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2008 (1) TMI 426 - AT - Income TaxComputation of the total income - Notional gain arising from currency swap - gain arising only in the books of accounts not real income is taxable or not - HELD THAT - In the case before us, it is not true that the assessee had actually realized any income because of the fluctuation of foreign exchange rates as is apparent from the chart before us. We also note that while there is a book gain in asst. yr. 2002-03 and in asst. yr. 2003-04, the assessee company incurred a book loss in asst. yr. 2004-05. This clearly proves that what the Revenue wanted to tax in the case of the assessee company, was a contingent income and not a real income. Moreover, we note that the AO while completing the assessment for asst. yr. 2004-05 did not deduct the notional loss arising from currency swap. It is also true that the gain shown in the books in asst. yrs. 2002-03 and 2003-04 is not an actual gain but was reflecting a trend as is evident from the loss incurred in asst. yr. 2004-05 due to reverse cross-currency trend. Consequently, following the decision of the jurisdictional High Court in the case of CIT vs. Method Trading Investment Ltd. 1998 (4) TMI 11 - CALCUTTA HIGH COURT , we are of the view that the assessee need not pay tax merely because it is following the mercantile system of accounting ignoring the fact whether such book income is real income or not. Consequently, we are of the considered view that the gain arising in the books and not ultimately realized or actually received the benefit, is not a real income and hence is not taxable while computing the total income of the assessee for asst. yr. 2002-03. Expenses allowable under s. 37(1) - debited under the head Project office - HELD THAT - The assessee has filed before us the details of expenses and evidences that the expenses were incurred in connection with the hotels, which are already in operation. Since the details were not filed before the lower authorities, we are of the opinion that the issue should be restored back to file of the AO. We direct the AO to consider the claim of the assessee as per law after giving due opportunity to the assessee of being heard. However, while examining the claim of the assessee, he should bear in mind that the assessee had already commenced its hotel business and accordingly should dispose of its claim. Disallowed tax-free dividend u/s 14A - HELD THAT - While considering the Revenue's contention that the disallowance has been made under s. 14A mainly on assumptions that the assessee had incurred huge management expenses and paid interest on borrowed funds, on the other hand, we agree with the contentions and the case references cited by the Authorised Representative. However, we do not agree with the Authorised Representative that there was no expenditure incurred in connection with the earning of the dividend. Considering the relevant facts of the case we feel that in the interest of justice the addition under s. 14A should be restricted to 1 per cent of the dividend received, which has been claimed as tax-free. Disallowance on repairs, renewals, replacements and advertisement on an ad hoc basis - HELD THAT - We tend to agree with the AO that non-business expenses cannot be totally ruled off. It is true that the assessee had filed certain details pertaining to the expenditure claimed. It is also true that the lower authorities have restricted the disallowance to only 2 per cent of the total expenditure. Considering this background we do not want to interfere with the orders of the lower authorities and confirm the disallowance to 2 per cent of the aggregate repairs, renewals, replacements and advertisement expenses. Hence, the appeal of the assessee company fails. Interest-free advances - assessee company held approx. 88 per cent shares of the said subsidiary company - HELD THAT - We note that the advances given by the assessee company from time-to-time were against the issue of share capital. It has been placed on record that the assessee was actually allotted shares in a subsequent year out of the advances paid. Hence, it is not the case that the funding was for a temporary adjustment and hence should not be equated with a normal loan. If that be so, there should not be any question of interest payable on a permanent fund introduced by the assessee company forming part of the capital of the sister concern. In the balance sheet of the sister concern also, the amount has been shown as forming part of the shareholders' fund. Even regarding the source of funds, we disagree that the action of the AO who has made an ad hoc allocation and came to a conclusion that part of the total advances was funded out of borrowed capital and ignoring the decision of jurisdictional Calcutta High Court in the case of Britannia Industries Ltd. 2005 (6) TMI 19 - CALCUTTA HIGH COURT . Thus, we are of the view that the disallowance made by the AO had no reasonable basis and should be deleted in full. In the result, the appeal of the assessee for the asst. yr. 2003-04, is also allowed in part.
Issues Involved:
1. Taxability of notional gain on foreign currency swap. 2. Disallowance of project office expenses. 3. Disallowance under Section 14A of the Income Tax Act. 4. Ad hoc disallowance on repairs, renewals, replacements, and advertisement expenses. 5. Disallowance of interest on advances to a subsidiary company. 6. Ad hoc disallowance of staff welfare expenses. Detailed Analysis: 1. Taxability of Notional Gain on Foreign Currency Swap: The assessee company excluded Rs. 1,26,46,298 as "Notional gain on foreign currency swap" from its taxable income. The AO included this gain as taxable income based on the Supreme Court decision in Sutlej Cotton Mills Ltd. vs. CIT. The assessee argued that the gain was notional and not realized, hence not taxable. The Tribunal agreed with the assessee, stating that the gain was not realized and therefore not a real income. The Tribunal also noted that the Revenue taxed the book income from currency swap as taxable but did not allow the book loss incurred in subsequent years as tax deductible, which was inconsistent. Consequently, the Tribunal held that the notional gain of Rs. 1,26,46,298 is not taxable. 2. Disallowance of Project Office Expenses: The AO disallowed Rs. 1,41,148 claimed under "Project office" expenses, considering them pre-operative and capital in nature. The CIT(A) confirmed this decision. The assessee provided details showing that these expenses were for hotels already in operation. The Tribunal remanded the issue back to the AO for fresh examination, directing the AO to consider the claim as per law after giving the assessee an opportunity to be heard. 3. Disallowance under Section 14A of the Income Tax Act: The AO disallowed Rs. 32,30,630 as interest and Rs. 20,00,000 as management expenses under Section 14A, related to tax-free dividend income. The assessee argued that no new investments were made during the year and that the investments were from its own funds. The Tribunal agreed with the assessee that the AO's disallowance was based on assumptions and not clear findings. The Tribunal restricted the disallowance under Section 14A to 1% of the dividend received, which was claimed as tax-free. 4. Ad Hoc Disallowance on Repairs, Renewals, Replacements, and Advertisement Expenses: The AO made an ad hoc disallowance of Rs. 6,46,970, which was 2% of the total expenses claimed. The CIT(A) confirmed this disallowance. The Tribunal upheld the AO's decision, agreeing that non-business expenses could not be completely ruled out and that the disallowance was reasonable. 5. Disallowance of Interest on Advances to a Subsidiary Company: The AO disallowed Rs. 50,19,658 out of the total interest claim, assuming that part of the advances to the subsidiary company was financed out of borrowed funds. The CIT(A) confirmed this disallowance. The assessee argued that the advances were made out of its own funds and were for commercial expediency. The Tribunal agreed with the assessee, noting that the advances were made to protect its original investment and were used for the subsidiary's business purposes. The Tribunal deleted the disallowance, following the Supreme Court decision in S.A. Builders Ltd. vs. CIT. 6. Ad Hoc Disallowance of Staff Welfare Expenses: The AO made an ad hoc disallowance of Rs. 5,00,000 under "Staff welfare expenses" due to lack of detailed information. The CIT(A) confirmed this disallowance. The Tribunal remanded the issue back to the AO for fresh examination, directing the AO to allow the assessee an opportunity to be heard and to dispose of the claims according to law. Separate Judgments: The Tribunal delivered a consolidated judgment for both assessment years 2002-03 and 2003-04, addressing the same issues consistently across both years. The Tribunal's decisions for each issue in the subsequent year followed the rationale and conclusions drawn for the earlier year.
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