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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 ..... bility increase due to exchange fluctuations in the next year has not been treated as allowable expenditure is relevant, for the purpose of determining whether the reduction in liability due to exchange fluctuations on amounts borrowed for acquisition of assets could be assessed as income in the year under appeal. The treatment in terms of taxation has to be uniform at all times - AO is directed to delete the disallowance Issue of Prorata premium - Held that:- Similar issue was considered by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Limited Vs. CIT [1997 (4) TMI 5 - SUPREME COURT] as 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 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. In fact, allowing the entire expenditure in one year might give a very dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issues as under: On Revenue appeal, in ITA No. 1670/Hyd/2017: 5.1. Revenue is aggrieved on the issue of freight charges and notional gain on freight expenses. a) Disallowance of freight charges: Out of the total expenditure of ₹ 454.30 Crores, AO disallowed 2% of the claim on estimate as some of the letters have returned unserved. Assessee furnished the details and the additional information was verified by AO. After considering the same, Ld.CIT(A) has held as under: 6.4. It is seen that in the confirmation letters addressed to AO her by the owners their addresses were available. The payments were made to them through bank. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional 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 liability? (only in C.A. No. 7228 of 2008 - asst. year 1991-92) 7.4. The Hon'ble Supreme Court held on question No.1, that the fluctuations in the rate of foreign exchange is allowable u/s.37(1) of the Act. On the second question the Hon'ble Supreme Court referred to its previous decisions and held that 'the assessee would be entitled to adjust the actual cost of the imported capital assets acquired in foreign currency on account of fluctuation in the rate of exchange'. Therefore the questions that arose were different and the conclusion of the Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting 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 ₹ 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 in the next year has not been treated as allowable expenditure is relevant, for the purpose of determining whether the reduction in liability due to exchange fluctuations on amounts borrowed for acquisition of assets could be assessed as income in the year under appeal. The treatment in terms of taxation has to be uniform at all times. 7.10. For all the above reasons, the AO's action in making addition of ₹ 7,02,20,606/- as notional income is not justified. Therefore, the AO is directed to delete the disallowance of ₹ 7,02,20,606/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year relevant to the assessment year 2007-08, the assessing officer has already allowed the deduction in the sum of ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the remaining 15 million bond holders. The pro-rata liability claimed every year is as under. Financial Year Asst. Year Amount claimed as expenditure 5/12/2006 to 31/3/2007 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot just a one-time payment but a liability spread out over a number of years. When a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. It is not necessary to go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, to pay the discounted amount over and above the amount received for the 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 h ..... 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