchase of raw materials. With regard to the claim of Rs. 145.85 crores what we find from p. 28 of the assessment order is that only Rs. 126.06 crores represents purchase of raw material and components. Therefore, the assessee's claim is allowed only to the extent of Rs. 126.06 crores out of Rs. 145.85 crores. As regards Rs. 268.16 crores, the entire amount, is allowable since it represents additional liability in respect of loans taken for purchase of raw material and components. The ground is thus allowed partly.
33. Ground No. 15 is directed against the disallowance of the following items of expenses aggregating to Rs. 47.73 lakhs on the ground that they relate to prior period, not accrued or ascertained during the relevant counting year:(1) Hyderabad -Water charges Rs. 31.58 lakhs(2) Power group -Consumption of raw material Rs. 09.75 lakhs & components(3) Corporate office -Installation charges of transfer, Rs. 02.43 lakhs Noida Township Alternatively, it is contended that directions may be given to the AO to allow the above amounts as deductions in the relevant earlier assessment year.
34. On a careful perusal of the matter and having regard to the findings of the CIT(A) in para 22 of his order, which are not controverted before us, on behalf of the assessee, we hold the claim cannot be accepted. The findings of the CIT(A) are that the dispute with regard to the aforesaid expenditure were settled in the earlier years and that there is no evidence to show that they were settled in the relevant accounting year. We therefore, uphold the orders of the IT authorities. The prayer for directions for the earlier years is also rejected since the Tribunal cannot issue directions in respect of assessment years not before it. The ground is accordingly dismissed.
35. Ground No. 16 is directed against the disallowance of Rs. 61 lakhs in the assessment representing adjustments made on the basis of the observations of the C&AG. However, before us, the claim was confined to Rs. 33 lakhs representing the 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 The contention before us is that the above amounts were incorporated in the accounts as per the directions of the C&AG and, therefore, the same had to be followed by the assessee and there was little choice in the matter. We find that this issue has been dealt with in para 24 of the CIT(A). The ground on which the disallowance has been made and sustained is that there were no details furnished by the assessee during the appellate proceedings. Even before us, the only ground taken is that the amounts were incorporated in the accounts on the basis of the directions of the C&AG and our attention was not drawn to any details in this behalf. Though it may be true that the assessee had no choice in the matter except following the directions of the C&AG, it should be able to give details of the claim which is the minimum requirement. In the absence of any details either before the IT authorities or before us, the disallowance appears to us, to be justified. We sustain the same and dismiss the ground.
36(a) Ground No. 17 relates to the computation of deduction under Section 80HHC. The dispute, as was explained before us, is in respect of two areas only. The first issue is whether the CIT(A) was right in sustaining the disallowance of a part of the claim, on the ground that the approval of the CIT, in respect of the inward remittance of Rs. 19,54,95,086 was not obtained, is correct. This amount was not brought into India during the relevant year of account. There was no approval or permission from the CIT concerned for bringing the remittance into India after the year of the account. In such circumstances, we confirm the decision of the CIT(A).
(b) The second issue is against the decision of the Departmental authorities to increase the figure of total turnover by Rs. 125.25 crores by including the miscellaneous income such as interest and other revenues. The contention is that such receipts do not form part of the total turnover and hence, have to be excluded. Such receipts are as under: (1) Rs. 14,28,66,000-The contention is that this represents internal adjustments on notional basis under which one Department of the assessee charges for work rendered to any Department. This is not an actual receipt constituting the part of the assessee's turnover. It is accordingly, directed to be excluded from the total turnover.
(2) Interest: The assessee has received interest as under :(a) From various banks for short-term and time deposit Rs. 5,74,06,000(b) From others Rs. 4,04,88,000(c) under Section 244A of the IT Act Rs. 1,99,54,000(d) From various other sources Rs. 13,33,21,000 Bombay High Court held that receipts which do not form part of sale proceeds cannot come within the ambit of total turnover, after examining the object for which the amendment to the section was introduced. The question before the High Court was whether receipts which have no nexus with the export activity can be included in the total turnover. The Bombay High Court held as follows, at p. 442 of the report : "Similarly, prior to 1st April, 1992, there was one more distortion.
In most cases, the Department used to include receipts whereby total turnover came to be artificially inflated. This brought down the 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 Clause (ba) of the Explanation, total turnover also excluded freight or insurance. A reading of Clause (b) and Clause (ba) of the Explanation clearly indicates that the legislature has brought on par the components of export turnover and sale turnover. Both the numerator and the denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits. Therefore, the numerator and the denominator are required to have a common element which is the sale proceeds. In fact, by the proviso in Clause (ba) to the Explanation, it is further provided that the expression "total turnover" shall have effect so as to exclude Section 28(iiia), (iiib) and (iiic) which refer to, inter alia, profits on sale of a licence granted under the Import (Control) Order, cash assistance, duty drawback, etc. This exclusion also shows that the 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 the aforesaid judgment and respectfully following the same, we direct the AO to exclude the above receipts of interest from the total turnover.
(3) Rs. 85,84,97,250-The detail of this amount are contained in p.
46 of the printed accounts at Sch. 13 thereof. The following are the items concerned :Oxygen/Acetylene sales 629Scrap sales 4,39,554Dividend-Gross (TDS Rs. 58,399 thousand) 2,36,194Vehicle hire charges 1,244Sale/consumption of surplus stores charged off(i) Fixed assets 7,038(ii) Capital stores 9,284Others [including grants of Rs.1,189 thousands 4,00,748(previous year Rs. 1,794 thousands) from Governmentof India for research and development projects and Rs.nil (previous year Rs. 19,030 thousands) towards So far as oxygen, acetylene sales are concerned, they have been rightly included as turnover. The inclusion of scrap sales is also correct. Vehicle hire charges however, does not represent the turnover and, therefore, is directed to be excluded. The profit on the 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 the item mentioned as 'others' in the amount of Rs. 40,07,48,000, there is no break-up available and the description of the amount in the schedule is also not very helpful. There is no explanation for this figure even before us. Therefore, the inclusion of this amount in the total turnover is confirmed. The AO is directed to modify the figure of total turnover in accordance with our directions.
37. The other contention with regard to Section 80HHC is that the AO was wrong in reducing the gross total income first by the deduction under Sections 80HH, 80HHB and 80-I and granting deduction under Section 80HHC only from the balance. The contention is that the deduction is available from the export profits themselves which cannot be reduced by the deductions mentioned in the aforesaid sections. The contention of the assessee is supported by the language of Section 80HHC(1). The deduction contemplated by the section is of the profits derived by the assessee from the export of goods or merchandise. The section does not authorise the adjustments of the deductions under Sections 80HH, 80HHB and 80-I from the export profits before the deduction under Section 80HHC is given. These sections are not concerned with export profits at all. Whatever deduction is computed by applying the formula prescribed by Section 80HHC is to be allowed against the export profits without such profits being reduced by other deductions. There is no warrant in law, enabling the AO to do so. We, therefore, accept the assessee's contention. This ground is partly allowed.
38. Ground No. 18 is directed against the action of the CIT(A) in not allowing Rs. 295.50 lakhs being premium actually paid during the year on redemption of one set of debentures. 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 of Madras Industrial Investment Corporation Ltd. v. CIT . no further relief is due. Accordingly, the ground is dismissed.
39. Ground No. 20 which relates to interest under Sections 234A and 234B are consequential in nature.
40. Ground No. 21 relating to the disallowance of guest-house rent is dismissed in the absence of any relevant facts.