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TMI Blog2023 (12) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... ituation does not exist in the instant case, as the AO herself has mentioned the nature of appellant's business as that of Information Technology line, i.e., IT related purchase/sales or services. Therefore, the conclusion of the AO derived on the basis of CBDT Instruction No. 3 of 2010 in the above circumstances is not fit to be supported that the foreign exchange fluctuation loss is a speculative loss The issue has been decided in favour of the assessee by the decision (supra) of the Tribunal in its own case. Respectfully following the Tribunal s decision (supra) and agreeing with the submissions of the assessee, we delete the impugned disallowance. Disallowance u/s 36 (i) (viii) - whether taking cognizance of timeline prescribed under section 80IA to make the impugned disallowance u/s 36(1)(viii) is in accordance with law or not? - assessee submitted that it satisfies all the conditions prescribed under section 36(1)(viii) to claim deduction for the amount transferred to special reserve and taking cognisance of timelines prescribed under section 80IA for making any disallowance is not called for - The contention of the assessee is that section 36(1)(viii) is a comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Disallowance of depreciation - assessee has made investment in windmill to earn income from investments and such investment activity cannot be equated with activities in the nature of trade or business or adventure - CIT(A) deleted the impugned disallowances holding that the assessee can claim depreciation as it owns the assets and the same is put to use for business - HELD THAT:- The parties agree that this issue is covered against the Revenue by the decision of Hon ble Delhi Court [ 2023 (1) TMI 70 - DELHI HIGH COURT] - The appeal of the Revenue pertaining to AY 2012-13 against the deletion of similar disallowance by the Ld. CIT(A) has been dismissed by the Tribunal [ 2023 (5) TMI 577 - ITAT DELHI] Following the precedent as above, we find no merit in the appeals of the Revenue which we hereby reject. These grounds are dismissed. TDS u/s 194C or 194J - short deduction/non deduction of TDS - AO payments made by the assessee to Suzlon Energy Ltd. was in the nature of technical and professional services - CIT(A) relying on the decision of Hon ble Calcutta High Court in CIT vs. S.K. Tekriwal [ 2012 (12) TMI 873 - CALCUTTA HIGH COURT] deleted the impugned dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on account of foreign exchange fluctuations as allowable deduction, when it is an admitted fact that the loan received is used as circulating capital for the purpose of business. 4. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in treating the loss of Rs. 18.82 Crore (rounded off) as notional loss in respect of restatement of ECBs. 5. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in treating the loss of Rs. 1.72 Crore (rounded off) as a speculative loss which is incurred on account of foreign exchange loss in respect to currency derivative contracts. 6. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in restoring the matter to the Assessment Officer and not allowing the deduction claimed by the Assessee under Section 36(1)(viii) of the Income Tax Act 1961. 7. That the disallowance of Rs. 1,76,16,528/- is illegal and bad in law and the CIT(A) has erred in not deleting the same. 8. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in restoring the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as grossly erred on facts and in law in upholding the addition/ disallowance of Rs 18,64,61,000 without appreciating the well settled position of law and the facts of the case. This addition may kindly be deleted. 4. That the CIT(A) has grossly erred on facts and in law in upholding the addition/ disallowance of Rs 7,92,643/- under Sec 14A and Rule 8D. The disallowance of Rs 7,92,643/- upheld is totally illegal and bad in law and may kindly be deleted. 5. That the CIT(A), in view of the facts and circumstances of the case, has grossly erred on facts and in law in upholding the addition/disallowance made by the AO of Rs 2,89,99,437/- under section 36(1)(viii). This addition may kindly be deleted. 6. That the disallowances made/upheld and the observations made are unjust, unlawful and based on mere surmises and conjectures. additions/disallowances made cannot be justified by any material on record and in any case they are excessive. 7. That the explanation given and the evidence produced, material placed and available on record has not been properly considered and judicially interpreted and the additions made cannot be justified in view of the said material and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation of Rs. 57,05,766/- on investment made in windmills; disallowance of Rs. 20,54,47,894/- being notional loss booked under the head foreign exchange loss; disallowance of Rs. 56,97,665/- for non-deduction of TDS; disallowance of Rs. 1,16,97,590/- under section 14A; disallowance of Rs. 1,76,16,528/- under section 36(1)(viii) and disallowance of Rs. 9,69,602/- under section 37 aggregating in all to Rs. 24,71,35,045/-. 5. The Ld. AO completed the assessment for the AY 2014-15 on 23.12.2016 on total income of Rs. 2,31,35,75,580/- under section 143(3) of the Act including therein disallowance of depreciation of Rs. 11,41,153/-; disallowance of notional loss of Rs. 18,64,61,000/- booked under the head foreign exchange loss; disallowance of Rs. 59,58,893/- for non-deduction of TDS; disallowance of Rs. 1,13,55,875/- under section 14A and disallowance of Rs. 2,89,99,437/- under section 36(1)(viii) of the Act aggregating in all to Rs. 2,31,35,75,580/-. 6. Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). In both the years, the Ld. CIT(A) partly allowed the appeal of the assessee. He confirmed the disallowance of Rs. 20,54,47,894/- and Rs. 18,64,61,000/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce-sheet date, i.e 31.01.2013. The enhanced liability of Rs. 18.82 crores was treated as revenue expenditure and claimed as deduction u/s 37(1) of the Act by the appellant. The deduction was disallowed by the AO as the same, according to him, constituted contingent liability. Aggrieved against the disallowance, the appellant has preferred the appeal. 9.1 The Ld. CIT(A) followed his order (supra) in AY 2014-15. The assessee is dissatisfied and is before the Tribunal. 10. The Ld. AR drew our attention to the submission made before the Ld. CIT(A) during the course of appellate proceedings for AY 2014-15 wherein the assessee has rebutted the contentions based on which the Ld. CIT(A) decided the matter against the assessee. The Ld. AR submitted that foreign exchange loss in relation to ECBs is an allowable deduction under section 37(1) of the Act and is duly covered by the judgment of Hon ble Supreme Court in CIT vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 354(SC) and the principles laid down therein have been followed in Oil and Natural Gas Corpn Ltd. (2010) 230 CTR (SC) 313. The Ld. AR further submitted that the decisions in Indian Molasses Co. P. Ltd. vs. CIT (1959) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this regard, before asserting any contentions, it is imperative to highlight the provisions of section 37 of the Act. Legal Provisions The relevant extract of section 37 of the Act is reproduced below: *37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the Assessee), lad out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession, Therefore the following conditions should be satisfied for claiming an expense to be tax deductible under the provisions of section 37(1) of the Act: There should be nexus between expenses incurred and business activities undertaken by the Assessee. In other words, the expenses should be incurred 'wholly and exclusively for the purpose of the business; The expenses incurred should satisfy the test of commercial expediency; The expenses should not be capital in nature; The expenses should not be in the nature of personal expenses Applicability to insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of judgements of Apex Court to the facts of the present case especially in light of the tests laid down by Apex Court in case of Woodword Governor (Supra). In this regard, it is submitted that the Appellant is in compliance with all the conditions mentioned by the Hon ble Supreme Court in the above case with respect to allowability of an expenditure. Consistently following Mercantile System of Accounting Appellant has consistently followed mercantile system of accounting and prepared its books as per available guiding principles. It has never been disputed by the Learned AO that Appellant is not following mercantile system of accounting and has not consistently pursued the same. Further, Learned AO has not made any observation with respect to inconsistency or any discrepancy in books of accounts of the Appellant. Consistently following Nationally Accepted Accounting Standards Appellate has been consistent in following nationally accepted accounting standards see Accounting Standards, Appellant is required to re-state the value of ECB liability on each balance sheet date depending on the exchange rate prevailing on the date of the balance sheet and to the profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesees's claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year has been disallowed by the Assessing Officer, inter alia, on the ground that this liability was a contingent liability and the loss was a notional one. The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessed the 'event' le. the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessed is a fait accompli and not a notional one. .... We, therefore, reject the submission of the Appellant in these appeals that in the revenue account cases, the increase in liability on account of the fluctuation, in the rate of foreign exchange prevailing on the last day of the financial year is notional or contingent and therefore cannot be allowed as a deduction in terms of Section 37 of the Act. 3.13. In light of above, it is submitted that the aforesaid case laws not only deals with the loss falling under the purview of section 43A of the Act bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , unless it happens to be the date of settlement of accounts, is transitory in nature. That being the case, it can be said that it does not pass the criteria of being called 'expenditure', as laid down by the Hon. Supreme Court in the case of Indian Molasses Co. P. Ltd. (supra). Incidentally, the same should also apply in the case of gain. But, the case at hand Involves loss and it is for that reason that loss is being discussed: ................ 5.15. According to the appellant, the decision in the case of Woodward Governor India. (P) Ltd. (supra) should be taken to be the authority for the general proposition that loss due to exchange rate fluctuation in respect of the value of ECBs is, as a rule, revenue expenditure to be allowed as deduction u/s 37(1) of the Act. In view of the foregoing discussion, this argument is not accepted, it cannot be accepted for the simple reason that, if that were done, it would bring the decision in the case of Woodward Governor India(P) Ltd. (supra) in direct conflict with the decision of the larger bench in the case of Indian Molasses Co. P. Ltd. v CIT (supra) as well as with the subsequent decision by the same bench in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ...... 15. For the reasons given hereinabove, we hold that, in the present case, the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1961 Act. ..... 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (1) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come tax (W.P. (c) 1707/2014 cm no. 3569/2014) dated February 22, 2016 Hon ble Delhi Court decided the issue of loss arising on derivative contract on account of Mark to Market reinstatement in favour of assessee and held as under- 44. This has to be also appreciated in the context of the Assessee following the mercantile system of accounting and Section 145 of the Act. The income of the Assessee is to be computed consistent with the regular method of accounting followed by the Assessee. The Assessee has been following AS-11 and AS-30 issued by the ICAI, in terms of which the loss/gains on outstanding derivatives contracts are to be recognized on mark to market basis. The Assessee is right in contending that CBDT Instruction No. 3 of 2010 cannot possibly override the existing decisions of the Supreme Court/ High Court on similar issues. The legal position in this regard has been explained in Ratan Melting (supra) and has been reiterated in CIT v. Nagesh Knitwears (P.) Ltd. (2012) 345 ITR 135 (Delhi) and CIT v. Indian Oil Co. Ltd., (2012) 254 CTR 113 (Bom). (Emphasis supplied) Hon'ble ITAT in case of Reliance Communications Ltd. vs. The Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be described as prejudicial to the interests of the revenue. We are, therefore, unable to countenance the view canvassed in the Impugned order on this issue. 8. It is clear that the Tribunal while decided the issue for the A.Y. 2007-08 has also considered the CBDT instruction no. 3/2010 which has been heavily relied upon by the Commissioner as well as the Id. DR. The Tribunal on the identical facts has decided 10 ITA NO.671/Mum/2013 Reliance Communications Ltd, this issue by holding that the view of the Commissioner cannot be countenanced with. Accordingly, we do not find any reason to take a different view from that of already taken by the Tribunal for the A.Y. 2007-08. Instructions No. 3/2010 cannot be made applicable with respect to forex loss on ECB lability 3.19. Without prejudice to above, your Honour would appreciate that Instruction No. 3 of 2010 issued by CBDT is applicable only where there is trading in forex derivatives, which is the not the situation in the instant case. 3.20. Appellant is an NBFC and inter-alia is in the business of acquiring loan for onward lending. Appellant has incurred loss on foreign exchange fluctuation amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 32.50 crores under section 36(i)(viii) in AY 2013-14 and 2014-15 respectively. When asked to justify, the assessee submitted that it satisfies all the conditions prescribed under section 36(1)(viii) to claim deduction for the amount transferred to special reserve and taking cognisance of timelines prescribed under section 80IA for making any disallowance is not called for. The explanation was not acceptable to the Ld. AO who made the impugned disallowance in both the years. 16. On appeal, the Ld. CIT(A) restored the matter to the Ld. AO with the following directions contained in para 8.5 of his appellate order for AY 2013- 14 which he followed in AY 2014-15 also:- 8.5. The assessee's contention that it provides long term finance with the understanding that the undertaking would be starting operations by the prescribed date/s but, in case the latter fails to do so (situation II), it is not the assessee's fault and the assessee should not be denied the deduction which it is otherwise entitled to, stands to reason. Also, the outer limit keeps on being extended by the Government. But, in case an undertaking has already started its operations before the prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant previous year) could never have been the intention of the Government. The Ld. AR further submitted that during the assessment proceedings of AY 2017-18, the Ld. AO duly questioned the eligibility of assessee s claim of deduction under section 36(i)(viii) and being satisfied with the submissions made by the assessee allowed the claim. He placed on record documents in support. The Ld. AR also stated that no such disallowance has been made by the Ld. AO in his assessment order for AY 2018-19 and copy of that order was submitted before us. 19 The Ld. CIT-DR relied upon the order of Ld. AO/CIT(A). 20. We have carefully considered the rival submissions and perused the records. It is not in dispute that the assessee is eligible for deduction under section 36(1)(viii) of the Act. The dispute is in a very narrow compass i.e. whether taking cognizance of timeline prescribed under section 80IA to make the impugned disallowance under section 36(1)(viii) is in accordance with law or not. The contention of the assessee is that section 36(1)(viii) is a complete code in itself and reference to section 80IA beyond what has been stated in the section itself is not warranted. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue in para 17 page 10-12 of his order. On query the assessee submitted that it earned dividend income of Rs. 45.49 lacs exempt under section 10(34) of the Act. It was also stated that no direct or indirect expenditure was incurred by the assessee with respect to above. However, the assessee suo-moto disallowed an amount of Rs. 37,60,000/- under section 14A of the Act. The said amount was computed on the basis of a prudent and reasonable method adopted by the assessee. Hence reference to Rule 8D is not called for. Strategic investments be not considered while computing disallowance under section 14A vis a vis Rule 8D. Hence no further disallowance be made under section 14A r.w. Rule 8D. 24. The Ld. AO did not accept the explanation of the assessee and relying on several decisions held that investment decisions are very strategic decisions in which top management is involved and therefore proportionate management expenses are required to be deducted while computing the exempt income from dividend. Not being satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, he calculated disallowance as per Rule 8D at Rs. 1,51,12, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of similar disallowance by the Ld. CIT(A) has been dismissed by the Tribunal in its order in ITA No. 4985/Del/2017 dated 9.5.2023. 29.3 Following the precedent as above, we find no merit in the appeals of the Revenue which we hereby reject. These grounds are dismissed. 30. Ground No. (b) in AY 2013-14 and Ground No. 3 in AY 2014-15 relate to disallowance of Rs. 56,97,665/- and Rs. 59,58,893/- under section 40(a)(ia) respectively on account of short deduction/non deduction of TDS made by the Ld. AO which have been deleted by the Ld. CIT(A). Briefly stated, the facts are that according to Ld. AO payments made by the assessee to Suzlon Energy Ltd. was in the nature of technical and professional services and therefore liable for TDS under section 194J instead of 194C of the Act. Accordingly, due to the difference in TDS rate, the Ld. AO disallowed 80% of the expense under section 40(a)(ia) of the Act. 30.1 On appeal, the Ld. CIT(A) relying on the decision of Hon ble Calcutta High Court in CIT vs. S.K. Tekriwal 361 ITR 432 deleted the impugned disallowance in both the years making identical observations and recording identical findings as under:- 6.2 I have carefully cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the Ld. CIT(A) and reject the appeal of the Revenue in both the AYs involved. 31. Ground No. (c) in AY 2013-14 and Ground No. 2 in AY 2014-15 relate to disallowance of Rs. 1,05,63,232/- and Rs, 1,16,97,590/- under section 14A of the Act respectively. The Ld. AO discussed this issue in para 4 at page 27-30 of his order for AY 2013-14. On query the assessee submitted that it earned dividend income of Rs. 3,032,862/- which it claimed as exempt under section 10(34) of the Act. It was also stated that it suo moto estimated an amount of Rs. 36,50,000/- as expense incurred towards earning the above dividend income and disallowed the same in the computation of income under section 14A of the Act r.w. Rule 8D of the Income Tax Rules. The assessee further submitted that no direct and indirect expenditure were incurred for earning the said income. Thus no disallowance under Rule 8D(i) Rule 8D(ii) is required. The assessee itself computed disallowance on a prudent and reasonable basis. It was also submitted that strategic investments be not considered while computing disallowance. 31.1 The submission of the assessee was not acceptable to the Ld. AO who relying on several decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Delhi Bench of the ITAT in the case of M/s Ganga Kaveri Credit Holding (P) Ltd vs ACIT, Circle 12(1). New Delhi in ITA No 919/Del/2014 is also held that disallowance u/s 14A cannot exceed the amount of dividend income. Further, strategic investments of the appellant are to be excluded for computing disallowance under Rule 8D(2)(iii) as held by the Hon'ble High Court of Delhi in the case of CIT v. Oriental Structural Engineers Pvt. Ltd.: 216 Taxman 92 (Del.). The appellant company has suo moto computed disallowance u/s 14A at Rs. 36,50,862/- as against exempt income of Rs 30,32,862/- Respectfully following the decisions cited above, disallowance of Rs. 1,53,47,590/- u/s 14A computed by the AO is not in order. Consequently, additional disallowance of Rs. 1,16,97,590/- after allowing benefit of suo moto disallowance of Rs. 36,50,862/- u/s 14A made by the appellant is directed to be deleted. The ground of appeal is ruled in favour of the appellant. 31.3 On similar grounds, the Ld. AO disallowed Rs. 1,13,55,875/- under section 14A in AY 14-15. On appeal, the Ld. CIT(A) restricted the disallowance to Rs. 45,49,293/- i.e. to the extent of exempt income and deleted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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