2010-VIL-426-ITAT-DEL
Equivalent Citation: [2010] 39 SOT 296 (DELHI), [2011] 8 ITR 58
Income Tax Appellate Tribunal DELHI
IT APPEAL NO. 106 (DELHI) OF 2009
Date: 16.04.2010
MICROSOFT CORPORATION (INDIA) (P.) LTD.
Vs
DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 6(1), NEW DELHI
Rajan Vora and Ankur Gupta for the Appellant.
G.S. Sahota for the Respondent.
BENCH
RAJPAL YADAV AND K.G. BANSAL, JJ.
JUDGMENT
K.G. Bansal, Accountant Member. - This appeal of the assessee emanates from the order of CIT (Appeals)-IX, New Delhi, passed on 23-10-2008 in Appeal No. 29/07-08, pertaining to assessment year 2000-01, in which levy of penalty of Rs. 15,34,529 under section 271(1)(c) was confirmed. The assessee had taken up five grounds in the appeal. However, the ld. counsel for the assessee submitted in the course of hearing before us that it wants to press only ground Nos. 4(ii) and 5. Ground No. 4(ii) is to the effect that on the facts and in the circumstances of the case and in law, the ld. CIT (Appeals) erred in upholding the levy of penalty imposed by the Assessing Officer in respect of claim of foreign exchange loss occurring on account of restatement of foreign currency loan, which was not the subject-matter of appeal before the Hon’ble Tribunal. Ground No. 5 is to the effect that the ld. CIT (Appeals) erred in not appreciating that the aforesaid claim of deduction was made under a bona fide belief and the same cannot amount to furnishing inaccurate particulars of income. In view of the aforesaid, other grounds are dismissed as not pressed.
1.1 In the course of hearing, the assessee filed two additional grounds, which read as under:—
"(i)On the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the penalty order of the ld. Assessing Officer, which is void ab initio as no satisfaction was recorded by the ld. Assessing Officer during the course of assessment proceedings that the appellant has furnished inaccurate particulars of income.
(ii)On the facts and circumstances of the case, the ld. CIT(A) has erred in confirming the penalty levied by the ld. Assessing Officer by merely relying on section 271(1B) inserted by the Finance Act, 2008 with retrospective from 1st April, 1989. The Hon’ble Delhi High Court in the case of Madhushree Gupta v. UOI [WP (C) No. 5059/2008] and British Airways Plc. v. UOI [WP (C) No. 6272/2008] ( 317 ITR 107 ) has considered the provisions of section 271(1B) of the Act and has held that in case a prima facie satisfaction is not recorded by the ld. Assessing Officer for the initiation of penalty proceedings, the penalty proceedings would be liable to be quashed."
1.2 During the course of hearing before us, the ld. counsel did not press for admission of these grounds. Therefore, the grounds are not admitted for the purpose of adjudication in this order.
2. The facts mentioned in the assessment order dated 31-1-2003, in respect of the matter covered in Grounds 4(ii) and 5, are that the assessee had taken loan of about Rs. 13.13 crores from Microsoft Corporation, U.S.A. ("the USA Co." for short). Due to fluctuation in rate of the foreign exchange, a loss of Rs. 39.90 lakhs was incurred in this year on account of the restatement of the liability on the closing day of the previous year. This amount was claimed as a revenue loss. The assessee was requested to justify the claim of deduction of aforesaid amount in computing the total income. It was submitted that the loan taken from the USA Co. has been utilized for revenue as well as capital expenditure and it is difficult to bifurcate the aforesaid loss in terms of capital and revenue expenses. It was conceded that the loss on capital account was lower than the loss on revenue account. It was further submitted that even capital loss will get allowed over a period of time by increase in the deduction of depreciation. The Assessing Officer considered the facts and the submissions. It was mentioned that it is the assessee who claimed revenue loss occurring on account of change in rate of foreign exchange. Therefore, the onus of proving that the loss was a revenue loss is on the assessee. This onus has not been discharged. Therefore, the loss was disallowed. Proceedings under section 271(1)(c) were also initiated in the course of assessment, which were disposed of by the order dated 28-9-2007. In this order, it is mentioned that from the letter of the Reserve Bank of India dated 16-10-1997, it is seen that the assessee was permitted to take a loan from the USA Co. for three purposes, namely, - (i) expansion of business operation, (ii) providing infrastructure facilities, and (iii) meeting working capital requirement. The assessee had submitted that the loan was utilized both on capital and revenue accounts. The evidence on record shows that only a sum of Rs. 1.25 lakhs was utilized on revenue account and the propor-tionate loss on this amount works out to Rs. 4,224. It is further mentioned that the explanation of the assessee in the penalty proceedings is that there is always a difference of opinion whether an expenditure is of capital nature or revenue nature. The auditor’s report does not suggest whether the expenditure was on capital account or revenue account. The money was actually utilized and, thus, there is no concealment of income or making of false or bogus entries in the books of account. Therefore, it was contended that on the facts and in the circumstances of the case, penalty under section 271(1)(c) is not leviable. The Assessing Officer considered the explanation. It was mentioned that the assessee could substantiate revenue expenditure of Rs. 4,224 only. The rest of the expenditure is on capital account. This leads to an inference that the assessee furnished inaccurate particulars of income, inasmuch as capital expenses were claimed as revenue expenses. On the facts, there could be no debate that the expenditure was by and large capital expenditure. The failure of the auditor to mention the purpose of the expenditure does not absolve the assessee from levy of penalty because it was always aware of the purpose for which the loan had been taken. Thus, it was held that the assessee is liable to be penalized under section 271(1)(c), leading to levy of penalty of Rs. 15,34,529.
2.1 Aggrieved by this order, the assessee moved an appeal before the CIT (Appeals)-IX, New Delhi. The arguments taken before him were more or less the same as the arguments taken before the Assessing Officer. The findings of the ld. CIT (Appeals) are that in view of the settled legal position and the submissions of the assessee itself, the deductibility of the expenditure in computing the total income would depend upon the purpose for which the loan is taken. In such a circumstance, the assessee should have bifurcated the expenditure in terms of capital and revenue expenditure. Since the assessee was aware of the purpose for which the loan was raised, its argument that the matter was debatable is not acceptable. Thus, the levy of penalty was upheld.
3. Before us, the ld. counsel for the assessee referred to the finding of the Assessing Officer on pages 4 and 5 of the assessment order, in which the claim of loss occurring on account of fluctuation in rate of foreign exchange, amounting to Rs. 39.90 lakhs was disallowed inter alia by relying on the decision in the case of Bestobell (India) Ltd. v. CIT [1979] 117 ITR 789 (Cal.). Further, our attention was drawn towards the written submissions filed before the Assessing Officer, dated 12-12-2002, in the course of assessment proceedings, in which it was inter alia submitted that as per decision of Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 , where profit or loss arises on account of appreciation or depreciation in the value of foreign exchange on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if foreign currency is held by the assessee on revenue account, a trading asset or a part of circulating capital. But, if, on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. This principle was followed in the case of CIT v. Hindustan Aluminium Corpn. Ltd. [1994] 207 ITR 670 (Bom.) and CIT v. Bharat Heavy Electricals Ltd. [1999] 239 ITR 756 (Delhi). The claim of deduction would, thus, depend upon the purpose for which the foreign currency is held or utilized. In the case of Bestobell (India) Ltd. (supra), the Hon’ble Calcutta High Court had disallowed such a loss as the same was held to be capital in nature. In the case of IAC v. Renusagar Power Co. Ltd. [1989] 28 ITD 439 (Cal.), it was observed that whereas for the allowance of expenditure incurred in obtaining a loan, it is not necessary to enquire whether the loan was used for acquiring the capital asset or current asset, but the expenditure incurred for repaying the loan would be allowable depending upon whether it was utilized for acquiring capital asset or a current asset. The case of the ld. counsel was that right from the inception of the assessment proceedings, the assessee had informed the Assessing Officer that the deductibility of the expenditure would depend upon the fact whether the loan was used towards capital account or current account. Its determination is a vexed question and has to be decided on the facts of each case. Coming to the facts of this case, the Assessing Officer was informed that the assessee is not in a position to identify the expenditure in terms of capital or revenue expenditure. The auditors had also not furnished the bifurcation in terms of capital or revenue expenditure. Therefore, the whole of the loss was debited to profit and loss account and, thus, got claimed as deduction under the bona fide belief that it was revenue in nature. However, that does not lead to inference of concealment of income or furnishing inaccurate particulars of income.
3.1 In order to support the proposition that the expenditure was claimed bona fidely as revenue expenditure, reliance was placed on the decision of Hon’ble Supreme Court in the case of Alembic Chemical Works Ltd. v. CIT [1989] 177 ITR 377 , in which expenditure incurred on acquisition of know-how leading to higher yield and sub-cultures of penicillin, in an existing business, was held to be revenue in nature. Further, reliance was placed on the decision of Hon’ble Supreme Court in the case of Madras Industries Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 in which the liability incurred on issuing of debentures at a discount was allowed over the period of the subsistence of the liability, being 12 years in that case. However, it was also mentioned that ordinarily, the revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred and the same cannot be spread over a number of years even if assessee has done so in its books of account. Reliance was also placed on the decision of Hon’ble Delhi High Court in the case of CIT v. H.M.A. Udyog (P.) Ltd. [2007] 159 Taxman 394 in which the assessee had claimed expenditure incurred on extensive repairs in its commercial premises for starting new business of restaurant and film distribution to be revenue expenditure. The Assessing Officer held the expenditure to be capital expenditure. This decision was upheld by the CIT (Appeals) and the Tribunal. However, in appeal against the levy of penalty, the Tribunal held that the question whether the expenditure was revenue expenditure or capital expenditure was a debatable issue. In view thereof, even if the revenue succeeds finally in quantum appeal, that will not lead to the inference of concealment of income or furnishing inaccurate particulars of income. Reliance was also placed on the decision of Hon’ble Andhra Pradesh High Court in the case of CIT v. Warner Hindustan Ltd. [1986] 160 ITR 217, in which one of the questions before the Hon’ble Court was whether, the Appellate Tribunal was justified in law in holding that the technical fee paid to Warner Lambert Pharmaceuticals Co. of USA of Rs. 51,264 and Rs. 1,56,771 for assessment years 1970-71 and 1971-72 respectively was revenue expenditure? (Question No. 6). It was held that the Tribunal was not justified in holding that the amounts paid by the assessee in two assessment years constituted revenue expenses. Reliance was also placed on the decision of Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627, in which it was held that interest paid on borrowed capital used to meet personal obligation of the assessee would not be deductible expenditure under section 37(1) of the Act. Reliance was also placed on the decision of Hon’ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254, in which it was held that the loss incurred on account of additional liability arising from fluctuation in rate of exchange in respect of loans raised for revenue purposes is deductible as expenditure under section 37(1).
3.2 Coming to the levy of penalty, it was argued that since the issue is debatable, the penalty could not be levied merely because the corresponding addition accepted by the assessee and it has become final. For this purpose, reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products (P.) Ltd. [2010] 322 ITR 158. The Hon’ble Court considered the language of the provision, and the decision of the court in the case of CIT v. Atul Mohan Bindal [2009] 183 Taxman 444 (SC), Union of India v. Dharmendra Textile Processors [2008] 174 Taxman 571 (SC); Union of India v. Rajasthan Spg. & Wvg. Mills Ltd. [2009] 180 Taxman 609 (SC); Dilip N. Shroff v. Jt. CIT [2007] 161 Taxman 218 (SC). It was inter alia held that the word "particulars" means the details furnished in respect of a particular claim in the return of income. Therefore, furnishing inaccurate particulars of income would mean furnishing details which were not accurate. Since there was no finding of the lower authorities that there was inaccuracy, erroneousness or falsity in the details, merely making of the claim, which is not sustainable in law, by itself will not lead to levy of penalty. Thus, it was argued that since there was no falsity in the particulars furnished by the assessee, penalty could not be levied under section 271(1)(c) of the Act.
3.3 In reply, the ld. DR relied on the order of the ld. CIT (Appeals), which has been summarized by us already and it reads as under:—
"4.6 I have considered the submissions made by the ld. AR. On the point that the levy of penalty is void ab initio as the Assessing Officer has not recorded any satisfaction during the course of the assessment proceedings regarding the furnishing of the inaccurate particulars of income, I reject the contentions of the AR as the Finance Act, 2008 has introduced section 271(1B) with retrospective effect from 1st of April, 1989 so as to provide that where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and if such order contains a direction for initiation of penalty proceedings under sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty under sub-section (1).
As mentioned in para 4.1 of this order, the AR himself referred to and confirmed the fact that the deductibility of the foreign exchange loss would depend on the purpose for which the said foreign currency loan is taken. This being so, the appellant itself should have taken pains to bifurcate the expenses relating to capital nature and the revenue nature and instead of wrong claim made in its return of income, should have claimed correct figures of the revenue expenses pertaining to the loss on foreign exchange fluctuation. The appellant could do so only during the course of the proceedings before the CIT(A)-IX, New Delhi, which shows that the appellant has filed inaccurate particulars while filing the return of income for the subject assessment year.
Regarding the contentions of the AR that the penalty has been levied on the contentious issue as mentioned in para 4.2 of this order, the ld. AR has filed to realize that though the decisions of other High Courts may be its favour but the decision rendered by the Hon’ble Apex Court in the case of East India Pharmaceutical Works Ltd. (supra) is a later decision which shall overrule the decision of any High Court on the issue. This again shows the mala fides on the part of the appellant. The AR has time and again referred to the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra) but the ratio of this decision is of no help to the appellant as the facts of the case are distinguishable from the facts of the present case. Reference by the AR to section 43A of the Act is also of no help to the appellant company as it is an established position that any expenditure - may be of foreign currency or out of the local currency - has to be given treatment as per the nature of the activities on which the amount has been spent. If it is capital, then no claim can be made in the profit and loss account of the assessee which is the case here. The AR himself confirmed the fact that the appellant has nowhere disclosed this fact in the Tax Audit Report which has confirmed the contents of deliberateness in its intentions as far as claiming loss on foreign exchange fluctuation is concerned. Even the reference to the RBI order is of no relevance in the instant case due to the fact that though the RBI gave approval to the appellant but that does not mean that the capital nature of the loss can also be claimed as revenue loss in its return of income. In view of the above arguments, especially the fact that the appellant could carry out the bifurcation for loss incurred by it on account of foreign exchange fluctuation into revenue and capital expense only before the CIT(A) there remain no doubt that the appellant filed inaccurate particulars of income for subject assessment year. I fail to comprehend as to how the various case law, on which the appellant relied, have any relevance in the instant case, especially when the appellant’s AR confirmed that clause 17(a) of Tax Audit Report issued for the subject assessment year does not contain any mention of the same. Accordingly, the various grounds taken up by the appellant against levy of penalty for concealment is hereby rejected."
4. We have considered the facts of the case and rival submissions. The first question in this case is whether, any bona fide dispute existed on the issue whether the loss occurring on account of fluctuation in rate of foreign exchange, provided in the books by re-stating the liability at the close of the previous year, constituted revenue or capital expenditure? The assessee had not furnished the details of utilization of loan or the loss before the Assessing Officer. The details were obtained by the CIT (Appeals) in the course of appeal against the quantum order. These have been mentioned by the ld. CIT(A) on page 8 of his order in Appeal No. 4/2003-04. The details are as under:—
Particulars Security Deposit |
Purpose Capital |
Purpose Revenue |
Balance sheet item 40425500 |
Tax payment |
Advance/self tax |
|
|
|
35169966 |
Computers |
24028396 |
|
|
|
Plant & Machinery |
9870134 |
|
|
|
Furniture |
5994760 |
|
|
|
Other fixed assets |
2451944 |
|
|
|
Revenue items |
|
125000 |
|
|
4.1 The learned CIT(A) held, only a sum of Rs. 1.25 lakhs to be revenue expenditure, deductible as such. The expenditure on computers, plant and machinery, furniture and other fixed assets, and the security deposit were held to be on capital account. Payment of tax is not a revenue expenditure deductible in computing the income as it is appropriation of income. Thus, on merits the order of the ld. CIT(A) was correct. This part of the order was accepted by the assessee.
4.2 Since a part of the foreign exchange loan was used for purchase of capital asset, we may also refer to the provision contained in section 43A, which has not been referred to by any of the rival parties. This provision reads as under:—
"43A. Special Provisions consequential to changes in rate of exchange of currency.—(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43, or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid."
4.3 We have also perused Form No. 3CD, dated 24-7-2000, certified by Shri Deepak Roy of Deloitte Haskins & Sells. This report does not furnish any detail about utilization of foreign exchange denominated loan because such detail was not required to be furnished in the aforesaid statutory form. The report also mentions that expenditure of capital nature amounted to Rs. 5,89,650. The note further states that assets costing below Rs. 40,000 amounting to Rs. 55,19,919 have been charged to profit and loss account. Annexure IV, furnishing the details of such assets, has not been enclosed with the report, as filed in the paper book. Annexure XI of the tax audit report shows opening balance at Rs. 13,39,65,467 addition to loan at Rs. 39.90 lakhs (because of exchange fluctuation), payment of Rs. 66,75,467 and closing balance at Rs. 13,12,80,000. Thus, the evidence does not through any light on the issue before us. In view thereof, the assessee’s case cannot draw any support from the reports. Further, in the case of Concord of India Insurance Co. Ltd. v. Smt. Nirmala Devi [1979] 118 ITR 507 (not referred to by any of the parties but supplied by us ), a case dealing with delay in filing special leave petition, the Hon’ble Supreme Court inter alia held that it is a settled law that the mistake of counsel may in certain circumstances be taken into account in condoning the delay. However, there is no general proposition of law in this behalf. The question always is - whether, the mistake was bona fide or a devise to cover up latches?
4.4 Section 43A deals with ascertainment of the cost or written down value of an asset acquired from a country outside India on account of change in rate of exchange during a year. We examined various submissions and orders placed before us to find whether computers, plant and machinery etc. were purchased from a country outside India. We do not find any mention about the vendor either in the details or in the order. Therefore, we are not in a position to examine the case from the stand point of section 43A. This point has also not been mentioned by any of the rival parties.
5. The ld. counsel has relied on a number of cases to argue that on the facts and in the circumstances of the case, the question - whether, the expenditure is capital or revenue in nature? is a disputable point. On the other hand, the case of the ld. DR is that no such dispute exists as the addition was sustained on the basis of the decision in the case of Bestobell (India) Ltd. (supra), and the submissions of the assessee which were in line with the aforesaid decision. We may now consider various cases relied upon by the rival parties in this behalf.
5.1 In the case of Sutlej Cotton Mills Ltd. (supra), the question before the Hon’ble Supreme Court was - whether, on the facts and in the circumstances of the case, the assessee’s claim for exchange loss of Rs. 11 lakhs for assessment year 1957-58 and Rs. 5,50,000 for assessment year 1959-60, in respect of remittances of profits from Pakistan, was not allowable as a deduction? In that case, the assessee had remitted Rs. 25 lakhs and Rs. 12.50 lakhs in Pakistani currency from West Pakistan to India. These amounts admittedly originated from profit earned in Pakistan in assessment year 1954-55. The court came to the conclusion that the question cannot be answered unless it is first determined whether the amounts were held as part of fixed capital or circulating capital. Therefore, the matter was remitted to the Tribunal to decide the issue of determination of the aforesaid question after obtaining additional evidence, if necessary. The ratio of the judgment is that it will be a revenue loss if the amount is held as a part of circulating capital and capital loss if it is held as a part of fixed capital. To our mind, the ratio of this case does not advance the case of the assessee. In fact, it goes against its case for the simple reason that the assessee utilized the foreign currency denominated loan inter alia for placing security deposits, purchase of computers, plant and machinery, furniture and other fixed assets, which led to creation of new capital assets, and discharge of tax liability. In the case of Madras Industrial Investment Corpn. Ltd. (supra), the finding of the Tribunal was that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3 lakhs in that Accounting year. The court came to the conclusion that this conclusion was not justified looking to the nature of the liability. Although the liability was incurred in the accounting year, yet it was a continuing liability which stretched over a period of 12 years. In this context, the Hon’ble Court observed that ordinarily, the revenue expenditure which incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred even though it has been written off in the books of account over a number of years. However, the facts may justify an assessee who has incurred an expenditure in a particular year to spread and claim it over a number of years because allowing the entire expenditure in one year will give a distorted picture of profit of that year. This decision also does not advance the case of the assessee for the simple reason that the loan was utilize primarily for placing security deposit, payment of tax liability and pur- chase of assets. In the case of Alembic Chemical Works Ltd. (supra), the assessee has acquired know-how for obtaining higher yield and also sub-cultures of higher yield of penicillin. He was already carrying on the business of manufacture of penicillin. The Court came to the conclusion that although the assessee had obtained a completely new plant under the agreement with new processes and technologies, it is also a matter of fact that the assessee was carrying on the manufacturing of penicillin in the plant from the year 1961. The products of the assessee continued to be the same. Therefore, it was held that the expenditure was of revenue nature. The facts of this case are also distinguishable inasmuch as the loan has been utilized for discharging tax liability, purchase of fixed assets etc. In the case of H.M.A. Udyog (P.) Ltd. (supra), the question was regarding the expenditure incurred on repairs in his commercial premises for starting business of restaurant and film distribution. The assessee was earlier carrying on the business of advertising of various cigarette products. In regard to levy of penalty on the addition of the expenditure to total income, it was held that the question was debatable and, thus, penalty will not be leviable. However, in the instant case, the money has been utilized for the purpose of payment of tax liability and purchase of fixed assets, where no such controversy can arise. The question in the case of Warner Hindustan Ltd. (supra) was regarding payment of technical fees and the Hon’ble Andhra Pradesh High Court held that the expenditure was capital in nature. In this case a reference was also made to the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 , in which it was mentioned that the question whether an expenditure is capital or revenue in nature is a vexed one. Its determination requires not only the consideration of acquisition of a capital asset and benefit of enduring nature but also whether the expenditure was in the capital field or the revenue field. Even when seen in the light of this decision, the foreign exchange was utilized for security deposit, tax payment and purchase of fixed assets. Therefore, the utilization was either in capital field or amounted to appropriation of profit. The ratio of this case does not advance the case of the assessee. Thus, on the face of it, various amounts mentioned in the table in paragraph 3.4, except for Rs. 1.25 lakhs, were spent for acquisition of capital asset and payment of tax. These expenses are capital in nature and there cannot be any dispute about it.
5.2 Coming to the issue whether increase in liability on account of fluctuation in foreign exchange, referable to the aforesaid amount would be revenue or capital in nature, the assessee relied on the decision of Hon’ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). The ratio of the decision is that such expenditure would be revenue expenditure if the liability was incurred on revenue account and it would be capital expenditure if it was incurred on capital account. In the case of East India Pharmaceutical Works Ltd. (supra) the Hon’ble Court mentioned that the money was withdrawn from the overdraft account to meet personal obligation to donate a sum of Rs. 10 lakhs for starting an engineering college. Therefore, the interest cannot be allowed to be deducted in computing the total income. These cases go against the assessee. But we are also aware of the provision contained in section 36(1)(iii) regarding deduction of interest paid in respect of capital borrowed for the purpose of business and the case law thereunder. Such interest is deductible in computing the income under section 36(1)(iii). There are a number of cases to support the aforesaid view. However, we may mention that none of the rival parties referred to any cases decided under the aforesaid provision.
5.3 On the other hand, in the case of Bestobell (India) Ltd. (supra), relied upon by the revenue in this behalf, the Hon’ble Calcutta High Court mentioned that as a result of devaluation, the assessee became liable to an extra amount in terms of rupees for repayment of its debt. The whole of such expenditure is inextricably connected with the indebtedness of the assessee and did not arise de hors the indebtedness. It was also not incurred for the purpose of taking loan. Therefore, the Hon’ble Court did not agree with the ld. counsel for the assessee that the extra amount provided by the assessee constituted extra expenditure incurred for meeting the debt just as postal expenses, bank charges etc. Thus, it was held that the loss was not of revenue nature.
5.4 On the conjoint reading of all the aforesaid cases, it becomes clear to us that the loan was primarily utilized in the capital field and, thus, any increase or decrease in the liability will be on capital account. However, in the relevant year interest paid on borrowings for acquisition of capital asset was deductible as revenue expenditure, irrespective of the fact whether the capital asset was put to use or not. Even after the amendment made to this section by Finance Act, 2003, with effect from 1-4-2004, the interest paid on such borrowings continues to be deductible albeit from the date when the asset was put to use. Although provision of section 36(1)(iii) is not applicable in case of loss occurring on account of fluctuation in the rate of foreign exchange, as the provision deals with interest only, yet there could be genuine doubt in the mind of the assessee that such loss is to be at par with interest expenditure, both being revenue in nature even in absence of any specific provision dealing with foreign exchange loss. In that sense, one could conclude that insofar as loss relatable to security deposit and purchase of computers, plant and machinery, furniture and other fixed assets is concerned, the same is allowable as revenue expenditure. In case of fixed assets, even if the loss is capitalized, the assessee would be entitled to deduction of depreciation and, thus, will ultimately be able to get the deduction albeit over a number of years. However, the assessee also utilized a portion of the loan for payment of advance-tax. The general proposition canvassed before us about the issue being debatable is not applicable at all in respect of this payment because payment of advance-tax and self-assessment tax is not an expenditure incurred for the purpose of business. This is an item of appropriation of income. Therefore, we are of the view that there could be no dispute in regard to the loss pertaining to the payment of advance-tax.
6. Coming to the issue of levy of penalty, the only case made out by the ld. counsel is that bona fide dispute existed between the revenue and the assessee as to whether the loss was deductible in computing the income. In this regard, the facts are that the increase in loan was quantified by the auditor in Annexure XI of the tax audit report regarding particulars of loan or deposits. The loss occurring on account of fluctuation was not debited to profit and loss account as Schedule K regarding administrative and other expenses showed such loss at nil against Rs. 26,28,380 last year. Therefore, this amount seems to have been claimed while computing the income as revenue loss. We have already dealt with the argument that there was a bona fide dispute in regard to deductibility of this loss. It has been held that while there could be dispute in regard to other items, there could be no dispute whatsoever in respect of tax payment. The question is whether penalty under section 271(1)(c) is leviable on the whole or any part of the claim.
6.1 In the case of Dharmendra Textile Processors (supra), relied upon by the ld. CIT (Appeals) and the ld. DR, the finding of the court is that it is not penal in nature and the question of levy of penalty has to be decided in terms of statutory language employed in the main provision and Explanations appended thereto. This case, therefore, cannot be taken to be an authority for the proposition that wherever addition is made to the returned income, penalty under section 271(1)(c) follows automatically. The correct interpretation of the judgment is that the explanation of the assessee has to be tested in terms of the statutory provision.
6.2 In the case of Rajasthan Spg. & Wvg. Mills Ltd. (supra), the finding of the Hon’ble Court is that it has to be shown by the revenue that conditions expressly mentioned in the statute for applicability of section 11AC hold good on the facts of the case. The judgment is similar in contents to the interpretation placed by us earlier on the decision in the case of Dharmendra Textile Processors ( supra). Thus, it has to be seen whether the conditions mentioned in section 271(1)(c) are satisfied in the instant case. In the case of Dilip N. Shroff (supra), it was held that "inaccurate particulars of income" mean inaccuracy in the details filed by the assessee regarding its claim. If the details are factually correct, mere omission or negligence would not lead to either suppressio veri or suggestio falsi. However, the finding regarding mens rea has been displaced by the decision in the case of Dharmendra Textile Processors (supra). These cases along with other cases were considered by the Hon’ble Supreme Court in the case of Reliance Petro Products (P.) Ltd. (supra). The aforesaid and other cases were considered and thereafter it was held that the word "particulars" means details furnished in respect of a particular claim and, therefore, if the details are accurate, the inference regarding concealment of income or furnishing inaccurate particulars of income cannot be drawn. Thus, the ratio which emanates from these cases is that - (i) the levy will depend upon the statutory language and Explanations thereto; and (ii) the inference of inaccurate particulars cannot be drawn if details furnished are correct.
6.3 In this case, the details of foreign exchange loss were not furnished in the return of income. In the tax audit report, it was shown as increase in liability of the loan. The loss was not debited in Schedule K of the audited accounts. The particulars of expenditure were ascertained by the ld. CIT(A) in quantum-appeal proceedings, which have been furnished by us in paragraph 3.4 of this order. Thus, it can be said that the assessee made a claim in respect of which full particulars were not furnished in the return. The claim not warranted as per the tenor of Schedule-XI of the tax-audit report and Schedule K of the audited accounts. Nonetheless, we have already held that there could be a bona fide belief as to whether increase in liability on account of purchase of assets and security deposit was revenue or capital liability. There could have been no such belief in regard to the tax payment. Thus, the claim was ex facie false in respect of the tax payment. There is no explanation beyond what has been considered earlier, i.e., existence of bona fide belief. As per statutory language the initial onus to furnish satisfactory explanation is on the assessee. No satisfactory explanation has been furnished in regard to the loss occurring on account of tax payment. The general explanation that capital expense versus revenue expense is a vexed question is not applicable to loss occurring on this account. Therefore, we are of the view that - (i) the ld. CIT(A) was not right in levying penalty in respect of loss occurring on account of purchase of capital asset and placing security deposit; and (ii) he was right in levying penalty in respect of loss occurring on account of tax payment.
7. In the result, the appeal is partly allowed.
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