ACIT Circle 4(1) vs Ball Beverage Packaging (India) Pvt Ltd – Dispute Over Infrastructure Expenses and Foreign Remittance for AY 2015-16

Case Overview: ACIT Circle 4(1) vs Ball Beverage Packaging (India) Pvt Ltd – AY 2015-16

This article discusses the Income Tax Appellate Tribunal’s (ITAT) ruling in the case of ACIT Circle 4(1), New Delhi (the appellant) versus Ball Beverage Packaging (India) Pvt Ltd (the respondent), for the assessment year (AY) 2015-16. The appeal, registered under case number ITA 6680/DEL/2019, was filed by the Revenue on August 9, 2019, and the final tribunal order was pronounced on July 26, 2023.

Background of the Case

The appellant, ACIT Circle 4(1), New Delhi, filed an appeal against the order passed by the Commissioner of Income Tax (Appeals)-38, New Delhi, which pertained to several disallowances made by the Assessing Officer (AO) during the assessment proceedings for AY 2015-16. The respondent, Ball Beverage Packaging (India) Pvt Ltd, had claimed various expenses in its profit and loss account, which were disallowed by the AO on grounds such as being capital in nature or for non-compliance with tax deduction at source (TDS) provisions under Section 195 of the Income Tax Act, 1961.

Key Issues in the Appeal

The main issues raised by the Revenue in the appeal included:

• Disallowance of infrastructure development expenses amounting to Rs. 12,24,32,850, which were considered by the AO as capital expenditure.
• Disallowance under Section 40(a)(i) of the Act for foreign remittances amounting to Rs. 7,75,31,468, where TDS was not deducted.
• Disallowance of loss on foreign currency fluctuation amounting to Rs. 6,18,30,027.
• Reduction of an addition made on account of other expenses from Rs. 21,68,000 to Rs. 10,84,000.
• Disallowance of legal expenses amounting to Rs. 11,56,765, which was related to plant acquisition and considered capital expenditure.

Proceedings Before the ITAT

During the hearing, the Tribunal examined each of the grounds raised by the Revenue and the respondent’s submissions in defense of the CIT(A)’s order. The respondent was represented by Senior Advocate Shri Salil Agarwal and his team, while the Revenue was represented by CIT DR Shri P. Praveen Sidharth.

1. Disallowance of Infrastructure Development Expenses

The AO had classified infrastructure development expenses as capital in nature, leading to the disallowance of Rs. 12,24,32,850 from the respondent’s claim. The CIT(A) reversed this decision, ruling that the expenses were incurred to facilitate business operations rather than acquiring a capital asset.

The ITAT upheld the CIT(A)’s decision, referencing the Supreme Court’s ruling in L.H. Sugar Factory & Oil Mills Pvt. Ltd., where it was established that expenses facilitating business operations without altering fixed capital are revenue in nature. Thus, the infrastructure development expenses were correctly allowed as revenue expenditure.

2. Disallowance Under Section 40(a)(i) for Foreign Remittances

The AO disallowed Rs. 7,75,31,468 for foreign remittances, citing non-compliance with TDS requirements under Section 195 of the Act. The CIT(A) deleted this disallowance, noting that the AO failed to examine the applicability of TDS provisions despite having sufficient information, such as invoices and tax residency certificates.

The ITAT agreed with the CIT(A)’s findings, stating that the provisions of Section 40(a)(i) pertain to the disallowance of expenses due to non-deduction of TDS, not due to the non-availability of Form 15CA/CB. The Tribunal cited the Supreme Court’s ruling in GE India Technology vs. CIT, which supported the respondent’s case, and upheld the CIT(A)’s decision to delete the disallowance.

3. Disallowance of Loss on Foreign Currency Fluctuation

The AO had disallowed Rs. 6,18,30,027 out of the respondent’s claimed loss on foreign currency fluctuation, suspecting manipulation to increase revenue loss. The CIT(A) found that the AO had misinterpreted the entries and that the net impact on the profit and loss statement was nil.

The ITAT upheld the CIT(A)’s decision, noting that the AO’s assessment was flawed and the CIT(A) had correctly determined that the foreign currency fluctuation had no impact on the profit and loss statement, thereby rendering the disallowance unjustifiable.

4. Reduction of Addition on Account of Other Expenses

The AO had made an ad hoc disallowance of 2% of the total expenses under various heads, citing unverifiable expenses. The CIT(A) reduced this disallowance to 1% after examining the discrepancies pointed out by the AO.

The ITAT found that the ad hoc disallowance made by the AO was not supported by specific defects and was thus unjustifiable. Consequently, the Tribunal ruled in favor of the respondent, allowing the entire expense and dismissing the Revenue’s appeal on this ground.

5. Disallowance of Legal Expenses

The AO had disallowed Rs. 11,56,765 in legal expenses related to plant acquisition, categorizing them as capital expenditure. The CIT(A) reversed this disallowance, classifying the expenses as professional services related to business operations.

The ITAT upheld the CIT(A)’s decision, referencing the Karnataka High Court’s ruling in CIT vs. United Breweries Ltd., which established that fees paid for consultation in business expansion, even when related to capital assets, are revenue in nature.

Conclusion

The ITAT’s ruling in ACIT Circle 4(1) vs Ball Beverage Packaging (India) Pvt Ltd reaffirms the importance of correctly classifying expenses as capital or revenue in nature. The Tribunal upheld the CIT(A)’s deletions of disallowances, emphasizing the necessity for AOs to thoroughly examine the applicability of tax provisions and avoid ad hoc disallowances without substantive evidence.

This case serves as a significant reference for future disputes involving the classification of infrastructure expenses, foreign remittances, and other business-related expenditures under the Income Tax Act, 1961.

ACIT Circle 4(1) vs Ball Beverage Packaging (India) Pvt Ltd – Dispute Over Infrastructure Expenses and Foreign Remittance for AY 2015-16