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TMI Blog2018 (6) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in the assessment completed u/s 143(3) r.w.s 147 of the IT Act for the A.Y 2010-11. We hold that the assessee, which is following a uniform and consistence method of accounting, and has claimed the expenditure in accordance with the notification of the Min of Corporate Affairs and the A.O has allowed the same in the subsequent assessment years, the revenue cannot take a contrary stand only for the A.Y 2009-10. In the result, the grounds of the appeal of the assessee on this issue are allowed. - ITA No. 1689/Hyd/2012 And ITA No. 1735/Hyd/2012 - - - Dated:- 22-5-2018 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri P. Murali Mohan Rao For The Revenue : Dr. K. Srinivas Reddy ORDER PER P. MADHAVI DEVI, J.M.: Both are cross appeals of the assessee as well as the revenue against the order of the Ld. CIT(A)-2, Hyderabad dated 18.09.2012. In the assessee appeal, the assessee has raised the following grounds of appeal. 1. That the Order of the learned m (A) is not only erroneous both on facts and in law but is perverse. 2. That the learned m (A) erred in upholding the addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational Market by issuing Foreign Currency Convertible Bonds worth USD 25 million, which is having the convertible option to equity shares or repayment of bonds after Five Years. 13. That during the financial year 2008-09 the company has incurred foreign exchange loss of as, 21,92,00,000/- on Foreign Currency Convertible Bonds due to fluctuation of exchange currency. 14. That the Appellant Company has restated the Bonds at the exchange rates prevailing at the year end and the difference out of such restatement is transferred to Foreign Currency Monetary Item Translation Difference Account, to be written off over a period of 3 years. 15. That the learned C!T(A) failed to appreciate that the Appellant Company has transferred 1/3 of the difference amount to profit and Loss Account under the head Gain/Loss account during the Financial Year 2008-09 by following the notification issued by Ministry of Corporate affairs on 31 march 2009 Vide notification No. G.S.R. 225(E) regarding foreign exchange loss which is not correct and not justified. 16. That the notification No. G.S.R. 225(E) clarifies that companies can debit to profit and losses account, all forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-Newspaper Periodicals. 26. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 12,55,745/- towards Advertisement-Sign Boards. 27. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 42,00,984/- towards Advertisement-TV. 28. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 13,45,954/- towards Advertisement-0thers. 29. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 18,74,353/- towards Business promotion expenses. 30. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 6,30,770/- towards Dry Cleaning Expenses. 31. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 8,56,234/- towards Postage courier charges. 32. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of ₹ 4,55,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore they are rejected as not pressed. Additional ground of appeal No. 20 is an argument in favour of admission of additional grounds while ground of appeal No. 21 is a legal ground and all the facts relating to this ground are on record. Therefore, this ground is admitted and we proceed to dispose the appeal of the assessee as under. 3. As regards grounds No. 2 to 6 relating to disallowance u/s 40A(3) of the IT Act, we find that similar issue had arisen in the assessee s own case for the A.Y 2008-09 and A Bench of this Tribunal (to which both of us are signatories) has considered the issue at length at para 4 to 7 of its order has held as under, which is reproduced hereunder, for the sake of ready reference. 4. Brief facts of the case relating to Ground No.2 are that the assessee company, which is in the business of running clubs and hospitality, filed its return of income for the A.Y 2008-09 on 26.09.2008 declaring income of ₹ 89,61,93,030. The return was processed on 9.2.2010 raising a demand of ₹ 7,24,50,170/-. Subsequently, the assessment was picked up for scrutiny u/s 143(3) of the Act and various details were called for from the assessee. The details wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure of the assessee company, then the A.O shall not make any disallowance u/s 40A(3) of the IT Act to such an extent. The grounds of appeal No. 2 to 6 are accordingly treated as partly allowed for statistical purposes. 4. As regards grounds No. 7 to 9, we find that similar issue had arisen in the assessee s own case for the A.Y 2008-09 and that the ground of appeal raised by the revenue in its appeal for the A.Y 2009-10 is also similar to the grounds raised by the revenue for the A.Y 2008-09 which has been considered by the Tribunal and the Tribunal dealt with the issue at paras 8 to 12 which are reproduced hereunder for ready reference: 8. As regards Grounds of appeal Nos.3 to 6, brief facts are that on verification of the details filed by the assessee, the AO observed that the assessee has not made TDS from various payments totaling to ₹ 5,21,75,632. He therefore, disallowed the same u/s 40(a)(ia) of the Act. On appeal, the CIT (A) has deleted the disallowance with a direction to the AO to verify whether the payment towards the expenditure, was actually paid or payable and to allow the same if it is found to have been actually paid, before 31st of March i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing returned income by the recipient. By referring to the said proviso, he submitted that though this proviso has been inserted by the Finance Act of 2013, various Benches of the Tribunal have held this proviso to be clarificatory in nature and applicable retrospectively. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township reported in 61 Taxman.com 45 (Del.) in support of this contention. He therefore, submitted that since the assessee has not been treated as an Assessee in Default u/s 201(1) of the Act, it is to be presumed that the recipients have offered the said income to tax and in such circumstances, no disallowance u/s 40a(ia) is to be made. 11. The learned DR however, supported the order of the authorities below. 12. Having regard to the rival contentions and the material on record, we find that the Hon'ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township (Supra) has considered the applicability of the second proviso to section 40a(ia) and has held to be declaratory and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove that the payment, in question, were made within the time specified as per the provisions of section 43Bof the Act. The learned Counsel for the assessee submitted that the assessee has not debited these amounts to the P L A/c and has not claimed the same as expenditure and hence they cannot be disallowed u/s 43B of the Act. He has drawn our attention to the details of the outstanding liabilities at pages 6 to 7 of the Paper Book wherein these amounts are shown as payable and submitted that these details were also filed before the AO, who has not verified the same. He submitted that the opening balances from the earlier years are being added as income of the relevant A.Y and prayed for deletion of the addition. 14. The learned DR was also heard. 15. We find that at pages 6 7 of the paper book filed by the assessee are the copies of the trial balance as on 31.03.2008 showing the outstanding expenses and provisions. The amounts disallowed by the AO are the statutory provisions made by the assessee. The assessee's contention that these amounts have not been debited to the P L A/c needs verification. Therefore, we deem it fit and proper to remit this issue to the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctices for the benefits to the shareholders of the company, but is notional loss as the asset continues to be owned by the company. She observed that the marked to market loss is given different accounting treatment by different assessees and a notional loss which should be contingent in nature cannot be allowed to be set off against the taxable income. Thus, she disallowed the claim of expenditure of ₹ 7,30,66,667/- claimed by the assessee as notional capital loss and brought it to tax. Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the order of the A.O and the assessee is in second appeal before us. 6.1 The Ld. Counsel for the assessee while reiterating the submissions made before the authorities below has placed reliance upon the following decisions in support of his contentions: (a) CIT Vs PACT Securities Financial Services Ltd., reported in 61 taxmann. com 192 (AP TS). (b) Cooper Corporation Pvt Ltd., Vs DCIT, reported in ITA No. 866/PN/2014. (c) CIT Vs Woodward Governor India Pvt Ltd., reported 179 taxman.com 326 (SC) (d) Gati Limited Vs ITO, in ITA No. 1325/Hyd/2015. (e) Crane Software International Ltd., Vs. DCIT i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the AO was upheld by the CIT(A) vide decision dated 29.11.2001. Being aggrieved, the assessee went in appeal to the Tribunal. By judgment and order dated 1.4.2005 the Tribunal relying on its earlier decision in the case of M/s Woodward Governor India P. Ltd. for the assessment years 1995-96, 1996-97 and 1997-98 held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year had to be allowed. This decision of the Tribunal has been upheld by the Delhi High Court vide the impugned judgment dated 30.4.2007, hence, this Civil Appeal is filed by the Department. 6. Shri Parag Tripathi, learned Additional Solicitor General, appearing on behalf of the Department submitted that, in this case, the assessee(s) claims deduction under Section 37, which is a residuary provision, as there is no specific provision dealing with adjustment based on foreign exchange fluctuations on the Revenue account (akin to Section 43A, which deals with such adjustments in the Capital account). According to the learned counsel, the essence of deductibility under Section 37 is that the increase in liability due to foreign exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is borrowed and used in business: 2. The liability thus was, since by way of loan, the increased liability of ₹ 500/- was towards business increased by ₹ 500/- which resulted into business loss as a result of modification of existing liability. Likewise if on fluctuation, the dollar rate is reduced to ₹ 32/- per dollar, the liability will get reduced by ₹ 300/- and there would be a business gain of ₹ 300/-. 8. In the light of the above illustration, learned counsel urged that when the assessee(s) borrows 100 US$ on 1.4.1999 he incurs a crystallised liability, however, the value of that liability undergoes a change by 31.3.2000 on account of the fall in the rupee value. In other words, the rate of exchange fluctuated from ₹ 35 per dollar as on 1.4.1999 to ₹ 40 per dollar as on 31.3.2000, thus, increasing the liability of the assessee by ₹ 500. According to the learned counsel, the assessee was entitled therefore to deduction under Section 37(1) for such enhanced liability. Similarly, if the dollar rate had reduced from ₹ 35 to ₹ 32 per dollar, then the assessee's liability would stand reduced by ₹ 300 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y having gone irretrievably and consequently, the requirement of expenditure is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression expenditure incurred while dealing with the question as to whether there was a distinction between the actual liability in presenti and a liability de futuro. The word expenditure is not defined in the 1961 Act. The word expenditure is, therefore, required to be understood in the context in which it is used. Section 37enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P L account the value of the stock-in- trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading Section 37(1) with Section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word profit implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Section 145(1) enacts that for the purpose of Section 28 and Section 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with Section 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the nature of liability. The assessee company was bound to discharge the bonds on due dates. The assessee was paying interest to bond-holders. It is clear that the bond finance was in the nature of loan finance. 34.3. It becomes the capital of the company only when the bond holders exercise their option at the appropriate time in future. That conversion is only a future event, that mayor may not happen, depending on the option exercised by the bond-holders. Therefore, the possible equity character of the funds was contingent on the fact whether bonds would be converted or not in a future date. The nature of a present day loan fund cannot be held as equity fund on the basis of such contingency. 34.4. As far as the nature of the funds for the asst. year 200607 is concerned, it was a liability in the nature of loan, that too interest bearing loan. If the funds are treated as equity capital for asst. year 2006-07, how the payment of bond interest would be justified in law, as law does not permit payment of interest on a company's equity capital. 34.5. In the facts and circumstances of the case, the issue is decided in favour of the assessee . 6.5 Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ordinary shares or to redeem their claim of bonds on 06.12.2011 at 147.882% of the principal. He observed that since the said bonds are convertible and have the characteristic of equity shares, proportionate expenditure on the issue of bonds has to be treated as capital expenditure. He further observed that the main purpose of FCCBs was for expansion of their business, i.e., investment in wide ranging capital investment projects and the advantage that would accrue to the assessee from such capital investment would be of an enduring nature. He further observed that the bonds were not meant to be part of profit earning process or a part of the working capital but was meant for investment in the capital field such as off-shore acquisition, acquisition/ purchase of scrips, / investment in wholly owned subsidiaries etc., He therefore, treated the expenditure of ₹ 2,64,26,757 incurred on issue of the bonds as capital expenditure and accordingly, brought it to tax. Aggrieved, assessee filed an appeal before the Ld. CIT(A) who confirmed the order of the A.O. and the assessee is in second appeal before us. 3. The Ld. Counsel for the assessee, Mr. Y. Ratnakar, while reiteratin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance upon the following decisions in support of his contention. 1. India Cements Ltd., vs. CIT (1966) 60 ITR 52 (SC) 2. CIT vs. Tumus Electric Corpn. Ltd., (1990) 49 Taxman 249 (MP) (HC) 3. CIT vs. East India Hotels Ltd., (2001) 119 Taxman 235 (Cal.) 4. CIT vs. South India Corpn. (Agencies) Ltd., (2007) 164 Taxman 249 (Mad.) 5. CIT vs. First Leasing Co. of India Ltd., (2008) 304 ITR 67 (Mad.) 6. CIT vs. Secure Meters Ltd., 321 ITR 611 7. CIT vs. ITC Hotels Ltd., 334 ITR 109 8. M/s. Crane Software International Ltd. vs. DCIT, Bangalore Order dated 08.02.2011 in ITA.Nos. 741 742/Bang/2010. 9. CIT vs. Havells India Ltd., 352 ITR 376 10. DCIT vs. UAG Builders (P) Ltd., Delhi (2012) 25 taxmann.com 205 (Del.) 3.1. Further he has also relied upon the CBDT circular No.56 dated 19th March, 1971 on the provisions of section 35Dwherein it was clarified that the provisions of section 35D will not have the effect of bringing the expenditure covered by the decision of the Hon'ble Supreme Court in the case of India Cements Ltd., reported in (1966) 60 ITR 52 within the scope of the expenditure to be amortized agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court of Calcutta was considering the allowability of the expenditure on account of issue of debentures and the applicability of Section 35D to such expenses and it was held that Section 35D has been introduced w.e.f. 01.04.1971 to give benefit to the assessees in case of capital expenses but a deduction, which is otherwise allowable as revenue expenditure, cannot be denied after insertion of Section 35D. The Hon'ble High Court also took note of the CBDT Circular No.56 dated 19.03.1971 which clarified the provision of section 35D and the amortization allowable and the said provision has further been clarified that it is not intended to supersede any other provision of the I.T. Act, under which such expenditure is admissible as a deduction. In the case before the Hon'ble Calcutta High Court, 20% of the debentures was payable by the end of three years from the date of issue of debentures by way of issue of shares and the balance 20% at the end of 8th, 9th , 10th and 11th years from the date of allotment of debentures by payment in cheques. The Hon'ble High Court held the above facts of conversion of 20% of the debentures into shares by the end of 3 years to make th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure allowable u/s 37(1) of the Act. The Hon ble Supreme Court had also taken note of the fact that in the previous years, whenever the dollar rates would be reduced, the department had taxed the gains which accrued to the assessee therein on the basis of accrual and it was only in the relevant year when the dollar rates increased resulting in a loss, that the department disallowed the deduction / debit and that it indicated the double standards adopted by the department. Even in the case before us, the assessee has stated that the disallowance is made only in A.Y 2009.10, whereas the balance of the expenditure which has been claimed in subsequent assessment years, has been allowed as a deduction in the assessment completed u/s 143(3) r.w.s 147 of the IT Act for the A.Y 2010-11. Respectfully following the above decisions (cited supra), we hold that the assessee, which is following a uniform and consistence method of accounting, and has claimed the expenditure in accordance with the notification of the Min of Corporate Affairs and the A.O has allowed the same in the subsequent assessment years, the revenue cannot take a contrary stand only for the A.Y 2009-10. In the result, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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