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TMI Blog2016 (5) TMI 1386X X X X Extracts X X X X X X X X Extracts X X X X ..... ose years - Held that:- We note that the assessee did not claim depreciation while computing business profit for Assessment year 2000-01 and 2001-02, which position had become final as the ld. Assessing Officer did not allow depreciation in those years. However, the Explanation-5 to section 32 of the Act was inserted by the Finance Act w.e.f. 01/04/2002 (i.e. from Assessment year 2002-03) from which year the assessee had started claiming depreciation. Considering the totality of facts, we are in agreement with the finding of the Ld. Commissioner of Income Tax (Appeal) that it is not open for the Assessing Officer to assume the allowance of depreciation for earlier years, when such depreciation was not actually allowed in those years, because, the situation could have been different, if he would have reopened the assessment of those earlier years. Without amending the assessments of those years, the assumed written down value could not be considered to work out the depreciation of the current year - Decided against revenue Exchange rate fluctuation loss - Held that:- We affirm the stand of the Ld. Commissioner of Income Tax (Appeal) by holding that the loss arising on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) and also the decision of the Tribunal in ITA No.3285 5087/Mum/2007 for Assessment year 2001-02 2002-03 in the case of assessee itself, order dated 25/02/2009. This factual matrix was not controverted by the ld. DR and he merely relied upon the impugned order. 2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is engaged in the business of extraction of lime stone, which is used for manufacturing cement. During the relevant previous years to Assessment year 1994-95 to 1998-99, the assessee incurred expenditure for development of mine amounting to ₹ 5,64,12,225/-. The assessee commenced commercial exploitation in the previous year relevant to Assessment year 1998-99. For the year under consideration, the assessee claimed 1/10th of the expenditure amounting to ₹ 56,41.223/- and aggregate of installments of the above assessment years was not claim due to adequacy of profit amounting to ₹ 2,88,02,610 (para 2 of statement of facts). This claim was accepted in Assessment year 2000-01 by the Assessing Officer. The copy of computation of income and assessment order was handed over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure had been incurred to remove the overburden. Even by the appellant's own admission, the development of mine would mean the work of digging openings as tunnels, raises and winzes to give access to new workings, to provide access to the ore. No evidence has been lead by the AR to support that the said expenditure had been incurred for any of these activities. The expenditure for removal of overburden, per-se would not qualify as an expenditure for either prospecting or development of mines. 7.3.1 Further, a perusal of the assessment records for the A.Y.2000-01 wherein, the AR has claimed that a similar claim was allowed by the AO earlier indicates that the said issue regarding allowability of claim u/s.35E has not been discussed anywhere in that assessment year. Part of the claim made u/s.35E was allowed by default as claimed. Hence, of the issue regarding allowability or otherwise of the said claim u/s.35E was never considered or adjudicated upon by the AO even in the A.Y.2000-01. Hence, there is no question of taking different view in the year under consideration, no view whatsoever having been formed by the AO earlier. 7.4 In view of the discussion above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince, this ground was not raised before the Revenue authorities, therefore, in all fairness, this ground is sent to the file of the Assessing Officer to examine the claim of the assessee and decide in accordance with law. The assessee be given opportunity of being heard. 7. The appeal of the assessee is partly allowed for statistical purposes. 8. Now, we shall take up appeal of the Revenue (ITA No.5751/Mum/2009), wherein, first ground pertains to holding that it is not open for the Assessing Officer to assume the allowance of depreciation for earlier years, when such depreciation was not actually allowed in those years. Without taking into consideration, explanation-5 below section 32(1)(ii) inserted by the Finance Act, 2001, which will apply retrospectively with effect from 01/04/1988. 8.1. The crux of argument advanced on behalf of the Revenue is in support of the assessment order, whereas, the counsel for the assessee explained that for Assessment year 2000-01 2001-02, identical claim was accepted by the Assessing Officer and explanation-5 to section 32 was w.e.f. Assessment year 2002-03. Reliance was placed upon the decision in K. K. Doshi Vs CIT (O2008) 297 ITR 38(S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground, raised by the Revenue. 9. The next ground pertains to exchange rate fluctuation loss claimed by the assessee. The crux of argument on behalf of the Revenue is that the Ld. Commissioner of Income Tax (Appeal) erred in allowing the exchange rate fluctuation loss, suffered by the assessee as the assessee had borrowed from various banks to meet out its capital requirement. On the other hand, the counsel for the assessee defended the conclusion arrived at in the impugned order by claiming that the impugned issue is covered by the decision in CIT vs Woodword Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC). 9.1. We have considered the rival submissions and perused the material available on record. Briefly, the claim was in respect of exchange rate fluctuation loss in respect of loan borrowed by the assessee from various banks to meet out its working capital requirement. The stand of the ld. Assessing Officer/Ld. DR is that the exchange fluctuation loss cannot be considered as a revenue expenditure as the relevant effect as to given in the balance sheet by restating the loan amount outstanding. The assessee suffered a loss on account of fluctuation of foreign currency on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business should be allowed in computing the income chargeable under the head profits and gains of business . In Sections 30 to 36, the expressions expenses incurred as well as allowances and depreciation has also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament has used the expression any expenditure in Section 37 to cover both. Therefore, the expression expenditure as used in Section 37 may, in the circumstances of a particular case, cover an amount which is really a loss even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M.P. Financial Corporation v. CIT reported in 165 ITR 765 the Madhya Pradesh High Court has held that the expression expenditure as used in Section 37 may, in the circumstances of a particular case, cover an amount which is a loss even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in 225 ITR 802. According to the Law and Practice of Income Tax by Kanga and Palkh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where Section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing regularly employed by the assessee. In this case, we are concerned withSection 28. Therefore, Section 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (see judgment of this Court in the case of United Commercial Bank v. CIT reported in 240 ITR 355). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the accounting standard followed by the assessee(s) in this batch of Civil Appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange rate vis-`-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P L account for the reporting period. 19. A company imports raw material worth US $ 250000 on 15.1.2002 when the exchange rate was ₹ 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15.4.2002 when the exchange rate is ₹ 49 per US $. However, on the balance sheet date, 31.3.2002, the rate of exchange is ₹ 50 per US $. In such a case, in terms of AS-11, the effect of the exchange difference has to be taken into P L account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e. ₹ 50 at 31.3.2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of ₹ 4 (50-46) per US $ is to be shown as an exchange loss in the P L acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the varied liability. In this batch of civil appeals, we are concerned with increase in the existing liability on account of foreign exchange fluctuations on capital account . 23. Before coming to the arguments, we quote hereinbelow Section 43A, as it stood prior to 1.4.2003: 43A. Special provisions consequential to changes in rate of exchange of currency--(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel, under the preamended Section 43A, the effect of increase or decrease of liability arose only at the point of payment because the point of accrual shifted to the point of payment. In this connection, learned counsel urged that the difference between accrual and payment of a liability is that normally the point of accrual and the point of payment represent two different time milestones. However, according to the learned counsel, in the case of a contingent liability, like that of foreign exchange fluctuations, the point of accrual and the point of payment become the same. According to the learned counsel, under the pre-amended dispensation of Section 43A, the effect of increase or decrease of liability could only arise at the point of payment, as the point of accrual shifts to the point of payment. 27. Learned counsel next contended that on a proper and true interpretation of the amendment to Section 43A, introduced by Finance Act, 2002, Section 43A is clarificatory. According to the learned counsel, the occasion for the clarificatory amendment arose in view of the judgments of the various High Courts, which interpreted the unamended provision as laying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) applies only where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring the asset. Section 43A(1), therefore, has no application unless the asset is acquired and the liability existed, before the change in the rate of exchange takes effect. In such a case, Section 43A contemplates recomputation of the cost of the assets for the purposes of depreciation [Sections 32 and 43(1)], and also as regards capital assets for scientific research [Section 35(1)(iv)] and also regarding patent rights or copyrights [Section 35A]. 31. As held in Arvind Mills case (supra) increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. Thus, the adjustments in the actual cost are to be made irrespective of the date of actual payment in foreign currency made by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets. 33. As stated above, what triggers the adjustment in the actual cost of the assets, in terms of unamended Section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for Section 43A which corresponds to para 10 of AS-11 such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of Section 43(1). The unamended Section 43A nowhere required as condition prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertains to claim of depreciation in respect of badminton court amounting to ₹ 13,665/-. This ground was discussed in preceding para of this order(ITA No.5957/Mum/2009) for Assessment year 2005-06, therefore, decided in favour of the assessee. 12. Next ground pertains to disallowance in respect of reimbursement of school expenses amounting to ₹ 22,75,669/- at Satna. Without going into much deliberation, we note that this has been decided in preceding para of this order (in ITA No.5957/Mum/2009) for Assessment year 2005-06. Following the same reasoning, this ground is decided in favour of the assessee. 13. The next ground pertains to restricting the claim for depreciation on UPS at the rate of 15% as against 60% treating the same as plant and machinery amounting to ₹ 1,01,025/-. 13.1. Considering the totality of facts, we find that this issue is covered by the decision of the Tribunal in Macawber Engineering Systems (I)(P.)Ltd. vs ACIT (2012) 19 ITR (T) 302 and DCIT vs Datacraft India Ltd. (2010) 40 SOT 295 (Mumbai)(SB), thus, the Assessing Officer is directed to decide the issue in the light of the aforesaid decision and allow the assessee the depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income Tax (Appeal) sent back the matter to the file of the Ld. Assessing Officer to make a reasonable disallowance by following the decision from Hon ble jurisdictional High Court in Godrej Boyce Mfg. Ltd. We find no infirmity in the direction of the Ld. Commissioner of Income Tax (Appeal) and the same is affirmed. 20. The next ground is with respect to claim of foreign exchange fluctuation loss in respect of loan borrowed by the assessee to meet out its working capital requirements. This issue has been decided in preceding para of this order (ITA No.5751/Mum/2009) for Assessment year 2005-06. The same order will be applicable to the impugned ground also. 21. The last ground in the present appeal is with respect to allowance of depreciation, which was not actually allowed in earlier years. This ground has been decided in ITA No.5751/Mum/2009 for Assessment year 2005-06, therefore, the same reasoning/decision will be applicable to the impugned ground also. 22. Now, we shall take up appeal of the assessee in ITA No.8049/Mum/2010, wherein, first ground pertains to disallowance in respect of expenditure u/s 14A read with Rule-8D of the Rules is concerned, we find t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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