Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 99834 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 2 month(s) 27 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-09-2015
Appeal Filed By
Assessee
Bench Allotted
C
Assessment Year
2005-2006
Appeal Filed On
02-07-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH C , KOLKATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI M.BALAGANESH, AM ] ITA NO.1396/KOL/2010 ASSESSMENT YEAR : 2005 - 06 ( A PPELLANT ) (RESPONDENT) EMPIRE & SINGLE TEA LTD., (SINCE - VER SUS - D.C.I.T., CENTRAL CIRCLE - III, MERGED WITH APEEJAY SURRENDRA KOLKATA CORPORATE SERVICES PVT.LTD.KOLKATA (PAN: AAACE 5739 R) FOR THE APPELLANT : SHRI MANISH TIWARI, FCA FOR THE RESPONDENT : SHRI D.BANERJEE, JCIT DATE OF HEARING : 24.09.2015. DATE OF PRONOUNCEMENT : 29.09.2015. ORDER PER SHRI M.BALAGANESH, AM 1. THIS APPEAL OF THE ASSESSEE ARISES OUT OF THE ORDER OF TH E LEARNED CITA IN APPEAL NO. 143 / CC - III/ CIT(A),C - I/07 - 08 DATED 12.01.2010 FOR THE ASST YEAR 2005 - 06 ARISING OUT OF THE ORDER OF T HE LEARNED ASSESSING OFFICER FRAMED U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). 2. SHRI. MANISH TIWARI , FCA, THE LEARNED AR ARGUED ON BEHALF OF THE ASSESSEE. SHRI. D.BANERJEE, JCIT , THE LEARNED DR ARGUED ON BEHALF O F THE REVENUE . 3. IT IS SEEN THAT THE APPEAL FOR THE ASSESSEE HAS BEEN DELAYED BY 66 DAYS. THE LD. AR FILED AN AFFIDAVIT BEFORE US EXPLAINING THE REASONS FOR CONDONATION OF DELAY. THE AFFIDAVIT IS REPRODUCED BELOW : - I, SRI MANISH TIWARI SON OF LATE S.D.TIWARI BY FAITH HINDU, BY PROFESSION CHARTERED ACCOUNTANT, IN MY CAPACITY AS A AUTHORISED REPRESENTATIVE OF M/S. EMPIRE & SINGLE TEA LTD. (SINCE MERGED WITH APEEJAY SURRENDRA CORPORA TE SERVICES PVT. LTD.,) DO HEREBY SOLEMNLY AFFIRM AN OATH AND DECLARE AS FOLLOWS : - 1 ) THAT MR. SUDIPTO DEY NEWLY ENGAGED EXECUTIVE OFFICER OF TAXATION DEPARTMENT OF APEEJAY GROUP OF COMPANIES MET ME ON 20 TH MAY 2010 FOR THE FIRST TIME AND SOUGHT FOR LEGAL ADVICE ON ADVERSE INFERENCES CONTAINED IN APPEAL NO.143/CC - III/CIT(A)C - I/07 - 08 DATED 26.02.2008. 2 ) THAT I RETAINED A COPY OF THE SAID APPEAL ORDER TILL 29.05.2010 FOR STUDY BEFORE GIVING OPINION ON THE POINT. 3 ) THAT ON 29.05.2010 WHEN THE SAID EXECUTIVE OFFICER ATTENDED AGAIN I MADE REQUISITION OF CERTAIN RELEVANT PAPERS AND DOC UMENTS BEFORE CONVEYING FINAL OPINION. 4 ) THAT THE DOCUMENTS REQUISITIONED WERE MADE AVAILABLE TO ME ON 07.06.2010 ON THE GROUND THAT THESE WERE LYING AT TEA GARDEN AT ASSAM. ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 2 5 ) THAT AFTER SCRUTINY OF RELEVANT PAPERS AND DOCUMENTS AND THE APPEAL ORDER I FORMED O PINION TO CONTEST THE ADVERSE APPEAL ORDER AND DRAFTED GROUNDS OF APPEAL FOR APPROVAL OF THE APPELLANT BEFORE FINALIZATION. 6 ) THAT DELAY FROM 16.06.2010 TO THE ACTUAL DATE OF FILING U/S 253 IS FOR PROCEDURAL MATTERS LIKE TYPING, COMPARING, SIGNATURE OF THE A PPELLANT, PAYMENT OF FEES ETC. WE ARE SATISFIED THAT THE ASSESSEE HAS ADDUCED COGENT REASONS AND HAS BEEN GENUINELY PREVENTED IN FILING THE APPEAL IN TIME BEFORE US. HENCE THE REASONS STATED BY THE LD.AR IN THE CONDONATION PETITION IS ACCEPTED AND DELAY FOR 66 DAYS IS CONDONED. THE LD. DR FAIRLY CONCEDED TO THE CONDONATION PETITION. HENCE THE APPEAL IS ADMITTED. 4. TH E FIRST ISSUE TO BE DECIDED IN THIS APPEAL OF THE ASSESSEE IS WHETHER THE LD. CIT(APPEAL S) IS CORRECT IN DELETING THE ADDITION MADE TOWARD S EMPLOYEES CONT - RIBUTION TO PROVIDENT FUND (E.P.F.) AMOUNTING TO RS. 69,706/ - WHICH WAS REMITTED BEYOND THE DUE DATE PRESCRIBED UNDER THE P.F. ACT BUT BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME UNDER SECT ION 139(1) OF THE ACT. 4 .1. THE ASSESS ING OFFICER DISALLOWED THE EMPLOYEES CONTRIBUTION TO P.F. UNDER SECTION 36(1)(VA), READ WITH SECTION 2(24)(X) OF THE ACT, IN VIEW OF THE FACT THAT THE SAME WERE NOT REMITTED WITHIN THE DUE DATE PRESC RIBED UNDER THE P.F. ACT. AGGRIEVED, THE ASSESSEE CHALLE NGED THIS ISSUE BEFORE THE LD. CIT(APPEAL S), WHO CONFIRMED THIS ADDITION. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND: - THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ACTION OF LD. CIT(A) TO CONFIRM ADDITION OF R S.6 9,706/ - REPRESENTING EMPLOYEE S CONTRIBUTION TO P.F. FOR MAY 2004 IS OPPOSED TO HIS OWN FINDING IN SIMILAR SITUATION RELEVANT TO ASSESSMENT YEAR 2006 - 07. 4 .2 THE LD. A.R. ARGUED THAT THE DATE OF REMITTANCES OF EPF IS MENTIONED IN PAGES 9 - 10 OF THE ASSE SSMENT ORDER AND ARGUED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON BLE APEX COURT IN THE CASE OF VINAY CEMENT LIMITED REPORTED IN 313 ITR 1 (SC). IN RESPONSE TO THIS, THE LD. D.R. VEHEMENTLY SUPPORTED THE ORDER OF THE AS SESSING OFFICER . 5 . WE HAVE HEARD THE RIVAL SUBMISSIONS ON THIS ISSUE AND HOLD THAT THIS ISSUE IS DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE APEX COURT IN VINAY CEMENT LIMITED REPORTED IN (20090) 313 ITR 1 (SC), WHEREIN IT HAS B EEN HELD THAT STATUTORY ITEM LIKE EPF IS PAID BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME BE ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 3 ALLOWED IRRESPECTIVE OF THE FACT WHERE THE CONTRIBUTION RELATED TO THE EMPLOYEE AND EMPLOYER . FROM THE VERIFICATION OF THE DATES AS STATED IN THE ASSESSME NT ORDER, IT IS OBSERVED THAT THE ASSE SSEE HAD DULY REMITTED THE ENTI RE EPF DUES BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME. RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE APEX COURT AS STATED (SUPRA), WE ALLOW THE APPEAL OF THE ASSESSEE. ACCOR DINGLY, GROUND NO. 1 RAISED BY THE ASSESSEE IS ALLOWED. 6 . THE SECOND ISSUE TO BE DECIDED IN THE APPEAL OF THE ASSESSEE IS AS TO WHETHER THE LD. CIT(APPEAL S) IS CORRECT IN DISALLOWING THE FOREIGN EXCHANGE LOSS OF RS.11 ,00,000/ - . 6 .1. BRIEF FACT S OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CULTIVATION OF GREEN LEAVES AND MANUFACTURE AND SALE OF BLACK TEA. THE ASSESSEE HAD BORROWED EXTERNAL COMMERCIAL BORROWINGS (HEREINAFTER REFERRED TO AS ECB ) OF USD 55 ,00,000 AND UTILIZED T HE SAME FOR GENERAL BUSINESS PURPOSES. HENCE, THIS GOES TO PROVE THAT THE LOAN HAS BEEN OBTAINED FOR REVENUE ACCOUNT. THIS LOAN WAS OUTSTANDING AS ON 31S T MARCH, 2005 AND THE SAME WAS RESTATED AT THE EXCHANGE RATE PREVAILING AT THE END OF THE YEAR IN CONS ONANCE WITH THE ACCOUNTING STANDARD 11 (AS - 11) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) BY THE ASSESSEE - COMPANY. THE ASSESSEE INCURRED A NOTIONAL EXCHANGE LOSS OF RS.11,00,000/ - ON SUCH RESTATEMENT IN VIEW OF THE INCREASE IN LIABIL ITY PAYABLE ON THE LOAN ACCOUNT. THIS IS WORKED OUT AS UNDER: - ECB VALUE AS ON 31.03.2005 [55,00,000 US $ @ 43.75] = 24,06,25,000 ECB VALUE AS ON 31.03.2004 [55,00,000 US $ @ 43.55] = 23,95,25,000 EXCHANGE LOSS ON ECB AS ON 31.03.2005 = 11,00,000 6 .2. THE ASSESSING OFFICER DISALLOWED THE SAME AS THE EXCHANGE LOSS INCURRED THEREON WAS NOTIONAL IN NATURE BY INVOKING THE PROVISIONS OF SECT ION 43A OF THE ACT, WHEREIN PURSUANT TO AN AMENDMENT BROUGHT WITH EFFECT FROM 1 ST APRIL, 2003, ANY EXCHANGE LO SS ARISING OUT OF RESTATEMENT COULD BE ALLOWED TO BE CAPITALISED OR ALLOWED AS DEDUCTION ONLY ON PAYMENT BASIS AND NOT ON MERE RESTATEMENT. THE ASSESSEE PLEADED THAT THE PROVISIONS OF SECTION 43A PER SE ARE NOT APPLICABLE TO THE FACTS OF THE CASE AS NO ASS ET WAS ACQUIRED OUT OF ECB LOAN AVAILED BY THE ASSESSEE AS ADMITTEDLY ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 4 THE SAID LOAN WAS AVAILED FOR GENERAL WORKING CAPITAL BUSINESS PURPOSES ONLY. BUT THIS EXPLANATION BEFORE THE ASSESSING OFFICER DID NOT HOLD WATER. AGGRIEVED, THE ASSESSEE PREFERRED APPE AL BEFORE THE LD. CIT(APPEALS), WHO UPHELD THE DECISION OF THE ASSESSING OFFICER. AGGRIEVED, THE ASSESSEE IS IN APPEAL BE FORE US ON THE FOLLOWING GROUND : - 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) HAS ERRED IN HOLDING THAT LIAB ILITY IN RESPECT OF FOREIGN LOAN DUE TO EXCHANGE FLUCTUATION HAS NOT ACCRUED AND THEREBY CONFIRMING THE DISALLOWANCE OF RS.11,00,000/ - ON THIS SCORE. 6.3 . THE LD. A.R. ARGUED THAT THE ASSESSEE HAD BORROWED ECB LOAN FOR ITS GENERAL WORKING CAPITAL PURPO SES WHICH IS ONLY ON REVENUE ACCOUNT. HE PLACED ON RECORD A COPY OF THE ECB LOAN AGREEMENT. HE FURTHER ARGUED THAT SINCE THE ECB LOAN WAS UTILIZED ON REV ENUE ACCOUNT AND NO FIXED ASSET S WERE PURCHASED OUT OF THE SAME, THE PROVISIONS OF SECTION 43A OF THE A CT PER SE ARE NOT APPLICABLE TO THE ASSESSEE. HE RELIED ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. REPORTED IN 312 ITR 254 (SC) IN SUPPORT OF HIS CONTENTION THAT THE EXCHANGE LOSS ON RESTATEMENT OF THE FOREI GN CURRENCY LOAN FOR THE END OF THE YEAR LEADING TO INCREASE IN LIABILITY IS AN ALLOWABLE BUSINESS EXPENDITURE. IN RESPONSE TO THIS, LD. D.R. VEHEMENTLY SUPPORTED THE ORDER OF THE LOWER AUTHORITIES. 6.4 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL AVAILABLE ON RECORD. IT IS SEEN FROM THE ECB LOAN AGREEMENT, THAT THE LOAN WAS UTILIZED FOR GENERAL CORPORATE PURPOSES AND NOT FOR ACQUISITION OF ANY FIXED ASSETS. HENCE, WE HOLD THAT THE BORROWINGS WERE UTILIZED ON REVENUE ACCOUNT AND THE PROV ISIONS OF SECTION 43A OF THE ACT WERE NO T APPLICABLE AT ALL IN THE FACT S OF THE CASE. BASED ON THIS, IT COULD LOGICALLY BE CONCLUDED THAT ANY EXCHANGE FLUCTUATION ARISING OUT OF THE RESTATEMENT OF THE SAID LOAN AT THE END OF THE YEAR, BE IT GAIN OR LOSS, W OULD ALSO FALL ON REVENUE ACCOUNT AND HENCE, AUTOMATICALLY COMES UNDER THE AMBIT OF TAXATION IF IT IS A GAIN AND ALLOWABLE AS AN EXPENDITURE IF IT IS A LOSS. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS . - WOODWARD GOVERNOR INDIA P. LTD. REPORTED IN 312 ITR 254 (SC), WHEREIN THE QUESTIONS RAISED BEFORE THEIR LORDSHIPS WERE AS UNDER: - ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 5 (I) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ADDITIONAL LIABILITY ARISING ON ACCOUNT OF FLUCTUA TION IN THE RATE OF EXCHANGE IN RESPECT OF LOANS TAKEN FOR REVENUE PURPOSES COULD BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) IN THE YEAR OF FLUCTUATION IN THE RATE OF EXCHANGE OR WHETHER THE SAME COULD ONLY BE ALLOWED IN THE YEAR OF REPAYMENT OF SUCH LOAN S? (II) WHETHER, THE ASSESSEE IS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH BALANCE SHEET DATE, PENDING ACTUAL PAYMENT OF THE VARIED LIABILITY? THEIR LORDSH IPS HAD CATEGORICALLY HELD THAT SINCE THE LOAN WAS BORROWED FOR GENERAL BUSINESS PURPOSES I.E. ON REVENUE ACCOUNT, ANY LOSS ARISING OUT OF RESTATEMENT AT THE END OF THE YEAR WOULD BE SQUARELY ALLOWABLE UNDER SECTION 37(1) OF THE ACT. THE RELEVANT OPERATIVE PORTION OF THE SAID JUDGMENT IS REPRODUCED BELOW: - 13. AS STATED ABOVE, ONE OF THE MAIN ARGUMENTS ADVANCED BY THE LEARNED ADDITIONAL SOLICITOR GENERAL ON BEHALF OF THE DEPARTMENT BEFORE US WAS THAT THE WORD 'EXPENDITURE' IN SECTION 37(1) CONNOTES 'WHAT I SPAID OUT' AND THAT WHICH HAS GONE IRRETRIEVABLY. IN THIS CONNECTION, HEAVY RELIANCE WAS PLACED ON THE JUDGMENT OF THIS COURT IN THE CASE OF INDIAN MOLASSES COMPANY (SUPRA). RELYING ON THE SAID JUDGMENT, IT WAS SOUGHT TO BE ARGUED THAT THE INCREASE IN LIAB ILITY AT ANY POINT OF TIME PRIOR TO THE DATE OF PAYMENT CANNOT BE SAID TO HAVE GONE IRRETRIEVABLY AS IT CAN ALWAYS COME BACK. ACCORDING TO THE LEARNED COUNSEL, IN THE CASE OF INCREASE IN LIABILITY DUE TO FOREIGN EXCHANGE FLUCTUATIONS, IF THERE IS A REVALUA TION OF THE RUPEE VIS - ` - VIS FOREIGN EXCHANGE AT OR PRIOR TO THE POINT OF PAYMENT, THEN THERE WOULD BE NO QUESTION OF MONEY HAVING GONE IRRETRIEVABLY AND CONSEQUENTLY, THE REQUIREMENT OF 'EXPENDITURE' IS NOT MET. CONSEQUENTLY, THE ADDITIONAL LIABILITY ARISI NG ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE WAS MERELY A CONTINGENT/NOTIONAL LIABILITY WHICH DOES NOT CRYSTALLIZE TILL PAYMENT. IN THAT CASE, THE SUPREME COURT WAS CONSIDERING THE MEANING OF THE EXPRESSION 'EXPENDITURE INCURRED' WHILE DEAL ING WITH THE QUESTION AS TO WHETHER THERE WAS A DISTINCTION BETWEEN THE ACTUAL LIABILITY IN PRESENTI AND A LIABILITY DE FUTURO. THE WORD 'EXPENDITURE' IS NOT DEFINED IN THE 1961 ACT. THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO BE UNDERSTOOD IN THE CO NTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE INCOME CHA RGEABLE UNDER THE 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 A MOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. 14. IN THE CASE OF M.P. FINANCIAL CORPORATION V. CIT REPORTED IN 165 ITR 765 THE MADHYA PRADESH HIGH COURT HAS HELD THAT THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MAY, IN THE CIRCUMSTANCES O F A PARTICULAR CASE, COVER AN AMOUNT WHICH IS A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. THIS VIEW OF THE MADHYA PRADESH HIGH COURT HAS BEEN APPROVED BY THIS COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORP ORATION LTD. V. CIT REPORTED IN 225 ITR 802. ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 6 ACCORDING TO THE LAW AND PRACTICE OF INCOME TAX BY KANGA AND PALKHIVALA, SECTION 37(1) IS A RESIDUARY SECTION EXTENDING THE ALLOWANCE TO ITEMS OF BUSINESS EXPENDITURE NOT COVERED BY SECTIONS 30 TO 36 . THIS SECTI ON, ACCORDING TO THE LEARNED AUTHOR, COVERS CASES OF BUSINESS EXPENDITURE ONLY, AND NOT OF BUSINESS LOSSES WHICH ARE, HOWEVER, DEDUCTIBLE ON ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING. (SEE PAGE 617 OF THE EIGHTH EDITION). IT IS THIS PRINCIPLE WHICH ATTR ACTS THE PROVISIONS OF SECTION 145 . THAT SECTION RECOGNIZES THE RIGHTS OF A TRADER TO ADOPT EITHER THE CASH SYSTEM OR THE MERCANTILE SYSTEM OF ACCOUNTING. THE QUANTUM OF ALLOWANCES PERMITTED TO BE DEDUCTED UNDER DIVERSE HEADS UNDER SECTIONS 30 TO 43C FROM THE INCOME, PROFITS AND GAINS OF A BUSINESS WOULD DIFFER ACCORDING TO THE SYSTEM ADOPTED. THIS IS MADE CLEAR BY DEFINING THE WORD 'PAID' IN SECTION 43(2) , WHICH IS USED IN SEVERAL SECTIONS 30 TO 43C , AS MEANING ACTUALLY PAID OR INCURRED ACCORDING TO THE ME THOD OF ACCOUNTING UPON THE BASIS ON WHICH PROFITS OR GAINS ARE COMPUTED UNDER SECTION 28 / 29 . THAT IS WHY IN DECIDING THE QUESTION AS TO WHETHER THE WORD 'EXPENDITURE' IN SECTION 37(1) INCLUDES THE WORD 'LOSS' ONE HAS TO READ SECTION 37(1) WITH SECTION 28 , SECTION 29 AND SECTION 145(1) . ONE MORE PRINCIPLE NEEDS TO BE KEPT IN MIND. ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE. ONE MORE AS PECT NEEDS TO BE HIGHLIGHTED. UNDER SECTION 28(I) , ONE NEEDS TO DECIDE THE PROFITS AND GAINS OF ANY BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR. THEREFORE, ONE HAS TO TAKE INTO ACCOUNT STOCK - IN - TRADE FOR DETERMINATION OF PROFITS. THE 1961 ACT MAKES NO PROVISION WITH REGARD TO VALUATION OF STOCK. BUT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE P&L ACCOUNT THE VALUE OF THE STOCK - IN - TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST O R MARKET PRICE, WHICHEVER IS THE LOWER. THIS IS HOW BUSINESS PROFITS ARISING DURING THE YEAR NEEDS TO BE COMPUTED. THIS IS ONE MORE REASON FOR READING SECTION 37(1) WITH SECTION 145 . FOR VALUING THE CLOSING STOCK AT THE END OF A PARTICULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT. THIS IS BECAUSE PROFITS/LOSS IS EMBEDDED IN THE CLOSING STOCK. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE THEORY UNDERLYING THE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. AS PROFITS FOR INCOME - TAX PURPOSES ARE TO BE COMPUTE D IN ACCORDANCE WITH ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS, SUCH PRINCIPLES STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS, UNREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING Y EAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUNT IN A CONTINUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACT UALLY. AT THIS STAGE, WE NEED TO EMPHASISE ONCE AGAIN THAT THE ABOVE SYSTEM OF COMMERCIAL ACCOUNTING CAN BE SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENT. THIS IS WHERE SECTION 145(2) COMES INTO PLAY. UNDER THAT SECTION, THE CENTRAL GOVERNMENT IS EMPOWER ED TO NOTIFY FROM TIME TO TIME THE ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. ACCORDINGLY, UNDER SECTION 209 OF THE COMPANIES ACT, MERCANTILE SYSTEM OF ACCOUNTING IS MADE MANDATORY FOR COMPANIES. IN OTHER WORDS, ACCOUNTING STANDARD WHICH IS CONTINUOUSLY ADOPTED BY AN ASSESSEE CAN BE SUPERSEDED OR MODIFIED BY LEGISLATIVE INTERVENTION. HOWEVER, BUT FOR SUCH INTERVENTION OR IN CASES FALLING UNDER SECTION 145(3) , THE METHOD OF ACCOUNTING UNDERTAKEN BY THE ASSESSEE CONTINUOUSLY IS SUPREME. IN THE PRESENT BATCH OF CASES, THERE IS NO FINDING GIVEN BY THE AO ON THE CORRECTNESS OR ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 7 COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. EQUALLY, THERE IS NO FINDING GIVEN BY THE AO STATING THAT THE ASSESSEE HAS NOT COMPLIE D WITH THE ACCOUNTING STANDARDS. 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 . IN VIEW OF THE AFORESAID JUDGMENT OF THE HON BLE APEX COURT, WE HOLD THAT THE SUM OF RS.11 ,00,000/ - BEING THE EXCHANGE LOSS WOULD BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) OF THE ACT FOR THE ASSESSMENT YEAR 2005 - 06. ACCORDINGLY, GROUND NO. 2 RAISED BY THE ASSESSEE IS ALLOWED. 7 . THE THIRD ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD.CIT(APPEALS) IS CORRECT IN ALLOWING THE CLAIM OF THE ASSESSEE THAT THE MISCELLANEOUS RECEIPTS AGGREGATING TO RS. 4,64,057/ - AROS E FROM TEA BUSINESS AND ACCORDINGLY TREATING THE SAME AS BUSINESS INCOME AS AGAINST THE TREATMENT BY THE ASSESSING OFFICER AS INCOME FROM OTHER SOURCES. AGGRIEVED, THE ASSESSEE IS IN APPEAL BE FORE US ON THE FOLLOWING GROUND : - 3 . THAT ON THE FACTS AND IN T HE CIRCUMSTANCES OF THE CASE, LD. CIT(A) IS WRONG AND UNJUSTIFIED IN NOT HOLDING SUNDRY RECEIPTS AGGREGATING TO RS.4,64,057/ - AS PROFIT AND GAINS OF BUSINESS. 7 .1. IN RESPONSE TO THIS, T HE LD. D.R. ARGUED THAT FROM THE VERY NATURE OF THE MISCELLANEOUS RECEIPTS, IT SHOULD BE ASSESSED ONLY AS INCOME FROM OTHER SOURCES AND ACCORDINGLY HE ARGUED THAT TH E ACTION OF THE LD. CIT(APPEALS ) IS WRONG AND PRAYED FOR SETTING ASIDE THE ORDER OF THE LD. CIT(APPEALS) IN THIS REGARD. THE LD. A.R. FILED THE BREAK - UP OF THE RECEIPTS AMOUNTING TO RS. 4,69,727/ - AND PLEADED THAT THE SAME ARE TO BE CONSIDERED ONLY AS BUSINESS INCOME AS THEY HAD AROSE IN THE COURSE OF TEA BUSINESS. 7 .2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE D ETAILS OF RS. 4,69,727/ - / - ARE AS BELOW: - M/S. EMPIRE & SINGLO TEA LTD. (SINCE MERGED WITH APEEJAY SURRENDRA CORPORATE SERVICES PVT.LTD.) A. SALE OF GUNNY BAG/DRUMS RS. 5,670.00 B. BAZAAR RENT RS .67,184.00 C , ROAD ROLLER HIRE CHARGES RS . 3,000.00 D. LAND ACQUISITION BY ONGC RS.3,28,969.00 E. LAND ACQUISITION BY MONTU NAG RS. 2,400.00 F. HIRE CHARGES OF MACHINERY TO APEEJAY TEA LTD. RS. 50,000.00 G. POST OFFICE RENT RS. 1,388.00 ITA NO. 1396/KOL/2010 EMPIRE & SINGLO TEA LTD. . A.YR. 2005 - 06 8 H. CAR INSURANCE CLAIM RS. 1,000.00 I. MISCELLANEOUS RECEIPT RS. 4,385.00 J. HIRE CHARGES OF VEHICLE FOR ELECTION DUTY RS. 5,730.00 7 .3. FROM THE AFORESAID LIST IT COULD BE SEEN THAT ITEMS A TO F WERE ONLY ARISING OUT OF BUSINESS INCOME AND ACCORDINGLY TO BE TREATED AS INCOME FROM BUSINESS. AS REGARDS ITEMS G TO J, THEY ARE TO BE TREATED AS INCOME FROM OTHER SOURCES. WE DIRECT THE ASSESSING OFFICER TO RE - COMPUTE ACCORD INGLY. ACCORDINGLY, GROUND NO.3 OF THE ASSESSEE IS PARTLY ALLOWED. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNC ED IN TH E COURT ON 2 9.09.2015. SD/ - SD/ - [MAHAVIR SINGH] [M.BALAG ANESH] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 29.09.2015. R.G.(.P.S.) COPY OF THE ORDER FORWA RDED TO : 1 . EMPIRE & SINGLO TEA LTD., (SINCE MERGED WITH APEEJAY SURRENDRA CORPORATE SERVICES PVT. LTD.), APEEJAY HOUSE, 15, PARK STREET, KOLKATA - 700016. 2 THE D.C.I.T., CENTRAL CIRCLE - III, KOLKATA. 3 . THE CIT - CENTRAL - I, KOLKATA , 4. THE CIT(A) - CENTRAL - I, KOLKATA. 5 . DR, KOLKATA BENCHES, KOLKATA TRUE COPY , BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES
Mehul