Ita/1382/2009 Of The Commissioner Of Income Tax,Cochin v. International Creative Foods(P)Ltd,Kochi

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN FRIDAY, THE 1ST OCTOBER 2010 / 9TH ASWINA 1932 ITA.No. 1382 of 2009() ---------------------- ITA.227/COCH/2006 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- INTERNATIONAL CREATIVE FOODS (P) LTD., AMALGAM HOUSE, BRISTOW ROAD, KOCHI-3. ADV. SRI.P.BALAKRISHNAN (E) FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 1.10.2010 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR, &K. SURENDRA MOHAN, JJ. -------------------------------------------- -------------------------------------------- Dated this the 1st day of October, 2010 JUDGMENT Ramachandran Nair, J. This is an appeal filed by the revenue under Section 260A of theIncome Tax Act against the orders of the Tribunal on various questionsraised in the appeal. We have heard senior counsel appearing for therevenue and Sri. P. Balakrishnan, counsel appearing for the respondent-assessee. 2. The first question raised pertains to assessee's claim fordeduction of exchange rate fluctuation on the outstanding loan which isstated to be $ 25 lakhs. The assessing officer found that the loanremained outstanding and the exchange rate fluctuation is not actualliability but is only a provision which cannot be allowed. Thecontention of standing counsel is that the first appellate authority aswell as the Tribunal allowed the claim by following AccountingStandards (AS) II issued by the Institute of Chartered Accountants ofIndia. According to counsel for the revenue unless liability is accrued ITA 1382/2009 the assessee cannot claim deduction. Counsel appearing for theassessee on the other hand contended that loan account maintained inthe Balance Sheet is in Indian rupee and at the end of the previous year,foreign exchange fluctuation is added to the rupee liability which isclaimed as deduction by the assessee. Even though we find force in thecontention of assessee, there is nothing to indicate in the orders of anyof the authorities below as to when the assessee availed the loan and forevery year whether the assessee was claiming deduction wheneverexchange rate fluctuation was adverse to them. If the practice adoptedby the assessee is correct, then whenever exchange rate fluctuationgoes to reduce the rupee liability of the loan, the same should be takenas income of the relevant year. We feel the matter requiresreconsideration by the assessing officer after verifying the accounts forprevious and subsequent years with regard to treatment of exchangerate fluctuation by the assessee. We therefore set aside the orders ofthe tribunal and that of the lower authorities and remand the matter tothe assessing officer for fresh consideration after giving an opportunityto the assessee to produce accounts for previous and subsequent yearsand after verifying the assessment records of those years. If the ITA 1382/2009 assessee has followed uniform practice of debiting and crediting theprofit and loss account with variation in exchange rate fluctuation, thendeduction should be allowed for this year, if the exchange ratefluctuation has caused increase in rupee liability of the loan account. ITA 1382/2009 assessee has followed uniform practice of debiting and crediting theprofit and loss account with variation in exchange rate fluctuation, thendeduction should be allowed for this year, if the exchange ratefluctuation has caused increase in rupee liability of the loan account. 3. The next question raised pertains to assessee's claim ofdeduction of depreciation which was disallowed by the assessingofficer for the reason that machinery itself is installed on 31.3.2002. Itis seen that the first appellate authority as well as the Tribunal allowedthe claim by following the decision of this Court in GEO TECCORPORATION, 244 I.T.R. 452, wherein this Court has held that ifmachinery was kept ready for use, the assessee is entitled to claimdepreciation. Senior counsel appearing for the revenue contended thatthe value of machinery itself is around Rs. 98 lakhs and there is nothingto indicate that the assessee has even kept the machinery ready for useeven assuming that the same is sufficient for claiming depreciation.Counsel appearing for the assessee on the other hand submitted thatnone of the authorities below found that machinery was not kept readyfor use, and so much so, going by the decision of this Court abovereferred, the assessee is rightly granted relief by the appellate authority. ITA 1382/2009 We are unable to accept the contention of the assessee and we find thatneither the CIT (Appeals) nor the Tribunal has considered relevantfacts on this issue. In the first place, nobody has considered what themachinery is. The assessee obviously procured the machinery frommanufacturer and machinery of this value will certainly involveinstallation with all integrated facilities, trial run and commissioning.Even assuming that keeping the machinery ready for use itself issufficient for claiming depreciation, assessee has to establish that themachinery was brought to it's site and installation and commissioningwere done which is possible only after trial run. Since none of theauthorities has considered these matters, we allow the appeal on thisissue and set aside the orders of the first appellate authority and that ofthe Tribunal and even assessment and remand the matter to theassessing officer to reconsider the same with documentary evidenceabout the transport, installation, trial run and commissioning of themachinery. If the machinery was not put to use in regular production,then the assessing officer will consider whether the judgment abovereferred will entitle the assessee for deduction based on findings offacts on the issues stated above. ITA 1382/2009 4. The next ground pertains to assessee's entitlement fordeduction of amounts paid to two consultants, one being Rs. 2,15,748/-and the other being Rs. 5 lakhs. After hearing both sides and aftergoing through the Tribunal's order, we find no merit in this groundbecause assessee was carrying on business and the advice given bythem was for the purpose of business and so much so, the Tribunalrightly held that expenditure is revenue in nature entitling the assesseefor deduction. We therefore dismiss the appeal on this issue. 5. The next ground raised by the revenue pertains todisallowance of Rs. 13,27,234/- which is the expenses incurred by theassessee on behalf of Hindustan Lever Ltd. Senior counsel contendedthat expenditure was to be reimbursed by Hindustan Lever Ltd. and somuch so it is not a real expenditure for the assessee. However,assessee's counsel contended that expenditure is a business expenditureand is allowable and there is nothing to indicate the Hindustan Leverltd. has reimbursed though assessee may have a claim ofreimbursement. We do not find any justification for the departmentalappeal on this issue because if amount incurred by the assessee isreimbursed the same is assessable under Section 41(2) of the Act. ITA 1382/2009 Consequently we dismiss the appeal on this issue. 5. The next ground raised by the revenue pertains todisallowance of Rs. 13,27,234/- which is the expenses incurred by theassessee on behalf of Hindustan Lever Ltd. Senior counsel contendedthat expenditure was to be reimbursed by Hindustan Lever Ltd. and somuch so it is not a real expenditure for the assessee. However,assessee's counsel contended that expenditure is a business expenditureand is allowable and there is nothing to indicate the Hindustan Leverltd. has reimbursed though assessee may have a claim ofreimbursement. We do not find any justification for the departmentalappeal on this issue because if amount incurred by the assessee isreimbursed the same is assessable under Section 41(2) of the Act. ITA 1382/2009 Consequently we dismiss the appeal on this issue. 6. The last issue raised by the revenue pertains to payment toforeign technicians of Rs. 1 46,160/- which was disallowed for thereason that tax was not deducted at source under Section 195(2) of theAct. The Tribunal reversed the disallowance made under Section 40(a)(i) of the Act for the reason that payments to non-resident Indians werenot subject to tax. We find from the Tribunal's order that payment wasmade outside India for services rendered outside India and so much so,no TDS was called for. In view of this finding of the Tribunal, we donot find any ground to interfere with the order of the Tribunal on thisissue. The appeal filed by the revenue on this issue is also dismissed. In the result, Appeal is allowed to the extent indicated aboveremanding the first two issues referred above for fresh consideration bythe assessing officer. (C.N.RAMACHANDRAN NAIR)Judge.Judge. (K. SURENDRA MOHAN) Judge. kk kk