ITO, New Delhi V. M/s. ACL Wireless Ltd., New Delhi

ITA 1330/DEL/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65714 (ITAT-DELHI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 19-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ANURADHA MISRA
• Keywords: Capital asset; Depreciation; Business expenditure; Rule of consistency; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : A : NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER ITA NO.1330/DEL/2012 ASSESSMENT YEAR : 2007-08 ITO, COY. WARD 1(2), ROOM NO.398-B, CR BUILDING, IP ESTATE, NEW DELHI. VS. ACL WIRELESS LTD., 104-107, HEMKUNT TOWER, 98, NEHRU PLACE, NEW DELHI. PAN : AACCA7370G CO NO.167/DEL/2012 (ITA NO.1330/DEL/2012) ASSESSMENT YEAR : 2007-08 ACL WIRELESS LTD., 104-107, HEMKUNT TOWER, 98, NEHRU PLACE, NEW DELHI. PAN : AACCA7370G VS. ITO, COY. WARD 1(2), ROOM NO.398-B, CR BUILDING, IP ESTATE, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R.S. SINGHVI, CA REVENUE BY : MRS. ANURADHA MISRA, CIT, DR ORDER PER A.D. JAIN, JUDICIAL MEMBER THE APPEAL IS FILED BY THE DEPARTMENT AND THE CROSS O BJECTIONS BY THE ASSESSEE. THEY ARE DIRECTED AGAINST THE ORDER OF THE CIT (A)-IV, NEW DELHI DATED 05.01.2012 FOR ASSESSMENT YEAR 2007-08. 2. THE DEPARTMENT, IN ITS APPEAL, HAS TAKEN THE FOLLO WING EFFECTIVE GROUNDS OF APPEAL:- ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 2 1. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DELETING DISALLOWANCE OF ` 2,74,75,159/- ON ACCOUNT OF CAPITALIZATION OF PRODUCT IMPROVEMENT EXPENSES. 2. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DEL ETING ADDITION OF ` 1,27,95,082/- ON ACCOUNT OF TREATMENT OF LEASED PROPERTY IMPROVEMENT EXPENSES AS CAPITAL EXPENDITURE. THE CIT (A) HAS IGNORED THE FACT THAT THE ASSESSEE HAS TAKEN OFFICE SPACE ON RENT. THIS SPACE, AS MENTIONED BY THE ASSESSEE IN ITS LETTER DATED 19.11.2009 WAS RAW. BEFOR E THIS RAW OFFICE SPACE I.E., A SHELL BUILDING COULD BE PUT TO U SE BY THE ASSESSEE AS A BUSINESS ASSET, THE ASSESSEE HAD INCURR ED EXPENDITURE ON FLOORING, TILING, PARTITIONING THE SPACE AND SANITARY FITTING ETC. THE OFFICE CREATED WITH THESE EXP ENSES, THOUGH ON A RENTED PREMISES HAS BROUGHT INTO EXISTENCE A CAPITAL ADVANTAGE. THE NEW OFFICE IS A PART OF ASSESS EES APPARATUS FOR CONDUCTING ITS BUSINESS. THE EXPENDITUR E THEREFORE IS CAPITAL IN NATURE. 3. APROPOS GROUND NO.1, THE FACTS AS PER THE RELEVANT ORDERS ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PR OVIDING VALUE ADDED SERVICES TO VARIOUS MOBILE TELEPHONE SERVIC E PROVIDERS, LIKE M/S BHARTI AIRTEL LTD. AND M/S HUTCHISON MAX TEL ECOM PVT. LTD. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE CLAIMED AN A MOUNT OF ` 6,86,87,898/- ON ACCOUNT OF PRODUCT IMPROVEMENT E XPENSES, CLAIMING THE SAID EXPENDITURE TO HAVE BEEN INCURRED IN THE OR DINARY COURSE OF THE BUSINESS OF THE ASSESSEE. THIS EXPENDITURE COMPRISED TH E FOLLOWING:- I) THE TECHNOLOGY PLATFORM WAS EVOLVED BY REFACTORI NG THE UTILITY CLASSES AND BACK END APIS OF THE PLATFORM INTO SERVICE INTERFACES. II) PROFILING AND OPTIMIZATION RESULTING FROM THE FINDIN GS WAS DONE TO THE DATA OBJECT LAYER IN ORDER TO ACHIEVE G REATER SCALABILITY OF THE PLATFORM. ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 3 III) BASED ON FEEDBACK FROM USERS OF THE SERVICE, SOME USER FL OWS WERE MODIFIED WHICH INCLUDES CHANGES FOR DIFFERENT LA NGUAGES IN WHICH SERVICES IS DEPLOYED. IV) PRODUCT INTEGRATION WITH THE TELECOM NETWORK ELEMEN T (SMSC, DP, ETC.) WAS ACHIEVED IN SEVERAL OPERATOR NETWORKS. V) R&D WAS DONE ON SOME NEW PRODUCT INITIATIVES (LIKE YA HOO MOBILE IM FOR RELIANCE NETWORK) 4. BEFORE THE ASSESSING OFFICER, IT WAS EXPLAINED THAT THE AFORESAID EXPENDITURE HAD BEEN INCURRED REGULARLY AS PER THE A SSESSEES REQUIRED BUSINESS EXPEDIENCY ON A RECURRING BASIS, TO KEEP PACE W ITH THE FAST CHANGING TECHNOLOGY IN THE MOBILE PHONE INDUSTRY, AS PER THE AGREEMENTS MADE WITH THE SERVICE PROVIDER. THE EXPEN DITURE WAS CLAIMED TO BE A REVENUE EXPENDITURE. 5. THE ASSESSING OFFICER, HOWEVER, HELD THE EXPENDITURE TO BE CAPITAL IN NATURE AND DISALLOWED IT, HOLDING THAT TH E ASSESSEE HAD AMORTIZED THE SAID EXPENDITURE OVER A PERIOD OF THR EE YEARS IN ITS BOOKS OF ACCOUNT WHEREAS IN ITS COMPUTATION OF INCOME, THE ASSESSEE HAD CLAIMED THE SAME AS A REVENUE EXPENDITURE. THE A SSESSING OFFICER ALLOWED DEPRECIATION OF 60% ON THE AFORESAID EXPENDITURE. THIS AMOUNTED TO ` 4,12,12,739/-. THE REMAINING AMOUNT OF ` 2,74,75,159/- WAS DISALLOWED BY THE ASSESSING OFFICER. 6. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT (A) DELETED THE DISALLOWANCE, HOLDING IT TO BE REVENUE EXPENDITURE. IT WAS OBSERVED THAT SINCE SIMILAR EXPENDITURE HAD BEEN ALLOWED BY TH E ASSESSING OFFICER IN SCRUTINY ASSESSMENTS FOR PRECEDING AND SUCCEEDI NG YEARS, THE RULE OF CONSISTENCY ALSO DEMANDED THE EXPENDITURE FOR THE YEAR UNDER CONSIDERATION ALSO BE ALLOWED. ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 4 7. AGGRIEVED, THE DEPARTMENT HAS RAISED GROUND NO.1 B EFORE US. 8. LD. DR, IN THIS REGARD, HAS CONTENDED THAT THE LD. CIT (A) ERRED IN DELETING THE DISALLOWANCE CORRECTLY MADE BY THE ASSESSIN G OFFICER ON ACCOUNT OF CAPITALIZATION OF PRODUCT IMPROVEMENT EX PENSES; THAT WHILE DOING SO, THE LD. CIT (A) HAS FAILED TO CONSIDER THE OBSERVATIONS OF THE ASSESSING OFFICER TO THE EFFECT THAT WHEREAS THE ASSESSEE H AD AMORTIZED THE EXPENDITURE OVER THREE YEARS IN ITS BOO KS OF ACCOUNT, THE SAME HAD BEEN CLAIMED AS REVENUE EXPENDITURE IN THE C OMPUTATION OF INCOME OF THE ASSESSEE; THAT FURTHER, THE LD. CIT (A) HAS FAILED TO APPRECIATE THAT THE ASSESSING OFFICER HAD ALLOWED DEPRE CIATION OF 60% ON THE EXPENDITURE, WHICH AMOUNTED TO ` 4,12,12,739/-. 9. IN THIS REGARD, HAVING CONSIDERED THE RIVAL CONTEN TIONS IN THE LIGHT OF THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT F OR ASSESSMENT YEAR 2003-04, SIMILAR EXPENDITURE HAD BEEN DISALLOWED. THE ITAT ALLOWED THE SAME. FOR ASSESSMENT YEARS 2004-05 TO 2006-07, THE ASSESSING OFFICER HIMSELF ALLOWED SIMILAR EXPENDITURE. LIKEWISE , FOR ASSESSMENT YEARS 2008-09 AND 2009-10 ALSO THE ASSESSING OFFICER HIM SELF ALLOWED THE SAID EXPENDITURE. IT IS TAKING INTO ACCOUNT SUCH ALLOWANCE BY THE ASSESSING OFFICER HIMSELF, IN THE EARLIER AS WELL AS SUCCE EDING ASSESSMENT YEARS, THAT THE LD. CIT (A) HAS AND, IN OUR C ONSIDERED OPINION, RIGHTLY SO, DELETED THE DISALLOWANCE. IT RE MAINS UNDISPUTED THAT AS OBSERVED BY THE LD. CIT (A), THE EXPENDITURE WAS INCURRED IN TERMS OF THE AGREEMENT FOR PRODUCTION OF VALUE ADDED SERVICE TO MOBILE PHONE OPERATORS. THE CORRESPONDING RECEIPTS TH EREFROM WERE SHOWN BY THE ASSESSEE AS ITS TRADING RECEIPTS AND WERE DUL Y OFFERED TO TAX. THE EXPENSES, THE DETAILS OF WHICH AS GIVEN ABOV E, CONSISTS OF RENT, ELECTRICITY, VEHICLE MAINTENANCE, COMMUNICATI ON, INSURANCE, PROVISIONAL EXPENSES, SALARY AND OTHER BENEFITS TO THE E MPLOYEES, ETC. THE ASSESSING OFFICER NOWHERE MADE OUT THE ASSESSEE TO HA VE ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 5 ACQUIRED ANY ASSET OF CAPITAL NATURE OR TO HAVE DERIV ED ANY ADVANTAGE FOR LONG-TERM BY INCURRING THE EXPENDITURE. IT IS P ATENT ON RECORD THAT THE ASSESSEE RENDERS CONSULTANCY SERVICES AND DOES NOT REQU IRE ANY SIGNIFICANT CAPITAL ASSETS. THE EXPENSES WERE UNDOUBTEDL Y INCURRED IN THE COURSE OF THE DAY-TO-DAY BUSINESS OPERATIONS OF THE ASSESSEE, SUCH OPERATIONS BEING ROUTINE IN NATURE, BY WAY OF PROVID ING VALUE ADDED SERVICES TO ITS CUSTOMERS. IT WAS ALSO NEVER THE CASE OF TH E ASSESSING OFFICER THAT THE SERVICES SO PROVIDED BY THE ASSESSEE WERE EVER USED BY THE ASSESSEE AND NOT BY THE MOBILE OPERATORS. FURTHE R, IT IS COMMON KNOWLEDGE THAT MOBILE SERVICES REQUIRED CONTIN UED UPGRADATION AND MONITORING. AS SUCH, THE LD. CIT (A ) HAS RIGHTLY OBSERVED THAT THE EXPENDITURE IN QUESTION WAS INCURRED AS A MATTER OF ROUTINE, FOR THE BUSINESS AND COMMERCIAL EXPEDIENCY O F THE ASSESSEES BUSINESS, I.E., CONSULTANCY BUSINESS. THE LD. CIT (A) HA S ALSO DECLARED THAT THE CAPITALIZATION OF SUCH EXPENSES IN PRECEDING YEARS WAS FOR THE PERIOD PRIOR TO THE COMMENCEMENT OF THE ASSESSEES BUSINE SS. RIGHT FROM THE COMMENCEMENT OF THE BUSINESS OF THE ASSESSEE, THE EXPENSES STARTED BEING CLAIMED AS REVENUE, EVERY YEAR. THE ALLOWANCE OF SIMILAR EXPENDITURE IN THE EARLIER AS WELL AS SUBSEQU ENT YEARS, IT IS PERTIENENT TO NOTE, WAS MADE IN SCRUTINY ASSESSMENTS. WHI LE DELETING THE DISALLOWANCE, THE LD. CIT (A) HAS PLACED RELIANCE ON THE FOLLOWING CASE LAWS:- I) CIT VS. ASAHI INDIA SAFETY GLASS LTD., 64 DTR (DEL) 63; II) ASSAM BENGAL CEMENT CO. LTD. VS. CIT, 27 ITR 34 (SC) ; & III) CIT VS. J.K. SYNTHETICS LTD., 309 ITR 371 (DEL). 10. IN ASAHI INDIA (SUPRA), IT HAS BEEN OBSERVED, INT ER ALIA, CONSIDERING THE NATURE OF EXPENDITURE ON SOFTWARE, TH AT THE TEST OF ENDURING BENEFIT IS NOT A CERTAIN OR CONCLUSIVE TEST ; THAT WHAT IS REQUIRED TO BE SEEN IS THE REAL INTENT AND PURPOSE OF THE EXPENDITURE ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 6 AND AS TO WHETHER THE EXPENDITURE RESULTS IN CREATION OF FIXED CAPITAL BY THE ASSESSEE, AN EXPENDITURE WHICH ENABLES THE PROFIT MAKING STRUCTURE TO WORK MORE EFFICIENTLY, LEAVING THE SOUR CE OF THE PROFIT MAKING STRUCTURE UNTOUCHED, WOULD BE REVENUE EXPENDI TURE. 11. IN ASSAM BENGAL CEMENT CO. LTD. (SUPRA), IT HAS BEEN OBSERVED THAT IF THE EXPENDITURE IS INCURRED FOR ACQU IRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS, IT IS PROPERLY ATTRIBUTABLE TO CAPITAL AND IS CAPITAL EXPENDITURE; THAT IF SUCH EXPENDITURE, ON THE OTHER HAND, IS INCURRED FOR THE PURPOSE OF BRINGING INTO EXISTENCE ANY SUCH ASSET O R ADVANTAGE, BUT FOR RUNNING THE BUSINESS OR WORKING IT WITH A VIE W TO PRODUCE PROFITS, IT IS A REVENUE EXPENDITURE. 12. LASTLY, IN CIT VS. J.K. SYNTHETICS LTD. (SUPRA), IT WAS HELD THAT THE EXPENDITURE INCURRED TOWARDS INITIAL OUTLAY OF B USINESS WOULD BE IN THE NATURE OF CAPITAL EXPENDITURE, BUT IF IT IS INCU RRED WHILE THE BUSINESS IS CARRYING ON, IT WOULD HAVE TO BE ASCERTAINED IF T HE EXPENDITURE IS INCURRED FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING BENEFIT FOR THE BUSINESS AND IF THAT B E SO, IT WOULD BE IN THE NATURE OF CAPITAL EXPENDITURE; THAT IF, ON THE OTHER HAND, THE EXPENDITURE IS FOR RUNNING THE BUSINESS OR WORKING IT W ITH A VIEW TO PRODUCE PROFITS, IT WOULD BE IN THE NATURE OF REVENU E EXPENDITURE. 13. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LD. CIT (A) IN THIS REGARD, FOR WHICH, THE SAID ORDER IS CONFIRMED. 14. GROUND NO.1 RAISED BY THE DEPARTMENT IS REJECTED. 15. APROPOS GROUND NO.2, ACCORDING TO THE SAID GROUND , THE LD. CIT (A) HAS ERRED IN DELETING THE ADDITION OF ` 1,27,95,082/-, MADE ON ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 7 ACCOUNT OF TREATMENT OF LEASED PROPERTY IMPROVEMENT EXPENSES AS CAPITAL EXPENDITURE. 16. THE ASSESSING OFFICER TREATED THE LEASED PROPERTY I MPROVEMENT EXPENSES CLAIMED BY THE ASSESSEE TO THE TUNE OF ` 1,27,95,082/- AND DISALLOWED THE SAME. THIS WAS DONE BY TREATING THE EXPE NDITURE OF ` 1,42,16,758/- CLAIMED BY THE ASSESSEE AS CAPITAL EXPEN DITURE AND ALLOWING DEPRECIATION OF 10% AMOUNTING TO ` 14,21,676/- THEREON. IT WAS OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAD T AKEN SPACE ON RENT AND HAD INCURRED VARIOUS EXPENSES ON NET WORKING, FIRE FIGHTING, ELECTRICITY CABLING, FLOORING, TILING, SAN ITARY PARTITIONS, ETC.; THAT THE ASSESSEE, IN ITS BOOKS OF ACCOUNT HAD AMORTISED THE SAI D EXPENSES OVER A PERIOD OF THREE YEARS, WHEREAS IN THE COMPUTAT ION OF INCOME, THE ASSESSEE HAD CLAIMED THE EXPENSE AS BEING REVENUE IN NATURE. 17. THE LD. CIT (A), HAVING DELETED THE ADDITION MA DE BY THE ASSESSING OFFICER, THE DEPARTMENT HAS RAISED GROUND NO.2 BEFORE US. 18. THE LD. DR CONTENDED THAT WHILE WRONGLY DELETIN G THE ADDITION CORRECTLY MADE BY THE ASSESSING OFFICER, THE LD. CIT (A ) OVERLOOKED THE FACT THAT THE ASSESSEE HAD TAKEN OFFICE SPACE ON RENT; THAT EVEN AS PER THE ASSESSEES OWN LETTER DATED 19.11.2009 FILED BEFORE THE ASSESSING OFFICER, THE SAID SPACE WAS RAW SPACE, IN THE SHAPE O F A SHELL BUILDING; THAT IN ORDER TO MAKE USE OF THE SAID RAW OFFICE SPACE , I.E., TO PUT THE SAID SPACE TO USE AS A BUSINESS ASSET, THE ASSESSEE HAD INCURRED THE EXPENDITURE IN QUESTION; THAT THOUGH THE PREMISES ON WHICH THE OFFICE OF THE ASSESSEE GOT THEREBY CREDIT, BY INCURRENCE OF SUC H EXPENDITURE, IT BROUGHT INTO EXISTENCE A CAPITAL ADVANTAGE OF THE ASSESSEE, WHICH WAS WRONGLY OVERLOOKED BY THE LD. CIT (A). THAT THE LD. CIT (A) FAILED TO APPRECIATE THAT THE NEW OFFICE OF THE ASSESSEE WAS A PART OF THE ASSESSEES APPARATUS IN CONDUCTING ITS BUSINESS; AND THAT THE REFORE, ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 8 THE ASSESSING OFFICER HAD CORRECTLY TREATED THE EXPENDI TURE INVOLVED AS CAPITAL EXPENDITURE. 19. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER IN THIS REGARD. THE DETAILS OF THE EXPENDITURE HAVE BEEN FILED BEFORE US. IT HAS BEEN SU BMITTED THAT THE PREMISES IN WHICH THE OFFICE OF THE ASSESSEE EXIST, WAS A RENTED PREMISES; THAT NO NEW ASSET WAS BROUGHT INTO EXISTENCE BY INCURRING THE EXPENDITURE; THAT IT WAS ONLY TO MAKE THE LEASED PREMISES SUITABLE FOR THE ASSESSEES BUSINESS PURPOSES THAT THE EXPENDITURE IN QUESTION WAS INCURRED; THAT MOREOVER, THE TRIBUNAL, IN THE CA SE OF M/S ANGELIQUE INTERNATIONAL LTD., VIDE ORDER DATED 13.07.2012, PA SSED FOR ASSESSMENT YEAR 2007-08 IN ITA NO.481/DEL/2011 (COPY IS PLACED ON RECORD), I.E., FOR THE SAME YEAR AS UNDER CONSIDERATION HEREIN, HAS AL LOWED SIMILAR EXPENDITURE; THAT FURTHER, IN CIT VS. HI LINE PENS ( P) LTD. 306 ITR 182 (DEL), IT HAS BEEN HELD THAT WHERE THE EXPENSE IS INCU RRED TOWARDS REPAIRING THE RENTED PREMISES FOR THE BUSINESS ACTIVITY OF THE ASSESSEE, AND THERE IS NO INTENTION OF THE ASSESSEE TO BRING IN N EW CAPITAL ASSET INTO EXISTENCE, SUCH EXPENSES FALL WITHIN THE EXPRESSION REPAIRS TO PREMISES IN SECTION 30 (A) (I) OF THE IT ACT, WHICH IS AN ALLOWABLE EXPENDITURE; THAT STILL FURTHER, THE ASSESSEE IS RUNNING INTO HEAVY LOSSES AND NO ADVANTAGE WAS DERIVED FROM THE INCURRENCE OF THE EXPENDITURE IN QUESTION. 20. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND HAVE PE RUSED THE MATERIAL ON RECORD WITH REGARD THERETO. THE DETAIL OF EXPENDITURE FILED BEFORE US SHOWS THAT AS SHOWN BEFORE THE TAXING AUTHORIT IES, THE EXPENDITURE WAS INCURRED ON NETWORKING, FIRE FIGHTIN G, ELECTRICITY CABLING, FLOORING, TILING, SANITARY PARTITIONS, ETC. THE PREMISES ON WHICH THE OFFICE OF THE ASSESSEE WAS SITUATED WAS A RENTED PREMI SES TAKEN BY THE ASSESSEE AND THE ASSESSEE WAS NOT AN OWNER THEREOF. THE ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 9 EXPENDITURE, NO DOUBT, WAS INCURRED IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE. NO ADDITION WHATSOEVER, WAS MADE TO THE STRUCTURE ON THE RENTED PREMISES. IN FACT, THE WHOLE IDEA OF T HE INCURRENCE OF THE EXPENDITURE WAS TO MAKE THE LEASED PREMISES SUITABLE FOR THE ASSESSEES BUSINESS PURPOSES. THE ASSESSEE NEVER GOT TO ACQUIRE ANY NEW ASSET OR ADVANTAGE BY EXPENDING THE AMOUNT. THE LD. CIT (A) HAS DULY TAKEN INTO CONSIDERATION THESE FACTS WHILE RIGHTL Y DELETING THE ADDITION WRONGLY MADE BY THE ASSESSING OFFICER. 21. FOR THE ABOVE, WE CONCUR WITH THE FINDINGS RECOR DED BY THE LD. CIT (A) AND THE SAME ARE UPHELD. GROUND NO.2 IS ALSO REJECTED. 22. IN THE CROSS OBJECTIONS, THE ASSESSEE HAS RAISED THE FOL LOWING GROUND:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE C IT (A) WAS NOT JUSTIFIED IN NOT ACCEPTING CLAIM OF FOREIG N EXCHANGE LOSS AMOUNTING TO RS.10,09,662/- EVEN THOUGH SAME IS R ELATING TO TRADING ASSET AND PERMISSIBLE DEDUCTION UNDER THE LAW . 23. THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF ` 10,09,662/- REPRESENTING PROVISION FOR INTEREST LOSS. WHILE DOING S O, THE ASSESSING OFFICER OBSERVED THAT THE LOSS WAS ON ACCOUNT OF REVAL UATION OF CURRENT ASSETS/LIABILITIES IN FOREIGN CURRENCY AS ON 31.03.2007. THIS, ACCORDING TO THE ASSESSING OFFICER, WAS A NOTIONAL AND CONTINGENT LOSS. DURING THE YEAR, THE ASSESSEE HAD PROFIT ON ACCOUNT OF FOREIG N INTEREST RATE FLUCTUATION IN RESPECT OF ACTUAL RECEIPTS. 24. THE LD. CIT (A) UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 25. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE HAS C ONTENDED THAT THE LOSS SUFFERED IS A FOREX LOSS, HOLDING IT TO BE ON ACCOUNT OF RE- ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 10 VALUATION OF CURRENT ASSETS/LIABILITIES IN FOREIGN CU RRENCY AS ON 31.03.2007, AMOUNTING TO A NOTIONAL AND CONTINGENT LOSS; THAT FOREIGN EXCHANGE REVALUATION HAS TO BE DONE EVERY YEAR; THAT THE MATTER STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE F OLLOWING DECISIONS:- I) CIT VS. L.G. ELECTRONICS INDIA (P) LTD., 309 ITR 26 5 (DEL); AND II) CIT VS. WOODWARD GOVERNORS INDIA PVT. LTD., 312 IT R 254 (SC) 26. THE LD. DR, ON THE OTHER HAND, HAS STRONGLY RELIE D ON THE IMPUGNED ORDER IN THIS REGARD, CONTENDING THAT THERE IS NO ERROR WHATSOEVER IN THE ORDER OF THE LD. CIT (A) WITH REGA RD TO THE CROSS OBJECTIONS RAISED BY THE ASSESSEE; THAT THE LOSS UNDISPUTEDL Y WAS ON ACCOUNT OF REVALUATION OF CURRENT ASSETS/LIABILITIES IN FOREIGN CURRENCY AS ON 31.03.2007; THAT THIS WAS, UNDOUBTEDLY, A NOTION AL AND CONTINGENT LOSS; THAT DURING THE YEAR, THE ASSESSEE HAD E ARNED PROFIT ON ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATION IN RESPECT OF ACTUAL RECEIPTS; THAT THE PROVISION OF ` 10,09,662/- WAS SET OFF BY THE ASSESSEE AGAINST THE SAID PROFIT; THAT THE LD. CIT (A) HAS COR RECTLY OBSERVED THAT THE TRANSACTIONS HAVING NOT BEEN COMPLETED DURING TH E YEAR UNDER CONSIDERATION, THE LOSS HAS BEEN SHOWN BY THE ASSESSEE AS PR OVISION AND THE PROVISIONAL LOSS ON ACCOUNT OF THE YEAR END RE STATEMENT OF CLOSING BALANCES CANNOT BE ALLOWED TO BE SET OFF AGAIN ST ACTUAL PROFIT EARNED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE R ATE FLUCTUATION REGARDING TRANSACTIONS COMPLETED DURING THE YEAR UNDER CONSIDERATION; THAT CONTINGENT NOTIONAL LIABILITY CA NNOT BE ALLOWED AS A DEDUCTION, WHERE THERE IS NO BACKING OF ACTUAL REMIT TANCES AND COMPLETION OF TRANSACTIONS; THAT AS SUCH, THE ORDER OF THE LD. CIT (A) IN THIS REGARD REQUIRES TO BE CONFIRMED WHILE DISMISSING TH E CROSS OBJECTION FILED BY THE ASSESSEE. ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 11 27. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND HAVE PE RUSED THE MATERIAL WITH REGARD THERETO. IN L.G. ELECTRONICS (SUPRA), IT HAS BEEN HELD THAT LOSS ON ACCOUNT OF FOREIGN EXCHANGE RATE FL UCTUATION IS AN ALLOWABLE BUSINESS EXPENDITURE U/S 37 OF THE IT ACT. 28. IN WOODWARD GOVERNORS (SUPRA) ALSO, IT HAS BEEN H ELD, AFFIRMING THE DECISION IN CIT VS. WOODWARD GOVERNORS INDIA PVT. LTD., 294 ITR 451 (DEL), THAT FOR VALUING THE CLOSING STOCK AT THE END OF A PARTICULAR YEAR, THE VALUE PREVAILING ON THE LAST DA TE IS RELEVANT; THAT THIS IS BECAUSE PROFIT/LOSS IS EMBEDDED IN THE CLOSING STOC K; THAT WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED P ROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE IN PRO FITS/ACTUAL REALIZATION; THAT THIS IS THE THEORY UNDERLYING THE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. 29. IN THE CASE OF THE ASSESSEE, DURING THE YEAR, THE ASSE SSEE HAD EARNED PROFIT ON ACCOUNT OF INTEREST RATE FLUCTUATIO N IN RESPECT OF ACTUAL RECEIPTS. IT HAD SET OFF PROVISION FOR INTEREST LOSS, AM OUNTING TO ` 10,09,662/- ON ACCOUNT OF REVALUATION OF CURRENT ASSE TS/LIABILITIES IN FOREIGN CURRENCY AGAINST THE PROFIT EARNED ON ACTUAL RECEIPTS. IT HAS RIGHTLY BEEN CONTENDED ON BEHALF OF THE ASSESSEE THAT C URRENT ASSETS AND LIABILITIES IN FOREIGN EXCHANGE IN ACCORDANCE WI TH THE AS 11, ARE REQUIRED TO BE REVALUED AS PER THE RATE APPLICABLE A T THE END OF THE YEAR. UNDOUBTEDLY, FOREX REVALUATION HAS TO BE DONE EVERY TIME. THEREFORE, THE LD. CIT (A) CLEARLY ERRED IN UPHOLDI NG THE DISALLOWANCE WRONGLY MADE BY THE ASSESSING OFFICER. 30. HENCE, FINDING IT TO BE JUSTIFIED, THE CROSS OBJEC TION RAISED BY THE ASSESSEE IS ACCEPTED. ITA NO.1330/DEL/2012 CO NO.167/DEL/2012 12 31. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED , WHEREAS CROSS OBJECTION RAISED BY THE ASSESSEE IS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 19.10.20 12. SD/- SD/- [T.S. KAPOOR] [A.D. JAIN] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED, 19.10.2012. DK COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES