WIPRO FINANCE LTD. versus COMMISSIONER OF INCOME TAX on 12 April 2022

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1. This appeal takes exception to the judgment and order dated2.4.2008 passed by the Division Bench of the High Court of Karnatakaat Bengaluru in I.T.A. No. 633/2004.

2. Briefly stated, the appellant company submitted returns ofincome on 29.11.1997 for the assessment year 1997-1998, mentioningloss of income, amongst others, owing to exchange fluctuation ofRs.1,10,53,909/-. After processing the return under Section 143(1)(a) ofthe Income Tax Act, 1961[1], the assessment was completed on 16.3.2000.As against the loss declared by the appellant due to exchange fluctuation,the assessment was concluded by positive taxable income. Against thatdecision, the matter was carried in appeal by the appellant before theCommissioner of Income Tax (Appeals)[2] and eventually, by way of appealbefore the Income Tax Appellate Tribunal[3] being I.T.A. No. 795 (Bang)/2000.

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1 for short, “the 1961 Act”

2 for short, “CIT(A)”

3 for short, “ITAT”

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1 for short, “the 1961 Act”

2 for short, “CIT(A)”

3 for short, “ITAT”

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A3. In the appeal before the ITAT, the appellant not only claimeddeduction in respect of loss of Rs.1,10,53,909/- arising on account ofexchange fluctuation, but also set up a fresh claim in respect of revenueexpenses to the tune of Rs.2,46,04,418/-, erroneously capitalised in thereturns. The ITAT entertained this fresh claim set forth by the appellantand recorded in its judgment that the department’s representative hadBno objection in that regard. Additionally, the ITAT adverted to the decisionof this Court in National Thermal Power Co. Ltd. vs. Commissionerof Income Tax[4] in support, for entertaining fresh claim of the appellantin exercise of powers under Section 254 of the 1961 Act. The ITAT, inthe first place, reversed the finding given by CIT(A) regarding applicationCof Section 43A of the 1961 Act. The ITAT opined that the said provisionhad no application to the fact situation of the present case. Having saidthat, it then proceeded to consider the question whether the loss sufferedby the appellant owing to exchange fluctuation can be regarded asrevenue expenditure or capital expenditure incurred by the appellant,and answered the same in favour of the appellant by holding that itDwould be a case of expenditure on revenue account and an allowablededuction. The ITAT answered the same in the following words: - “….. So far as the argument whether the impugned expenditureor loss is revenue or capital in nature we find that the fundsborrowed were utilised for the purposes of regular finance businessEcarried on by the assessee. Such an income has also been offeredfor taxation and accepted by the department. Quantification ofexchange fluctuation loss has been done as per rule 115 of the I TRules. Said rule must be applied in computing the total income ofthe assessee had held by the Supreme Court in CIT vs. ChowguleFCo Ltd. – 218 ITR 384. Further the exchange fluctuation lossis an expenditure incidental to carrying on of business andcomes within the purview of section 37 of the Act as thesame is incurred wholly and exclusively for the purposesof business. It is nobody’s case that the funds borrowed in foreign exchange have been diverted for non-businessGpurposes. In such a case the decision of the Supreme Court inIndia Cement Case (supra) fully covers the issue in favour of theassessee. We also find that in this case, assessee’s claim satisfiesall the tests laid down by Supreme Court in 124 ITR 1 extracted supra. In this case entire borrowal of loan and the utilisation ofthe same, is in trading operations of the company more profitablyand the fixed capital in this case is untouched. Hence theexpenditure is on revenue account and allowable.

We also find the loss incurred by the assessee cannot betreated as contingent in nature as the loss on account of foreignexchange fluctuation has been quantified in terms of rule 115 ofIT Rules and further the liability is real as per terms of theagreement with CDC. Just because the liability is payable in futuredoes not covert the actual liability into contingent liability as heldby the Supreme Court in Calcutta Co Ltd. vs. CIT – 37 ITR 1 andBharat Earth Movers Ltd. vs. CIT – 245 ITR 428. Similar viewhas been expressed by ITAT special bench in ONGC case 83ITR 51 (SB). Looking from any angle the claim on this issue isallowable. Accordingly, we allow the entire claim of Rs.3,56,57,727/-. We direct the AO to do so. This issue is held in favour of theassessee.”

(emphasis supplied)

4. The matter was carried before the High Court by thedepartment. Amongst others, following questions were formulated forconsideration as substantial questions of law concerning subject deductionclaimed by the appellant. The same read thus: - “(3) Whether on facts and in the circumstances of the case, theTribunal is justified in deleting the dis-allowance of claim to thetune of Rs.1,10,53,509/- for the assessment year 1997-98 in respectof exchange fluctuation that was made by the Assessing Officer?(in ITA No. 633/2004 only).

(4) Whether on facts and in the circumstances of the case, theTribunal is justified in allowing the additional claim ofRs.2,46,04,418.00 for the assessment year 1997-98 holding thatthe capitalisation of the said sum is to be treated as revenueexpenses? (in ITA No. 633/04 only).”

The High Court vide impugned judgment has reversed the viewtaken by the ITAT, mainly observing that the ITAT had not recordedsufficient reasons in support of its conclusion and in any case, theconclusion was without any basis.

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5. We have heard Mr. S. Ganesh, learned senior counsel for theappellant and Mr. Vikramjit Banerjee, learned Additional Solicitor Generalappearing for the respondent.

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6. The broad undisputed relevant facts, as can be culled out fromthe record are that the appellant entered into a loan agreement with oneBCommonwealth Development Corporation having its registered officeat England in the United Kingdom, for borrowing amount to carry on itsproject described in Schedule 1 to the agreement - for expanding itsprimary business of leasing and hire purchase of capital equipment toexisting Indian enterprises. Schedule 1 of the agreement reads thus: - “SCHEDULE 1

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(referred to in Recital A)

Description of the Project

The Project consists of the financing by the Company of theacquisition of plant, machinery and equipment to be used in itsDleasing business in accordance with the applicable laws andregulations of India and the Company’s Memorandum and Articlesof Association.”

The loan was obtained in foreign currency (5 million poundssterling). However, while repaying the loan, due to the difference of rateEof foreign exchange, the appellant had to pay higher amount, resulting inloss to the appellant. Indeed, the loan amount was utilised by the appellantfor financing the existing Indian enterprises for procurement of capitalequipment on hire purchase or lease basis. The fact remains that theactivity of financing by the appellant to the existing Indian enterprisesFfor procurement or acquisition of plant, machinery and equipment onleasing and hire purchase basis, is an independent transaction or activitybeing the business of the appellant.

7. As regards, the transaction of loan between the appellant andCommonwealth Development Corporation, the same was in the natureof borrowing money by the appellant, which was necessary for carryingGon its business of financing. It was certainly not for creation of asset ofthe appellant as such or acquisition of asset from a country outside Indiafor the purpose of its business. In such a scenario, the appellant wouldbe justified in availing deduction of entire expenditure or loss suffered byit in connection with such a transaction in terms of Section 37 of the Act.HFor, the loan is wholly and exclusively used for the purpose of business of financing the existing Indian enterprises, who in turn, had to acquireplant, machinery and equipment to be used by them. It is a differentmatter that they may do so because of the leasing and hire purchaseagreement with the appellant. That would be, nevertheless, an activityconcerning the business of the appellant. In that view of the matter, theITAT was right in answering the claim of the appellant in the affirmative,relaying on the dictum of this Court in India Cements Ltd. vs.Commissioner of Income Tax, Madras[5]. The exposition in this decisionhas been elaborated in the subsequent decision of this Court in EmpireJute Co. Ltd. vs. Commissioner of Income Tax[6].

8. The ITAT has extracted the relevant portion of the decision inIndia Cements Ltd.[7], which reads thus: -

“7. ….. where there is no express prohibition, an outgoing, bymeans of which an assessee procures the use of a thing by whichit makes a profit, is deductible from the receipts of the business toascertain taxable income. …..

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16. ….. the loan obtained is not an asset or advantage of anenduring nature….. the expenditure was made for securing theuse of money for a certain period … and it is irrelevant to considerthe object with which the loan was obtained. …..

17. ….. the act of borrowing money ….. was not incidental to thecarrying on of a business. …..”

Similarly, the exposition in the case of Empire Jute Co. Ltd.[8] isalso extracted by the ITAT, which reads thus: - “5. ….. it is not a universally true proposition that what may becapital receipt in the hands of the payee must necessarily be capitalexpenditure in relation to the payer. The fact that a certain paymentconstitutes income or capital receipt in the hands of the recipientis not material in determining whether the payment is revenue orcapital disbursement qua the payer. …..

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5 AIR 1966 SC 1053

6 (1980) 4 SCC 25

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A8. ….. There may be cases where expenditure, even if incurredfor obtaining advantage of enduring benefit, may, nonetheless, beon revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature, acquired byan assessee that brings the case within the principle laid down inthis test. What is material to consider is the nature of theBadvantage in a commercial sense and it is only where theadvantage is in the capital field that the expenditure wouldbe disallowable on an application of this test. If theadvantage consists merely in facilitating the assessee’strading operations or enabling the management and conductCof the assessee’s business to be carried on more efficientlyor more profitably while leaving the fixed capital untouched,the expenditure would be on revenue account, even thoughthe advantage may endure for an indefinite future. The testof enduring benefit is therefore not a certain or conclusive testand it cannot be applied blindly and mechanically without regardDto the particular facts and circumstances of a given case. …..

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11. ….. “What is an outgoing of capital and what is an outgoingon account of revenue depends on what the expenditure iscalculated to effect from a practical and business point of viewrather than upon the juristic classification of the legal rights, ifany, secured, employed or exhausted is the process.”

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The question must be viewed in the larger context ofbusiness necessity or expediency. …..”

(emphasis supplied)

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9. A priori, we are of the considered opinion that the analysis doneby the ITAT and the conclusion arrived at in respect of the subject claimof the appellant being the correct approach consistent with the expositionof this Court, needs to be upheld. In our opinion, the High Court missedGthe relevant aspects of the analysis of the ITAT concerning the factsituation of the present case. As a matter of fact, the High Court has noteven adverted to the aforementioned reported decisions, much less itsusefulness in the present case.

10. The learned ASG appearing for the department had faintlyargued that since the appellant in its return had taken a conscious explicit H

plea with regard to the part of the claim being ascribable to capitalexpenditure and partly to revenue expenditure, it was not open for theappellant to plead for the first time before the ITAT that the entire claimmust be treated as revenue expenditure. Further, it was not open to theITAT to entertain such fresh claim for the first time. This submissionneeds to be stated to be rejected. In the first place, the ITAT was consciousabout the fact that this claim was set up by the appellant for the first timebefore it, and was clearly inconsistent and contrary to the stand taken inthe return filed by the appellant for the concerned assessment year includingthe notings made by the officials of the appellant. Yet, the ITAT entertainedthe claim as permissible, even though for the first time before the ITAT, inappeal under Section 254 of the 1961 Act, by relying on the dictum of thisCourt in National Thermal Power Co. Ltd.[9]. Further, the ITAT has alsoexpressly recorded the no objection given by the representative of thedepartment, allowing the appellant to set up the fresh claim to treat theamount declared as capital expenditure in the returns (as originally filed),as revenue expenditure. As a result, the objection now taken by thedepartment cannot be countenanced.

11. Learned ASG had placed reliance on the decision of this Courtin Goetze (India) Ltd. vs. Commissioner of Income Tax[10]in supportof the objection pressed before us that it is not open to entertain freshclaim before the ITAT. According to him, the decision in NationalThermal Power Co. Ltd.[11] merely permits raising of a new groundconcerning the claim already mentioned in the returns and not aninconsistent or contrary plea or a new claim. We are not impressed bythis argument. For, the observations in the decision in Goetze (India)Ltd.[12] itself make it amply clear that such limitation would apply to the“assessing authority”, but not impinge upon the plenary powers of theITAT bestowed under Section 254 of the Act. In other words, this decisionis of no avail to the department.

12. Learned counsel for the department had also relied on thedecision of this Court in Assistant Commissioner of Income Tax,Vadodara vs. Elecon Engineering Company Limited[13]. This decisionis on the question of application of Section 43A of the 1961 Act.

10 [2006] 284 ITR 323

13 (2010) 4 SCC 482

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AAccordingly, the exposition in this decision will be of no avail to the factsituation of the present case. For, we have already noticed that theappellant had not acquired any asset from any country outside India forthe purpose of his business.

13. In view of the above, this appeal ought to succeed. TheBimpugned judgment and order of the High Court needs to be set asideand instead, the decision of the ITAT dated 3.6.2004 in favour of theappellant on the two questions examined by the High Court in theimpugned judgment, needs to be affirmed and restored. We orderaccordingly.

C14. As a result of allowing the entire claim of the appellant to thetune of Rs.3,56,57,727/- being revenue expenditure, suitable amends willhave to be effected in the final assessment order passed by the assessingofficer for the concerned assessment year, thereby treating theconsequential benefits such as depreciation availed by the appellant-assessee in relation to the stated amount towards exchange fluctuationDrelated to leased assets capitalised (being Rs.2,46,04,418/-), as unavailableand non-est.

15. The appeal is allowed in the above terms with no order as tocosts.

EPending interlocutory applications, if any, stand disposed of.

Devika Gujral

Appeal allowed.

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