Industrial Filters & Fabrics Private Limited, Indore V. The ACIT 5(1), Indore

ITA 104/IND/2013

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0575 (ITAT-INDORE)
• Duration Of Justice: 5 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 19-07-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 15-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R P MOURYA
• Assessee Lawyers: ANIL KHANDELWAL CAS
• Keywords: Capital asset; Depreciation; Earning of tax free income; Revenue expenditure
• Section: 14A; 37; 6

Judgement Text

ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ITA NO. 104/IND/2013 A.Y. 2009-10 INDUSTRIAL FILTERS & FABRICS PRIVATE LIMITED, INDORE PAN AAACI 3900 J :: APPELLANT VS ACIT-5(1), INDORE :: RESPONDENT ASSESSEE BY SHRI PANKAJ SHAH & SHRI ANIL KHANDELWAL, CAS RESPONDENT BY SHRI R.P. MOURYA, SR.DR DATE OF HEARING 26.07.2018 DATE OF PRONOUNCEMENT 19.09.2018 O R D E R PER SHRI KUL BHARAT, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDE R OF LD. CIT(A)-II, INDORE, DATED 22.11.2012 FOR THE ASSESSM ENT YEAR 2009-10 ON THE FOLLOWING GROUNDS OF THE APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.2 5 LACS ON ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 2 ACCOUNT OF SHARE APPLICATION MONEY RECEIVED BY THE APPELLANT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.50,62,032/- BEING LOSS ON ACCOUNT OF EXCHANGE R ATE DIFFERENCE INCURRED ON WORKING CAPITAL LIMIT IN FO REIGN EXCHANGE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.1 ,98,871/- OUT OF INTEREST U/S 14A OF THE ACT. 2. SO FAR AS GROUND NO.1 REGARDING THE CONFIRMATION OF THE ADDITION OF RS.25 LACS ON ACCOUNT OF SHARE APPLICATION MONEY RE CEIVED BY THE APPELLANT FROM M/S. JAVDA INDIA IMPEX LTD. IS CONCE RNED, BOTH THE PARTIES SUBMITTED THAT THIS ISSUE HAS ALREADY BEEN ARGUED IN LENGTH IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2007-08 & 2008-09 IN ITA NOS. 404 & 484/IND/2012 AND AS SUCH, THE DECISION T AKEN IN THE ABOVE YEARS WILL PREVAIL IN THE PRESENT YEAR TOO. 3. CONSIDERING THE RIVAL SUBMISSIONS AND THE FACT T HAT THE ISSUE IS COVERED VIDE OUR ORDER DATED 31.8.2018 IN FAVOUR OF THE ASSESSEE IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2007-08 & 2008-09 IN ITA NOS. 404 & 484/IND/2012, WE DIRECT THE ASSESSING OF FICER TO DELETE THE ADDITION. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 3 4. AS REGARDS GROUND NO.2, FACTS, IN BRIEF, ARE THA T THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE ASS ESSEE CO. HAS OBTAINED FOREIGN EXCHANGE LOAN AMOUNTING TO USD 585 206 @RS.42.72 PER USD I.E. RS.2.50 CRORES. SINCE THE DOLLAR RATE AS ON 31.3.2009 HAS GONE UP TO RS.51.37/-, A LIABILITY OF RS.50,62,032/ - WAS CREATED ON DIFFERENCE OF DOLLAR RATE OF RS.8.65/- FOR USD 5852 06. IT WAS EXPLAINED THAT ENTRY HAS BEEN PASSED IN THE ACCOUNTS BASED ON ACCOUNTING STANDARDS ISSUED BY THE ICAI. COPY OF LOAN SANCTION LETTER, BANK, STATEMENT, CALCULATION OF LOSS PROVIDED AND EVIDENC E IN SUPPORT OF RATE OF DOLLAR ON THAT DATE WERE ALSO FURNISHED TO THE ASSE SSING OFFICER. HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT SUCH LOSS IS NOT CERTAIN AND SHOULD HAVE BEEN CLAIMED IN THE YEAR IN WHICH IT HAS ACTUALLY INCURRED. AGGRIEVED WITH THE ACTION OF THE ASSESSIN G OFFICER, THE ASSESSEE WENT INTO APPEAL BEFORE THE LD. CIT(A). 5. BEFORE LD. CIT(A), IT WAS SUBMITTED BY THE ASSES SEE THAT IT IS A SETTLED POSITION THAT FLUCTUATIONS IN THE RATES OF FOREIGN EXCHANGE RESULTING INTO GAIN OR LOSS ARE ON REVENUE ACCOUNT, IF THE FO REIGN CURRENCY IS HELD ON REVENUE ACCOUNT OR A TRADING ACCOUNT OR AS A PAR T OF CIRCULATING CAPITAL USED IN THE BUSINESS. ACCORDINGLY, ANY APPRECIATION OR DEPRECIATION IN THE VALUE OF THE FOREIGN CURRENCY IS REGARDED EITHER AS PROFIT OR LOSS ON TRADING/REVENUE ACCOUNT. ON THE OTHER HAND, IF THE FOREIGN EXCHANGE ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 4 LIABILITY ARISES IN RELATION TO ACQUISITION OF FIXE D ASSET, THE CORRESPONDING GAIN OR LOSS IS REGARDED AS OF A CAPITAL NATURE. HO WEVER, LD. CIT(A) NOTED THAT THE ASSESSEE IS DEALING IN MANUFACTURING OF IN DUSTRIAL FILTER BAGS, CAGES TRADING IN INDUSTRIAL FABRICS AND RELATED ACC ESSORIES, IN WHICH MOST OF THE PURCHASES IN CAPITAL ACCOUNT OR REVENUE ACCO UNT IS WITHIN INDIA. THERE IS NO COMPULSION AS SUCH ON THE ASSESSEE TO P AY IN DOLLARS, AS MOST PURCHASES BY THE ASSESSEE ARE IN INDIA, WHERE PAYMENT IS REQUIRED TO BE MADE IN RUPEE AND NOT IN DOLLARS AND IN FACT, PAYMENT HAS BEEN MADE IN RUPEE CURRENCY ONLY. IN SUCH CIRCUMSTANCES, THERE WAS NO BUSINESS COMPULSION ON THE ASSESSEE TO TAKE FOREIGN CURRENCY LOAN. BESIDES THIS, THE LD. CIT(A) NOTED THAT MANY PAYMEN TS ARE MADE FROM THIS ACCOUNT FOR CAPITAL EXPENSES. ON 21.8.18 ALONE , THERE ARE PAYMENTS VIDE TWO CHEQUES OF RS.46,56,000/- AND RS.36,42,000 /- TOWARDS LAND PURCHASE IN MANGALIA. IN THE ASSESSMENT YEAR 2009-1 0, THE ASSESSEE HAS MADE PAYMENTS TOWARDS CAPITAL ASSETS OF RS.3,37 ,34,144/-. AS THESE CAPITAL ASSETS ARE PURCHASED IN INDIA FROM RUPEES C URRENCY, THERE WAS NO PAYMENT IN FOREIGN CURRENCY FOR SUCH ASSETS AND THE REFORE, LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION ON SUCH CAP ITAL ASSETS IS NOT ALLOWABLE EVEN U/S 43A OF THE I.T. ACT. FURTHER, TH E ASSESSEE HAS NOT BEEN ABLE TO PROVIDE ANY BREAKUP OF UTILISATION OF SUCH FOREIGN CURRENCY LOAN TOWARDS CAPITAL ACCOUNT AND REVENUE ACCOUNT. D ISCUSSING AFORESAID FACTS, THE LD. CIT(A) FINALLY CONFIRMED THE ADDITIO N HOLDING AS UNDER: ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 5 IN VIEW OF THE VARIOUS POINTS MENTIONED ABOVE, AS THERE WAS NO BUSINESS COMPULSION ON THE APPELLANT TO TAKE FOREIG N CURRENCY LOAN AND AS THERE IS NO BIFURCATION AVAILABLE IN UTILIZATION OF SUCH LOAN TOWARDS CAPITAL ACCOUNT AND REVENUE ACCOUNT AND NO CAPITAL ACCOUNT PAYMENT BEING MADE IN FOREIGN CURRENCY, THE CLAIM OF LOSS O N FOREIGN EXCHANGE FLUCTUATION LOSS IS HEREBY DISALLOWED. FOR THIS, RE LIANCE IS PLACED ON DECISION OF APEX COURT IN CASE OF OIL AND NATURAL G AS COMMISSION LTD. (2010) 15 ITJ 297 (SC), AS THE FOREIGN CURRENCY LOA N IS TAKEN FOR THE FIRST TIME DURING THE YEAR UNDER CONSIDERATION WHER EAS IN ALL EARLIER YEARS, THERE WAS RUPEE LOAN, HENCE THERE IS NO CONS ISTENCY. BESIDES SUCH LOAN IS NOT TAKEN FOR BUSINESS COMPULSIONS, AS MOST OF THE PAYMENTS ARE MADE TO INDIAN PARTIES IN RUPEES CURRE NCY. NO CAPITAL ASSETS ARE IMPORTED OR ACQUIRED IN FOREIGN CURRENCY . EVEN THE CONDITIONS OF AGREEMENTS FOR LOAN BETWEEN APPELLANT AND SBI CANNOT BE BRUSHED ASIDE IN WHICH POINT 13 STATES THE POLIC Y FOR CRYSTALLIZATION OF LAON WHICH SAYS THAT LOAN IS TO BE CRYSTALLIZED AND CONVERTED INTO RUPEE WORKING CAPITAL DEMAND LOAN AT THE PREVAILING T.T. SELLING RATE FOR THE CURRENCY OF FCNRBTL , WHEN THE LOAN IS NOT REPAID ON DUE DATE. HENCE SUCH LOSS DUE TO FOREIGN EXCHANGE RATE FLUCTU ATION IS CRYSTALLIZED AS PER THE AGREEMENT ONLY AFTER ONE YEAR OF SPAN OF THIS LOAN I.E. AFTER 1 YEAR OF 18.7.08 WHEN LOAN OF RS.2,50,00,000/- WAS G IVEN AND IN FACT SUCH LOAN IS REPAID BY APPELLANT TO THE BANK ON 17. 7.09 I.E. EXACTLY AFTER 1 YEAR, WHEN APPELLANT REPAID RS.2,85,28,793/- TO T HE BANK. HENCE ON THE ONE HAND LOSS ON FLUCTUATION OF FOREI GN EXCHANGE IS NOT CRYSTALLIZED ON 31.3.09 BUT IT CRYSTALLIZED ON 17.7.09 I.E. IN A.Y. ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 6 10-11 AND SECONDLY CLAIM OF SUCH LOSS OF RS.50,62,0 32/- IS MUCH HIGHER THAN DIFFERENCE OF ONLY RS.35,28,793/- IN LO AN AMOUNT AND REPAID AMOUNT AND SUCH AMOUNT INCLUDE BOTH FOREIGN EXCHANG E LOSS AND INTEREST COMPONENT. CONSIDERING ALL THE POINTS MENT IONED ABOVE, THE CLAIM OF LOSS ON FOREIGN EXCHANGE FLUCTUATION OF RS .50,62,032/- AS BEING DISALLOWED BY A.O., IS UPHELD. 5. BEING AGGRIEVED, THE ASSESSEE IS BEFORE US. BEFO RE US, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES AND SUBMITTED THAT THE ASSESSEE WAS ENJOYING CASH CREDIT (CC) WORKING LIMIT FROM STATE BANK OF I NDIA AMOUNTING TO RS. 450 LAKHS. RATE OF INTEREST BEING CHARGED BY TH E BANK WAS 13.50% P.A. TO REDUCE ON INTEREST COST, ASSESSEE REQUESTE D FOR CONVERSION OF CC LIMIT OF RS 250 LAKHS INTO FOREIGN CURRENCY LOAN @ LIBOR + 4 %. ACCORDINGLY AN AMOUNT OF RS. 250 LAKHS, AFTER CONVE RSION OF USD 585206 (@ RS. 42.72 PER DOLLAR), WAS CREDITED BY TH E BANK TO THE ASSESSEES CASH CREDIT ACCOUNT ON 18.07.2008 (PAGE NO. 3 OF PB). THIS WAS REPAYABLE BY THE ASSESSEE EXACTLY AFTER ONE YEA R I.E. ON 17.07.2009. HOWEVER, IN THE MEAN TIME WHILE CLOSING THE ACCOUNTS ON 31.03.2009, THE RATE OF DOLLAR ROSE TO RS. 51.37 H ENCE THE ASSESSEE MADE A PROVISION OF RS. 50,62,032 I.E. $ 585206 X (51.37 42.72) AND DEBITED THE SAME TO P & L ACCOUNT FOR THE RELEVANT FY 2008-09. IN THE NEXT YEAR I.E. FY 2009-10 WHEN LOAN WAS SETTLED ON 17.7.2009, EXCESS ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 7 PROVISION AT RS.15,33,239/- WAS OFFERED AS INCOME I N P & L ACCOUNT. THIS TREATMENT OF CHARGING LOSS IN FY 2008-09 AND O FFERING THE EXCESS PROVISION IN FY 2009-10 WAS IN ACCORDANCE WITH THE ACCOUNTING STANDARD PRESCRIBED BY ICAI WHICH ARE MANDATORY IN NATURE UNDER COMPANIES ACT, 1956. HOWEVER, THE REVENUE AUTHORITI ES DISALLOWED/CONFIRMED THE AMOUNT STATING THAT THE LO SS WAS NOT CERTAIN. FURTHER, THE LEARNED COUNSEL FOR THE ASSESSEE FILED A DETAILED WRITTEN SYNOPSIS ON THIS ISSUE, WHICH READS AS UNDER: 2.2 IT IS A SETTLED POSITION THAT FLUCTUATIONS IN THE RATES OF FOREIGN EXCHANGE RESULTING INTO GAIN OR LOSS ARE ON REVENUE ACCOUNT, IF THE FOREIGN CURRENCY IS HELD ON REVENUE ACCOUNT OR A TRADING ACCOUNT OR AS A PART OF CIRCULATING CAPITAL USED IN THE BUSINESS. AND ACCORDINGLY, ANY APPRECIATION OR DEPR ECIATION IN THE VALUE OF THE FOREIGN CURRENCY IS REGARDED EI THER AS PROFIT OR LOSS ON TRADING/REVENUE ACCOUNT. ON THE O THER HAND, IF THE FOREIGN EXCHANGE LIABILITY ARISES IN RELATIO N TO ACQUISITION OF FIXED ASSET, THE CORRESPONDING GAIN OR LOSS IS REGARDED AS OF A CAPITAL NATURE. 2.3 FOREIGN EXCHANGE LOSS CANNOT BE DISALLOWED MERE LY BECAUSE THE LOSS IS NOT PAID OR THE SAME IS NOTIONA L. PROVISION FOR LOSS HAS BEEN MADE AS PRESCRIBED BY T HE ACCOUNTING STANDARD (AS) PRONOUNCED BY ICAI. THES E AS ARE MANDATORY IN NATURE FOR ALL THE COMPANIES ACCOR DING TO SECTION 211 (3A) READ WITH 211(3C) OF THE COMPANIES ACT, 1956, AND SECTION 145(2) OF THE ACT. ACCORDING TO AS 11, MONETARY ITEMS SUCH AS FOREIGN CURRENCY NOTES, BALA NCE IN BANK ACCOUNT DENOMINATED IN THE FOREIGN CURRENCY WH ICH ARE RECEIVABLE OR PAYABLES, AND LOANS DENOMINATED I N THE FOREIGN CURRENCY MUST BE VALUED AT THE CLOSING FORE IGN ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 8 EXCHANGE RATE AS ON THE BALANCE SHEET DATE. IN CAS E OF LOSS ON FOREIGN EXCHANGE FLUCTUATION ARISING ON THE BALA NCES SHEET DATE, VALUATION OF MONETARY /REVENUE ITEM MUS T BE RECOGNIZED AS AN EXPENSE IN THE RELEVANT PERIOD. 2.4 LOSS ON ACCOUNT OF EXCHANGE RATE DIFFERENCE IS COVERED UNDER SECTION 37 OF THE ACT . SECTION 37 IS A RESIDUAL SECTION FOR DEDUCTION OF REVENUE EXPENDITURE AND ALLOWS A N EXPENSE TO BE DEDUCTED IF IT IS NOT CAPITAL IN NATU RE OR PERSONAL IN NATURE, AND IT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND PROFESSION. FURTHER THE EXPENDITURE, WITHIN THE MEANING OF SEC 37, DOES NOT CONNOTE ONLY WHAT IS PAID OUT AND/OR SOMETHING WHICH IS GONE IRRETRIEVABLY, BUT IT MAY INCLUDE A LOSS EVEN THOUGH ASSESSEE HAS NOT PAID THE LIABILITY. THE AS SESSEE BEING A CO. HAS TO COMPULSORILY FOLLOW MERCANTILE S YSTEM OF ACCOUNTING [SEC. 209(3) OF THE COMPANIES ACT, 1956) . 2.5 HAD THERE BEEN SUCH AN INTENTION OF THE LEGISLA TURE AS TAKEN BY THE AO, THE SAME WOULD HAVE BEEN SPECIFICALLY PR OVIDED AS DONE IN CASE OF EXPENSES COVERED U/S. 43 B. EVE N SECTION 43A INSERTED SPECIFICALLY FOR FOREIGN EXCHA NGE LOSS COVERS LOSS ON CAPITAL ACCOUNT ONLY. IT DOES NOT CO VER LOSSES IN CASE OF REVENUE ACCOUNTS WHICH CLARIFIES THE INT ENTION OF THE LEGISLATURE. THUS, IT IS VERY CLEAR THAT THE L OSS ON THE FOREIGN EXCHANGE DIFFERENCE ON THE BALANCE SHEET DA TE IS EXPENDITURE U/S 37. 2.6 APPELLANT RELY ON THE FOLLOWING CASES : A.CIT VS WOODWARD GOVERNOR INDIA P.LTD. 312 ITR 254 (SC) B.CIT VS. MARTIN & HARRIS P. LTD. (1985) 154 ITR 460(CAL) C. OIL & NATURAL GAS CORP. LTD. VS CIT (2010) 15 I TJ 297 (SC) D. DY. CIT V. COSMO FILMS LTD. (2012) 13 ITR 340 (DELHI)(TRIB.) : IN THIS CASE, ASSESSEE CONVERTED T HE FOREIGN CURRENCY ASSETS AND LIABILITIES INTO RUPEE TERMS AT THE PREVAILING EXCHANGE RATE AT THE LAST DATE OF FI NANCIAL ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 9 YEAR AND THIS WAS REFLECTED IN THE PROFIT AND LOSS ACCOUNT. IN THE CURRENT YEAR IT WAS LOSS WHILE IN THE IMMEDI ATE PRECEDING YEAR THERE WAS GAIN. IT WAS HELD THAT THE LOSS IS ALLOWABLE AS BUSINESS LOSS. (A.YS. 2004 05, 2005 06, 2006 07) I.E FOREIGN CURRENCY LOSS IS ASSESSABLE AS BUSINESS LOSS . 2.7 REASONS FOR DISALLOWANCE CITED BY LD. CIT(A): LD. CIT(A) CONFIRMED THE DISALLOWANCE ON THE FOLLOW ING GROUNDS : A. THAT THERE WAS NO COMPULSION FOR THE ASSESSEE FO R ANY PAYMENT IN FOREIGN CURRENCY (PAGE 7 OF APPELLATE OR DER) B. THAT THE ASSESSEE HAS MADE PAYMENTS FROM CASH CR EDIT ACCOUNT FOR CAPITAL EXPENSES (ON 21.8.2009 RS.46560 00 + RS.3642000 FOR BUYING THE LAND). IN RESPECT OF THE ABOVE PLEAS OF LD CIT(A), IT IS S UBMITTED AS BELOW : A(I) ASSESSEE IS FREE TO MANAGE ITS AFFAIRS IN THE MANNER HE CONSIDER TO BE THE BEST AS PER HIS PRUDENCE. DEDUCT ION OF ANY EXPENSE IS ALLOWED ON THE BASIS OF BUSINESS EXPEDIE NCY AND NOT ON COMPULSION. THE FOREIGN CURRENCY LOAN WAS TAKE N TO REDUCE INTEREST COST BUT PROVED TO BE WRONG. HOWEVER DISA LLOWANCE IN INCOME TAX CAN NOT BE MADE JUST FOR THAT REASON AS THE EXPENSE WERE INCURRED FOR THE BUSINESS PURPOSE. A(II) ASSESEE WOULD HAVE SAVED RS 15.85 LAKHS ON IN TEREST COST WHICH IS APPROX @ 6.34 % (14.50% PAYABLE ON CC LI MIT 4.5% + LIBOR ON FC LOAN I.E. 8.16% ACTUALLY PAID). THE SHA RP DECLINE IN RATE OF RUPEE AS COMPARED TO DOLLAR WAS AN UNUSUAL EVENT. B(I) LD. CIT(A) IS WRONG IN INTERPRETING THAT APP ELLANT HAS USED CC LIMIT FOR PURCHASE OF LAND. CC ACCOUNT IS A BAN K ACCOUNT IN WHICH ALL RECEIPTS ARE DEPOSITED AND PAYMENTS ARE M ADE THERE ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 10 FROM. BANK INSIST TO ROUTE ALL TRANSACTIONS THROUGH ONE ACCOUNT SO THAT THEY CAN KEEP A CHECK OVER USAGE OF CREDIT LI MITS, AND CHECK DIVERSIFICATION OF FUND. EVEN OTHERWISE, PRACTICAL LY A SEPARATE BANK ACCOUNT IS NOWHERE MAINTAINED FOR CAPITAL TRAN SACTIONS. BESIDES, IT IS PERTINENT TO NOTE THAT THE CC ACCOU NT HAS NOT BECAME OVERDRAWN EVEN AFTER TWO PAYMENTS OF RS. 46, 56,000 AND RS. 36,42,000 FOR LAND. OUT OF AVAILABLE LIMIT OF RS. 200 LAKHS, ONLY 167 WAS BEING UTILIZED EVEN AFTER THESE TWO PAYMENTS WERE MADE (PAGE 9 OF PAPER BOOK). AUDITORS ARE REQUIRED TO REPORT ON USAGE OF FUNDS. IN AUDIT REPORT IT IS STATED THAT, NO FUNDS RAISED ON SHORT TERM BASIS HAVE BEEN USED FOR LONG TERM INVESTMENT (PAGE 35 OF PB). B(II) APPELLANT HAD SUFFICIENT LONG TERM FUNDS AT HIS DISPOSAL TO PURCHASE THE LAND. THIS MAY BE UNDERSTOOD FROM STAT EMENT OF LONG TERM FUNDS AND ITS UTILISATION AS GIVEN ON PAG E NO. 8 OF THE PAPER BOOK. FROM THAT, IT IS CLEAR THAT APPELLANT H AD LONG TERM RESOURCES OF RS 768.39 LAKHS WHERE AS DEPLOYMENT OF FUNDS FOR LONG TERM ASSETS WAS RS. 692.51 LAKHS ONLY. THUS TH ERE WAS A SURPLUS OF RS. 75.88 LAKHS OF LONG TERM FUNDS. HENC E CONTENTION OF THE LD CIT ABOUT USING CASH CREDIT LIMIT FOR LAN D PURCHASE IS NOT CORRECT. HERE, WE RELY ON THE DECISION OF BOMBAY HIGH COUR T IN THE CASE OF RELIANCE UTILITIES & POWER LIMITED (2009) 178 TA XMANN 135, WHICH HELD THAT WHEN INTEREST FREE FUNDS ARE AVAILA BLE THEN A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OU T OF INTEREST FREE FUNDS. (THE APPELLANTS HAD A SURPLUS LONG TER M FUND OF RS. 75.88 LAKHS EVEN AFTER INVESTMENT IN LAND AND ALL OTHER FIXED ASSETS). THE SAME RATIO WAS FOLLOWED IN THE CASE OF M/S ORBITECH VS JCIT (2011) 11 AXMANN.COM 225 (BOM). B(III) BANK GRANTING THE CASH CREDIT LIMIT IS MORE VIGILANT AND CONCERNED ABOUT THE CORRECT UTILIZATION OF THEIR MO NEY. THEY ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 11 HAVE TAKEN AN UNDERTAKING THAT COMPANY WILL NOT DIV ERT SHORT TERM WORKING CAPITAL LIMIT TO LONG TERM USAGE. THATS WH Y THEY INSIST ON MAINTAINING A SINGLE ACCOUNT FOR ROUTING ALL TRANSA CTIONS AND USE OTHER ANALYSIS/TECHNIQUES TO ASCERTAIN ANY POSSIBLE DIVERSIFICATION. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON THE FILE. TH E LD. CIT(A) DISALLOWED THE CLAIM OF THE ASSESSEE OBSERVING AS UNDER: APPELLANT HAS NOT BEEN ABLE TO PROVIDE ANY BREAKUP OF UTILIZATION OF SUCH FOREIGN CURRENCY LOAN TOWARDS S UCH FOREIGN CURRENCY LOAN TOWARDS CAPITAL ACCOUNT AND REVENUE A CCOUNT. APPELLANT HAS ALSO NOT BIFURCATED THOSE PURCHASES I N WHICH THERE IS COMPULSION TO MAKE PAYMENT IN DOLLARS FROM THOSE PURCHASES WHERE PAYMENTS ARE MADE IN RUPEES. IN VIEW OF THE VARIOUS POINTS MENTIONED ABOVE, AS T HERE WAS NO BUSINESS COMPULSION ON THE APPELLANT TO TAKE FOR EIGN CURRENCY LOAN AND AS THERE IS NO BIFURCATION AVAILA BLE IN UTILIZATION OF SUCH LOAN TOWARDS CAPITAL ACCOUNT AN D REVENUE ACCOUNT AND NO CAPITAL ACCOUNT PAYMENT BEING MADE I N FOREIGN CURRENCY, THE CLAIM OF LOSS ON FOREIGN EXCH ANGE FLUCTUATION LOSS IS HEREBY DISALLOWED. FOR THIS, RE LIANCE IS PLACED ON DECISION OF APEX COURT IN CASE OF OIL AND NATURAL GAS COMMISSION LTD. (2010) 15 ITJ 297 (SC), AS THE FOREIGN ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 12 CURRENCY LOAN IS TAKEN FOR THE FIRST TIME DURING TH E YEAR UNDER CONSIDERATION WHEREAS IN ALL EARLIER YEARS, THERE W AS RUPEE LOAN, HENCE THERE IS NO CONSISTENCY. BESIDES SUCH L OAN IS NOT TAKEN FOR BUSINESS COMPULSIONS, AS MOST OF THE PAYM ENTS ARE MADE TO INDIAN PARTIES IN RUPEES CURRENCY. NO C APITAL ASSETS ARE IMPORTED OR ACQUIRED IN FOREIGN CURRENCY . EVEN THE CONDITIONS OF AGREEMENTS FOR LOAN BETWEEN APPELLANT AND SBI CANNOT BE BRUSHED ASIDE IN WHICH POINT 13 STATES TH E POLICY FOR CRYSTALLIZATION OF LOAN WHICH SAYS THAT LOAN IS TO BE CRYSTALLIZED AND CONVERTED INTO RUPEE WORKING CAPIT AL DEMAND LOAN AT THE PREVAILING T.T. SELLING RATE FOR THE CU RRENCY OF FCNRBTL, WHEN THE LOAN IS NOT REPAID ON DUE DATE. H ENCE SUCH LOSS DUE TO FOREIGN EXCHANGE RATE FLUCTUATION IS CRYSTALLIZED AS PER THE AGREEMENT ONLY AFTER ONE YE AR OF SPAN OF THIS LOAN I.E. AFTER 1 YEAR OF 18.7.08 WHEN LOAN OF RS.2,50,00,000/- WAS GIVEN AND IN FACT SUCH LOAN IS REPAID BY APPELLANT TO THE BANK ON 17.7.09 I.E. EXACTLY AFTER 1 YEAR, WHEN APPELLANT REPAID RS.2,85,28,793/- TO THE BANK. HENCE ON THE ONE HAND LOSS ON FLUCTUATION OF FOREI GN EXCHANGE IS NOT CRYSTALLIZED ON 31.3.09 BUT IT CRYS TALLIZED ON 17.7.09 I.E. IN A.Y. 10-11 AND SECONDLY CLAIM OF SU CH LOSS OF ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 13 RS.50,62,032/- IS MUCH HIGHER THAN DIFFERENCE OF ON LY RS.35,28,793/- IN LOAN AMOUNT AND REPAID AMOUNT AND SUCH AMOUNT INCLUDE BOTH FOREIGN EXCHANGE LOSS AND INTER EST COMPONENT. CONSIDERING ALL THE POINTS MENTIONED ABO VE, THE CLAIM OF LOSS ON FOREIGN EXCHANGE FLUCTUATION OF RS.50,62,032/- AS BEING DISALLOWED BY A.O., IS UPHE LD. 7. WE FIND THAT THE DECISION OF LD. CIT(A) IS CONTR ARY TO THE DECISION OF HON'BLE SUPREME COURT RENDERED IN CASE OF CIT VS WO ODWARD GOVERNOR INDIA P.LTD. 312 ITR 254 (SC). EVER OTHERWISE, THE ASSESSEE HAS DEMONSTRATED THAT ANY GAIN ARISING OUT OF FLUCTUATI ON IN FOREIGN EXCHANGE HAS BEEN OFFERED FOR TAXATION IN THE SUBSEQUENT YEA R. IN VIEW OF THESE FACTS, WE DIRECT THE ASSESSING OFFICER TO DELETE TH E ADDITION. ACCORDINGLY, THIS GROUND OF THE APPEAL OF THE ASSESSEE ALLOWED. 8. THE LAST GROUND PERTAINS TO CONFIRMATION OF ADDI TION OF RS.1,98,871/- OUT OF INTEREST U/S 14A OF THE I.T. A CT. FACTS, IN BRIEF, ARE THAT FROM THE BALANCE-SHEET, THE ASSESSING OFFICER NOTICED THAT TOTAL INVESTMENTS WERE RS.49,46,000/- IN THE PRECEDING YE AR WHICH ROSE TO RS.56,95,000/-. THE INCOME FROM THESE INVESTMENTS W ILL BE IN THE SHAPE OF DIVIDEND ONLY, WHICH IS EXEMPT U/S 10 OF THE I.T . ACT. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN THE SAME. THE ASSESSEE SUBMITTED THAT THE ASSESSEE CO. HAS VERY OLD INVEST MENT OF EQUITY SHARES OF IFF OVERSEAS P. LTD. FOR RS.25000/-. BESIDES THI S, THE ASSESSEE CO. ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 14 INVESTED AN AMOUNT OF RS. 4921000/- IN SHARES OF I FF HILSON P LTD IN FY 2007-08 AND A FURTHER INVESTMENT OF RS. 700000/- WA S MADE IN THE RELEVANT YEAR 2008-09. THIS IS A TRADE INVESTMENT I N A SUBSIDIARY COMPANY FOR BUSINESS PURPOSE (NOT TO EARN DIVIDEND) . IN THE INVESTEE COMPANY, I.E. IFF HILSON P LTD., ASSESSEE COMPANY / GROUP HOLD 51% EQUITY AND 49% IS HELD BY HILLSON GROUP OF U.K. THUS IT IS A JOINT VENTURE COMPANY EXCLUSIVELY PROMOTED FOR MANUFACTUR ING AND MARKETING CAGES WHICH IS ONE OF THE IMPORTANT COMPONENT OF ASSESSEES PRODUCT INDUSTRIAL FILTER BAGS. HILSON GROUP OF UK COMME NDED GOOD MARKET REPUTATION AS MANUFACTURER OF CAGES AND IT ALSO PRO VIDES TECHNOLOGY FOR THE SAME. ASSESSEE ENVISAGED A BOOST FOR ITS OWN PR ODUCT AS A RESULT OF ASSOCIATION WITH THE HILLSON SINCE CAGES BEING AN IMPORTANT COMPONENT IN INDUSTRIAL FILTER BAGS MANUFACTURED BY THE ASSES SEE. AN UNDERSTANDING WAS MADE THAT THE ASSESSEE WOULD BUY CAGES FROM IFF HILLSON P LTD. FOR ITS FILTER BAGS, AND IT WOULD ALSO MARKET THE SAME. THUS THE SAID INVESTMENT IS PURELY A TRADE VENTURE. IN VIEW OF TH E FACT THAT THE INVESTMENT IS A TRADE INVESTMENT WITH AN INTENTION TO BOOST OWN BUSINESS BESIDES EARNING INCOME ALSO, THE PROVISIONS OF SECT ION 14A ARE NOT APPLICABLE. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE WITH THE SUBMISSION OF THE ASSESSEE AND CALCULATED DISALLOWA NCE U/S 14A R.W. RULE 8D AT RS.1,98,871/-. AGGRIEVED WITH THE ACTION OF THE ASSESSING OFFICER, THE ASSESSEE CHALLENGED THE ISSUE BEFORE T HE LD. CIT(A). ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 15 9. LD. CIT(A) NOTED THAT RULE 8D R.W.S. 14A HAS BEE N PROSPECTIVELY APPLIED FROM THE ASSESSMENT YEAR 2008-09 AND IN THE PRESENT CASE, THE YEAR INVOLVED IS ASSESSMENT YEAR 2009-10. THE CASE- LAWS RELIED BY THE ASSESSEE ARE FOR ASSESSMENT YEARS PRIOR TO AMENDMEN T AND INSERTION OF RULE 8D. THE INVESTMENT MADE AT RS.56,95,000/- GIVE S RISE TO DIVIDEND AND IN SUCH CASES, STATUTE PROVIDES FOR PROPORTIONA TE DISALLOWANCE UNDER RULE 8D R.W.S. 14A OF THE I.T. ACT. CONSIDERI NG THIS AND ALSO THE FACT THAT SUCH DISALLOWANCE WAS CONFIRMED IN ASSESS EES OWN CASE FOR THE ASSESSMENT YEAR 2008-09, THE LD. CIT(A) CONFIRM ED THE DISALLOWANCE AT RS.1,98,871/- U/S 14A R.W. RULE 8D. BEING AGGRIE VED, THE ASSESSEE HAS CHALLENGED THIS ISSUE BEFORE US. 10. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS REITERATED THE SUBMISSIONS MADE BEFORE REVENUE AUTHORITIES AND SUB MITTED THAT DIVIDEND OR CAPITAL GAIN WERE NOT THE MOTIVE FOR PR OMOTING THE COMPANY/ BUYING THE SHARES. THE ASSESSEE WAS NOT JUST AN INV ESTOR BUT PROMOTER. INVESTMENT WAS TO BENEFIT INDIRECTLY BY WAY OF INCR EASE IN GOODWILL AND TURNOVER WHICH ULTIMATELY RESULT INTO INCREASE IN T HE INCOME TOO. FOLLOWING TRANSACTIONS DURING THE RELEVANT YEAR WIT H THE INVESTEE COMPANY PROVES THE OBJECT OF PROMOTING IT : GOODS PURCHASES (TRADED) RS. 6667752 6 GOODS PURCHASES (RAW MATERIAL) RS. 1354533 JOB WORK PAYMENTS RS. 5716319 ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 16 IN THE BALANCE SHEET ALSO, THESE ARE CLASSIFIED AS TRADE INVESTMENT. IN SUPPORT OF THE CLAIM THE LD. COUNSEL FOR THE ASSESS EE RELIED UPON THE DECISION IN THE CASE OF CIT VS PHIL CORPORATION LTD . (BOMBAY HC AT GOA) (2011) 244 CTR (BOM) 226 ALONG WITH THE FOLLOW ING JUDICIAL PRONOUNCEMENTS: A. EXPENSES ON EARNING EXEMPT INCOME - INVESTMENT IN GROUP CO. (2012) 19 ITJ MPFC VS DCIT; B. INTEREST ON BORROWED CAPITAL TO GAIN CONTROL ON SUBSIDIARY IS ALLOWED U/S 36(I)(III) : CIT VS PHIL CORP LTD. 244 CTR 226 (BOM); C. INVESTMENTS MADE IN EARLIER YEARS IN WHICH INTER EST WAS ALLOWED. IN CURRENT YEAR, NO EVIDENCE BROUGHT BY RE VENUE TO PROVE THAT BORROWED FUNDS WERE USED FOR INVESTING. DISALLOWANCE IS NOT CALLED FOR.: MPFC VS DCIT IN (2012) 19 ITJ 145 TRIB INDORE; D. NARENDRA NARANG VS ADDL CIT (2011) 18 ITJ 383 ( INDORE TRIB); AND E. WHEN INTEREST IS PAID ON BORROWED CAPITAL TO GAI N CONTROL ON SUBSIDIARY, IT IS ALLOWABLE U/S. 36(I)(III) : ACIT VS TULIP STAR HOTELS LTD.338 ITR 482 & S. A. BUILDERS 288 ITR 1 ( SC) 288 ITR 1 (SC). 11. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ERS OF THE REVENUE AUTHORITIES AND SUBMITTED THAT THE REVENUE AUTHORIT IES WERE JUSTIFIED IN THEIR ACTIONS BECAUSE THE INCOME FROM THESE INVESTM ENTS IS IN THE SHAPE OF DIVIDEND, WHICH IS EXEMPT U/S 10 OF THE I.T. ACT . 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOT H THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON THE FILE. TH E ONLY EXPLANATION OF THE ASSESSEE THAT THE INVESTMENT IS MADE FOR COMMER CIAL EXPEDIENCY. WE ARE UNABLE TO ACCEPT THE EXPLANATION OF THE ASSE SSEE IN THE LIGHT OF THE RECENT JUDGMENT OF THE HONBLE APEX COURT RENDE RED IN THE CASE OF MAX OPP INVESTMENT LTD. VS. CIT [2018] 91 TAXMANN.C OM 154 (SC). WE, ITA NO.104/IND/2013 INDUSTRIAL FILTERS AND FABRICS 17 THEREFORE, DECLINE TO INTERFERE WITH THE ORDER OF T HE LD. CIT(A). SAME IS HEREBY AFFIRMED. THIS GROUND OF THE APPEAL OF THE A SSESSEE IS DISMISSED. FINALLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLO WED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 19.9.201 8. SD/- (MANISH BORAD) ACCOUNTANT MEMBER SD/- ( KUL BHARAT) JUDICIAL MEMBER DATED : 19.9.2018 COPY TO: ASSESSEE/RESPONDENT/CIT(A)/CIT/DR, INDORE