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M/s Bajaj Sons Ltd., C-103, Phase-V, Focal Point, Ludhiana. Vs The Addl. CIT, Range-1, Ludhiana.
June, 25th 2014

                             ITA No .1114/ CH D/ 2009
                           Assessm ent Y ear : 2006- 07

M/ s Baj aj Sons Lt d.,            Vs             T he Addl . CIT ,
C -103, Phase -V ,                                Range -1,
Focal Poi nt ,                                    Ludhi ana.
Ludhi ana.

PAN : AA ACB6875 H

(Appellant )                                         (R espondent )

       Appell ant b y :     None
       Respondent by :      Smt. J yoti Kum ari

               Date of Heari ng :                 21.05.2014
               Date of P ronouncem ent :          19.06.2014

                                   O R D E R


       The appeal filed by the assessee is against the order of the

Commissioner        of    Income    Tax    (Appeals)-I,       Ludhiana    dated

30.09.2009 against the order passed under section 143(3) of the

Income-tax Act, 1961 ( 'the Act' for short).

2.     The assessee has raised the following grounds of appeal :

       1.     That order passed u/s 250(6) by the Ld. Commissioner of Income
       lax (Appeals) is against law and facts on the file in as much as he was
       not justified to arbitrarily uphold action of the Ld. Assessing Officer in
       disallowing interest on capital-work-in progress amounting to Rs.

       2.     That he was further not justified to uphold the action of the Ld.
       Assessing Officer in:

               a)     disallowing a sum of Rs. 6,95,000/- towards exchange
               difference by resort to provisions of section 43A.

              b)     disallowing a sum of Rs. 3,05,735/- out of processing fee
              against ECB by wrongly treating the same as a capital

              3.     That he further gravely erred in upholding the disallowance of
              Rs. 50,000/- by resort to provisions of section 14A."

3.    The assessee moved an application for adjournment which

was refused as the matter had been adjourned from date to date.

We proceed to decide the present appeal after hearing ld. DR for

the revenue.

4.    The perusal of the Memo of Appeal reflects that the ground

of appeal No. 1 against addition of Rs. 12,805/- was not pressed

on the earlier dates of hearing and hence, the same is dismissed as

not pressed.

5.    The issue in ground No. 2(a) is against disallowance of Rs.

6,95,000/- under the provisions of section 43A of the Act.

6.    T h e b r i e f f a c t s o f t h e c a s e a r e t h a t d u r i n g t h e ye a r u n d e r

consideration, the assessee had debited a sum of Rs.6,95,000/-

under head `Financial Expenses' on account of foreign exchange

difference on ECB.            I n r e p l y, t h e a s s e s s e e p o i n t e d o u t t h a t t h e

foreign exchange difference is in accordance with the accounting

standard AS-II had to be reported at each balance sheet date using

the closing date and the same was allowable as an expenditure.

The   Assessing        Officer,       however         noted      that      "    The     foreign

exchange difference claimed under the head `financial expenses'

is on account of ECB loan from Citi Bank and loan from GE

Capital raised by the assessee company against various assets

during the year under consideration.                     Since the loan fund raised

from these banks has been utilized for the raising of capital

assets, the expenses connected with the raising of capital assets,

the expenses connected with the raising of loan, till the asset is

first put to use for the purpose of business has to be capitalized."

The Assessing Officer, thus treated a sum of Rs. 6,95,000/- as a

capital loss and capitalized the same under the head Plant &

Machinery           on     which        depreciation            @     15%        was      allowable.

However, depreciation @ 7.5% was allowed as the asset was put

to use for a period less than 180 days and the net addition was

made at Rs. 642,875/-.

7.       Before the Commissioner of Income Tax (Appeals), the

submission of the assessee was that the loans were availed much

later than the date of putting to use the respective assets. As per

the ld. AR for the assessee, as contended before the Commissioner

of Income Tax (Appeals), the provisions of section 43A were not

applicable as the exchange difference was not on account of

b o r r o w i n g f o r t h e p u r p o s e o f i m p o r t e d m a c h i n e r y.    The said loan

was     taken       only to        save      the     cost     of    interest         on   indigenous

borrowing.          T h e C o m m i s s i o n e r o f I n c o m e T a x ( A p p e a l s ) r e l yi n g

upon the provisions of section 43A of the Act upheld the order of

Assessing Officer and dismissed the ground of appeal.

8.       The assessee is aggrieved and hence, the ground No. 2(a)

raised by the assessee.

9.       On the perusal of record and the relevant provisions of Act,

the issue arising in the present appeal is in relation to the

disallowance computed under section 43A of the Act.                                           Section

43A of the Act is attracted where an assessee has acquired any

a s s e t i n a n y p r e v i o u s ye a r f r o m a n y c o u n t r y o u t s i d e I n d i a f o r t h e

purpose of his business or profession and in case the said asset

has been acquired out of foreign borrowings, where there is an

increase or reduction in the liability of the assessee as compared

to the liability of the assessee after the acquisition of the asset,

as compared to the liability existing at the time of acquisition of

the asset as compared to the liability at the time of making

p a ym e n t ,    then      such       liability       irrespective       of    the   method    of

accounting adopted by the assessee is to be added or deducted

from the actual cost of the asset.                            The first condition provided

under section 43A of the Act is that the assessee should have

acquired any asset from a country o utside India in any previous

year.       The Assessing Officer had noted that the assessee had

raised the said ECB loan from Citi Bank and from GE Capital

a g a i n s t v a r i o u s a s s e t s d u r i n g t h e ye a r .   However, the case of the

assessee before the Commissioner of Income Tax (Appeals) was

that the provisions of sec43A were not applicable as the foreign

exchange was not on account of borrowing for the purpose of

imported machinery.                   The assessee has filed a Paper Book which

is available on record.                        However, it is not clear from the

documents available on record whether the assessee had utilized

the said foreign exchange for the purpose of acquisition of

machinery from an y country outside India.                                     Incase the basic

condition         of     acquisition of             asset       from    outside   India   is   not

satisfied then the provisions of section 43A are not attracted.                                 In

order to cull out the facts, we deem it fit to restore this issue

back to the file of Assessing Officer to determine the facts of the

case and decide the issue in accordance with law after affording

reasonable opportunity of hearing to the assessee. The ground of

appeal No. 2(a) is thus, allowed for statistical purposes.

10.     The issue in ground No. 2(b) is against the disallowance of

Rs. 305735/- on account of processing fee against the ECB loan.

11.     This issue raised vide ground No. 2(b) is linked to the

earlier issue raised by the assessee. The matter has been remitted

back to the file of Assessing Officer against ground No. 2(a) in

order to determine the nature of the ECB loan taken by the

assessee.       In case the said loan has been taken during the course

o f c a r r yi n g o n o f t h e b u s i n e s s , t h e e x p e n d i t u r e i n c u r r e d o n

processing fee is to be allowed as expenditure in the hands of the

assessee.         However, in case the said loan is utilized for the

acquisition of assets from a country outside India, then the

processing fee is a capital expenditure and the same is to be

c a p i t a l i z e d t o t h e c o s t o f P l a n t & M a c h i n e r y.   This aspect also

shall be verified by the Assessing Officer and the issue would be

decided in accordance with law.                        The ground of appeal No. 2(b)

raised by the assessee is allowed for statistical purposes.

12.     The      ground        No.     3    raised      by     the     assessee   is   against

disallowance of Rs. 50,000/- under section 14A of the Act.

13.     The brief facts relating to the issue are that during the year

under consideration, the assessee had earned dividend income of

Rs. 279,170/- and also agricultural income of Rs. 45,000/-.                                 The

Assessing Officer in view of the investments made by the assessee

invoked the provisions of section 14A of the Act and disallowed a

sum of Rs.1,00,000/- out of general and administrative expenses

and financial expenses relatable to earning of exempt income.

The said disallowance was restricted to Rs. 50,000/- by the

Commissioner             of    Income        Tax       (Appeals)        against   which      the

assessee is in appeal.   T h e ye a r u n d e r a p p e a l i s a s s e s s m e n t ye a r

2006-07 and the provisions of section 8D are not applicable and

in view thereof, we restrict the disallowance to Rs. 20,000/-. The

ground of appeal No. 3 raised by the assessee is thus, partly


14.   In the result, appeal of the assessee is partly allowed.

      Order pronounced in the open Court on 19th June, 2014.

            Sd/-                                                            Sd/-
    ( T.R.SOOD)                                         (S USHMA CHO WLA)
 ACCO UNTANT ME MBER                                    JUDICIAL ME MBER

Dated: 19th June, 2014
`Poonam '
Copy to:
      The Appell ant, The Respondent, The C IT(A), The C IT,DR.

                                                     Assistant R egist rar
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