2009 (11) TMI 903 - AT - Income Tax

Loss incurred on cancellation of foreign exchange forward contract - ''Speculation loss or business loss'' - AO treated it as speculation loss and added to the total income of the assessee. CIT held the transaction as business loss. HELD THAT - The issue is against the Revenue and in favour of the assessee by the decision in the case of CIT vs. Woodword Governor (I) Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT held that the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u/s 37(1). In view of the submission of the ld DR, this ground raised by the Revenue is dismissed. Disallowance of Interest - Claimed as business expenditure - AO observed that the funds on which the interest has been paid were utilised for the purpose of making investment from which the income has to be computed u/s. 45 and not u/s. 28. Since the assessee has not utilised the borrowed funds for the purpose of its business, therefore, the assessee has not fulfilled the conditions of section 36(1)(iii) for allowing the said expenses from the business income. He accordingly disallowed. HELD THAT - We find the CIT(A) has given a finding that no investment has been made during the year and the borrowed funds are utilised for making payments to the sundry creditors. The factual findings given by the CIT(A) could not be controverted by the learned DR. Therefore, we find merit in the submission of the learned counsel for the assessee that the AO disallowed the interest expenditure only on mere presumption without bringing any material or evidence on record. In absence of any material brought before us to controvert the factual findings given by the learned CIT(A) that no fresh investment has been made during the year, therefore, this ground by the Revenue being devoid of merit is dismissed. Book profit u/s. 115JB computation - addition being the surplus from the sale of rights in the premises made - profit which was taken directly to the Balance Sheet as capital reserve without routing the same through the Profit and Loss A/c - On being questioned by AO as submitted that since the rights in booked premises were held as capital asset, the profit arising from the sale thereof was not credited to the Profit and Loss A/c - CIT(A) held that the AO does not have the jurisdiction to go beyond the net profit shown in the Profit and Loss A/c. except to the extent provided in Explanation to section 115JB. HELD THAT - As it is clear that the Profit and Loss A/c. of a company shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of exceptional nature also. Further the company is also required to set out the various items relating to the income and expenditure of the company arranged under most convenient heads and disclosing profit or loss in respect of transactions of a kind not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature if material in amount. We find although the assessee has earned a profit from the sale of rights in an immovable property the same has not been routed through the Profit and Loss A/c. and has directly been credited to the Balance Sheet. In our opinion, the AO cannot go beyond the book profits as per the audited accounts provided they are prepared as per the manner provided in Part II and Part III of Schedule VI to the Companies act, 1956 and are adopted in the AGM. However, admittedly the accounts are not prepared in the manner provided in Part II and Part III of Schedule VI to the Companies Act, 1956 since the profit on sale of investments which is a material amount, has not been routed through the Profit and Loss A/c. Therefore, the AO, has the power to re-work the book profit by recasting the accounts in the manner provided as per Part II and Part III of Schedule VI to the Companies Act, 1956. In this view of the matter, the order of the CIT(A) on this issue is set aside and that of the AO is restored. In the result, the appeal filed by the Revenue is partly allowed.

Summary

Issues Involved:
1. Treatment of loss incurred on cancellation of foreign exchange forward contract.
2. Deletion of disallowance of interest amounting to Rs. 82,49,728.
3. Deletion of addition of Rs. 10,38,13,765 being the surplus from the sale of rights in the premises to the book profit u/s. 115JB.

Issue-wise Detailed Analysis:

1. Treatment of Loss Incurred on Cancellation of Foreign Exchange Forward Contract:
The Revenue contested the CIT(A)'s decision to treat the loss on cancellation of foreign exchange forward contracts as a business loss rather than a speculation loss. The Assessing Officer had added the loss of Rs. 25,75,000 to the total income of the assessee as speculation loss. However, the CIT(A) relied on the jurisdictional High Court decision in ITO vs. Badradas Gauridu Pvt. Ltd. and guidelines issued by RBI under FEMA, 1999, to classify the transaction as a business loss. The Revenue's appeal was dismissed as the learned DR conceded that the issue was settled in favor of the assessee by the Supreme Court in CIT vs. Woodword Governor (I) Pvt. Ltd.

2. Deletion of Disallowance of Interest Amounting to Rs. 82,49,728:
The Assessing Officer disallowed the interest expenditure of Rs. 82,49,728 on borrowed funds, arguing that the funds were used for investment purposes, not business purposes, thus not fulfilling the conditions of section 36(1)(iii) of the Income-tax Act, 1961. The CIT(A) found that the assessee had not made any new investments during the year and had used the borrowed funds to pay sundry creditors, thereby allowing the interest claim. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue could not provide evidence to counter the factual findings that no fresh investments were made, and the disallowance was based on mere presumption.

3. Deletion of Addition of Rs. 10,38,13,765 to Book Profit u/s. 115JB:
The Assessing Officer added Rs. 10,38,13,765 to the book profit u/s. 115JB, arguing that the profit from the sale of rights in the premises was not routed through the Profit and Loss A/c but directly taken to the Balance Sheet as capital reserve, violating the provisions of Part II and Part III of Schedule VI to the Companies Act. The CIT(A) sided with the assessee, referencing the Supreme Court's decision in Apollo Tyres Ltd. and the Bombay High Court's decision in Kinetic Motor Co. Ltd., stating that the Assessing Officer cannot go beyond the net profit shown in the Profit and Loss A/c. The Tribunal, however, found that the accounts were not prepared in accordance with the Companies Act as the profit was not routed through the Profit and Loss A/c. Therefore, the Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's decision to rework the book profit.

Conclusion:
The appeal by the Revenue was partly allowed. The Tribunal dismissed the Revenue's grounds regarding the foreign exchange loss and interest disallowance but upheld the addition to book profit under section 115JB, emphasizing the necessity of compliance with the Companies Act in preparing accounts.