2016 (12) TMI 939 - AT - Income Tax

Addition on foreign exchange gain - restatement of liability - contingent gain - Held that - As has been pointed out by ld DR that once the utilization of borrowings are held to be on revenue account and mercantile system followed, then the resultant exchange gain or loss at the end of the year due to restatement of foreign currency loan would automatically take the revenue receipt/expenditure as the case may be. Accordingly, we allow the appeal filed by the Revenue on this issue. However, we find in the order of the ld CIT (A) that the assessee had incurred exchange loss for the assessment year 2005-06 but not claimed as deduction treating it notional in nature in line with the consistent stand taken by the assessee. In this regard, we deem it fit and appropriate in the interest of justice, to give direction to the Learned AO to grant deduction of exchange loss in the subsequent assessment years to be in consonance with our findings hereinabove. Otherwise, it would only result in Revenue trying to blow hot and cold simultaneously. Accordingly, the ground raised by the Revenue is allowed subject to the direction given above. Disallowance of interest on borrowings - Held that - As the assessee company is engaged in the business of investment and finance, therefore the interest paid by the company on the amount borrowed for the purpose of business should be allowed as revenue expenditure under section 36(1) (iii)/ 37(1) of the Act. Thus it would be fair and proper to allow the interest expenses on loan as revenue expenditure. Accordingly, we allow the appeal filed by the assessee. Non-taxability of income from service fees - Held that - CIT(A) pointed out that in case of put option it is contingent and based of future uncertain events, there is no transfer and there is no capital asset accruing to the assessee, therefore the consideration of put option is not a capital asset. Besides, we have already allowed in this appeal the interest on borrowed capital,( to acquire the fixed investments), as revenue in nature. Considering the above cited factual position, we dismiss the said ground of the assessee.

Issues Involved:
1. Taxability of foreign exchange gain.
2. Disallowance of interest on borrowings.
3. Non-taxability of income from service fees.

Issue-wise Analysis:

1. Taxability of Foreign Exchange Gain:

The Revenue contested that the foreign exchange gain amounting to ?13,90,00,000 should be chargeable to tax, while the assessee treated it as contingent in nature. The Assessing Officer (AO) added the foreign exchange gain to the taxable income, citing that the event causing the gain had already occurred and referencing the mandatory Accounting Standard-11.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that the gain was notional and contingent, not real income. The CIT(A) referenced several judicial decisions supporting the non-taxability of notional gains.

Upon appeal, the Tribunal found merit in the Revenue's submissions, supported by previous ITAT Kolkata and Supreme Court decisions. The Tribunal allowed the Revenue's appeal but directed the AO to grant deduction of exchange loss in subsequent years to ensure consistency.

2. Disallowance of Interest on Borrowings:

The AO disallowed interest expenditure of ?25,44,73,131, treating it as part of the cost of investments, as the borrowed funds were used to acquire investments. The CIT(A) upheld this disallowance, considering the interest expenditure as capital in nature.

The assessee argued that the interest should be allowed as revenue expenditure under sections 36(1)(iii) and 37(1) of the Act, as the borrowed funds were used for business purposes. The Tribunal agreed with the assessee, noting that the principle of res judicata does not apply to income tax matters and that the interest paid for business purposes should be allowed as revenue expenditure.

3. Non-taxability of Income from Service Fees:

The assessee argued that if interest on borrowings is treated as capital in nature, the income from service fees related to put options should also be treated as capital receipt and not liable to tax. The CIT(A) dismissed this argument, stating that the consideration received for granting put options was for services rendered and not for acquiring a capital asset, making it a trading receipt.

The Tribunal upheld the CIT(A)'s decision, agreeing that the consideration for put options was contingent and based on future uncertain events, with no transfer of a capital asset.

Conclusion:

The Tribunal allowed the Revenue's appeal regarding the taxability of foreign exchange gain and directed the AO to grant deduction of exchange loss in subsequent years. The Tribunal also allowed the assessee's appeal regarding the disallowance of interest on borrowings, treating it as revenue expenditure. However, the Tribunal dismissed the assessee's appeal on the non-taxability of income from service fees, upholding the CIT(A)'s decision that it was a trading receipt.

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