2018 (2) TMI 734 - AT - Income Tax

Addition treating the premium paid to hedge against exchange fluctuation risk as service fees - Held that - The appellant has drawn attention to the fact that the similar amounts claimed in the preceding years have been allowed and has also explained in detail that the loan from Bridgestone Corporation Japan was utilized for working capital needs and repayment of existing loans and hence has to be treated as on revenue account and not on capital account and hence as the expenditure was incurred for the purposes of business it was also allowable u/s 37. The claim of the appellant is found to be eligible for allowance in the year under consideration - Decided in favour of assessee. Addition on account of under valuation of closing stock - Held that - As per section 145A of the Income Tax Act, 1961, wherein method of valuation will be applicable not only in closing stock, but on inventory i.e. opening and closing stock as well as on both purchases and sales. Therefore, the AC is not justified in adding the excise duty in closing stock of raw materials and incidental goods. We, therefore, direct the AO to compute the total income by adding cess, duty or tax paid incurred not only in closing stock but also in purchases, opening stock, sales, wherever such excise duty is already added. In respect of assessment years 2005-06, 2008-09, and 2009- 10, the Ld. CIT(A) has already allowed the claim of the assessee as we have held above. Therefore, on the same reasoning, Departmental appeals for all the three years are dismissed.

Summary

Issues Involved:
1. Deletion of addition of ?1,93,48,000/- as premium paid to hedge against exchange fluctuation risk treated as service fees for AY 2006-07.
2. Deletion of addition of ?2,50,79,009/- on account of undervaluation of closing stock for AY 2011-12.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?1,93,48,000/- as Premium Paid to Hedge Against Exchange Fluctuation Risk (AY 2006-07):

The Revenue raised a ground of appeal against the deletion of the addition of ?1,93,48,000/- by the CIT(A), which was initially disallowed by the Assessing Officer (AO) as expenditure claimed by the assessee for premium paid on swap for prepayment of loan. The AO contended that the premium did not constitute interest allowable under section 36(1)(iii) and was not allowable under section 37 as it was considered capital expenditure.

The CIT(A) found that the appellant had taken an ECB loan from Bridgestone Corporation Japan, repayable in January 2007. To guard against exchange rate fluctuation, the appellant entered into an agreement with Citi Bank Mumbai, paying a premium of ?1,93,48,000/-. The CIT(A) concluded that this amount qualified as interest under section 2(28A) of the Act, which includes any service fee for money borrowed or debt incurred. The CIT(A) also noted that similar claims had been allowed in preceding years and that the expenditure was for business purposes, thus allowable under section 37.

The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not controvert the findings of fact. Therefore, the grounds raised by the Revenue were dismissed.

2. Deletion of Addition of ?2,50,79,009/- on Account of Undervaluation of Closing Stock (AY 2011-12):

The Revenue appealed against the CIT(A)'s deletion of the addition of ?2,50,79,009/- made by the AO due to undervaluation of closing stock. The AO had added the difference of excise duty on the closing and opening stock of raw material consumption, asserting that the assessee’s method of valuation should include excise duty as per section 145A.

The CIT(A) directed the assessee to adopt the working as per the ITAT's directions in earlier years, which involved adding excise duty not only to the closing stock but also to purchases, opening stock, and sales to avoid distortion of profits. The CIT(A) relied on previous decisions where similar additions were deleted by the Tribunal.

The Tribunal upheld the CIT(A)'s decision, noting that the issue had been consistently decided in favor of the assessee in earlier years and no contradictory precedent was presented by the Revenue. Thus, the Tribunal saw no reason to interfere with the CIT(A)'s order, and the grounds raised by the Revenue were dismissed.

Conclusion:

Both appeals by the Revenue were dismissed, with the Tribunal affirming the CIT(A)'s decisions on the deletion of the additions for both the premium paid to hedge against exchange fluctuation risk and the undervaluation of closing stock. The Tribunal emphasized the consistency of the decisions with earlier years and the lack of contradictory evidence from the Revenue.