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TMI Blog2020 (12) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... leted the assessment at Loss of Rs. 35,17,01,680/- as against the returned Loss of Rs. 63,91,64,737/-, after making certain additions/disallowances. The Assessee-Company is engaged in the business of manufacture of cables, wires and stainless steel wires. The Ld. CIT(A) allowed the appeal of the assessee partly, therefore, Revenue is in Departmental Appeal and Assessee is in the Cross Objection. 5. Ground No.1 of the appeal of the Revenue reads as under : "Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of Rs. 26,35,58,122/- on account of by back/prepayment of foreign currency convertible bonds (FCCBs)?" 5.1. The assessee has disputed the addition of Rs. 26,35,58,122/- before the Ld. CIT(A) on account of buy back of foreign currency convertible bonds (FCCBs) at discount. The assessee had availed Foreign Currency Convertible Bonds (FCCBs) from Europeon Union aggregating US $36 millions. This was available to Assessee-Company; it used the loan to purchase Capital Assets for the Company. The assessee, therefore, argued that as the loan receipt in A.Y. 2007-2008 was capital receipt, the buy back of FCCBs by European Union ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he outstanding maturity of the original FCCB and is for less than three years, the all-in-cost ceiling should not exceed 6 months Libor plus 200 bps, as applicable to short term borrowings. In other cases, the all-in-cost for the relevant maturity of the ECB, as laid down in A.P. (DIR Series) No. 26 dated October 22, 2008 shall apply. 8. The Appellant in terms of automatic route, complying the regulatory procedures repurchased 2110 FCCBs of the value of US $ 10.55 millions (Rs. 54,06,87,500/- at exchange rate of Rs. 51.25). Repurchase was made at discount of US $ 5.40 million (Rs. 27,71,29,378/-). As such, the Appellant reduced its obligation to repay FCCBs by Rs. 26,35,58,122/-(54,06,87,500 minus Rs. 27,71,29,378). Amount of Rs. 26,35,58,122/- was shown under the head "other income-Schedule-P " to the balance sheet as at 31.3.2009. In the computation, the amount of Rs. 26,35,58,122/- was claimed as capital receipt. Computation of income for the assessment year 2009-10 is at pages 34 to 36 of the paper book. 9. Here it is important to note the utilization of FCCB proceeds. Year-wise details of utilization of FCCB proceeds are as under : Particulars of utilization Financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FCCBs being spices of debentures were nothing but a debt/loan. General law is that a remission of debt is not income. The principle of general law was superseded by sections 41(1) and 59(l) of the Act, which provides that remission of a debt / liability, shall be treated as income of the year of remission. The fact that Legislature had to insert sections 41(1) and 59(1), to bring to tax remission of a debt / liability as income of the year of remission show that the same is not income in the general sense. It was for this reason that by the clause (v) Section 2(24) of the Act, any sum chargeable under sections 41 and 59 has been specifically included in the definition of "income". 14. Waiver of loan is not covered by Section 41(1) - The requisite condition to attract section 41(1) is that the assessee should have been allowed deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thereof. It is not the case here that principal amount of FCCBs was claimed as expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of FCCBs is not covered by section 28(iv) of the Act. Similar view has been taken in following judgments: (i) CIT v. Chetan Chemicals Pvt. Ltd. (2004) 267 ITR 770 (Guj); (ii) Iskraemeo Regent Ltd v. CIT (2011) 331 ITR 317 (Mad) (iii) Rollatainers Ltd. v. CIT (2011) 339 ITR 54 (Del) Proposition (iii) - Applicability of Logitronics P. Ltd. (supra) 19. It is submitted that in Logitronics P. Ltd. (supra), assessee had taken loan from State Bank of India, which could not be paid and the loan was categorized as non performing asset (NPA). By way of one time settlement, the assessee paid Rs. 1.85 Cr. against the principle amount of Rs. 4.76 Cr. and the difference of Rs. 2.91 Cr. was waived by the bank. The issue was whether the amount was waived was income chargeable to tax under the head 'profit & gains of business'. 20. It is submitted that the genesis of reasons recorded by the Assessing Officer in the present appeal are same as were recorded in ¡he case of Logitron les P. Ltd. (supra). 21. Considering the issue whether loan waived was chargeable o tax under the head "business income", the Hon'ble High Court held that: "if the loan was taken for acquiring t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongly not applied. The Appellant submits that the ground is squarely covered by the Logitronics P. Ltd, (supra). Proposition (iv) - No provision to levy tax on the amount of Rs. 6,35,58,122/- 25. Both the charging provisions and the computational provisions together constitute complete code to bring a particular receipt to income tax. Department is seeking to lax partial waiver of FCCBs under the head "profit & gains of business or profession". Section 28 is a charging section for profits and gains of business or profession. It takes into account the receipts of specified categories as income. All the receipts mentioned in section 28 are inherently of income nature. Waiver of loan is not envisaged as income. Since neither section 28 nor section 41(1) is applicable, therefore, accretion by way of discount on repurchase of FCCBs cannot be brought to tax. In the absence of any provision bringing to charge the alleged profit on buyback of shares at discount cannot be brought to tax merely on the principle of fairness and/ or equity." 5.4. The Ld. CIT(A) considering the explanation of assessee, material on record in the light of Judgments of jurisdictional Delhi High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken for acquiring capital asset and waiver of loan for trading purposes : "In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if the loan was for trading purpose and was treated as such from the very beginning in the books of account the waiver thereof may result in income more so when it was transferred to the profit and loss account " Since the FCCBs were raised to use the proceeds for setting up of new project and the AO in paragraph 3.3 has himself observed that FCCBs were utilized in increasing assets of the company, most of them being depreciable asset, therefore, applying the ratio of aforesaid judgment, it is held that the addition of Rs. 26.35.58.122/- cannot be sustained. Purchase of FCCBs, a debenture at discount is not different from waiver of loan by the bank or financial institution. It is not worthy that the AO while discussing the case of Logitronics P. Ltd. went by the facts of CIT v. Jubilant S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not apply because the amount of FCCBs was not allowed as expenditure or trading liability in earlier year. Further, no addition could be made under section 28(iv) of the I.T. Act. The assessee is in manufacturing business and has admittedly utilised the FCCBs by increasing the asset of the assessee company and most of them being depreciable asset which fact is also mentioned by the A.O. in the assessment order. Since the FCCBs were raised to use the proceeds for setting-up of new project and this fact is admitted by the A.O. in the assessment order, therefore, assessee used the loan to purchase the capital asset for the company. The ITAT, Delhi E-Bench, Delhi in the case of M/s. OK Play India Ltd., Roz- Ka-Meo Industrial Estate, Tehsil Nuh, District Mewat, Haryana vs., JCIT, Range-II, Gurgaon (supra), considering the Judgment of the jurisdictional Delhi High Court in the case of Logitronics P. Ltd., vs., CIT (supra) and Judgment of Hon'ble Supreme Court in the case of CIT vs., Mahindra & Mahindra Ltd., (supra), decided the identical issue in favour of the assessee and appeal of assessee has been allowed. The findings of the Tribunal in paras 3.7 to 3.12 are reproduced as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax is upon the 'total income of the previous year'. The term 'income' is defined under section 2(24). In general, all receipts of revenue nature, unless specifically exempted, are chargeable to tax. Loan taken is not normally a kind of receipt which will be treated as income. However, when a part of that loan is waived off by the creditor, some benefit accrues to the assessee. Question is what would be the character of waiver of part of the loan at the hands of the assessee ? Waiver definitely gives some benefit to the assessee. Whether it is to be treated as capital receipt ? If it is so, then only capital gains tax would be chargeable under section 45 or else, whether remission of loan is no income at all ? The answer to these questions would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax, but on the other hand, if the loan was taken for trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof may result in the income, more so when it was transferred to the profit and loss account. [Para 23]" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (I) of the IT Act. 12. The first issue is the applicability of Section 28 (iv) of the IT Act in the present case. Before moving further, we deem it apposite to reproduce the relevant provision herein below:- '28. Profits and gains of business or profession.- The following income shall be chargeable to income-tax under the head "Profits and gains of business profession",- (iv) the value of any benefit or perquisite, whether convertible into money or no , arising from business or the exercise of a profession; 13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, i appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of prevailing exchange rate was shown in the balance sheet under the head "unsecured loans", Fluctuations the extent of acquisition of fixed assets in India by utilizing FCCBs was added to the actual cost and depreciation charged thereon. 27. The stand of the Appellant was that enhance liability on account of foreign exchange fluctuation was accounted for in accordance with Accounting Standard-11 and that section 43A was not applicable." 9.2. It is noted in the impugned order that A.O. was of the view that though Section 43A applies to the assets acquired from Abroad, however, analogy of Section 43A, which bars enhancement of actual cost, on account of exchange fluctuations except in the case of actual payment can be applied to depreciable assets acquired/bought in India by utilising foreign funds raised through FCCBs etc., Therefore, the A.O. disallowed the depreciation on enhanced cost of Rs. 27,37,25,941/- attributable to assets bought in India. 9.3. The assessee disputed the disallowance of depreciation having referred to Section 43(1) which defines the term "actual cost" and has made the following submissions : "30. In CIT v. Arvind Mills Ltd. (1992) 193 ITR 255, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore moving further, it will be appropriate to refer to judgment of Hon'ble Supreme Court in CIT v. Woodward Governor India P. Ltd. (2009) 312 ITR 254, wherein, the issue of impact of exchange differences arising in foreign currency transactions was considered threadbare. From the judgment, following principles emerge: (i) loss suffered by an assessee on account of fluctuation in the rate of foreign exchange as on the date of balance sheet is an item of expenditure under section 37 of the Act. (ii) profits & gains of the previous year are required to be computed in accordance with relevant Accounting Standard. In terms of AS-11, foreign currency loan denominated in a foreign currency is a monetary item, to be valued at the closing rate. Accounting Standard-11 33. From Woodward Governor India P. Ltd. (supra), it is evident that the Hon'ble Supreme Courts laid down that in respect of foreign currency transactions profits & gains of the previous year is required to be computed in accordance with Accounting Standard- 11. 34. Accounting Standard-11, deals with 'effect of change in foreign exchange rates'. Its object of AS-11 is to express / report the transactions involvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange rate between the transaction dale and the date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each intervening period up to the period of settlement is determined by the change in exchange rates during that period. Tax Effects of Exchange Differences 41. Gains and losses on foreign currency transactions and exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes on Income. 42. The Companies (Accounting Standards) Amendment Rules, 2009, with retrospective effect from 7.12.2006, gave the following option to an enterprise: "Exchange differences relatable to acquisition of depreciable capital asset was allowed to be added or deducted from the cost of the asset and Exchange difference in other cases was allowed to be accu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25,12,68,265/- and capital work in progress would have been lower by Rs. 1,11,36,933. Further, such foreign exchange difference amounting to Rs. 9,24,73,143/- (net of depreciation of Rs. 7,67,166/- and net of tax of Rs. 2,53,54, 691/-) which was recognized as gain in the Profit & loss account for the financial year 2007-08 is adjusted from the General Reserve in the current year." 46. That in conformity with mandatory AS-11, the Appellant has regularly been taking into account the effect of foreign exchange fluctuation in preparing its accounts. Since the enhanced liability has been taken into account in accordance with AS-11 and the provisions of section 43A are not applicable, therefore, the claim of the Appellant is allowable. 47. This ground is no more res-integra, inasmuch as, ITAT, Mumbai Bench in DDIT v. Staubil A.G. India Branch Office (ITA No. 3703/Mum/2005) has been decided the identical issue in favour of the assessee." 14. In the alternative, it was submitted that in case it is held that depreciation is not allowable, then enhanced liability (loss) deserves to be allowed under Section 37 of the Act as held by Hon'ble Supreme Court in Maruti Udyog Ltd., wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs, 1,82,76,330/- on enhanced cost of Rs. 27,37,25,941/-. Hence the ground is allowed." 9.5. The Ld. D.R. relied upon the Order of the A.O. and submitted that assessee wrongly claimed the depreciation on enhanced cost. The Ld. D.R. submitted that decision of ITAT, Mumbai Bench in the case of DDIT vs., Staubil A.G. India Branch Office [ITA.No.3703/Mum./2005] would not apply to the facts of the case. 9.6. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below. Learned Counsel for the Assessee submitted that in assessment year under appeal exchange loss of Rs. 27,37,25,941/- was added to WDV and depreciation of the impugned amount was claimed. In A.Ys. 2010-2011 and 2011-2012, gain was reduced from WDV and depreciation was claimed on reduced WDV. In A.Y. 2012-2013 exchange loss of Rs. 12,34,93,464/- was added to WDV and depreciation was claimed on enhanced cost. The A.O. referring to Section 43A disallowed the depreciation. In A.Ys. 2010- 2011 and 2011-2012 though WDV was reduced by the exchange gain, however, incremental depreciation attributable to exchange loss of Rs. 27,37,21,941/- for A.Y. 2009-2010 under appeal was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. It therefore deals with realised exchange gain/loss. The treatment of unrealised exchange gain/loss is not covered under the scope of S. 43A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines etc.," 9.6.2. Order of ITAT, Cochin Bench in the case of MFAR Hotels & Resorts Ltd., vs., ACIT ITA.No.63/Coch/2015, Dated 16.03.2018 in which it was held as under : "6.9. In the present case, though the assessee took the plea before the lower authorities that AS-11 is applicable, the lower authorities has not at all examined it and straightaway applied the provisions of sec. 43A. In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out of foreign currency loans. Hence, the Assessing Officer has to bifurcate the foreign exchange fluctuation in respect of foreign cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Unsecured Loans" the fluctuations to the extent of acquisition of fixed assets in India by utilising FCCBs was added to the actual cost and depreciation charged thereon. Thus, the assessee purchased the machinery in India from the foreign funds through FCCBs which fact is not disputed by the authorities below. It is, therefore, clear that though Section 43A apply to the assets acquired from Abroad, still the A.O. without justification applied Section 43A for making the disallowance of depreciation against the assessee. Section 43A thus could not apply in the case of the assessee which is also held by various Benches of the Tribunal in the decisions quoted above. Accounting Standard-11 would also apply in the case of the assessee. The assessee has also explained that Companies Amendment Rules also apply to the facts of the case because option is given to assessee and it provided "Where long term foreign currency monetary items relates to acquisition of depreciable capital asset, the same shall be added/deducted from the cost of the asset and shall be depreciated accordingly over the balance life of the asset.". It is not in dispute that assessee followed AS-11 regularly. In A.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to A.Y. 2009-2010, the unit suffered loss of Rs. 2,45,32,014/- which was carried forward as "business loss". It was also submitted that in A.Y. 2008-2009 the Tribunal vide Order Dated 18.05.2012 has allowed similar claim of assessee following the decision of Hon'ble Bombay High Court. The Ld. CIT(A) following the same allowed the claim of assessee and the operative portion of the Order of the Ld. CIT(A) in paras 20 and 21 of the Order are reproduced as under : "20. It was submitted that for the preceding assessment year i.e. 2008-09 A.Y., ITAT by the order dated 18.5.2012, in ITA No. 3901 /Del/2011 has held that the Appellant was right in carrying forward the loss of Chopanki unit. In allowing the appeal for assessment year 2008-09, the ITAT followed the decision of Bombay High Court in CIT v. Galaxy Surfactants Ltd. [2012] 343 ITR 108. 21. Respectfully following the decision of ITAT in appellant's own case for the assessment year 2008-09, the AO is directed to allow carry forward of loss of Rs. 2,45,32,014/- of Chopanki unit as business loss. It is not a case, where losses of non eligible unit or units are being set off against the profit of eligible unit. The issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made clear that findings under section 10A would be applicable to the cases governed by provisions of Section 10B of the I.T. Act and it was a group appeals which have been decided by the Hon'ble Supreme Court by holding that deduction under section 10A/10B is to be allowed while computing the gross total income and not at the stage of computation of total income in Chapter-VI of the I.T. Act dealing in the aggregation of the income set-off or carried forward of the loss. Learned Counsel for the Assessee, therefore, submitted that issue is covered by Order of ITAT for the A.Y. 2008-2009 in the case of same assessee and ultimately decided by the Hon'ble Supreme Court in the case of CIT vs., Yokogawa India Ltd., (supra), in which in para-18 held as under : "18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross^ total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly dismissed. 15. In the result, C.O.No. 200/Del./2017 of the Assessee dismissed. C.O.No.34/Del./2019 in ITA.No.3564/Del./2015 A.Y. 2011-2012 [M/s. K.E.I. Industries Ltd., New Delhi]. 16. In this cross objection the assessee has raised the following ground : "That on facts and circumstances of the case and in law, Commissioner of Income tax (Appeals)-5, New Delhi did not appreciate that exchange difference relatable to acquisition of indigenous depreciable assets was on revenue account. Accordingly, fluctuation gain of Rs. 1,12,30,905/- relatable to acquisition of such assets was liable to be taxed as income." 16.1. The cross objection is time barred. In the present case, the appeal of Revenue has been dismissed in ITA.No.3564/Del./2015 vide Order Dated 21.10.2019. Learned Counsel for the Assessee submitted that Cross Objection was filed subsequently to make an alternative claim and is depending upon the issue raised in the Departmental appeal for A.Y. 2009-2010 on Ground No.2. 16.2. Since we have dismissed the Departmental Appeal for the A.Y. 2009-2010, therefore, cross objection of the assessee becomes infructuous. The delay in filing the cross objection is however con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning given in A.Y. 2009-2010 (supra), we set aside the Orders of the authorities below and allow the claim of assessee for depreciation. 21.1. In the result, Ground Nos. 2 to 2.5 of the Assessee are allowed. 22. Ground No.3 reads as under : "3. That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the addition of Rs. 24,48,822/- under section 14A of the Act and to the book profits under section 115JB of the Act." 22.1. On Ground No.3, assessee has contested the addition to the book profit under section 115JB of an amount of Rs. 24,48,822/- under section 14A of the I.T. Act. The addition was made by virtue of clause (f) of Explanation-1 to Section 115JB of the Act. According to assessee this issue is no longer resintegra. In the past also, no adjustment on this amount has been made by the A.O. although the assessee has been receiving dividend regularly. The Ld. CIT(A) noted that assessee has received dividend income of Rs. 2,37,896/- during assessment year under appeal. As in the past years, the assessee offered to tax a sum of Rs. 24,48,822/- as expenditure incurred in relation to exempt income under section 14A read with Rule 8D which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1 reads as under : 3.1. That on the facts and circumstances of the case and in law, the CIT(A) has erred in not appreciating the disallowance under section 14A cannot exceed the exempt income." 24.1. On Ground No.3.1, assessee contended that the Ld. CIT(A) has erred in not appreciating that disallowance under section 14A cannot exceed the exempt income. Learned Counsel for the Assessee in support of the above ground relied upon Judgments of the Hon'ble Delhi High Court in the case of ACB India Ltd., vs., ACIT [2015] 374 ITR 108 (Del.) and Pr. CIT vs., M/s. Caraf Builders & Constructions (P.) Ltd., [2019] 414 ITR 122 (Del.). 24.2. The Ld. D.R. also submitted that the issue is covered in favour of the assessee by the above decisions. 25. We have considered the rival submissions of both the parties. It is an admitted fact that in assessment year under appeal assessee has received dividend income of Rs. 2,37,896/-. In the case of Joint Investments Pvt. Ltd., vs., CIT 372 ITR 694 (Del.) (HC) the Hon'ble Delhi High Court held that "by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window ..... X X X X Extracts X X X X X X X X Extracts X X X X
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