INCOME TAX ACT, 1961

Section 37(1) Article 7 Article 11

Business expenditure - Allowability - Expenses of discounting charges of letter of credits (LC) -

Assessee was a seller of gold/bullion to PEC, a Government of India undertaking and nominated agency for import of bullion, against issuance of letters of credit. Against supplies of gold by the assessee to PEC, PEC establishes an issuance of letter of credit in favour of the assessee for 90/180/360 days credit. The assessee accepts the LC through its bankers in Australia. As per the terms of LC, the assessee was entitled to charge interest at the rate of LIBOR plus a margin of 0.5% per annum. In its return of income assessee declared an amount of Rs. 25,71,10,851 as interest income. Against this income the assessee claimed expenses of an equal amount on account of discounting of various LCs received from PEC and discounted with its bankers in Australia which have been disallowed by the AO in the assessment proceedings. CIT(A) dismissed the appeal of the assessee.Held: From the records it could be seen that there is no interest credit, since within a day or two of usance of letter of credit by PEC Ltd.'s bank to the assessee, letter of credit stands discounted by the assessee with ANZ Bank of Australia. The cost of discounting letter of credit was identical and equal to the notional interest in respect of the letter of credit itself. The AO also admits in the assessment order that interest in this case was not interest simplicitor, i.e., it does not arise out of a loan liability. The interest was in the context of a transaction of high-seas sale of bullion, a part of the cost of such bullion itself. Thus, the same was in the nature of business expenditure and incurred only to facilitate the transaction of sale of bullion. Both Usance interest and the discounting charges were part of the sale transaction as duly entered into by parties, but revenue authorities erred in giving finding which is contrary to their own narration of the facts. This was not a case where a claim had been made for interest under income from other sources. The interest itself was notional and was never received by the assessee. This is properly demonstrated by the assessee from the computation of income. The interest in the present case is part of the cost of the bullion itself. The AO as well as the CIT(A) both failed to look into this aspect. Such interest is not interest within the meaning of section 2(28A). The authorities below have even failed to point out how section 56 is applicable in the subject case. The revenue authorities have completely failed to understand the transaction as entered into by the assessee with PEC Ltd. and merely sought to pounce on one stray notional credit only with a view to create a tax liability. The order of the CIT(A) was, thus, set side and appeal of the assessee was allowed.

Followed:CIT v. Cargill Global trading (P) Ltd. 92011) 11 Taxmann.com 219 (Del) : 2011 TaxPub(DT) 1422 (Del-HC). Relied:CIT v. Cocanada Radhaswami Bank ltd. 91965) 57 ITR 306 (SC) : 1965 TaxPub(Dt) 304 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2005-06

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