Gati Limited, Secunderabad V. Addl.CIT, Range-2, Hyderabad

ITA 749/HYD/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1390 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 16-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V HEMALATHA
• Keywords: Capital asset; Depreciation; Assessment record; Revenue expenditure; Capital expenditure
• Section: 28; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.749/HYD/2012 : ASSESSME NT YEAR 2007-08 M/S. GATI LTD., SECUNDERABAD. ( PAN - AABCG 3709 Q) V/S. ADDL. COMMISSIONER OF INCOME-TAX RANGE 2, HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI Y.RATNAKAR RESPONDENT BY : SMT. G.V.HEMALATHA (CIT-DR) DATE OF HEARING 10.10.2012 DATE OF PRONOUNCEMENT 04.01.2013 O R D E R PER SAKTIJIT DEY, JUDICIAL MEMBER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDE R OF THE COMMISSIONER OF INCOME-TAX-II, HYDERABAD DATED 26.3.201 2 PASSED UNDER S.263 OF THE INCOME-TAX ACT, 1961, FOR THE ASSESSMENT YE AR 2007-08. 2. THE ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF CARGO TRANSPORT AND TRADING, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR2007- 08 DISCLOSING INCOME OF RS. 15,54,67,315 AND A BOOK PROF IT OF RS.2,62,85,309 UNDER S.115JB OF THE ACT. ASSESSMENT WAS COMPLETED ON A T OTAL INCOME OF RS.16,36,43,210, AFTER MAKING AN ADDITION OF RS.81,99 ,666, BEING UNPAID LEAVE ENCASHMENT LIABILITY, TO THE INCOME RETURNED UND ER THE NORMAL PROVISIONS, AND AFTER MAKING AN ADJUSTMENT BY WAY OF R EDUCTION (RS.23,762) OF DEPRECIATION ON THE WDV ON DISALLOWANCE OF REVENUE EXPENDITURE TREATING ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 2 THE SAME AS CAPITAL EXPENDITURE IN THE ASSESSMENT YEAR 200 0-01, VIDE ORDER OF ASSESSMENT DATED 29.12.2009 PASSED UNDER S.143(3) OF THE ACT. 3. THE COMMISSIONER OF INCOME-TAX, WHILE PERUSING THE ASSESSMENT RECORDS FOR THE YEAR UNDER APPEAL, NOTED THAT THE ASSESSI NG OFFICER HAS NOT APPLIED HIS MIND TO THE FOLLOWING POINTS AND INITIATE D THE PROCEEDINGS UNDER S.263 OF THE ACT, BY ISSUING A SHOW CAUSE NOTICE- (A) ASSESSEE HAS OFFERED TONNAGE INCOME OF RS.12,60,230 AND R ENTAL INCOME OF RS.9,08,942 FROM CTC (COAST TO COAST) DIVISION . HOWEVER, IT IS SEEN FROM THE PROFIT & LOSS ACCOUNT OF THE CTC DIVISION THAT THE ASSESSEE WAS IN RECEIPT OF RS.15,46,428 TOWARDS DIFFERENCE IN EXCHANGE (NET) WHICH IS NOT INCIDENTAL TO TONNAGE INCOME AND THE SAME SHOULD HAVE BEEN ASSESSED UNDER THE HE AD OF PROFIT AND AGAINST OF BUSINESS. (B) AS PER SCHEDULE 19 ADMINISTRATIVE EXPENSES TO THE PRO FIT & LOSS ACCOUNT, THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.17,77,59 8 TOWARDS LOSS ON SALE OF FIXED ASSTS. HOWEVER, AN AMOUNT O F RS.16,37,540 WAS ONLY ADDED BACK UNDER EDSC DIVISION W HILE COMPUTING THE TOTAL INCOME LEAVING A BALANCE OF RS.1,40 ,058 WHICH IS REQUIRED TO BE BROUGHT TO TAX. (C) IT IS SEEN FROM THE COMPUTATION OF TOTAL INCOME (ED SC DIVISION) THAT THE ASSESSEE HAD CLAIMED AN AMOUNT OF RS.1,32,95,577 TOWA RDS GRATUITY PAID TO GATI GROUP GRATUITY FUND. AS PER TH E NOTES ON ACCOUNTS AT SL.NO.6 EMPLOYEE BENEFIT, AN AMOUNT OF RS.176.12. LAKH (INCLUDING THE SAID GRATUITY PAID OF RS.132,.96 LAC) HAD BEEN ADJUSTED AGAINST GENERAL RESERVE AS AT 01.07.2006 IN ACCORDANCE WITH TRANSITIONAL PROVISION IN THE ACCOUNTING STANDARD( AS) 15. SINCE THE SAID GRATUITY PAYMENT WAS MET FROM GENERAL RESERV ES AND NOT ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 3 DEBITED TO THE PROFIT & LOSS ACCOUNT, THE EXPENDITURE COULD BE HELD AS NOT PERTAINING TO PREVIOUS YEAR 2006-07 RELEVANT T O ASSESSMENT YEAR 2007-08. IN VIEW OF THE JUDGMENTS OF KEDARNATH JUTE MANUFACTURING CO. LTD. V/S. CIT(82 ITR 364), AS REAFF IRMED IN CIT V/S. KALINGA TUBES LTD. (218 ITR 164); AND THE DECISION OF THE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTI LISERS V/S. CIT(277 ITR 172), THE AMOUNT OF RS.1,32,95,577 TOWAR DS GRATUITY REQUIRES TO BE DISALLOWED. (D) ASSESSEE HAD REDUCED AN AMOUNT OF RS.2,64,26,757 TOWARDS FOREIGN CURRENCY CONVERTIBLE BONDS(FCCB) ISSUE EXPENSE S DEBITED TO SECURITIES PREMIUM ACCOUNT, WHILE COMPUTING THE TOTAL INCOME. AS PER THE NOTES ON ACCOUNT AT SL.NO.8, THE COMPANY ISSUED FCCBS OF FACE VALUE OF US $1,000 EACH WITH AN OPTION TO THE BO NDHOLDER TO CONVERT THE FCCB INTO ORDINARY SHARES OR TO REDEEM TH EIR CLAIMS OF BONDS ON 6.12.2011 AT 147.882% OF THE PRINCIPAL. SIN CE THE SAID BONDS ARE CONVERTIBLE AND HAVE THE CHARACTERISTIC OF EQ UITY SHARES, PROPORTIONATE EXPENDITURE ON THE ISSUE OF BONDS HAS TO BE TREATED AS CAPITAL EXPENDITURE AS HELD IN THE CASE OF BANCO PRODUCTS (INDIA )LTD. V/S. CIT(1999)63 TAXMAN 370(AHD) AND SONA STEERING S YSTEM LTD. V/S. CIT(2003)129 TAXMAN 152(MAG. CONSEQUENTLY, THE EXPENDITURE OF RS.2,64,26,57 REQUIRES TO BE DISALLOW ED AND ADDED BACK. 4. IN RESPONSE TO THE SHOW CAUSE NOTICE AND IN THE P ROCEEDINGS BEFORE THE COMMISSIONER OF INCOME-TAX, THE ASSESSEE, WHIL E OPPOSING GENERALLY THE REVISION PROPOSED UNDER S.263 OF THE ACT , SUBMITTED THAT THE ASSESSING OFFICER HAS ALREADY APPLIED HIS MIND TO THE ISSUE S IN RELATION TO WHICH THE ACTION UNDER S.263 WAS PROPOSED, AND THEREFOR E, THE COMMISSIONER OF INCOME-TAX WAS NOT JUSTIFIED IN REVISING THE ASSESSMENT JUST TO SUBSTITUTE HIS VIEWS ON THE ISSUES IN QUESTION. IT WAS ALSO SUBMITTED THAT TWO VIEWS ARE ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 4 POSSIBLE ON THE ISSUES IN QUESTION, AND AS SUCH WHEN THE ASSESSI NG OFFICER HAS TAKEN ONE OF THE TWO POSSIBLE VIEWS, INITIATION OF PRO CEEDINGS UNDER S.263 IS NOT LEGALLY PERMISSIBLE. IT WAS ALSO FURTHER SUBMITTE D THAT THE ORDER OF ASSESSMENT WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE IN TERESTS OF THE REVENUE, AND HENCE THE PROVISIONS OF S.263 ARE NOT A TTRACTED TO THE FACTS OF THE CASE. IN SUPPORT OF THESE CONTENTIONS, RELIANCE WAS PL ACED ON A NUMBER OF DECISIONS OF THE APEX COURT AND VARIOUS HIGH COURTS, INCLUDING THE DECISIONS OF THE APEX COURT IN THE CASE OF CIT V/S. MAX INDIA LTD. (295 ITR 282) AND MALABAR INDUSTRIAL COMPANY LTD. V/S. CIT(24 3 ITR 83). ISSUE-WISE ELABORATE SUBMISSIONS WERE ALSO MADE IN SUPPORT OF THE CON TENTION THAT THE ASSESSMENT WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE I NTERESTS OF THE REVENUE ON ANY OF THE ISSUES THAT GAVE RISE TO THE PROCE EDINGS UNDER S.263 OF THE ACT. 5. AS FOR THE SECOND ISSUE RELATING TO DISCREPANCY WITH RE GARD TO ADMINISTRATIVE EXPENSES DEBITED TO PROFIT & LOSS ACCOUNT, THE COMMISSIONER OF INCOME-TAX WAS CONVINCED WITH THE EXPLANATION OF TH E ASSESSEE, AND AS SUCH, DID NOT GIVE ANY DIRECTION TO THE ASSESSING OFFICER. WITH REGARD TO THE OTHER THREE ISSUES, THE COMMISSIONER OF INCOME-TAX WAS N OT CONVINCED WITH THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO BRING TO TAX THE AMOUNTS OF RS.15,46,428 ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION GAIN; RS.1,32,95,577 BEING GRATUITY LIABILITY; AND RS.2,64, 26,757 BEING FCCB ISSUE EXPENSES, VIDE IMPUGNED ORDER DATED 26.3.2012 PASSED U NDER S.263 OF THE ACT. 6. AGGRIEVED BY THE ORDER OF THE COMMISSIONER OF I NCOME-TAX, ASSESSEE PREFERRED THE PRESENT APPEAL BEFORE US. ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 5 7. THE GROUNDS RAISED BY THE ASSESSEE BASICALLY PERTAIN TO FOUR ISSUES. IN GROUND NOS.1,2,3,4 AND 8, THE ASSESSEE HAS CHALLE NGED THE VALIDITY AND LEGALITY OF THE PROCEEDINGS INITIATED U NDER S.263 OF THE ACT. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMIT TED BEFORE US THAT INVOKING OF JURISDICTION UNDER S.263 OF THE ACT IS WITH OUT AUTHORITY OF LAW, AS THE ASSESSMENT ORDER IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSMENT ORDER CANNOT BE HELD TO BE ERRONEOUS OR PREJUDICIAL TO THE INTERESTS OF REVENUE BECAUSE OF INAD EQUATE ENQUIRY. HE SUBMITTED THAT THERE IS DIFFERENCE BETWEEN LACK OF ENQU IRY AND INADEQUATE ENQUIRY. IN SUPPORT OF SUCH CONTENTION, THE LEARNED A UTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF 332 ITR 167; 227 CTR 133. THE L EARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE FURTHER SUBMITTED THAT THERE CAN BE NO REVISION IF THE ISSUE ON WHICH THE COMMISSIONER OF INCOME- TAX HAS EXERCISED HIS JURISDICTION UNDER S.263 IS A DEBATABLE ISSUE. IN T HAT EVENT, THE ASSESSMENT ORDER PASSED CANNOT BE HELD TO BE ERRONEOUS SO FA R AS IT IS PREJUDICIAL TO THE INTERESTS OF REVENUE. IN THIS CONTE XT, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED UPON TH E DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF 315 ITR 225 (D EL); AND 276 ITR 165(GUJ). THE LEARNED AUTHORISED REPRESENTATIVE FO R THE ASSESSEE SUBMITTED THAT WHERE TWO VIEWS ARE POSSIBLE, AND THE AS SESSING OFFICER HAS TAKEN ONE OF THE PLAUSIBLE VIEW, THE COMMISSIONER OF I NCOME-TAX IN EXERCISE OF POWER UNDER S.263 CANNOT TERM THE VIEW TAKEN BY T HE ASSESSING OFFICER TO BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVEN UE AND SUBSTITUTE HIS OWN VIEW. IN THIS REGARD, THE LEARNED AUTHORISED REP RESENTATIVE FOR THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS- ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 6 (A) CIT V/S. MUNJAL CASTINGS (303 ITR 23)-P&H (B) CIT V/S. PANKAJ DHIRAJLAL DHRUVE (305 ITRT 332)- GUJ (C) CIT V/S. MAX INDIA LTD. (268 ITR 128)- P&H (D) CIT V/S. ARVIND JEWELLERS (177 CTR 546)-GUJ (E) S.R.KOSHTI V/S. CIT(276 ITR 165)-GUJ (F) CIT V/S. MAX INDIA LTD. (295 ITR 282)-SC (G) MALABAR INDUSTRIAL CO. LTD. V/S. CIT (243 ITR 83 )-SC 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTE D THAT THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT HAS NOT AT A LL CONSIDERED THE ISSUES, IN RELATION TO WHICH THE COMMISSIONER OF INCO ME-TAX EXERCISED HIS JURISDICTION UNDER S.263 OF THE ACT. HENCE, THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER ERRONEOUS AND PREJUDICIAL TO THE INT ERESTS OF REVENUE. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES ON THE ISSUE OF LEGALITY AND VALIDITY OF THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME-TAX PASSED UNDER S.2 63 OF THE ACT. WE HAVE ALSO GONE THROUGH THE WRITTEN SUBMISSIONS OF THE ASSESSEE AND THE CASE-LAW RELIED UPON BY THE PARTIES ON THIS ISSUE. WE FI ND THAT THE COMMISSIONER OF INCOME-TAX HAS ISSUED SHOW CAUSE NOTICE UNDER S.263 OF THE ACT TO THE ASSESSEE, PROPOSING TO REVISE THE ASSESSMENT IN RELATION TO THE FOUR ISSUES, IN RELATION TO WHICH, ACCORDING TO HIM, THE ORDER OF ASSESSMENT WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE RE VENUE. ON CONSIDERATION OF THE SUBMISSIONS OF THE ASSESSEE IN RESPONSE T O SUCH SHOW- CAUSE NOTICE, THE COMMISSIONER OF INCOME-TAX HAS IN FACT IN VOKED THE JURISDICTION UNDER S.263 OF THE ACT ONLY IN RELATION T O THREE ISSUES, HAVING SATISFIED HIMSELF WITH THE EXPLANATION OF THE ASSESSEE IN RELATION TO THE FOURTH ISSUE. ON GOING THROUGH THE ORDER OF ASSESSMENT DATED 2 9.12.2009, WHICH CAME TO BE REVISED BY THE COMMISSIONER OF INCOME-TAX TH ROUGH THE ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 7 IMPUGNED ORDER UNDER S.263 OF THE ACT, WE FIND IN T HE SAID ASSESSMENT ORDER WHICH HARDLY RUNS INTO THREE PAGES, ONLY TWO ADJUSTMENT S, AS MENTIONED IN PARA 2 OF THIS ORDER, ONE BY WAY OF ADDITION OF RS.81 ,99,666 ON ACCOUNT OF UNPAID LEAVE ENCASHMENT LIABILITY; AND THE OTHER BY WAY OF DISALLOWANCE OF RS.23,762, BEING DEPRECIATION ON THE WDV ON DISALLOWAN CE OF REVENUE EXPENDITURE TREATING THE SAME AS CAPITAL EXPENDITURE I N THE A.Y. 2000-01, HAVE BEEN MADE, WHILE COMPLETING THE ASSESSMENT ON A TO TAL INCOME OF RS.16,36,43,210. THERE IS NOT EVEN A WHISPER, NOT TO SPEAK OF ANY DISCUSSION, IN THE SAID ASSESSMENT ORDER, IN RELATION TO AN Y OF THE ISSUES IN RELATION TO WHICH THE COMMISSIONER OF INCOME-TAX PASSED THE IMPUGNED ORDER UNDER S.263 OF THE ACT. EVEN THOUGH IT APPEAR S FROM THE ISSUE-WISE ARGUMENTS ADVANCED BEFORE US, THAT THE ASSESSING OFFICER HA S MADE CERTAIN ENQUIRIES IN RELATION TO THESE ISSUES, MERELY ISSUING A QU ESTIONNAIRE OR MAKING ENTRIES IN THE ORDER SHEET DOES NOT AMOUNT TO AN EFFECT IVE ENQUIRY. THE RECORDS MUST REVEAL THAT THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT WITH DUE APPLICATION OF MIND. THE ASSESSING OFFICER IN THE PRESENT CASE, AS EVIDENT FROM THE IMPUGNED ORDER OF ASSESSMENT, HAS FAILE D TO PASS ANY SPEAKING ORDER IN RELATION TO ANY OF THE ISSUES GIVING RISE TO THE ORDER UNDER S.263 OF THE ACT. AS HAS BEEN HELD BY THE HONBLE SUP REME COURT IN THE CASE OF MALABAR INDUSTRIES CO. LTD. V/S. CIT (SUPRA), THE COMMISSIONER OF INCOME-TAX CAN EXERCISE REVISIONAL JURISDICTION UNDER S.2 63 IF HE IS SATISFIED THAT THE ORDER OF THE ASSESSING OFFICER SOUGHT TO BE REVI SED IS ERRONEOUS AND ALSO PREJUDICIAL TO THE INTERESTS OF THE REVENUE. AN ORDER IS ERRONEOUS IF IT HAS BEEN PASSED ON AN INCORRECT ASSUMPTION OF FACTS OR ON I NCORRECT APPLICATION OF LAW OR NON-APPLICATION OF MIND TO SOMET HING WHICH WAS OBVIOUS AND REQUIRED APPLICATION OF MIND OR BASED ON NO MATER IAL OR INSUFFICIENT MATERIAL SO AS TO AFFECT THE MERITS OF THE CASE AND THERE BY CAUSE PREJUDICE TO THE INTERESTS OF THE REVENUE. THE ROLE OF THE ASSESSING OFFICER UNDER THE INCOME-TAX ACT, IS NOT ONLY THAT OF AN ADJUDICATOR, BU T ALSO OF AN INVESTIGATOR. ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 8 HE CANNOT REMAIN PASSIVE IN THE FACE OF A RETURN WHICH AP PARENTLY MAY BE IN ORDER BUT CALLS FOR FURTHER ENQUIRY. HE MUST DISCHARGE BOTH THE ROLES EFFECTIVELY. THE ASSESSING OFFICER IS REQUIRED TO CARRY OU T INVESTIGATION WHERE THE FACTS OF THE CASE SO REQUIRE AND ALSO DECIDE THE MA TTER JUDICIOUSLY ON THE BASIS OF THE MATERIAL COLLECTED BY HIM AS ALSO THOSE PRODU CED BY THE ASSESSEE BEFORE HIM. IN SUM AND SUBSTANCE, THE ASSESSMENT ORDER PASSE D BY THE ASSESSING OFFICER SHOULD REVEAL THAT THERE IS PROPER INVEST IGATION AND ENQUIRY MADE BY THE ASSESSING OFFICER AND HE HAS APPLIED HIS MIND TO THE MATERIAL AVAILABLE BEFORE HIM BEFORE COMING TO HIS CONCLUSIONS. IN THE FACTS OF THE PRESENT CASE, AS ALREADY STATED EARLIER, REVEALS NEITHER APPLICATION OF MIND NOR PROPER ENQUIRY OR INVESTIGATION INTO THE ISSUES P OINTED OUT BY THE COMMISSIONER OF INCOME-TAX. IN THIS VIEW OF THE MATTER , WE DO NOT FIND ANY MERIT IN THE CONTENTIONS OF THE ASSESSEE WITH REGARD TO T HE LEGALITY OR VALIDITY OF THE IMPUGNED ORDER OF THE COMMISSIONER OF INCOME-TA X PASSED UNDER S.263 OF THE ACT. 10. NOW, WE MAY DEAL WITH THE ARGUMENTS OF THE PART IES AND THE MERITS OF THE DIRECTIONS GIVEN BY THE COMMISSIONER OF I NCOME-TAX IN THE IMPUGNED ORDER UNDER S.263 OF THE ACT IN RELATION T O EACH OF THE THREE ISSUES INVOLVED. ISSUE-I ASSESSMENT OF DIFFERENCE IN EXCHANGE OF RS.15,46,428 AS I NCOME FROM OTHER SOURCES: 11. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE A SSESSEE SUBMITTED BEFORE US THAT ASSESSEE PLIES SHIPS AND IT IS TAXED UNDER TONNAGE TAX SCHEME, AS PROVIDED UNDER CHAPTER XIIG OF THE INCO ME-TAX ACT, 1961. S.115VA OF THE ACT GIVES AN OPTION TO THE ASSESSEE FOR CO MPUTING THE INCOME FROM THE OPERATION OF QUALIFYING SHIPS IN ACCORDANCE WI TH THE PROVISIONS OF CHAPTER XIIB. THE ASSESSEE HAVING OPTED TO BE TAXED U NDER THE AFORESAID PROVISION FOR ITS SHIPPING DIVISION, THE DIFFERENCE IN EXCHANGE OF RS.15,46,428 ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 9 HAS TO BE TAXED IN TERMS WITH THE AFORESAID PROVISION SI NCE IT AROSE IN THE COURSE OF TRANSACTIONS RELATING TO THE OPERATION OF QUAL IFYING SHIPS. IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE THAT THE COMMISSIONER OF INCOME-TAX WAS NOT JUSTIFIED IN DIRECTIN G THAT THE SUM OF RS.15,46,428 SHOULD NOT BE TREATED AS INCOME FROM SHIPPI NG BUSINESS, BUT AS INCOME FROM OTHER SOURCES. THE LEARNED AUTHORISED REPRESE NTATIVE FOR THE ASSESSEE SUBMITTED THAT THE INCOME HAS TO BE COMPUTED WHETH ER IT IS SHIPPING INCOME OR ANY OTHER INCOME ONLY AFTER DEDUCTI NG THE EXPENSES RELATABLE TO THE EARNING OF SUCH INCOME. HE FURTHER SU BMITTED THAT ANY ACCRETION OR LOSS TO THE AMOUNTS PAYABLE TO THE SERVICE PR OVIDER CONNECTED WITH THE PLYING OF QUALIFYING SHIPS WILL BECOME A PART OF COMPUTATION OF INCOME FROM SHIPPING BUSINESS. IT WAS FURTHER SUBMITTED THAT THE ADDITIONAL PAYMENT MADE TO THE SERVICE PROVIDER OR SAVING IN THE PAYMENT MADE TO THE SERVICE PROVIDER HAS A DIRECT AND IMMEDIATE NEXUS WITH T HE PLYING OF QUALIFYING SHIPS. THEREFORE, IT CANNOT BE CONSIDERED TO BE AN ACTIVITY INDEPENDENT OF PLYING OF SHIPS. THE LEARNED AUTHOR ISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT IT FORMS PART OF THE CORE ACTIV ITY OF THE ASSESSEE. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE T AKING US THROUGH THE PROVISION CONTAINED IN S.115V.I SUBMITS THAT THE SECT ION NOWHERE STATES THAT EXPENSES INCURRED IN ACTIVITIES OF OPERATING QUALIF YING SHIPS SHALL NOT BE CONSIDERED WHILE COMPUTING THE SHIPPING INCOME. THE LEA RNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE COMMI SSIONER OF INCOME- TAX COMPLETELY MISCONCEIVED THE FACT WHILE OBSERVING THA T NAMES OF THE PERSONS FROM WHOM FREIGHT RECEIVED DURING THE YEAR DO NOT APPEAR IN THE LIST SUBMITTED BEFORE HIM BY THE ASSESSEE. HAD THE COMMISSIONER OF INCOME-TAX SOUGHT A CLARIFICATION IN THIS REGARD THE ASSESSEE COULD HAV E EXPLAINED THE FACT THAT THEIR NAMES CANNOT APPEAR IN THE LIST SUBMITT ED BEFORE HIM ONLY BECAUSE THE PERSONS PAYING THE FREIGHT ARE DIFFERENT FR OM THE AGENCIES WHO ARE SERVICE PROVIDERS AND WHO PROVIDE SERVICE ENABLING T HE PLYING OF ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 10 QUALIFYING SHIPS BY THE ASSESSEE. THE LEARNED AUTHORISE D REPRESENTATIVE FOR THE ASSESSEE FURTHER SUBMITTED THAT THE OTHER DEFICIENCIES /DISCREPANCIES POINTED OUT BY THE COMMISSIONER OF INCOME-TAX ARE ALSO NON-EXISTENT AND HAD THE COMMISSIONER OF INCOME-TAX GIVEN AN OPPORTUNIT Y TO EXPLAIN THE SAME, THE DOUBTS IN THE MIND OF THE COMMISSIONER COULD HAVE BEEN REMOVED BY THE ASSESSEE. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE STRONGLY PLACING RELIANCE UPON A DECISION OF THE INCOME-T AX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH IN THE CASES OF DREDGING C ORPORATION OF INDIA LTD. IN ITA NOS.6 TO 8/VIZAG/2011 OF THE ASSESSEE AND IT A NOS.15 TO 17/VIZAG/2011 OF THE DEPARTMENT FOR THE ASSESSMENT YEAR S 2006-07 TO 2008- 09 DATED 25.7.2011 AND SUBMITTED THAT THE ISSUE INVOL VED HEREIN IS SQUARELY COVERED BY THE SAID DECISION OF THE VISAKHAPATNAM BENCH, WHEREIN IT WAS HELD THAT THE AMOUNTS RECEIVED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION CONSTITUTES INCOME FROM TONNAGE TAX SHIPPING INCOME AND CANNOT BE ASSESSED AS INCOME FROM OTHERS SOURCES. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON TH E CONTRARY, SUPPORTING THE ORDER OF THE COMMISSIONER OF INCOME-TAX SUBMITTED THAT THE AMOUNTS RECEIVED ON ACCOUNT OF FLUCTUATION IN FOREIGN EX CHANGE CANNOT BE CONSIDERED TO BE INCOME FROM SHIPPING AS IT DOES NOT HAVE ANY NEXUS WITH THE CORE ACTIVITY OF THE ASSESSEE. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS OPTED FOR COMPUTATION OF HIS INCOME FROM SHIPPING BUSINESS UNDER T HE TONNAGE TAX SCHEME UNDER CHAPTER XIIG OF THE ACT. THE ISSUE BEFORE US IS WHETHER THE AMOUNT OF RS.15,46,428 RECEIVED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS TO BE CONSIDERED AS PART OF THE SHIPPING BUSINESS AND TO BE TAXED UNDER CHAPTER XIIB OF THE ACT AS CLAIMED BY THE ASSESSEE OR IT SH OULD BE TREATED AS ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 11 INCOME FROM OTHER SOURCES HAVING NO NEXUS WITH THE SHIPPI NG OPERATION AS HELD BY THE COMMISSIONER OF INCOME-TAX. IT IS THE CONT ENTION OF THE ASSESSEE THAT THE INCOME OF RS.15,46,428 AROSE DUE TO THE DIFFE RENCE IN THE EXCHANGE RATE ON ACCOUNT OF PAYMENT OF FREIGHT ARISING OUT OF O PERATION OF QUALIFYING SHIPS AND THEREFORE, IT IS PART OF THE PROFIT RELATING TO THE ACTIVITY OF OPERATING QUALIFYING SHIPS COMING WITHIN THE TONNAGE TAX SCHEME P ROVIDED UNDER CHAPTER XIIG OF THE ACT. S.115VA. CHAPTER XIIG OF T HE ACT GIVES AN OPTION TO THE ASSESSEE TO COMPUTE THE PROFITS FROM THE BUSINESS OF OPE RATING QUALIFYING SHIPS IN ACCORDANCE WITH THE PROVISIONS CONTAINED UNDER TH E SAID CHAPTER. 14. FROM THE DETAILS OF GAIN/LOSS ON ACCOUNT OF FOR EIGN EXCHANGE FLUCTUATION RELATING TO THE ACTIVITIES OF OPERATING TH E QUALIFYING SHIPS FOR THE YEAR UNDER APPEAL, WHICH ARE AT PAGES 94 TO 111 OF TH E PAPER-BOOK, IT IS EVIDENT THAT THERE IS A NET CREDIT SURPLUS OF RS.15,46,4 28. THE SAID LIST COMPRISES OF DIFFERENT ITEMS LIKE EXCESS AMOUNT PAID DUE TO EXCHANGE FLUCTUATIONS FOR SERVICES TAKEN FROM THE SERVICE PROVIDER IN RELATION TO THE OPERATION OF QUALIFYING SHIPS, EXCESS AMOUNT PAYABLE DUE TO EXCHANGE FLUCTUATIONS ON THE OUTSTANDING AMOUNT PAYABLE TO SERVI CE PROVIDER, SAVING IN PAYMENT DUE TO EXCHANGE FLUCTUATIONS IN RESPECT OF AMOU NTS PAID TO SERVICE PROVIDER, SAVING DUE TO EXCHANGE FLUCTUATIONS IN RESPECT OF AMOUNTS PAYABLE TO SERVICE PROVIDER REMAINING OUTSTANDING, FREIGHT AMO UNTS RECEIVED OR RECEIVABLE IN EXCESS FROM THE CUSTOMERS DUE TO EXCHANGE F LUCTUATION IN THE COURSE OF OPERATING QUALIFYING SHIPS, FREIGHT AMOUNTS SHO RT RECEIVED OR RECEIVABLE FROM THE CUSTOMERS DUE TO EXCHANGE FLUCTUATIO N IN THE COURSE OF PLYING OF QUALIFYING SHIPS. KEEPING IN VIEW THE AFO RESAID ITEMS, THE OBSERVATION OF THE COMMISSIONER OF INCOME-TAX THAT THE GAIN ARISING FROM FOREIGN EXCHANGE FLUCTUATIONS DO NOT REPRESENT RECEIPT TRANSACTIONS IS NOT CORRECT. IN OUR VIEW, THE GAIN ON ACCOUNT OF FOREIGN E XCHANGE FLUCTUATIONS IS IN THE COURSE OF OPERATING QUALIFYING SHIPS AND THEREF ORE, PART OF THE PROFIT ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 12 DERIVED FROM SUCH BUSINESS. THE VISAKHAPATNAM BENCH O F THE TRIBUNAL IN THE CASE OF DREDGING CORPORATION OF INDIA LTD. (SUPRA) , WHILE DEALING WITH IDENTICAL ISSUE OF GAIN ON ACCOUNT OF FOREIGN EXCHANGE FL UCTUATIONS, HELD, VIDE ORDER DATED 25.7.2011, AS FOLLOWS- 9.3 THE GAINS REALIZED ON THE FOREIGN EXCHANGE FLU CTUATION NORMALLY TAKE THE COLOUR OF THE PRIMARY TRANSACTIONS. IT HAS BEE N STATED THAT THE ASSESSEE HAS ENTERED INTO CERTAIN TRANSACTIONS IN FOREIGN CU RRENCY IN CONNECTION WITH ITS CORE ACTIVITY OF DREDGING. ACCORDINGLY THE EXCH ANGE DIFFERENCE ARISING OUT OF SUCH ACTIVITIES SHOULD BE TREATED AS RELATED TO THE CORE ACTIVITY OF DREDGING. SIMILAR VIEW HAS BEEN TAKEN BY THE BANGAL ORE BENCH OF THE ITAT IN THE CASE OF ITC HOTELS V/S. DY. COMMISSIONER OF IN COME-TAX (2007)(107 TTJ (BANG) 955). ACCORDINGLY, IN OUR VIEW, THE LEARNED CIT(A) IS RIGHT IN HOLDING THAT THE SAME ARE RELATED TO THE ACTIVITY OF OPERAT ING QUALIFYING SHIPS. WE FIND THE AFORESAID ORDER OF THE TRIBUNAL TO BE DI RECTLY COVERING THE ISSUE AS IN DISPUTE IN THE PRESENT APPEAL. THEREFORE, FOLL OWING THE SAID DECISION, WE HOLD THAT THE AMOUNT OF RS.15, 46,428, BEING THE GAI N ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS RELATED TO THE ACTIVITY OF OPER ATING QUALIFYING SHIPS AND THEREFORE, HAS TO BE TAXED UNDER THE TONNAGE TAX SCHEME AS PROVIDED UNDER CHAPTER XIIG OF THE ACT. IN THIS VIEW OF THE MATTER, WE ARE NO INCLINED TO SUSTAIN THE IMPUGNED ORDER OF THE COMMISSIONER OF IN COME-TAX PASSED UNDER S.263 OF THE ACT, INSOFAR AS IT RELATES TO THE GA IN OF RS.15,46,428 ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS IS CONCERNED, ISSUE-II : DIRECTIONS FOR DISALLOWANCE GRATUITY OF RS.1,32,95,5 77: 15. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSE SSEE, NARRATING THE FACTS OF THE CASE IN RELATION TO THIS ISSUE, SUBMITTED BEFORE US, THAT THE COMPANY PROVIDES FOR GRATUITY LIABILITY EVER Y YEAR AND MAKES PAYMENT TO THE APPROVED GRATUITY FUND FROM TIME TO TIME. THE AMOUNTS ACTUALLY PAID TO THE ACCRUED GRATUITY FUND TOWARDS GRAT UITY LIABILITY IS CLAIMED AS EXPENDITURE EVERY YEAR AS PER S.43B OF THE ACT. FO R ASCERTAINING THE ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 13 CORRECT LIABILITY OF GRATUITY TOWARDS ITS EMPLOYEES, AT THE YEAR END, THE ASSESSEE TAKES THE ASSISTANCE OF AN ACTUARY WHO CALCULATES THE GRATUITY LIABILITY. AS ON 31.3.2007, THE ACTUARY QUANTIFIED TH E GRATUITY LIABILITY AT RS.2,47,52,069. OUT OF THE AFORESAID AMOUNT, THE ASSE SSEE PAID AN AMOUNT OF RS.1 CRORE BEFORE THE END OF THE FINANCIAL YEAR, I. E. ON 26.3.2007, AGAINST THE GRATUITY LIABILITY, WHICH WAS DEBITED TO THE GEN ERAL RESERVES AS PER THE ACCOUNTING STANDARD 15, NOTIFIED UNDER COMPANIES (ACCOUN TING STANDARDS) RULES. A FURTHER AMOUNT OF RS.32,95,577 WAS PAID BY TH E ASSESSEE ON 30.10.2007, WHICH IS BEFORE THE DUE DATE FOR FILING T HE RETURN OF INCOME, FOR THE ASSESSMENT YEAR UNDER APPEAL. 16. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE AMOUNTS HAVING BEEN ACTUALLY PAID T OWARDS THE GRATUITY LIABILITY IN TERMS OF S.43B OF THE ACT, IT IS AN ALLOW ABLE EXPENDITURE. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITT ED THAT THE COMMISSIONER OF INCOME-TAX, WITHOUT PROPERLY APPRECIATI NG THE FACTS, HAS DIRECTED FOR DISALLOWANCE OF THE AMOUNT OF GRATUITY PA ID OF RS.1,32,95,577 BY THE ASSESSEE, ONLY ON SUSPICION. THE LEARNED AUTHORISED REP RESENTATIVE FOR THE ASSESSEE SERIOUSLY DISPUTING THE OBSERVATION MADE BY TH E COMMISSIONER OF INCOME-TAX THAT NO EVIDENCE WAS PRODUCED WITH REGARD TO THE ACCRUAL OF LIABILITY, SUBMITTED THAT THE ASSESSEE HAS PRODUCED ALL TH E EVIDENCES INCLUDING THE CERTIFICATE OF ACTUARY. THE LEARNED AUTHORISED RE PRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT APART FROM THE CERTIFICATE, EVIDEN CE WITH REGARD TO PAYMENT OF FEE TO THE ACTUARY AND OTHER DETAILS WERE ALSO PRODUCED. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITT ED THAT THE COMMISSIONER OF INCOME-TAX WITHOUT SEEKING ANY CLARIFICA TION FROM THE ASSESSEE ON THIS ISSUE WAS NOT JUSTIFIED IN DRAWING HIS OWN INFERENCE ONLY ON PRESUMPTIONS AND SURMISES. ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 14 17. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE CONTRARY, STRONGLY SUPPORTING THE ORDER OF THE COMMISSIONER OF IN COME-TAX ON THIS ISSUE, SUBMITTED THAT SINCE THE LIABILITY WAS NOT SHOWN AS PAYABLE IN THE ASSESSEES ACCOUNT, THE COMMISSIONER OF INCOME-TAX WAS JUSTIFIE D IN DIRECTING FOR DISALLOWANCE OF THE AMOUNT CLAIMED TOWARDS PAYMENT OF GRATUITY. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AS IT APPEARS FROM THE ORDER OF THE COMMISSIONER OF INCOME-TAX, THE COMMISSIONER HAS NOT ACCEPTED THE CLAM OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE HAS NOT PRODUCED BY EVIDENCE T O ESTABLISH THAT THE GRATUITY AMOUNT OF RS.1,32,00,000 AROSE AS A LIABI LITY BY THE YEAR ENDED 31.3.2007. THE COMMISSIONER OF INCOME-TAX DOUBTING T HE CREDIBILITY OF THE REPORT OF THE ACTUARY INFERRED THAT SINCE THERE IS NO E VIDENCE OF ACCRUAL OF THE LIABILITY BY THE CLOSE OF THE RELEVANT ACCOUNTING YE AR, THE EXPENDITURE CANNOT BE ALLOWED IN TERMS OF S.43B. BEFORE DEALING WITH THE ISSUE ON HAND, LET US EXAMINE THE PROVISIONS, AS CONTAINED IN S.43B OF THE A CT, TO THE EXTENT RELEVANT FOR OUR PURPOSE, WHICH READ AS FOLLOWS- 43B. NOTWITHSTANDING ANYTHING CONTAINED IN ANY OT HER PROVISION OF THIS ACT, A DEDUCTION OTHERWISE ALLOWA BLE UNDER THIS ACT IN RESPECT OF ( A ) . ( B ) ANY SUM PAYABLE BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TO ANY PROVIDENT FUND OR SUPERANNUA TION FUND OR GRATUITY FUND OR ANY OTHER FUND FOR THE WELFARE OF EMPLOYEES, OR ( C ) .. (D) (E) (F).. SHALL BE ALLOWED (IRRESPECTIVE OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSES SEE ACCORDING ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 15 TO THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY H IM) ONLY IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 OF T HAT PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY HIM : PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL APPLY IN RELATION TO ANY SUM WHICH IS ACTUALLY PAID BY THE A SSESSEE ON OR BEFORE THE DUE DATE APPLICABLE IN HIS CASE FOR FURN ISHING THE RETURN OF INCOME UNDER SUB-SECTION (1) OF SECTION 1 39 IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED AS AFORESAID AND THE EVIDENCE OF SUCH PAYM ENT IS FURNISHED BY THE ASSESSEE ALONG WITH SUCH RETURN. .. A READING OF THE AFORESAID PROVISION MAKES IT CLEAR TH AT A DEDUCTION WITH REGARD TO THE EXPENDITURE CAN BE ALLOWED ONLY IF IT IS ACTUALLY PAID BY HIM WITHIN THE RELEVANT FINANCIAL YEAR OR BEFORE THE DU E DATE OF FILING OF THE RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR, IRRESPECTIVE O F THE PREVIOUS YEAR IN WHICH THE LIABILITY TO PAY SUCH SUM WAS INCURRED. 19. IT IS SEEN FROM THE CERTIFICATE OF THE ACTUARY WH ICH IS AT PAGE 117 OF THE PAPER-BOOK, THAT THE ASSESSEE HAS GRATUITY LIABIL ITY OF RS.2,47,52,069 AS ON 31.3.2007. IT IS THE CLAIM OF THE ASSESSEE THAT OV ER AND ABOVE THE AMOUNT OF RS.90,23,315 DEBITED TO THE PROFIT & LOSS ACCO UNT OF THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS PAID FURTHER AMOUNT OF RS. 1,32,95,577 TOWARDS THE GRATUITY LIABILITY, BY DIRECTLY DEBITING THE GENERAL RESERVE ACCOUNT, WITHOUT AFFECTING THE PROFIT & LOSS ACCOUNT. IN SUPPORT OF SUCH CLAIM, THE ASSESSEE HAS SUBMITTED A BANK ACCOUNT COPY OF THE GATI GROUP GRATUITY FUND HELD WITH INDIAN OVERSEAS BANK. AN EXA MINATION OF THE AFORESAID BANK ACCOUNT WHICH IS AT PAGES 20 AND 21 OF T HE WRITTEN SUBMISSIONS, IT APPEARS THAT AMOUNTS OF RS.1 CRORE AND RS. 32,95,577 HAVE BEEN DEPOSITED INTO THE AFORESAID GRATUITY FUND ACCOUNT IN MARCH, 2007 AND OCTOBER, 2007 RESPECTIVELY. THE AFORESAID DOCUMENTS PROD UCED BEFORE US ESTABLISHES THE FACT THAT THERE IS A LIABILITY TOWARDS G RATUITY AS ON 31.3.2007 AND THE ASSESSEE HAS ACTUALLY PAID THE AMOUNT OF RS.1,32,9 5,577, WITHIN THE ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 16 PERIOD PRESCRIBED UNDER THE PROVISIONS OF S.43B OF TH E ACT. IN THE AFORESAID VIEW OF THE MATTER, IN OUR VIEW, THE COMMISSIONER OF INCOME-TAX WAS NOT JUSTIFIED IN DISCARDING THE EVIDENCES PRODUCED BEFORE HIM , ON DOUBTS AND PRESUMPTIONS ONLY WITHOUT PROPERLY VERIFYING THEM. I F THE FACT OF PAYMENT OF GRATUITY TO THE TUNE OF RS.1,32,95,577 IS ESTABLISHED F ROM THE EVIDENCE AVAILABLE ON RECORD, THEN THE DEDUCTION CLAIMED BY TH E ASSESSEE CANNOT BE DISALLOWED INVOKING THE PROVISIONS OF S.43B. WE, THER EFORE, DIRECT THE ASSESSING OFFICER TO VERIFY THE BANK ACCOUNT, AND EXAMINE THE MATTER IN THE LIGHT OF SUCH OTHER EVIDENCE AS MAY BE CALLED FOR BY THE ASSESSING OFFICER, OR PRODUCED BY THE ASSESSEE IN SUPPORT OF ITS CLAIM OF HAVING MADE THE PAYMENTS IN QUESTION WITHIN THE PERIOD SPECIFIED IN S.4 3B, AND ACCORDINGLY DETERMINE THE ISSUE OF ALLOWABILITY OF THE CLAIM OF TH E ASSESSEE. TO THIS EXTENT, THE DIRECTIONS OF THE COMMISSIONER OF INCOME-TAX IN THE IMPUGNED ORDER ARE MODIFIED, AND THE ASSESSING OFFICER IS DIRECTED TO REDECIDE THIS ISSUE, BEARING IN MIND OUR OBSERVATIONS HEREIN ABOVE, I N ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING T O THE ASSESSEE. ISSUE-III : DISALLOWANCE OF EXPENSES AMOUNTING TO RS.2,64,26,757 FOR ISSUING FOREIGN CURRENCY CONVERTIBLE BONDS(FCCB): 20. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSE SSEE NARRATING THE FACTUAL ASPECTS IN RELATION TO THIS ISSUE SUBMITTED T HAT THE ASSESSEE COMPANY ON 5.12.2006 ISSUED UNSECURED FOREIGN CURRENCY CONV ERTIBLE BONDS (FCCB) FOR US$.20 MILLION. THE BOND-HOLDERS WERE GI VEN OPTION TO CONVERT THE FCCB INTO ORDINARY SHARES ON BEFORE 5.11.2011 OR CAN CLAIM REDEMPTION OF BONDS ON 6.11.2011 AT RS.147.882% OF THE BOND AMOU NT. IT WAS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE FO R THE ASSESSEE THAT THE BONDS WERE NOT COMPULSORILY CONVERTIBLE INTO ORDINA RY SHARES AND THE PURPOSE OF ISSUING THE BONDS WAS FOR THE BUSINESS OF THE COM PANY. FOR ISSUING THESE BONDS, THE COMPANY HAD TO INCUR EXPENSES TO THE TUNE OF ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 17 RS.2,64,26,757. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT DURING THE FINANCIAL YEAR 2006-07, NON E OF THE BOND HOLDERS EXERCISED THEIR OPTION FOR CONVERSION AND CONTINUED TO R EMAIN AS HOLDERS OF FCCB. THE AMOUNTS OUTSTANDING TO THE HOLDERS OF FCCB HAVE ALSO BEEN REPAID ON 13.12.2011. THE LEARNED AUTHORISED REPRES ENTATIVE FOR THE ASSESSEE SUBMITTED THAT BONDS WERE ISSUED FOR SECURING FUNDS F OR BUSINESS PURPOSES, WHICH INCLUDED EXPANSION OF THE BUSINESS. THERE FORE, THE EXPENSES INCURRED IN CONNECTION WITH THE ISSUE OF THE BONDS HAVE TO BE ALLOWED AS REVENUE EXPENDITURE. THE LEARNED AUTHORISED REPRESENT ATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS NOT ONLY EXAMINED THESE FACTS IN DETAIL BUT HAS COMPLETED THE ASSESSMENT AFTER DUE ENQUIRY . THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE ASSAILING THE OR DER PASSED BY THE COMMISSIONER OF INCOME-TAX IN DIRECTING DISALLOWANCE OF EXPENDITURE CLAIMED, BY TREATING IT AS CAPITAL EXPENDITURE, SUBMITT ED THAT WHILE COMING TO SUCH A CONCLUSION, THE COMMISSIONER OF INCOME-TAX HAS COMPLE TELY IGNORED THE DECISIONS RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF INDIA CEMENTS V/S. CIT(60 ITR 52) AND HONBLE RAJASTHAN HIG H COURT IN THE CASE OF CIT V/S. SECURE METERS LIMITED (321 ITR 611). THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT IT IS IMMA TERIAL WHETHER THE BORROWAL IS FOR ACQUIRING A CAPITAL ASSET OR FOR WORKING CAPITAL, BUT ONCE, IT IS ESTABLISHED AS LOAN FOR BUSINESS, THE EXPENDITURE FOR SUCH BORROWAL HAS TO BE ALLOWED AS REVENUE EXPENDITURE. 21. THE LEARNED DEPARTMENTAL REPRESENTATIVE, RELYIN G UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BRO OKE BOND INDIA LTD. V/S. CIT (225 ITR 798), SUBMITTED THAT ANY EXPENDITUR E INCURRED BY A COMPANY IN CONNECTION WITH THE ISSUE OF HARES WITH A VIE W TO INCREASE ITS SHARE CAPITAL HAS TO BE TREATED AS A CAPITAL EXPENDITURE , AS IT IS DIRECTLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COM PANY. ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 18 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIALS ON RECORD. WE HAVE ALSO CONSIDERED THE WRITTEN SUBMISSIO NS OF THE ASSESSEE AND THE CASE-LAW RELIED UPON BY THE PARTIES. THE ISSUE IN QUESTION RELATES TO ALLOWABILITY OR OTHERWISE OF AN AMOUNT OF RS.2,64,26, 757, BEING EXPENSES IN CONNECTION WITH FCCB ISSUE. WHILE THE ASSESSEE HAS CLAIMED I T AS REVENUE EXPENDITURE AND THE ASSESSING OFFICER WHILE COMPLETING TH E ASSESSMENT HAS ALLOWED THE SAME, THE COMMISSIONER OF INCOME-TAX IN EXE RCISE OF HIS POWER UNDER S.263 OF THE ACT HAS REVISED THE ASSESSMENT ORDER A ND DIRECTED THE ASSESSING OFFICER TO DISALLOW THE EXPENDITURE CLAIMED IN T HIS BEHALF, BY TREATING IT AS CAPITAL EXPENDITURE. THE REASON FOR DI RECTING SUCH DISALLOWANCE, AS EVIDENT FROM THE ORDER PASSED UNDER S.263 BEING THA T THE COMMISSIONER OF INCOME-TAX ON INTERPRETING THE OFFERING CIRCULAR OF FCCB NOTICED THAT THE PROCEEDS OF BONDS WERE MEANT FOR BUSINESS EXPANSION AFTER ACQUISITION ETC., WHICH ARE IN THE NATURE OF CAPITAL INVESTMENT. THE AD VANTAGE THAT WOULD ACCRUE TO THE ASSESSEE FROM SUCH INVESTMENT WOULD BE OF AN E NDURING NATURE. THE COMMISSIONER OF INCOME-TAX FURTHER CAME TO HOLD THA T THE ISSUANCE OF FCCB WAS NOT AN INTEGRAL PART OF THE EXISTING PROFIT MAKING PROCESS. 23. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS ISSUED THE FCCBS GIVING AN OPTION TO THE BOND-HOLDERS FOR CONVERTING T HE BONDS INTO SHARES. THOUGH THE ASSESSEE HAS CLAIMED THAT THE ISSUANCE OF FCCBS WA S FOR BUSINESS PURPOSE, AND FOR EXPANSION OF THE BUSINESS OF THE ASSESSEE, THE FACT REMAINS THAT AN OPTION WAS GIVEN TO THE BOND HOLDERS TO CONVER T THE BONDS INTO SHARES. THEREFORE, THE ONUS IS ON THE ASSESSEE TO ESTABLISH THAT THE FCCBS WERE NOT ISSUED FOR THE PURPOSE OF EXPANDING THE CAPITA L BASE OF THE COMPANY. THE HONBLE SUPREME COURT IN THE CASE OF BROO KE BOND INDIA LTD. V/S. CIT (SUPRA), HELD THAT THOUGH THE INCREASE IN THE CAPITAL RESULTS IN EXPANSION OF THE CAPITAL BASE OF THE COMPANY, AND INCID ENTALLY THAT WOULD ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 19 HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HELP I N THE PROFIT MAKING PROCESS, THE EXPENDITURE INCURRED IN THAT CONNECTION WOUL D RETAIN THE CHARACTER OF A CAPITAL EXPENDITURE, SINCE THE EXPENDITU RE IS DIRECTLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY. IN TH E CASE OF INDIA CEMENTS V/S. CIT (SUPRA), DECIDED BY THE HONBLE SUPREME COURT, THE ASSESSEE HAD TAKEN A LOAN AGAINST THE FIXED ASSETS OF THE COMPANY. THE ASSESSEE CLAIMED THE EXPENDITURE INCURRED TOWARDS STAMP DU TY, REGISTRATION FEE, ETC. AS MORTGAGE LOAN EXPENSES. THE ITO DISALLOWED THE EXPENDITURE BY HOLDING THAT THE EXPENDITURE WAS INCURRED IN OBTAININ G A CAPITAL AND THEREFORE SHOULD NOT BE ALLOWED AS AN EXPENDITURE. IN THAT CONTE XT, THE HONBLE SUPREME COURT HELD THAT ALLOWABILITY OF EXPENDITURE IN CONNECTION WITH THE OBTAINING OF A LOAN DOES NOT DEPEND ON THE PURPOSE AN D UTILIZATION OF LOAN. IN THE CASE OF CIT V/S. SECURE METERS LIMITED (SUPRA), TH E HONBLE RAJASTHAN HIGH COURT, WHILE CONSIDERING THE EXPENDITURE CLAIMED B Y THE ASSESSEE IN CONNECTION WITH THE ISSUE OF DEBENTURES, AFTER CONSIDERIN G THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF BROOKE BOND I NDIA LTD. (SUPRA) AND INDIA CEMENTS LTD. (SUPRA) HELD THAT THE DEBENTURES W HEN ISSUED WERE IN THE NATURE OF LOAN, AND THEREFORE, THE EXPENDITURE WOUL D BE ALLOWABLE AS REVENUE EXPENDITURE. 24. WE FIND FROM THE RECORD THAT THOUGH THE ASSESSEE H AS CLAIMED THAT VIDE ORDER SHEET ENTRY DATED 5.8.2009, THE ASSE SSING OFFICER HAS ENQUIRED ABOUT THE ISSUE OF FCCB AND THE EXPENDITURE CLAIMED IN THAT REGARD, HOWEVER, IN THE ASSESSMENT ORDER THERE IS NOT EVEN A W HISPER ON THIS ISSUE. NOTHING IS ALSO AVAILABLE ON RECORD BEFORE US WHICH REVE ALS THAT THE ASSESSING OFFICER HAS APPLIED HIS MIND TO THIS ISSUE AND HAS MADE A N IN DEPTH ENQUIRY TO FIND OUT THE EXACT NATURE OF THE EXPENSES CLAIMED. I T IS ALSO A FACT THAT THE COMMISSIONER OF INCOME-TAX HAS NOT CONSIDERED THE ALLOWAB ILITY OF THE EXPENDITURE KEEPING IN VIEW THE LAW LAID DOWN ON TH ESE ASPECTS BY THE APEX ITA NO.749/HYD/2012 M/S. GATI LTD., H YDERABAD 20 COURT AND OTHERS, WHICH WERE CITED BEFORE HIM. THAT BE ING SO, THE COMMISSIONER OF INCOME-TAX IN OUR VIEW, IS NOT JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO OUTRIGHT DISALLOW THE EXPENSES INCURRE D IN CONNECTION WITH THE ISSUE OF FCCBS. IN THIS VIEW OF THE MATTER, WE MODIFY THE DIRECTIONS OF THE COMMISSIONER OF INCOME-TAX AND DIRECT THE ASSESSING OFFICER TO EXAMINE THE ISSUE OF ALLOWABILITY OR OTHERWISE OF THE EXPENSES INCURRED BY THE ASSESSEE IN CONNECTION WITH THE ISSUE OF FCCBS, KEEPING IN V IEW THE RATIO OF THE VARIOUS DECISIONS ON THIS ASPECT, IN ACCORDANCE WITH LAW AND AFTER GIVING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLO WED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 4.1.2013 SD/- SD/- (SANJAY ARORA) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED/- 4 TH JANUARY, 2013 COPY FORWARDED TO: 1. M/S. GATI LTD., 1-7-293, M.G. ROAD, SECUNDERABAD. 2. 3. 4. ADDL. COMMISSIONER OF INCOME-TAX RANGE 2, HYDERABAD COMMISSIONER OF INCOME-TAX II, HYDERABAD DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S.