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TMI Blog2016 (12) TMI 939X X X X Extracts X X X X X X X X Extracts X X X X ..... round 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. - ITA No. 838/Kol/2009 - - - Dated:- 21-9-2016 - Shri N.V.Vasudevan, J.M. and Dr.A.L.Saini, A.M. For The Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient of a contingent liability is that it depends upon happening of a certain event. In the case of the assessee, the event i.e. the change in the value of foreign currency in relation to Indian currency, has already taken place in the current year. Therefore, the loss incurred by the assessee is a fait accompli and not a notional one. In fact the special bench of the ITAT, Delhi in the case of ONGC Vs. DCIT 83 ITD 151 has held that the loss ( or gain) arising as a result of fluctuation in foreign exchange rate on the closing day of the year is a loss incurred by ( or gain accruing to) the assessee and is not a notional loss ( or gain). It may also be noted here that as per the accounting standard-11, which is mandatory for companies-exchange differences arising on foreign currency transactions should be recognized as income or as expense in the period in which they arise. Since the said accounting standard is mandatory for companies, it has to be followed by the assessee company in letter and spirit. This also makes it amply clear that the exchange gain has to be accounted for as income of the year. In view of the reasoning as outlined above and the accepted principle of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase on which A.O. placed reliance to distinguish capital account with that of revenue account, the Apex Court only laid down the general principles for deciding the nature of gain and the facts can be distinguished. Foreign exchange gain is on account of fixed capital and not circulating capital. The gain is only contingent and notional as held by Uttarakhand High Court in the case of CIT Vs.ONGC 301 ITR 415, and hence can not be taxed. This view is further supported by Hon`ble Kolkata ITAT [EIH Hotels Ltd, 16 DTR 181. Foreign exchange gain is only hypothetical in nature and no real income to the appellant. Treatment given by the appellant for calculating MAT does not alter the nature of gain . It remains as notional and hypothetical. Decision In view of the discussion held and relying on the decision of jurisdictional ITAT in the case of EIH Associated Hotels Ltd ( 16 DTR 181), decision of Uttarakhand High Court in the case of CIT Vs. Oil Natural Gas Corporation Ltd ( 301 ITR 415) and decisions of Madras High Court in the case of Indian Overseas Bank Ltd ( 212 ITR 206 ) California Software Co. Ltd. ( 118 TTJ 842-2008), I hold that the notional f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 312 ITR 254-SC). 4.4 On the other hand, the ld Authorized Representative (AR) for the assessee has primarily reiterated the stand taken by the Ld.CIT (Appeal), which we have already noted in our earlier para No.4.2 and the same is not being repeated for the sake of brevity. 4.5 Having heard the rival submissions, we are of the view that there is merit in the submissions of the ld DR, since the proposition canvassed by ld. DR is supported by the decision of ITAT Kolkata and decision of Hon`ble Supreme Court , as referred above. 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 of ₹ 18,000,000/- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 254,473,131/- The facts of this issue are stated in brief. The main reasons for making the disallowance of interest ₹ 254,473,131/- by the Assessing Officer are as follows: i. Out of borrowed funds of ₹ 454.83 croresRs. 441.25 crores have been applied towards acquisition of investments. ii. Interest incomes shown in P L A/c have no nexus with the appellant`s investment activities as the appellant has not earned any income from the above said investment during the year under consideration. iii. No interest expenditure is attributable to the earning of interest income; foreign exchange gain and income from services shown in P L A/c as these incomes have no nexus with application of interest bearing borrowed funds. iv. The appellant Company suomoto disallowed the proportionate interest amount attributable to the acquisition of investment as cost of such investments in the earlier A.Y. 2003-04. v. The AR for the assessee submitted that the assessee has no explanation to offer when asked to show cause for treating the interest expenditure as cost of investments . vi. The facts of the case remains similar in the current year also and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred on borrowed capital for making an investment in equity shares going to add to the cost of investment. Accordingly it should be capitalized. Not being satisfied with the order of the ld CIT (A), the assessee is in further appeal before us. 5.3 Before us the ld AR for the assessee has submitted that investment made by the company for the purpose of business only. 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. The stand adopted by the appellant in the preceding year to capitalize the interest in the cost of investment, is not binding on it for the current year as the principle of Res judicata is not applicable to the income tax matters. Though the principle is well settled now, but one has to see the intention to know the real nature of transaction. The appellant in its own case suomoto disallowed proportionately a deduction in the earlier year and then realized that it erroneously disallowed a portion of the rightful claim of deduction. In the same way t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to income `from services fees offered by the appellant itself as income in the return and accordingly the same has been assessed as such. M/s GE Capital Services India was providing a loan to EssarTeleholding Ltd. against pledge of another company shares, required the assessee to grant put option in respect of the shares pledged. In this process the assessee granted put option and received ₹ 16,85,00,000/- from M/s EssarTeleholding as a consideration for the services rendered and accordingly the assessee showed in its books as receipt. The assessee has shown this receipt in his books of accounts as revenue income. But during the proceedings before the CIT (A) the assessee had filed an additional ground and requested the CIT (A) to treat income from service fee as capital receipt instead of revenue receipt. However, the ld CIT (A) has dismissed the ground raised by the assessee observing the followings: i. Nature of receipt receiving from EssarTeleholding for the services provided by the appellant by way of granting put option. ii. Secondly no consideration paid to fulfill the exercise of the condition of the option. It is only like a conditional guarantee dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant received the money as consideration for services rendered and not an advance as contemplated in the above said section, since no transfer of asset is involved and the entire transaction is only contingent in nature. viii. The other argument that if GE capital does not exercise the put option the consideration for granting put option will remain as a capital receipt and can not be taxed even under the head capital gain as there is no existence of a capital asset, so transfer of capital asset and consequently no gain arising on transfer of such capital asset. This argument looks very odd and contrary to earlier argument treating the asset under the category of transfer of capital asset. In view of the above facts and discussions held, I am of the opinion that the additional ground raised in not logical,correct and factually wrong and deserves to be rejected. Thus, the main findings of the ld CIT(A) is 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. 6.1 The ld AR for the assessee has submitted before us that since the interest on borrowed capital has been treated as cap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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