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2020 (12) TMI 1190 - AT - Income TaxAddition on account of buy back/prepayment of foreign currency convertible bonds (FCCBs) at discount - The assessee had availed Foreign Currency Convertible Bonds (FCCBs) from Europeon Union aggregating US 36 millions - Reason to make the addition is that FCCBs were utilised in increasing the depreciable asset of the assessee company - HELD THAT - The assessee satisfied the conditions of RBI to buy-back FCCBs. The assessee also proved on record that all the conditions of RBI in this regard have been made by assessee company. Section 41(1) of the I.T. Act would not apply because the amount of FCCBs was not allowed as expenditure or trading liability in earlier year - no addition could be made under section 28(iv) - The assessee is in manufacturing business and has admittedly utilised the FCCBs by increasing the asset of the assessee company and most of them being depreciable asset which fact is also mentioned by the A.O. in the assessment order. Since the FCCBs were raised to use the proceeds for setting-up of new project and this fact is admitted by the A.O. in the assessment order, therefore, assessee used the loan to purchase the capital asset for the company. ITAT, Delhi E-Bench, Delhi in the case of M/s. OK Play India Ltd., 2020 (2) TMI 416 - ITAT DELHI considering the Judgment of the jurisdictional Delhi High Court in the case of Logitronics P. Ltd., vs., CIT ( 2011 (2) TMI 12 - DELHI HIGH COURT and Judgment of Hon ble Supreme Court in the case of CIT vs.Mahindra Mahindra Ltd., (supra), decided the identical issue in favour of the assessee 2003 (1) TMI 71 - BOMBAY HIGH COURT . Disallowance of depreciation - enhanced cost on account of exchange fluctuation in respect of assets acquired in India - HELD THAT - Assessee purchased the machinery in India from the foreign funds through FCCBs which fact is not disputed by the authorities below. It is, therefore, clear that though Section 43A apply to the assets acquired from Abroad, still the A.O. without justification applied Section 43A for making the disallowance of depreciation against the assessee. Section 43A thus could not apply in the case of the assessee which is also held by various Benches of the Tribunal in the decisions quoted above. Accounting Standard-11 would also apply in the case of the assessee. The assessee has also explained that Companies Amendment Rules also apply to the facts of the case because option is given to assessee and it provided Where long term foreign currency monetary items relates to acquisition of depreciable capital asset, the same shall be added/deducted from the cost of the asset and shall be depreciated accordingly over the balance life of the asset. . It is not in dispute that assessee followed AS-11 regularly.In A.Y. 2010-2011 the Ld. CIT(A) allowed similar claim of the assessee, but, the Department did not file any appeal against the same Order. No infirmity in the Order of the Ld. CIT(A) in following the same. It may also be noted here that wherever there was an exchange gain to the assessee, the same was reduced from the WDV and claim was made accordingly, therefore, assessee is following the AS-11 consistently and as such the same should not have been disputed by the authorities below. The Ld. D.R. has not pointed-out any infirmity in the Order of the Ld. CIT(A) in allowing the depreciation to the assessee as per Law. Addition of returned loss of the exempted unit u/s 10B - HELD THAT - When the Tribunal has allowed similar claim of assessee in preceding A.Y. 2008-2009 and ultimately in group appeals, the Hon ble Supreme Court has allowed the claim of assessee, the issue is covered by the aforesaid decisions in favour of the assessee which fact is also accepted by the Ld. D.R. Therefore, there is no infirmity in the Order of the Ld. CIT(A) in allowing the claim of assessee. Addition to the book profit under section 115JB under section 14A - HELD THAT - As decided in VIREET INVESTMENT (P.) LTD. 2017 (6) TMI 1124 - ITAT DELHI we answer the question referred to us in favour of assessee by holding that the computation under clause( f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income-tax Rules, 1962 Disallowance u/s 14A - HELD THAT - In the case of Joint Investments Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT the Hon ble Delhi High Court held that by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by assessee in relation to the tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. It is, therefore, well settled Law that disallowance cannot exceed the exempt income. We, therefore, set aside the Orders of the authorities below and direct the A.O. to restrict the disallowance to ₹ 2,37,896/- only.
Issues Involved:
1. Deletion of addition on account of buyback/prepayment of foreign currency convertible bonds (FCCBs). 2. Disallowance of depreciation on enhanced cost due to exchange fluctuation. 3. Deletion of addition in returned loss of the exempted unit under section 10B. 4. Allowability of foreign exchange fluctuation loss as a deduction under section 37. 5. Addition under section 14A of the Act and to the book profits under section 115JB. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Buyback/Prepayment of FCCBs: The Revenue challenged the deletion of an addition of ?26,35,58,122/- on account of buyback of FCCBs. The assessee argued that the FCCBs were utilized for acquiring capital assets, thus the buyback was a capital receipt. The CIT(A) deleted the addition based on the Delhi High Court judgment in Logitronics P. Ltd. v. CIT, holding that section 41(1) and section 28(iv) of the IT Act did not apply as the FCCBs were not trading liabilities or benefits arising from business. The Tribunal upheld the CIT(A)’s decision, confirming that the FCCBs were utilized for capital expenditure, and thus the buyback at a discount was a capital receipt not taxable under sections 41(1) or 28(iv). 2. Disallowance of Depreciation on Enhanced Cost Due to Exchange Fluctuation: The Revenue disallowed depreciation of ?1,82,76,330/- on the enhanced cost due to exchange fluctuation, arguing that section 43A, which applies to assets acquired from abroad, barred such enhancement. The assessee contended that the enhanced liability was accounted for as per Accounting Standard-11 and that section 43A was not applicable. The CIT(A) allowed the depreciation, referencing the Supreme Court judgments in CIT v. Arvind Mills Ltd. and Woodward Governor India P. Ltd., and the ITAT Mumbai Bench decision in DDIT v. Staubil A.G. India Branch Office. The Tribunal upheld the CIT(A)’s decision, noting that section 43A did not apply to indigenous assets and that the assessee consistently followed AS-11. 3. Deletion of Addition in Returned Loss of the Exempted Unit under Section 10B: The Revenue contested the deletion of an addition of ?56,28,605/- in the returned loss of the exempted unit under section 10B. The CIT(A) allowed the carry forward of the loss, following the Tribunal’s decision for the A.Y. 2008-2009 and the Bombay High Court decision in CIT v. Galaxy Surfactants Ltd. The Tribunal confirmed that the issue was covered by the Supreme Court judgment in CIT v. Yokogawa India Ltd., which held that the deduction under section 10A/10B should be allowed while computing the gross total income, not at the stage of total income computation. 4. Allowability of Foreign Exchange Fluctuation Loss as a Deduction under Section 37: The assessee filed a cross objection claiming that the foreign exchange fluctuation loss of ?27,37,25,941/- should be allowed as a deduction under section 37 if depreciation was not allowed. Since the Tribunal dismissed the Revenue’s appeal on the depreciation issue, the cross objection became infructuous and was dismissed. 5. Addition under Section 14A of the Act and to the Book Profits under Section 115JB: The assessee contested the addition of ?24,48,822/- under section 14A to the book profits under section 115JB. The Tribunal referred to the Special Bench decision in ACIT v. Vireet Investment Pvt. Ltd., which held that the computation under clause (f) of Explanation 1 to section 115JB(2) should be made without resorting to section 14A read with Rule 8D. Consequently, the Tribunal deleted the addition. Additionally, the Tribunal held that the disallowance under section 14A could not exceed the exempt income, directing the AO to restrict the disallowance to ?2,37,896/-, the amount of exempt income received by the assessee. Conclusion: The Tribunal dismissed the Revenue’s appeal and the assessee’s cross objections, while partly allowing the assessee’s appeal by upholding the CIT(A)’s decisions on the key issues. The Tribunal’s decisions were based on established legal principles and precedents, ensuring consistency and adherence to applicable accounting standards and judicial pronouncements.
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