DCIT, CHENNAI V. Modine Thernal Systems Pvt. Ltd., Kancheepuram

ITA 3310/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4980 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2017
• Appeal Filed By: Department
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 07-12-2016
• Court: TRIBUNAL
• Department Lawyers: SUPRIYO PAL
• Assessee Lawyers: S S CHIDAMBARAM
• Keywords: Capital asset; Non-deduction of tax; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: CHENNAI . . . , '.. % , * BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.3310/MDS/2016 + + /ASSESSMENT YEAR: 2008-09 THE DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-4(1), CHENNAI. VS. M/S.MODINE THERMAL SYSTEMS PVT. LTD., K-7, SIPCOT INDUSTRIAL PARK, SRIPERUMBUDUR, KANCHEEPURAM DIST., TAMIL NADU-602 105. [PAN: AAECM 9438 K ] ( . /APPELLANT) ( /0. /RESPONDENT) . 1 / APPELLANT BY : MR.SUPRIYO PAL, JCIT /0. 1 /RESPONDENT BY : MR.S.S.CHIDAMBARAM, ADV. 1 /DATE OF HEARING : 23.02.2017 1 /DATE OF PRONOUNCEMENT : 12.04.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 13.09.2016 OF COMMISSIONER OF INCOME TAX (APPEALS)- 8, CHENNAI, IN ITA NO.66/2010-11 FOR THE AY 2008-09 AND RAISED THE FOL LOWING GROUNDS: ITA NO.3310/MDS/2016 :- 2 -: 1. THE ORDER OF THE CIT(A) IS CONTRARY TO LAW AND FACT S OF THE CASE. 2. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF FE ES PAID FOR INCREASE IN AUTHORIZED SHARE CAPITAL OF RS.8,80,162/-. 2.1 THE CIT(A) ERRED IN NOT FOLLOWING THE HONBLE APEX COURTS DECISION IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD . V. CIT (1997) 225 ITR 792 (SC), WHEREIN IT IS HELD THAT THAT EXPENSES AS HAVE BEEN CLAIMED FOR INCREASING THE AUTHORIZED SHARE CAPITAL OF THE ASSESSEE COMPANY ARE CAPITAL EXPENDITURE AND NOT ALLOWABLE AS REVENUE EXPENDITURE. 2.2 THE CIT(A) ERRED IN HOLDING THAT THE FEES PAID FOR INCREASE IN AUTHORIZED SHARE CAPITAL IS ELIGIBLE FOR DEDUCTION U/S.35D WHEREAS SECTION 3 5D HAS NO APPLICATION TO THE FACTS OF THE CASE. 2.3 HAVING REGARD TO THE DECISION OF DELHI HIGH COURT I N THE CASE OF CIT VS. HINDUSTAN INSECTICIDES LTD, 2001 250 ITR 338 (DEL) HAS HELD T HAT FEES PAID FOR INCREASE OF SHARE CAPITAL IS NOT DEDUCTIBLE, THAT FEES PAID FOR INCRE ASE IN AUTHORIZED SHARE CAPITAL IS NOT FEES FOR REGISTRATION OF THE COMPANY AND IS NOT AMO RTIZABLE U/S.35D, THE CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF THE AO. 3. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF IN TEREST OF RS.4,96,364/- ON ECB LOAN. 3.1 THE CIT(A) ERRED IN NOT APPRECIATING THAT THE MANUF ACTURING ACTIVITY OF THE ASSESSEE HAD NOT YET COMMENCED DURING THE PREVIOUS YEAR RELE VANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND HENCE THE INTEREST ON ECB L OAN IS CAPITALIZED BY THE AO. 4. THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF SA LES PROMOTION EXPENSES OF RS.13,68,298/- AND PROFESSIONAL CHARGES ON MARKET R ESEARCH OF RS.14,66,902/-. 4.1 THE CIT(A) ERRED IN NOT APPRECIATING THE FINDINGS O F THE AO THAT SALES PROMOTION EXPENSES CAN NEITHER BE ALLOCATED TO DESIGN CENTRE SERVICES NOR TO MANUFACTURING ACTIVITY SINCE MANUFACTURING OF THE PRODUCTS OF THE ASSESSEE HAD NOT YET COMMENCED. 4.2 THE CIT(A) ERRED IN NOT APPRECIATING THAT THE MANUF ACTURING ACTIVITY OF THE ASSESSEE HAD NOT COMMENCED DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE CLAIM ON SALES PROMOTION EXPENSE S AND PROFESSIONAL CHARGES ON MARKET RESEARCH IS NOT ALLOWABLE U/S.37 OF THE IT A CT AND HENCE THE AO HAS RIGHTLY TREATED THE IMPUGNED EXPENSES AS CAPITAL EXPENSES. 5. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LD.CIT(A) MAY BE SET-ASIDE AND THA T OF THE ASSESSING OFFICER RESTORED. 2.0 DELAY: THERE WAS A DELAY OF THREE DAYS IN FILING THE APPE AL BY THE REVENUE AND FURNISHED THE AFFIDAVIT EXPLAINING THE REASONS. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE AO AND HEARD THE LD.DR AND AND ASSESSEES COUNSEL AND CONDONE THE DELAY. 3.0 GROUND NOS.1 & 4 ARE GENERAL IN NATURE WHICH DO NO T REQUIRE SPECIFIC ADJUDICATION. ITA NO.3310/MDS/2016 :- 3 -: 4.0 GROUND NOS.2 TO 2.3 ARE RELATED TO THE DISALLOWANC E OF FEE PAID FOR INCREASE OF AUTHORIZED SHARE CAPITAL. THE AO FOUND DURING THE PREVIOUS YEAR RELEVANT TO ASST. YEAR 2008-09 THAT THE AUTHOR IZED SHARE CAPITAL OF THE ASSESSEE COMPANY HAS INCREASED FROM RS.12.60 CR ORES TO RS.30.00 CRORES AND THE ASSESSEE HAS DEBITED A SUM OF RS.1, 20,000/- RATES & TAXES AND RS.7,60,162/- WERE PAID TOWARDS INCREASE IN AUTHORIZED SHARE CAPITAL. THE AO HAS ASKED THE ASSESSEE EXPLAIN AS TO WHY THE ABOVE EXPENSES SHOULD NOT BE CAPIRALISED? THE ASSESSEE I N ITS REPLY DATED 25/11/2010 WITHDREW THE CLAIM OF REVENUE EXPENDITUR E AND CLAIMED THE DEDUCTION U/S 35D OF IT ACT. THE AO NOT BEING IMPRE SSED WITH THE EXPLANATION DISALLOWED THE CLAIM STATING AS UNDER: THE MATTER IS SQUARELY CONCLUDED BY TWO DECISIONS O F THE SUPREME COURT IN PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LIMITED V. CIT [1997) 225 I TR 792 AND BROOKE BOND INDIA LIMITED V, CIT [1997] 225 ITR 798. IT WAS HELD IN BOTH THE CASES T HAT EXPENDITURE INCURRED BY A COMPANY IN CONNECTION WITH ISSUE OF SHARES WITH A VIEW TO INCR EASE ITS SHARE CAPITAL IS DIRECTLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY. IN VIEW OF THE ABOVE, THE EXPENSES CLAIMED UNDER TH E HEAD RATES AND TAXES AMOUNTING TO RS.8,80,162/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME. 5.0 AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER (I N SHORT AO), THE ASSESSEE WENT ON APPEAL BEFORE THE LEARNED COMMISSI ONER OF INCOME TAX(APPEALS) (IN SHORT LD.CIT(A)) AND THE LD.CIT( A) DELETED THE ADDITION MADE BY THE AO AS UNDER: 4.1 I HAVE CONSIDERED THE OBSERVATIONS OF THE ASSES SING OFFICER AND THE SUBMISSIONS MADE BY THE APPELLANT. THE FIRST GROUND OF APPEAL IS GEN ERAL IN NATURE. THE SECOND GROUND OF APPEAL IS WITH REGARD TO DISALLOWANCE OF EXPENSES A MOUNTING TO RS.8,80,162/- CLASSIFIED UNDER RATES & TAXES. THE ASSESSING OFFICER OBSERV ES THAT THE APPELLANT INCURRED EXPENDITURE OF RS.8,80,162/- UNDER THE HEAD RATES & TAXES IN CONNECTION WITH INCREASE IN AUTHORIZED SHARE CAPITAL FROM RS.12.6 CRORES TO RS.3 0 CRORES. HOWEVER, IN THE COURSE OF APPELLATE PROCEEDINGS BEFORE ME, THE APPELLANT MADE AN ALTERNATE CLAIM THAT THESE EXPENDITURE ARE ALLOWABLE UNDER SEC 35D(2). ITA NO.3310/MDS/2016 :- 4 -: AS RIGHTLY POINTED OUT BY THE APPELLANT, FEES PAID TO REGISTRAR OF COMPANIES FOR INCREASE IN AUTHORIZED SHARE CAPITAL WAS HELD TO BE ELIGIBLE FO R DEDUCTION U/S.35D IN THE FOLLOWING CASES: 1. CIT V. MULTI METALS LTD.(1991) (188 ITR 151) (RA J) 2. CIT V. NUCHEM LTD. (2015) (59 TAXMANN.COM 455) ( P&H) RESPECTFULLY FOLLOWING THE ABOVE DECISIONS OF THE H ONBLE HIGH COURTS OF RAJASTHAN AND PUNJAB & HARYANA, THE ALTERNATE CLAIM OF THE APPELL ANT WITH REGARD TO THE EXPENDITURE OF RS.8,80,162/- INCURRED IN CONNECTION WITH INCREASIN G THEIR AUTHORIZED SHARE CAPITAL IS ALLOWED. THE APPELLANT SUCCEEDS ON THIS GROUND. 6.0 WE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSES SEE (IN SHORT LD.AR) CONTENDED THAT THE EXPENDITURE RELATING TO FEE PAID TO REGISTRAR OF COMPANY FOR INCREASING THE AUTHORIZED CAPITAL IS EL IGIBLE FOR DEDUCTION U/S.35D AS DECIDED IN THE FOLLOWING CASE LAWS: 1. CIT V. MULTI METALS LTD.(1991) (188 ITR 151) (RA J) 2. CIT V. NUCHEM LTD. (2015) (59 TAXMANN.COM 455) ( P&H) 6.1 WE HAVE GONE THROUGH THE PROVISIONS OF SEC.35D WHI CH ARE REPRODUCED AS UNDER: [AMORTISATION OF CERTAIN PRELIMINARY EXPENSES. 4 35D. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMP ANY OR A PERSON (OTHER THAN A COMPANY) WHO IS RESID ENT IN INDIA, INCURS, AFTER THE 31ST DAY OF MARCH, 1970 , ANY EXPENDITURE SPECIFIED IN SUB-SECTION (2), (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS, IN CONNECTI ON WITH THE EXTENSION OF HIS 6 [***] UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW [***] UNIT , THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DED UCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FO R EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNI NG WITH THE PREVIOUS YEAR IN WHICH THE BUSINESS COMMEN CES OR, AS THE CASE MAY BE, THE PREVIOUS YEAR IN WH ICH THE EXTENSION OF THE 6[***] UNDERTAKING IS COMPLETE D OR THE NEW 6[***] UNIT COMMENCES PRODUCTION OR OPERATION : 7[PROVIDED THAT WHERE AN ASSESSEE INCURS AFTER THE 31ST DAY OF MARCH, 1998, ANY EXPENDITURE SPECIFIED IN SUB- SECTION (2), THE PROVISIONS OF THIS SUB-SECTION SHA LL HAVE EFFECT AS IF FOR THE WORDS 'AN AMOUNT EQUAL TO ONE- TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN SUCCE SSIVE PREVIOUS YEARS', THE WORDS 'AN AMOUNT EQUAL T O ONE- FIFTH OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCC ESSIVE PREVIOUS YEARS' HAD BEEN SUBSTITUTED.] (2) THE EXPENDITURE REFERRED TO IN SUB-SECTION (1) SHALL BE THE EXPENDITURE SPECIFIED IN ANY ONE OR MO RE OF THE FOLLOWING CLAUSES, NAMELY : (A) EXPENDITURE IN CONNECTION WITH (I) PREPARATION OF FEASIBILITY REPORT; (II) PREPARATION OF PROJECT REPORT; ITA NO.3310/MDS/2016 :- 5 -: (III) CONDUCTING MARKET SURVEY OR ANY OTHER SURVEY NECESS ARY FOR THE BUSINESS OF THE ASSESSEE; (IV) ENGINEERING SERVICES RELATING TO THE BUSINESS OF TH E ASSESSEE : PROVIDED THAT THE WORK IN CONNECTION WITH THE PREPARATION OF THE FEASIBILITY REPORT OR THE PROJECT REPORT OR THE CONDUCTING OF MARKET SURVEY OR OF ANY OTHER SURVEY OR THE ENGINEERING SERVICES REFER RED TO IN THIS CLAUSE IS CARRIED OUT BY THE ASSESSEE HIMSELF OR BY A CONCERN WHICH IS FOR THE TIME BEING APPROVED8 IN THIS BEHALF BY THE BOARD; (B) LEGAL CHARGES FOR DRAFTING ANY AGREEMENT BETWEEN TH E ASSESSEE AND ANY OTHER PERSON FOR ANY PURPOSE RELATING TO THE SETTING UP OR CONDUCT OF THE BUSINE SS OF THE ASSESSEE; (C) WHERE THE ASSESSEE IS A COMPANY, ALSO EXPENDITURE (I) BY WAY OF LEGAL CHARGES FOR DRAFTING THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY; (II) ON PRINTING OF THE MEMORANDUM AND ARTICLES OF ASSOC IATION; (III) BY WAY OF FEES FOR REGISTERING THE COMPANY UNDER TH E PROVISIONS OF THE COMPANIES ACT, 1956 (1 OF 1956)9; (IV) IN CONNECTION WITH THE I SSUE, FOR PUBLIC SUBSCRIPTION, OF SHARES IN OR DEBE NTURES OF THE COMPANY, BEING UNDERWRITING COMMISSION, BROKERAGE A ND CHARGES FOR DRAFTING, TYPING, PRINTING AND ADVERTISEMENT OF THE PROSPECTUS; (D) SUCH OTHER ITEMS OF EXPENDITURE (NOT BEING EXPENDIT UR E ELIGIBLE FOR ANY ALLOWANCE OR DEDUCTION UNDER ANY OTHER PROVISION OF THIS ACT) AS MAY BE PRESCRIB ED. 6.2 SEC.35D IS RELATING TO AMORTIZATION OF EXPENSES BE FORE COMMENCEMENT OF THE BUSINESS OR AFTER COMMENCEMENT OF BUSINESS IN CONNECTION WITH THE EXTENSION OF UNDERTAKING OR ANY CONNECTION WITH THE SET UP OF NEW UNIT. AS PER SECTION SEC.35D(2)(C)(IV ) THE EXPENDITURE IS ALLOWED TO BE AMORTIZED IN THE FOLLOWING CIRCUMSTAN CES: (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT O F HIS BUSINESS, IN CONNECTION WITH THE EXTENSION OF HIS 6 [***] UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW [***] UNIT, THE LD.AR SUBMITTED THE FINANCIAL STATEMENTS AND A S PER THE FINANCIAL STATEMENTS THE ASSESSEE HAS COMMENCED THE BUSINESS DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND APPEARS TO BE A NEW UNIT ELIGIBLE FOR DEDUCTION U/S .35D ON CAPITAL EMPLOYED. ITA NO.3310/MDS/2016 :- 6 -: 6.3 THE ASSESSEE IS A NEW UNIT AND EXPENDITURE INCUR RED WAS PAYMENT OF FEE TO ROC. THE HONBLE SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION V. CIT 93 TAXMAN N.5 (SC) , 91 TAXMANN 23 [SC] BROOKE BOND INDIA AND CIT V. MULTI MILLS INDIA LTD., 118 ITR 151 RELIED UP ON BY THE LD.DR AND THE LOWER A UTHORITIES HAS CONSIDERED THE ISSUE WHETHER THE EXPENDITURE IS C APITAL EXPENDITURE OR REVENUE EXPENDITURE ALLOWABLE U/S 37(1) AND THEIR LORDSHIPS HELD THAT THE EXPENDITURE WAS CAPITAL EXPENDITURE BUT NOT CONSIDE RED THE ISSUE OF DEDUCTION U/S. 35D. 6.4 THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL PLACIN G RELIANCE ON THE DECISIONS OF - 1. CIT V. MULTI METALS LTD.(1991) (188 ITR 151) (RA J) 2. CIT V. NUCHEM LTD. (2015) (59 TAXMANN.COM 455) ( P&H) 6.5 THE CASE LAWS RELIED UP ON BY THE CIT(A) AND T HE ASSESSEE ARE SQUARELY APPLICABLE IN THE INSTANT CASE. THEREFORE, RESPECTFULLY FOLLOWING THE ABOVE DECISIONS WE HOLD THAT THE PAYMENT OF FEE TO ROC IS A CAPITAL EXPENDITURE AND THE ASSESSEE IS ENTITLED FOR DEDUCT ION UNDER SEC.35D OF INCOME TAX ACT FOR AMORTIZING THE EXPENDITURE. ACC ORDINGLY, WE UPHOLD THE ORDER OF THE LD.CIT(A) AND DISMISS REVENUES A PPEAL ON THIS GROUND. 7.0 GROUND NOS.3 TO 3.1 ARE RELATED TO THE DISALLOWANC E OF INTEREST OF RS.4,96,364/- ON RE-STATEMENT OF ECB LOAN. THE ASS ESSEE HIMSELF HAS ITA NO.3310/MDS/2016 :- 7 -: DISALLOWED THE EXPENDITURE U/S.40(A)(I) OF INCOME T AX ACT AND THE AO HAS NOT MADE ANY ADDITION ON ACCOUNT OF THE INTEREST ON ECB LOAN. THE AO HAS CAPITALIZED THE EXPENDITURE SINCE THE ASSESSEE HAS NOT COMMENCED THE BUSINESS ACTIVITIES. THE AO IN HIS ASSESSMENT ORDER STATED THAT ECB LOAN NEITHER ATTRIBUTABLE TO DESIGN CENTRE NOR TO I TS CORPORATE DIVISION AND CAPITALIZED THE EXPENDITURE AND STATED THAT THE EXP ENDITURE IS NOT ALLOWABLE IN SUBSEQUENT YEAR IN CASE OF REMITTANCE OF TDS. 8.0 THE ASSESSEE WENT ON APPEAL BEFORE THE LD.CIT(A) A ND THE LD.CIT(A) HELD THAT THE CAPITALIZATION OF INTEREST AMOUNTING TO RS.4,96,364/- IS NOT CORRECT AND ALLOWED THE ASSESS EES APPEAL. 9.0 AGGRIEVED BY THE ORDER OF THE LD.CIT(A), THE REVEN UE IS ON APPEAL BEFORE THIS TRIBUNAL. 10.0 DURING THE APPEAL, THE LD.DR ARGUED THAT THE ASSES SEE HAS TAKEN ECB LOAN FROM ITS HOLDING COMPANY M/S.MODINE MANUF ACTURING COMPANY., USA AMOUNTING TO RS.3,70,38,703/-. SINCE THE COMPA NY HAS NOT COMMENCED ITS BUSINESS, THE AO HAS RIGHTLY CAPITALI ZED THE EXPENDITURE. ACCORDING TO THE LD.DR, THE LD.CIT(A) IS NOT CORREC T IN HOLDING THE EXPENDITURE AS THE REVENUE EXPENDITURE. THE LD.DR ALSO RELIED ON THE DECISION OF ITAT, HYDERABAD IN THE CASE OF M+W ZAND ER(S) PVT. LTD., V. ACIT. ON THE OTHER HAND, THE LD.AR DEFENDED TH E ORDER OF THE LD.CIT(A). ITA NO.3310/MDS/2016 :- 8 -: 11.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED BEFORE US. THE ASSESSEE HAS TAKEN ECB LOAN FOR THE PURPOSE OF CONSTRUCTING/MANUFACTURING UNIT WHICH IS FOR ACQUIR ING THE CAPITAL ASSET. THE INTEREST RELATING THE BORROWED CAPITAL HAS ALRE ADY BEEN ADDED BACK TO INCOME U/S.40(A)(I) OF IT ACT AND HAS NO IMPACT ON THE ASSESSMENT OF THE YEAR UNDER CONSIDERATION. HENCE, THE ISSUES FOR TH E AY 2008-09 IS ONLY OF ACADEMIC INTEREST. THE EXPENDITURE INCURRED FOR A CQUIRING THE CAPITAL ASSET REQUIRED TO BE ALLOWED AS DEDUCTION ON PAYMEN T BASIS BUT NOT ON ACCRUAL BASIS. THIS ISSUE HAS BEEN SETTLED BY HON BLE SUPREME COURT CIT VS. WOODWORD GOVT. OF INDIA (P) LTD. 312 ITR 254 (S C). THE HONBLE APEX COURT IN THE DECISION CITED SUPRA DEALT WITH THE CAPITAL ACCOUNTS IN PARA NO.22 TO34 AND AMENDED PRO VISIONS OF IT ACT IN RESPECT OF SEC.43A DEALT WITH IN PARA NO.34 AS UNDE R: 34. LASTLY, WE ARE OF THE VIEW THAT AMENDMENT OF SE CTION 43A BY THE FINANCE ACT, 2002 WITH EFFECT FROM 1-4-2003 IS AMENDATORY AND NOT CLA RIFICATORY. THE AMENDMENT IS IN COMPLETE SUBSTITUTION OF THE SECTION AS IT EXISTED PRIOR THERETO. UNDER THE UNAMENDED SECTION 43A ADJUSTMENT TO THE ACTUAL COST TOOK PLAC E ON THE HAPPENING OF CHANGE IN THE RATE OF EXCHANGE WHEREAS UNDER THE AMENDED SECTION 43A THE ADJUSTMENT IN THE ACTUAL COST IS MADE ON CASH BASIS. THIS IS INDICATED BY TH E WORDS 'AT THE TIME OF MAKING PAYMENT'. IN OTHER WORDS, UNDER THE UNAMENDED SECTION 43A, 'A CTUAL PAYMENT' WAS NOT A CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CA RRYING COST OF THE FIXED ASSET ACQUIRED IN FOREIGN CURRENCY, HOWEVER, UNDER AMENDED SECTION 43A WITH EFFECT FROM 1-4-2003 SUCH ACTUAL PAYMENT OF THE DECREASED/ENHANCED LIABILITY IS MADE A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIX ED ASSET. THIS INDICATES A COMPLETE STRUCTURAL CHANGE BROUGHT ABOUT IN SECTION 43A VIDE FINANCE ACT, 2002. THEREFORE, THE AMENDED SECTION IS AMENDATORY AND NOT CLARIFICATORY IN NATURE. ITA NO.3310/MDS/2016 :- 9 -: 12.0 ON THE SIMILAR FACTS, THE CO-ORDINATE BENCH OF ITA T, HYDERABAD, IN ITA NO.2095/HYD/2011 HELD THAT IN THE CASE OF M/S.M +W ZANDER (S) PVT. LTD., VS. ACIT ON 06.06.2012 WAS HELD AS UNDER: 11. BRIEF FACTS OF THE ISSUE ARE THAT IT IS THE CL AIM OF THE ASSESSEE THAT IT HAS OBTAINED LOAN FROM ITS HEAD OFFICE FOR AN SGD 15,00,000 AND SGD 10,00,000 RESPECTIVELY. IT ALSO FILED LETTER DATED 25.4.2005 AND RBI'S LETTER DATED 26.4.2005 STATING THAT WITH RESPECT TO THE EXECUTION OF PARTICULAR PROJECTS, IT HAD BORROW ED CERTAIN MONIES ON REPATRIATION BASIS FROM ITS HEAD OFFICE. THE ASSESSEE ALSO REFERRED TO BOMBAY HIGH COURT DECISION IN THE CASE OF CIT V. DEMPO AND CO. PVT. LTD. (206 ITR 291) WHE REIN IT HAS SUMMED UP THE POSITION THAT FOR DETERMINING WHETHER THE DEVALUATION LOSS I S REVENUE OR CAPITAL WHAT IS RELEVANT IS UTILISATION OF THE AMOUNT AT THE TIME OF DEVALUATIO N AND NOT THE OBJECT FOR WHICH THE LOAN WAS TAKEN. ALSO IT WAS HELD THAT LOSS IN RESPECT OF CIRCULATING CAPITAL IS REVENUE LOSS WHEREAS LOSS IN RESPECT OF FIXED CAPITAL IS NOT. TH E ASSESSEE REFERRED TO THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. (312 ITR 254) (SC ). 12. THE CONTENTION OF THE ASSESSEE IS THAT U/S. 43 A WHENEVER THERE IS AN INCREASE IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIA N CURRENCY, THE LIABILITY IS TO BE ALLOWED AT THE TIME OF MAKING PAYMENT. HOWEVER, SECTION 43A DE ALS WITH A CASE WHEREIN THE ASSESSEE HAS ACQUIRED A CAPITAL ASSET AND IN THE CASE OF THE ASSESSEE IT HAS BORROWED FOR THE PURPOSE OF WORKING CAPITAL AND HENCE LIABILITY HAS ARISEN O N ACCOUNT OF REVENUE ACCOUNT AND THE SAME IS ADMISSIBLE. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. FROM A READING OF THE ENTIRE AS-11 AND ALSO THE EXTRACTS I T FOLLOWS THAT LOAN IS A NON-INTEGRAL FOREIGN OPERATION WITH REFERENCE TO THE HEAD OFFICE , SO LONG AS BRANCH IS INDEPENDENTLY CONDUCTING ITS BUSINESS ACTIVITIES. IN THE CASE ON HAND THE BRANCH IS INDEPENDENTLY CARRYING OUT CONTRACTS IN THIS COUNTRY AND HENCE, THE FLUCTU ATION IN THE RATE OF EXCHANGE CANNOT HAVE EFFECT ON ITS INTEGRAL OPERATIONS. THE ENTIRE TRANS ACTION IS NON-INTEGRAL IN NATURE AND HENCE, THE SAME IS TO BE TREATED AS PER PARA 24 OF AS- 11. THE FLUCTUATIONS IN THE RATE OF FOREIGN EXCHANGE ON THE QUANTUM OF LOAN WOULD NOT AFFECT TH E DAY TO DAY WORKING OR THE PROFIT OF A GIVEN YEAR. IT WOULD AFFECT ONLY ON REPAYMENT AT TH E TIME OF SETTLEMENT. HENCE, THE GAIN OR LOSS IS TO BE ACCUMULATED IN THE RESERVE ACCOUNT UN TIL THE DATE OF SETTLEMENT WHEREUPON IT CAN BE CREDITED OR DEBITED IN THE PROFIT AND LOSS A /C. HENCE, THE LOSS CLAIMED IS TO BE CARRIED FORWARD IN THE FOREIGN CURRENCY TRANSLATION RESERVE ACCOUNT AND SQUARED UP AT THE TIME OF SETTLEMENT. IT CANNOT BE ALLOWED TILL THE T IME OF SETTLEMENT. ACCORDINGLY, WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THIS GROUND OF THE ASSESSEE IS DISMISSED. 13.0 IN THE INSTANT CASE THE ASSESSEE HAS NOT CLAIMED T HE DEDUCTION FOR NON-DEDUCTION OF TAX AT SOURCE. HOWEVER THE LOAN IS TAKEN FOR THE PUSPOSE OF SETTING UP OF UNIT AND THE INTEREST ON LOAN IS A LLOWABLE ONLY ON PAYMENT BASIS. THEREFORE, WE ARE OF THE OPINION THAT THE AO HAS TO VERIFY WHETHER THE EXPENDITURE IS ACTUALLY PAID BY THE ASSESSEE OR THE EXPENDITURE IS DEBITED DUE TO RE-STATEMENT OF FOREIGN EXCHANGE LOA N AND DECIDE THE ISSUE IN THE LIGHT OF THE DECISION OF THE HONBLE S UPREME COURT AND THE ITA NO.3310/MDS/2016 :- 10 -: DECISION OF THE ITAT, HYDERABAD CITED SUPRA IN THE YEAR IN WHICH IT IS CLAIMED. THIS GROUND IS ALLOWED FOR STATISTICAL P URPOSE. 14.0 GROUND NOS.4.0 TO 4.2 ARE RELATED TO THE SALES PRO MOTION EXPENSES OF RS.13,68,298/- AND MARKETING EXPENSES OF RS.14,6 6,902/-. THE AO HAS DISALLOWED THE EXPENDITURE STATING THAT THE MAN UFACTURING ACTIVITY WAS NOT YET COMMENCED. ACCORDING TO THE AO, THE EXPENS ES WERE INCURRED BEFORE SETTING UP OF THE BUSINESS AND THE SAME REQU IRED TO BE CAPITALIZED. ACCORDINGLY THE AO DISALLOWED THE EXPENSES. 15.0 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WEN T ON APPEAL BEFORE THE LD.CIT(A) AND THE LD.CIT(A) DELETED THE ADDITION OBSERVING AS UNDER: IT IS NOT IN DISPUTE THAT THE TRADING ACTIVITY OF T HE APPELLANT HAD COMMENCED ALTHOUGH THE ASSESSING OFFICER STATES THAT ONLY SAMPLE SALES WER E MADE. IT IS ALSO NOT IN DISPUTE THAT SERVICES WERE RENDERED BY THE DESIGN CENTRE OF THE APPELLANT, THOUGH CONFINED TO THE HOLDING COMPANY OF THE APPELLANT. THE ASSESSING OFF ICER ACCEPTS THE FACT THAT MARKETING DEPARTMENT WAS INVOLVED IN RENDERING SERVICES TO TH E TRADING ACTIVITY OF THE APPELLANT. NO CLEAR AND COGENT REASONS HAVE BEEN GIVEN BY THE ASS ESSING OFFICER TO ARRIVE AT THE CONCLUSION THAT THE ABOVE EXPENSES WERE DISTINCTLY ALLOCABLE TO THE MANUFACTURING ACTIVITY APART FROM THE FACT THAT MANUFACTURING ACTIVITY HAS NOT YET COMMENCED. AS RIGHTLY OBSERVED BY THE APPELLANT, THERE IS NO REASON WHY MARKET RES EARCH SHOULD BE RESTRICTED ONLY TO MANUFACTURING ACTIVITY WHEN THEY ARE INVOLVED IN BO TH TRADING ARID MANUFACTURING APART FROM THE DESIGN OF THEIR PRODUCTS. THE ASSESSING OF FICER DID NOT FIND ANYTHING WRONG WITH THE CLAIM OF THE APPELLANT THAT THEY WERE INVOLVED IN TRADING AND DESIGNING ACTIVITIES APART FROM MANUFACTURING OF THEIR PRODUCTS. IT IS PERTINE NT HERE TO REFER TO THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN A SIMILAR CASE OF CIT V. ELECTRON INDIA (241 ITR 166) (MAD) WHEREIN IT WAS OBSERVED AS FOLLOWS: THE COMMERCIAL SALE OF THE PRODUCT IS NOT THE CRITE RION FOR DECIDING AS TO WHEN A BUSINESS IS SET UP. THE SETTING UP OF PLANT AND MAC HINERY AND COMMENCEMENT OF PRODUCTION ARE THE MATERIAL FACTORS FOR DECIDING AS TO WHETHER A BUSINESS HAS COMMENTED. AS OBSERVED BY THE JURISDICTIONAL HIGH COURT COMMER CIAL SALE OF THE PRODUCT IS NOT THE CRITERIA FOR DECIDING WHETHER A BUSINESS HAS BEEN SETUP. IN FACT, THE APPELLANT IS PLACED BETTER ON THIS CRITERION SINCE SAMPLE SALES HAVE ALREADY BEEN MADE AND REVENUE EARNED. ITA NO.3310/MDS/2016 :- 11 -: 16.0 APPEARING FOR THE REVENUE LD.DR ARGUED THAT THE EXPENSES CANNOT BE ALLOCATED TO EITHER DESIGN CENTRE OR TO MANUFACT URING ACTIVITY AS THE ASSESSEE HAS NOT COMMENCED THE PRODUCTION. ACCORDIN G TO THE LD.DR, SINCE THE EXPENDITURE IS RELATABLE TO SETTING UP OF BUSINESS AND ALLOCATED TO THE CORPORATE THE SAME SHOULD BE CAPITALIZED SIN CE THE COMMENCEMENT OF PRODUCTION YET TO BE STARTED. ON THE OTHER HAND , THE LD.AR RELIED ON THE ORDER LD.CIT(A). 17.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED BEFORE US. AS PER THE ASSESSMENT ORDER, IT IS OBSERVED THAT T HE ASSESSEE HAS MADE THE SAMPLE SALES TO THE TUNE OF RS.3,17,272/- WHICH INDICATES THAT THE ASSESSEE HAS INSTALLED THE BUSINESS UNIT AND RE ADY FOR COMMENCEMENT OF THE BUSINESS AND THE ASSESSEE ALSO MADE THE SAMP LE SALES IN THE YEAR UNDER CONSIDERATION. THE AO ALSO ACCEPTED THE ABOVE FACT. THE LD.CIT(A) ALLOWED THE ASSESSEES APPEAL PLACING RELIANCE ON T HE OBSERVATIONS HONBLE JURISDICTIONAL HIGH COURT DECISION ON SIMILAR FACTS WHICH ARE DISCUSSED ABOVE. THE LD.DR DID NOT BRING ANY EVIDENCE TO ESTA BLISH THAT THE ASSESSEE HAS NOT COMMENCED THE BUSINESS ACTIVITY AN D NO OTHER DECISION TO CONTROVERT THE OBSERVATION OF THE JURISDICTIONAL HIGH COURT RELIED UP ON BY THE CIT(A). FROM THE ABOVE FACTS, IT IS CLEAR TO US THAT THE A SSESSEE HAS ESTABLISHED THE UNIT AND COMMENCED THE BUSINESS. H ENCE, WE DO NOT FIND ITA NO.3310/MDS/2016 :- 12 -: ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CI T(A) AND UPHOLD THE SAME. THE APPEAL OF THE REVENUES IN THE GROUND NO .4 IS DISMISSED. 18.0 IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH APRIL, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . % ) (D.S.SUNDER SINGH) /ACCOUNTANT MEMBER /CHENNAI, 6 /DATED: 12 TH APRIL, 2017. TLN 1 /%7 87 /COPY TO: 1. . /APPELLANT 4. 9 /CIT 2. /0. /RESPONDENT 5. 7 / /DR 3. 9 ( ) /CIT(A) 6. + /GF