2018 (6) TMI 1271 - AT - Income Tax

Disallowance of freight charges - Held that - Since the disallowance was made on estimate basis without any basis and as assessee could prove the genuineness of expenditure, we do not see any reason to differ from the findings of Ld.CIT(A). There is no merit in the contentions of Revenue. The grounds are dismissed. Addition of notional gain on freight expenses - Held that - In the present case there is no denial that the amount of ₹ 85.23 crores borrowed was utilized for acquisition of capital assets. This being admitted position the exchange fluctuation can only be adjusted to the asset accounts by reducing the carrying amount of the fixed assets. It cannot be taxed as income - It is to be noted that in the next A.Y. 2009-10 there was a loss due to fluctuations in foreign exchange on the loans borrowed for acquisition of assets. The AO has not allowed this loss as deduction. There cannot be one method if the fluctuations result in reduction of liability and a different treatment if the fluctuations result in a higher liability. The fact that the liability increase due to exchange fluctuations in the next year has not been treated as allowable expenditure is relevant, for the purpose of determining whether the reduction in liability due to exchange fluctuations on amounts borrowed for acquisition of assets could be assessed as income in the year under appeal. The treatment in terms of taxation has to be uniform at all times - AO is directed to delete the disallowance Issue of Prorata premium - Held that - Similar issue was considered by the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Limited Vs. CIT 1997 (4) TMI 5 - SUPREME COURT as held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount in that accounting year. This conclusion was not justified looking to the nature of the liability. It was true that the liability had been incurred in the accounting year. But the liability was a continuing liability which stretched over a period of 12 years. It was, therefore, a liability spread over a period of 12 years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to-pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount over the relevant accounting period in question. - decided against revenue

Summary

Issues Involved:
1. Disallowance of freight charges.
2. Addition of notional gain on foreign exchange.
3. Disallowance of provision on redemption of Foreign Currency Convertible Bonds (FCCB).

Issue-wise Detailed Analysis:

1. Disallowance of Freight Charges:
The Assessing Officer (AO) disallowed 2% of the freight charges claimed by the assessee, amounting to ?5,65,73,472/-, on the basis that some confirmation letters sent to payees were returned unserved. The Commissioner of Income Tax (Appeals) [CIT(A)] found that the assessee provided sufficient details, including bank certificates and PAN numbers of the payees, confirming the genuineness of the transactions. The CIT(A) concluded that the 2% disallowance was not based on any logical ground and directed the deletion of the disallowed amount. The Tribunal upheld the CIT(A)'s decision, agreeing that the disallowance was made on an estimated basis without any factual basis, and dismissed the Revenue's appeal on this issue.

2. Addition of Notional Gain on Foreign Exchange:
The AO added a notional gain of ?7,02,20,608/- on foreign exchange to the assessee's income, which the assessee had excluded in its computation. The assessee argued that the gain was notional and related to funds used for acquiring capital assets, thus not taxable. The CIT(A) agreed, citing the Supreme Court's decision in ONGC Ltd. vs. CIT, which allowed exchange fluctuations on loans borrowed for purchasing capital assets to be adjusted to the actual cost of the assets. The CIT(A) observed that the assessee correctly excluded the notional gain from its taxable income and reversed the amount in the subsequent year. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the order, and dismissed the Revenue's appeal on this issue.

3. Disallowance of Provision on Redemption of FCCB:
The AO disallowed the assessee's claim of ?4,06,81,136/- for the proportionate premium on redemption of FCCB, arguing that the liability was contingent and not routed through the Profit & Loss Account. The CIT(A) upheld the AO's disallowance, agreeing that the liability was contingent. The assessee contended that the premium was a business deduction, as the liability was incurred in praesenti and spread over the bond's maturity period. The Tribunal referred to the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT, which allowed the spreading of liability over the period of debentures. The Tribunal concluded that the assessee's claim was justified and directed the AO to allow the deduction. The assessee's appeal was allowed.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, directing the deletion of the disallowance of freight charges and notional gain on foreign exchange, and allowing the deduction for the proportionate premium on redemption of FCCB. The order was pronounced on 20th June, 2018.