S.

No.

Case Law

1.

Apex Laboratories Pvt. Ltd. v. DCIT (2022) 442 ITR 1 (SC)

Issue

Relevant provision of law, analysis and decision

Are expenses incurred by pharmaceutical companies in providing incentives to medical practitioners, which are in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, allowable as deduction u/s 37 in the hands of the

pharmaceutical companies?

Relevant provision of the Income-tax Act, 1961

Section 37 is a residuary provision for claiming deduction while computing income under the head “Profits and gains of business or profession”. Any business or professional expenditure which does not ordinarily fall under sections 30 to 36, and which is not in the nature of capital expenditure or personal expenses, can be claimed under this provision.

Explanation 1 thereto, however, clarifies that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Analysis:

By an amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 published in the Official Gazette on December 14, 2009, medical practitioners were prohibited from accepting emoluments in the form of, inter alia, gifts, travel facilities, hospitality, cash or monetary grants. The 2002 Regulations also lay down corresponding action or sanctions which can be taken against, or imposed upon, the medical practitioner for violation of each stipulation, based on the monetary value thereof. Thus, acceptance of “freebies” given by pharmaceutical companies is clearly an offence on the part of the medical practitioner, punishable with varying consequences.

The CBDT Circular No. 5 of 2012 dated August 1, 2012 (2012) 346 ITR (St.) 95 clarified that any expense incurred in providing incentives in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) in the hands of pharmaceutical companies being an expense prohibited by law and that the sum equivalent to the value thereof enjoyed by the medical practitioner or professional associations would be taxable as business income or income from other sources, as the case may be, depending on the facts of each case. The circular, being clarificatory in nature, was effective from the date of implementation of the 2002 Regulations, i.e., from December 14, 2009.

Interpretation of law has two essential purposes: one is to clarify to the people governed by it, the meaning of the letter of the law; the other is to shed light and give shape to the intent of the law maker. And, in this process the courts’ responsibility lies in discerning the social purpose which the specific provision subserves.

It is only logical that when acceptance of “freebies” is punishable by the Medical Council of India (the range of penalties and sanction extending to a ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such “freebies”, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such penalties.

Even if the pharmaceutical companies’ contend that they do not indulge in any illegal activity by committing an offence as there is no corresponding penal provision in the 2002 Regulations applicable to them, there is no doubt that their actions fall within the purview of “prohibited by law” in Explanation 1 to section 37(1).

Decision:

In the present case too, the incentives (or “freebies”) given by the Pharmaceutical company, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee

– Pharmaceutical company, i.e., the provider or donor, was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Pharmaceutical company.

Thus, pharmaceutical companies’ gifting freebies to doctors is clearly “prohibited by law”, and not allowed to

be claimed as a deduction under section 37(1). Doing so would wholly undermine public policy.

Note – As per Explanation 1 to section 37(1), any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be allowed as a deduction or allowance.

In line with the above Supreme Court ruling, Explanation 3 has been inserted in section 37(1) by the Finance Act, 2022 to clarify that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” would include and would be deemed to have always included the expenditure incurred by an assessee, –

1. for any purpose which is an offence under any law for the time being in force, in India or outside India or which is prohibited by any law for the time being in force, in India or outside India; or
2. to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guidelines, as the case may be, for the time being in force, governing the conduct of such person; or
3. to compound an offence under any law for the time being in force, in India or outside India.

2.

CIT v. Reliance Energy Ltd. (2022) 441 ITR 346 (SC)

Issue

Relevant provision of law, analysis and decision

Does profit- linked deduction under Chapter VI-A have to be restricted to income computed under the head “Profits and gains of business or profession”?

Relevant provisions of Income-tax Act, 1961:

Section 80-IA(1) provides for deduction@100% of the profits and gains derived from eligible business referred to in section 80-IA(4), where the gross total income of an assessee includes any profits and gains derived by an undertaking or enterprise from such eligible business.

Section 80-IA(5) requires computation of profits and gains of such eligible business as if such eligible business is the only source of income of the assessee for the purpose of determining the quantum of deduction.

Section 80AB provides that for the purpose of allowing deduction under any section included in Chapter VI-A under the heading “C – Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of the Act (before making any deduction under Chapter VI-A) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. This is notwithstanding anything contained in the respective sections of Chapter VI-A.

Section 80A(1) stipulates that in computation of the “total income” of an assessee, the deductions specified in section 80C to section 80U shall be allowed from his “gross total income”.

Section 80A(2) provides that the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income.

Analysis:

A plain reading of section 80AB shows that the provision pertains to determination of the quantum of deductible income in the “gross total income”. Section 80AB cannot be read to be curtailing the width of section 80-IA. It is relevant to take note of section 80A(1) which stipulates that in computation of the “total income” of an assessee, deductions specified in section 80C to section 80U shall be allowed from his “gross total income”. Section 80A(2) provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the “gross total income” of the assessee. Thus, section 80AB which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of “net income”.

The essential ingredients of section 80-IA(1) are :

1. the “gross total income” of an assessee should include profits and gains;
2. those profits and gains should derived by an undertaking or an enterprise from a business referred to in sub-section (4).
3. the assessee is entitled to deduction of an amount equal to 100% of the profits and gains derived from such business for ten consecutive assessment years ; and
4. in computing the “total income” of the assessee, such deduction shall be allowed.

The import of section 80-IA is that the “total income” of an assessee is computed by taking into account the allowable deduction in respect of the profits and gains derived from the “eligible business”. The scope of sub-section (5) of section 80-IA is limited to determination of quantum of deduction under sub-section

(1) of section 80-IA by treating “eligible business” as the “only source of income”. Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to income under the head “Profits and gains of business and profession”.

For the purpose of calculating profit-linked deduction under any section of Chapter VI-A, loss sustained in other divisions or units cannot be taken into account, as only profits from the eligible business have to be taken into account as if it was the only source of income. Profits and gains from eligible business cannot be reduced by the loss suffered in any other business owned by the assessee.

Decision:

The net profit made by the assessee from the “eligible business” covered under sub-section (4) (i.e., from the assessee’s business unit involved in generation of power) represented income from the “eligible business” under section 80-IA and was the only source of income for the purposes of computing deduction under section 80-IA . The deduction admissible under section 80-IA could not be limited to income under the head “Profits and gains of business or profession”, by setting-off losses from non-eligible business against profits from eligible business.

Note – The issue arises in a case where loss from non-eligible business is being set-off against profits from eligible business, which results in income under the head “Profits and gains of business and profession” being lower than the profits from eligible business. In such a case, deduction under Chapter VI-A in respect of profits from eligible business would not be restricted to income computed under the head “Profits and gains of business and profession”. The same would however be restricted to gross total income as per the requirement in section 80A(2).

For example, let us take the case of XYZ Ltd., an Indian company, for P.Y.2022-23. The following are the particulars relating to the said company –

1. Profits from eligible business – Rs.90 lakhs,
2. Loss from non-eligible business – Rs.20 lakhs (which is set-off against profits from eligible business)
3. Income under the head “Profits and gains of business or profession” – Rs.70 lakhs [Rs.90 lakhs –

Rs.20 lakhs]

1. Gross total income – Rs.85 lakhs

In this case, assuming deduction under section 80-IA is the only deduction under Chapter VI-A for XYZ Ltd., the same would not be restricted to Rs.70 lakhs (being the income under the head “Profits and gains of business or profession”). However, the same would be restricted to Rs.85 lakhs, being the gross total income as per the requirement in section 80A(2).

If, in the above example, the gross total income was Rs.95 lakhs (instead of Rs.85 lakhs), then, the entire profits of Rs.90 lakhs from eligible business would be allowed as deduction u/s 80-IA.

This is the crux of the above Supreme Court ruling.

3.

New Noble Educational Society v. CCIT (2022) 448 ITR 594 (SC)

Issue

Relevant provision of law, analysis and decision

Does the

requirement under section 10(23)(vi) to solely engage itself in education mean that such institution cannot have objects not related to education? Also, is it necessary that the profits of business referred to in the seventh proviso to section 10(23C) be the profits of such business incidental to educational activity and not any other activity?

Relevant provision of law: Under section 10(23C)(vi), income of a university or educational institution existing solely for educational purposes and not for the purposes of profit, approved by the Principal Commissioner or Commissioner would be exempt.

As per the second proviso to section 10(23C), the Principal Commissioner or Commissioner, on receipt of application from an institution under clause (ii) or clause (iii) of the first proviso thereof, shall call for documents or information from it or make such enquiries to satisfy himself about the genuineness of the activities of the institution and compliance of such requirements of any other law for the time being in force by it as are material for the purpose of achieving its objects.

As per the seventh proviso to section 10(23C), the exemption provisions under section 10(23C)(vi) would not apply in relation to income of the educational institution, being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business.

Issue under consideration: The issue under consideration is whether the requirement under section 10(23)(vi) to solely engage itself in education mean that such institution cannot have objects not related to education. Also, is it necessary that profits of business referred to in the seventh proviso to section 10(23C) be the profits of such business incidental to educational activity and not any other activity.

Analysis and Conclusion:

The Supreme Court, made the following observations and conclusions:

(a) The requirement of the charitable institution, society or trust, etc., to “solely” engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust, etc., must relate to imparting education or be in relation to educational activities.

The term “solely” is not the same as “predominant/mainly”. The term “solely” means to the exclusion of all others.

Note – The Supreme Court observed that none of the previous decisions—especially American Hotel or Queens Education Society —explored the true meaning of the expression “solely”. Instead, what is clear from the previous discussion is that the applicable test enunciated in CIT (Addl.) v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) , i. e., the “predominant object” test was applied unquestioningly in cases relating to charitable institutions claiming to impart education. Accordingly, it overruled the decision in Queen’s Education Society v. CIT [2015] 372 ITR 699 (SC). Accordingly, the said decision given under Significant Select Cases at the end of Chapter 13 of the Study Material may be ignored.

1. Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under section 10(23C). At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities.
2. The seventh proviso to section 10(23C), as well as section 11(4A) refer to profits which may be “incidentally” generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.
3. The reference to “business” and “profits” in the seventh proviso to section 10(23C) and section 11(4A) merely means that the profits of business which is “incidental” to educational activity—i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.

However, where institutions provide their premises or infrastructure to other entities, trusts, societies, etc., for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enrol in such seminars, workshops, courses, etc., then the income derived from such activity cannot be characterised as part of education or “incidental” to the imparting education.

Additionally, the Supreme Court also held that wherever registration of trust or charities is obligatory under State or local laws, the concerned trust, society, other institution, etc., seeking approval under section 10(23C) should also comply with provisions of such State laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society, etc. This reasoning is reinforced by the recent insertion of another proviso of section 10(23C) with effect from April 1, 2021.

4.

ACIT (Exemptions) v. Ahmedabad Urban Development Authority (and other appeals) (2022) 449 ITR 1 (SC)

Issue

Relevant provision of law, analysis and decision

When can an activity be

considered as trade, commerce or business for attracting the provisions of the proviso to section 2(15)?

Relevant provision of law: As per section 2(15), ‘charitable purpose’ includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest and the advancement of any other object of general public utility.

However, as per the proviso to section 2(15), “advancement of any other object of general public utility” shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless,-

(1) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(2) the aggregate receipts from such activity or activities, during the previous year, does not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, for the previous year.

As per section 11(4A), for the purpose of availing the beneficial provisions of section 11(1)/(2)/(3) and (3A), the business must be incidental to the objectives of the trust and the trust has to maintain separate books of account in respect of such business. Likewise, the seventh proviso to section 10(23C) provides that for the purpose of availing exemption under section 10(23C)(iv)/(v)/(vi)/(via), the business should be incidental to the attainment of its objectives and separate books of accounts are maintained by the trust in respect of such business.

Issue under consideration: The issue under consideration is when an activity can be considered as trade, commerce or business for attracting the provisions of the proviso to section 2(15).

Analysis: The first consideration would be whether the activity concerned was or is in any manner covered by the objects clause. Thereafter, if the accounts disclose that the amounts paid are nominal mark-up over and above the cost incurred towards supplying the services, the activity may fall within the description of one advancing the general public utility. If on the other hand, there is a significant mark-up over the actual cost of service, the next step would be ascertain whether the quantitative limit in the proviso to section 2(15) is adhered to. It is only in the event of the trust actually carrying on an activity in the course of achieving one of its objects, and earning income which should not exceed the quantitative limit prescribed at the relevant time, that it can be said to be driven by charitable purpose.

Section 11(4A) [and Seventh proviso to section 10(23C)] must be interpreted harmoniously with section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities, should be conducted in the course of achieving the object of general public utility, and the income, profits or surplus or gains must, therefore, be incidental. The requirement in section 11(4A) [and Seventh proviso to section 10(23C)] of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to section 2(15), has not been breached.

Conclusion :The conclusions arrived at by way of this judgment, neither precludes any assessee (whether statutory or non-statutory) advancing objects of general public utility, from claiming exemption, nor the taxing authorities from denying exemption, in the future, if the receipts of the relevant year exceed the quantitative limit. The assessing authorities must on a yearly basis, scrutinize the record to discern whether the nature of the assessee’s activities amount to “trade, commerce or business” based on its receipts and income (i. e., whether the amounts charged are on cost-basis, or significantly higher). If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to section 2(15), has been breached, thus disentitling them to exemption.

5.

Pioneer Overseas Corporation USA (India Branch) v. CIT (International Taxation) (2022) 449 ITR 186 (SC)

Issue

Relevant provision of law, analysis and decision

Is pendency of dispute resolution under MAP a valid ground for waiver of interest under section 220(2A)?

Relevant provision of law: Section 220(2) provides for levy of simple interest@1% for every month or part of a month comprised in the period commencing from the day immediately following the 30 days period specified in section 220(1) (from service of notice of demand under section 156) and ending on the day on which the amount is paid.

Section 220(2A) provides for reduction or waiver of interest payable under section 220(2), if the PCC/CC/PC/Commissioner is satisfied that payment of such amount has caused or would cause genuine hardship to the assessee, default in payment of amount specified in notice of demand was due to

circumstances beyond the control of the assessee and the assessee has co-operated in any enquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

Facts of the case: The assessee applied for waiver of interest under section 220(2A) on the ground that the dispute was pending for resolution under the mutual agreement procedure under the Double Taxation Avoidance Agreement between India and the United States of America, which subsequently culminated in the year 2012 and the liability to pay the tax arose thereafter. The Commissioner, however, rejected the assessee’s application. The same was confirmed by the High Court.

Decision: The Supreme Court observed that merely raising the dispute before any authority cannot be a ground not to levy the interest and/or waiver of interest under section 220(2A). Otherwise, each and every assessee may raise a dispute and thereafter, may contend that since the litigation was bona fide, no interest is leviable. It is required to be noted that under section 220(2), the levy of simple interest on non- payment of the tax at 1 per cent. per annum is, as such, mandatory.

Note – It may be noted that under section 220(2A), the Commissioner may reduce or waive the interest payable by an assessee on the ground of genuine hardship. In this case, the assessee is a part of a global conglomerate which had in the earlier year $ 37.96 billion in net sales and $ 6.253 billion as operating profit, cannot be an irrelevant factor in considering whether any ’genuine hardship’ was undergone by the petitioner. Further, in comparison to the profitability of the petitioner over the years, the amount paid by it towards interest under section 220(2) was merely $ 0.004 billion (approx.). In the circumstances, the Commissioner of Income-tax concluded that no ‘genuine hardship’ can be said to have been caused to the petitioner on account of payment of interest.

6.

Reliance Telecom Ltd./Reliance Communications Ltd. (2022) 440 ITR 1 (SC)

Issue

Relevant provision of law, analysis and decision

Can the powers under section

254(2) be

exercised by the Tribunal to recall an order and rehear the entire order on merits?

Relevant Provision of Income-tax Act, 1961:

Section 254(1) empowers the Appellate Tribunal to pass such order thereon as it thinks fit, after giving both the parties to the appeal an opportunity of being heard.

Under section 254(2), the Appellate Tribunal, may amend an order passed by it u/s 254(1) with a view to rectifying any mistake apparent from the record. Such amendment may be suo moto or if the mistake is brought to its notice by the assessee or the Assessing Officer.

Facts of the Case:

The Department filed an appeal before the Tribunal against the order of Commissioner (Appeals). By a detailed order dated September 6, 2013, the Tribunal allowed the Department’s appeal. Against this order, the assessee filed a miscellaneous application for rectification u/s 254(2).

The contentions of the applicants in the miscellaneous applications, briefly summarized, were that in the initial order of the Tribunal on the income-tax appeals dated September 6, 2013, there are inadvertent errors and which need to be modified/rectified. The first main heading ‘Agreement and general terms and conditions of purchase’. The complaint of the assessee is that it was not considered in arriving at the final conclusion. Then comes heading No. 2 which reads thus: ‘Mistake in reading the ratio of the Delhi High Court’s decision in the case of DIT v. Ericsson A. B. reported in [2012] 343 ITR 470’. The third main heading is ‘Ignoring the decisions of the co-ordinate Benches and not constituting larger Bench in case a different view is taken’. Such application was made to the Tribunal seeking correction of the mistakes which are styled as ‘apparent from the record’. On being served with such applications, the petitioner- Department raised an objection to the maintainability thereof.

Simultaneously, the assessee also filed an appeal before the High Court against the Tribunal’s order dated September 6, 2013. By order dated November 18, 2016, the Tribunal allowed the assessee’s miscellaneous application filed under section 254(2) and recalled its original order dated September 6, 2013. Immediately thereafter, the assessee withdrew the appeal preferred before the High Court against the original order dated September 6, 2013.

Against the order passed by the Tribunal allowing the miscellaneous application under section 254(2) of the Act and recalling its order dated September 6, 2013, the Department preferred a writ petition before the High Court. The High Court dismissed the writ petition observing that, inter alia, the Department itself had gone into the merits of the case in detail before the Tribunal and the parties had filed detailed submissions based on which the Tribunal passed its order recalling its earlier order.

Analysis:

The order dated November 18, 2016 passed by the Tribunal recalling its earlier order dated September 6, 2013 was beyond the scope and ambit of the powers u/s 254(2). While allowing the application u/s 254(2) and recalling its earlier order dated September 6, 2013, the Tribunal had reheard the entire appeal on the merits as if the Tribunal was deciding the appeal against the order passed by the Commissioner (Appeals). A detailed order was passed by the Tribunal on September 6, 2013 holding in favour of the Department. That order could not have been recalled by the Appellate Tribunal in exercise of powers u/s 254(2). If the assessee was of the opinion that the order passed by the Tribunal was erroneous, either on the facts or in law, the only remedy available to the assessee was to prefer an appeal before the High Court. In this case, the assessee had already filed appeal before the High Court, and the same was withdrawn by it after the Tribunal, by order dated November 18, 2016, recalled its earlier order dated September 6, 2013.

Decision:

The order passed by the Tribunal dated November 18, 2016 recalling its earlier order dated September 6, 2013 was unsustainable, and ought to have been set aside by the High Court.

Note – In this case, the Supreme Court directed that the original order passed by the Tribunal dated September 6, 2013 passed in the respective appeal preferred by the Department be restored; and that the assessee may prefer appeal before the High Court against the original order dated September 6, 2013.

7.

Wipro Finance Ltd. v. CIT (2022) 443 ITR 250 (SC)

Issue

Relevant provision of law, analysis and decision

Would the loss incurred in foreign currency fluctuation at the time of

repayment of loan taken for financing acquisition of

plant and

machinery on lease/hire purchase by Indian enterprises with whom the

Relevant provision of law:

Under section 37, any expenditure (not being in the nature of expenditure described in sections 30 to 36), and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing income chargeable under the head “Profits and gains of business or profession”.

Section 254(1) empowers the Appellate Tribunal to pass such orders as it thinks fit, after giving both the parties to the appeal an opportunity of being heard.

Facts of the case:

The assessee-company, which was in the leasing business, obtained a loan in foreign currency from Commonwealth Development Corporation (CDC), having its registered office in the United Kingdom, to be utilised by the assessee for financing the procurement of capital equipment by existing Indian enterprises on hire purchase or lease basis. While repaying the loan, due to the difference in the rates of foreign exchange, the assessee had to pay a higher amount, resulting in loss to the assessee. For the relevant

assessee- company has lease/hire purchase agreement be

treated as allowable revenue expenditure?

Can the Tribunal entertain a fresh claim for the first time in exercise of its powers under section 254?

assessment year, the assessee declared, inter alia, a loss of Rs.1.11 crores owing to fluctuation in the rates of foreign exchange.

The assessee in its return had taken a conscious explicit plea with regard to part of the claim being ascribable to capital expenditure (Rs.2.46 crores) and partly to revenue expenditure (Rs.1.11 crores). Thereafter, for the first time before the Tribunal it pleaded that the entire claim must be treated as revenue expenditure. The Tribunal was conscious that this claim was made by the assessee for the first time before it and the same was contrary to the stand taken in the return filed by the assessee for the assessment year including the notings made by the officials of the assessee. Yet, the Tribunal entertained the claim as permissible, relying on the dictum of the court in National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC), wherein it was held that the Tribunal has the power to entertain question raised for the first time. The Tribunal is not confined only to the issues arising out of the appeal before the Commissioner (Appeals). It has the power to allow the assessee to urge any ground not raised before the Commissioner (Appeals). However, the relevant facts in respect of such ground should be on record.

Accordingly, in this case, the Tribunal held that the entire loan and the utilisation thereof was in trading operations of the company more profitably leaving the fixed capital untouched and hence the expenditure was on revenue account and allowable. The Tribunal allowed the entire claim of Rs. 3.57 crores.

Analysis:

The activity of the assessee of financing existing Indian enterprises for procurement or acquisition of plant, machinery and equipment on lease and hire purchase basis, was an independent transaction or activity being the business of the assessee. The transaction of loan between the assessee and CDC was in the nature of borrowing money by the assessee, which was necessary for carrying on its business of financing. It was not for creation of an asset of the assessee as such or acquisition from a country outside India for the purpose of its business. In such a scenario, the assessee would be justified in availing of deduction of the entire expenditure or loss suffered by it in connection with such a transaction in terms of section 37. The loan was wholly and exclusively used for the purpose of business of financing existing Indian enterprises, which in turn, had to acquire plant, machinery and equipment to be used by them. It was a different matter that they may do so because of the leasing and hire purchase agreement with the assessee. That would, nevertheless, be an activity concerning the business of the assessee. The Supreme Court held that the analysis and the conclusion arrived at by the Tribunal in respect of the claim of the assessee were correct.

As regards the restriction in powers to accept a new claim for the first time, such limitation on accepting new claims would apply to the “assessing authority”, but would not impinge upon the plenary powers of the Tribunal bestowed under section 254.

Decision:

As a result of allowing the entire claim of the appellant to the tune of Rs. 3.57 crores being revenue expenditure, suitable amendment will have to be effected in the final assessment order passed by the Assessing Officer for the concerned assessment year, thereby treating the consequential benefits such as depreciation availed of by the appellant-assessee in relation to the stated amount towards exchange fluctuation related to leased assets capitalized (being Rs. 2.46 crores), as unavailable.

Note – The crux of this case is that the assessee was engaged in leasing business. The assessee also financed the enterprises with whom it had entered into a lease agreement to enable them to obtain the plant, machinery on lease from it. For such financing, the assessee had obtained loan in foreign currency and incurred loss on account of currency fluctuation while repaying the loan. It was held that since the loan was borrowed for the financing activity, which was an activity concerning the business of the assessee, the loss was allowable under section 37. It was not a loan borrowed for acquisition of asset, in which case, the loss would have had to be adjusted against the actual cost of the asset.