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TMI Blog2018 (6) TMI 1271X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation. Relying on the decision of Oil and Natural Gas Corporation Ltd., Vs. CIT [322 ITR 180] (SC), AO brought the same to tax. 2.2. Next item considered by the AO was provision on redemption of Foreign Currency Convertible Bonds [FCCB]. Assessee claimed an amount of Rs. 4,06,81,136/- on account of proportionate premium on redemption of FCCB. As assessee reduced the same from share premium account, AO disallowed the same and added back to the income. 2.3. The other addition of depreciation on UPS is not disputed by the parties before us. 3. Aggrieved on the order of AO, an appeal was preferred before the Ld.CIT(A). The additional evidence filed by assessee was sent to AO on remand and after considering the report and submissions of assessee, Ld.CIT(A) allowed the contentions of assessee on freight charges and notional gain on foreign exchange. Revenue is aggrieved on the issues. Since the provision on redemption was not allowed, assessee is aggrieved. The grounds are raised accordingly. 4. Both the parties reiterated the stand and referred to the paper book placed, written submissions and various case law. 5. After considering the rival contentions, we decide the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount and also for the acquisition of assets. The questions for consideration before the Hon'ble Supreme Court in the case of ONGC Ltd vs CIT 322 ITR page 180 was whether exchange fluctuations on loans taken for revenue purposes could be allowed as deduction u/s.37(1), and fluctuations in the rate of exchange in respect of loans borrowed for purchasing capital assets could be adjusted to the actual cost of capital assets. These are two independent issues. The questions of law set out at page 187 of the judgement is as under: "(i)"Whether on the facts and circumstances of the case, the additional liability arising on account of fluctuations in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under section 37(1) of the Income-tax Act, 1961 (for short 'the Act') in the year of fluctuation in the rate of exchange or whether the same is allowable only in the year of repayment of such loans? ii) Whether the assessee is entitled to adjust the actual cost of imported capital assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year this amount was also reversed in accordance with the accounting standards. 7.8. The jurisdictional High Court in CIT vs. Pact Securities & Financial Services Ltd. reported in 374 ITR page 681 at page 693 observed as under: "Thus, even if at the relevant time, it was not mandatory to adopt the methodology prescribed by the guidance note or for that matter the accounting standard as it was not notified by the Central Government in the Official Gazette, in our opinion, it is not relevant for the reason that, as long as there was a disclosure of the accounting policy in the accounts, which had a backing of a professional body, such as the institute of Chartered Accountants of India, it could not be discarded by the Assessing Officer." 7.9 It is to be noted that in the next A.Y. 2009-10 there was a loss of Rs. 4,47,00,000 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 2,31,10,984/- being the proportionate amount of premium relating to that year, on pro-rata basis". 5.2.1. Ld.CIT(A), however, declined to allow by stating as under: "8.2. I have gone through the AO's observations and AR's contentions. It is seen that the AO has disallowed an amount of Rs. 4,06,81,136/towards prorata premium on redemption of Foreign Currency Convertible Bonds (FCCB). While doing so, the AO stated as under: "The assessee did not route this amount through the Profit & Loss Account and rather deducted it from the computation. Section 37 of the Act envisages that assessee can claim an amount only when it is accrued or ascertained liability. A contingent liability cannot constitute deductible expenditure of the purposes of Income Tax Act. Thus, putting aside of money which may become expenditure on the happening of an event would normally not constitute an allowable expenditure under the Income Tax Act." After having gone through the above, I am of the considered view that the AO's action is justified in disallowing an amount of Rs. 4,06,81,136/- towards prorata premium on redemption of Foreign Currency Convertible Bonds (FCCB). I fully agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/2007 2007-08 2,31,10,984 1/4/2007 to 31/3/2008 2008-09 4,06,81,136 1/4/2008 to 31/3/2009 2009-10 8,95,69,998 1/4/2009 to 31/3/2010 2010-11 4,86,81,167 1/4/2010 to 31/3/2011 2011-12 6,85,85,295 1/4/2011 to 6/12/2012 2012-13 10,58,79,151 8. The department itself gave up the contention that the liability is contingent for the subsequent years. Having realized that as on 31st March of each year the pro-rata premium to the extent not converted into share capital is allowable as an expenditure gave up its objection that it is contingent in nature. Even assuming for the sake of argument the bond holder has the discretion to opt for conversion of the bonds to share capital, there is nothing on record to show that during the assessment year in question the bond holders have exercised such on option beyond the 5 million USD. It is also not the case of the AO, that all the entire premium is allowable as deduction only in assessment year 20012-13, when the entire bonds were repaid. As a fact the claim for allowance was restricted year wise. Case -law that the deduction should be allowed u/s.37(1) 9. On the question of allowance of discount on is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. In the light of the ratio laid down by the Court in the case of India Cements Ltd. v. CIT [1966] 160 ITR 52 (SC) liability incurred the purpose of obtaining the loan would be revenue expenditure. The Tribunal, however, 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 of Rs. 3 lakhs 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. Ordinarily, the revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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