TITAN LABORATORIES P.LTD, MUMBAI V. ITO WD 10(2)(4), MUMBAI

ITA 156/MUM/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9387 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 06-01-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAM TIWARI
• Assessee Lawyers: JIMIT R SHAH
• Keywords: Depreciation; Revenue expenditure
• Section: 37(1); 145; 56; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 156 /MUM/2014 ASSESSMENT YEAR: 2009 - 10 M/S TITAN LABORATORIES PVT. LTD.102, TITAN HOUSE, M.P. VAIDYA MARG, GHATKOPAR (E) MUMBAI - 400077. VS. ITO - 10(2)(4) ROOM NO. 431, AAY KAR BHAVAN, M.K. ROAD MUMBAI - 400020. PAN NO. AACCT0509Q APPELLANT RESPONDENT ASSESSEE BY : SHRI JIMIT R . SHAH, AR REVENUE BY : SHRI RAM TIWARI , DR DATE OF HEARING : 11/07 /2017 DATE OF PRONOUNCEMENT : 27/09/2017 ORDER PER N.K. PRADHAN, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2009 - 10. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 2 2 , MUMBAI AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3 ) OF THE INCOME TAX ACT 1961, (T HE ACT). ITA NO. 156/MUM/2014 2 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: 1. THE CIT(A) ERRED IN CONFIRMING THE D ISALLOW AN CE OF F OREIGN E XCHANGE L OSS AMOUNTING TO RS.56,89,944/ - CLAIMED AS R EVENUE L OSS, WITHOUT APPRECIATING THE F ACTS AND C IRCUMSTANCES OF THE CASE. 2. THE CIT(A) AND THE AO OUGHT TO HAVE APPRECIATED THE FACT THAT THE A PPELLANT HAD BEEN FOLLOWING THE SAID SYSTEM OF D EBITING OR C REDITING THE L OSS OR G AIN ON YEAR AND CONVERSION OF F OREIGN E X CHANGE TO ITS P ROFIT & L OSS A CCOUNT AS PER M ERCANTILE S YSTEM OF A CCOUNTING, CONSISTENTLY SINCE 2005 - 06. 3. THE CIT(A) AND AO WERE NOT JUSTIFIED IN D ISREGARDING THE FACT THAT THE APPELLANT HAD TO BORROW AND REPAY THE SAID LOAN ONLY WITHIN ONE YEAR AS PER THE GUIDELINES LAID DOWN BY THE RESERVE BANK OF INDIA. 4. THE CIT(A) AND THE AO ALSO FAILED TO APPRECIATE THE FACT THAT THE SAID L OAN WAS BORROWED FOR ACQUIRING ASSETS INCLUDING WORKING CAPITAL REQUIREMENTS OF THE BUSINESS AND THAT ALL THE ASSETS THAT WERE PURCHASED, WERE PUT TO USE DURING THE YEAR ITSELF. 5. THE AO ERRED IN DET ERMINING THE FOREIGN EXCHANGE LOSS AT RS.12,44,476/ - AND ALSO ASSUMING AND PRESUMING THAT THE SAID LOSS WAS CONTINGENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE NATURE OF BUSINESS OF THE ASSESSEE - COMPANY WAS MANUFACTURING AND TRADING IN DRUGS AND PHARMACEUTICALS AND FORMULATIONS. IT HAD WRITTEN OFF THE LOSS ON FLUCTUATIONS IN FOREIGN CURRENCY TO THE PROFIT AND LOSS ACCOUNT. THE FOREIGN CURRENCY TERM LOAN (FCTL) WAS GRA NTED BY THE UNION BANK OF INDIA. THE ASSESSEE - COMPANY HAD ACQUIRED THE PLANT AND MACHINERY FROM LOCAL MARKET BY AVAILING THE ABOVE FCTL. THE MACHINERY WAS ACQUIRED BY THE COMPANY AND PUT TO USE IN THE YEAR 2007. THE SAID LOAN ITA NO. 156/MUM/2014 3 COULD NOT BE CARRIED FORWARD F OR MORE THAN ONE YEAR HENCE, AT THE END OF ONE YEAR, THE LOAN WAS SQUARED OFF AND THEN IT WAS ROLLED OVER IN THE SUBSEQUENT YEAR. DURING THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE HAD CLAIMED DEDUCTION OF RS. 56,89,944/ - ON ACCOUNT OF LOSS ON FCTL. THE ASSESSING OFFICER (AO) CAME TO A FINDING THAT THE SAID LOSS IS CONTINGENT IN NATURE. HE WAS ALSO OF THE VIEW THAT THE LOAN WAS NOT SETTLED DURING THE YEAR AND THE LOSS ON ACCOUNT OF FLUCTUATION CAN ONLY BE ALLOWED AT THE TIME OF RE PAYMENT. THE AO FURTHER DISCUSSED THE APPLICABILITY OF AS - 11 AND AS - 16 AND PROVISIONS OF SECTION 43A AND FINALLY HELD THAT THE LOSS CANNOT BE ALLOWED EITHER U/S 28 OR 37(1). 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). T HE LD. CIT(A) HAVING GONE THROUGH THE DECISION IN WOO D WORD GOVERNOR INDIA P. LT.D 312 ITR 254 (SC) , CIT VS. V.S. DEMPO & CO. PVT. LTD. 206 ITR 291 (BOM) AND SUTLEJ COTTON MILLS LTD. VS. CIT (1979) 116 ITR 1 (SC) HELD AS UNDER: WHAT EMERGES OUT OF THE ABOVE DECISION IN THAT THE ASSESSEE SHOULD BE HOLDING & DEALING THE FOREIGN CURRENCY ON ACCOUNT OF TRADING AND ONLY IN SUCH CASES DEPENDING UPON THE APPRECIATION OR DEPRECIATION, THE LOSS OR PROFIT CAN BE DETERMINED AND ALLOWED. IN THE CASE BEFORE ME THE APPELLANT IS NOT HOLDING THE U.S. DOLLAR AND NOT UTILIZING THE SAME IN BUSINESS ON REVENUE ACCOUNT OR ON TRADING ACCOUNT AND HENCE THE CLAIM OF THE APPELLANT THAT THE ABOVE LOSS AROSE WHILE CARRYING ON THE BUSINESS CANNOT BE ACCEPTED . ON APPLICATION ON THE TESTS LAID DOWN BY THE HONBLE SUPREME COURT ABOVE, I FIND THE APPELLANT HAD TAKEN FOREIGN CURRENCY TERM LOAN (FCTL) IN THE YEAR 2005 FOR ITA NO. 156/MUM/2014 4 ACQUISITION OF PLANT AND MACHINERY AND HENCE THE LOSS AROSE ON ACCOUNT OF FIXED CAPITAL AND IT IS NOT ON REVENUE ACCOUNT OR TRADING ACCOUNT. SINCE THE LOSS IS OF CAPITAL IN NATURE, THE CLAIM OF LOSS OF RS,56,89,944/ - ON ACCOUNT OF EXCHANGE FLUCTUATION CANNOT BE ACCEPTED. IN VIEW OF THE ABOVE DISCUSSION THE ACTION OF THE AO IS UPHELD AND THE GROUND RAISED IS DISMISSED. 5. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FILES (I) COPY OF FCTL STATEMENT ALONG WITH LEDGER ACCOUNTS, (II) COPY OF EXTRACT OF SECTION 211 OF COMPANIES ACT, 1956, (III) COPY OF EXTRACT OF AS - 11 , THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES, (IV) COPY OF EXTRACT OF AS - 16 , BORROWING COSTS, (V) COPY OF ORDER IN CHALLAPALLI SUGARS LTD . 98 ITR 167 (SC) , (VI) COPY OF ORDER IN TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD . 227 ITR 172 (SC) , (VII) COPY OF ORDER IN COOPER CORPORATION P VT. LTD . 159 ITD 165, (VIII) COPY OF ORDER IN MADDI LAKSHMAIAH & COMPANY LTD . 82 TAXMANN.COM 205, (IX) COPY OF EXTRACT SECTION 209 OF COMPANIES ACT 1956, (X) COPY OF EXTRACT SECTION 145 OF INCOME TAX ACT, 1961. 5.1 THE LD. COUNSEL FURTHER SUBMITS THAT A S - 16 IS APPLICABLE IN ACCOUNTING FOR BORROWING COSTS. BORROWING COSTS ATTRIBUTABLE TO MACHINERY CAN BE CAPITALIZED ONLY TILL THE QUALIFYING ASSET IS READY FOR ITS INTENDED USE AND THE SAME CEASES WHEN SUBSTANTIALLY ALL THE ACTIVITIES NECESSARY TO PREPARE T HE QUALIFYING ASSET FOR ITS INTENDED USE OR SALE ARE COMPLETE. IT IS SUBMITTED BY HIM THAT THE ASSESSEE - COMPANY HAS DEBITED ALL THE INTEREST AND RELATED EXCHANGE DIFFERENCE TO P&L ACCOUNT AT THE TIME OF PAYMENT ITSELF. FURTHER HE SUBMITS THAT AS THERE IS N O METHOD SUGGESTED IN THE INCOME TAX, ACT, 1961, THE ASSESSEE - COMPANY HAS FOLLOWED THE TREATMENT AS PRESCRIBED BY ACCOUNTING STANDARD (AS) WHICH ITA NO. 156/MUM/2014 5 STATES THAT THE EXPENSE CAN BE CLAIMED AS REVENUE EXPENDITURE BECAUSE THE BORROWING COSTS MAY INCLUDE EXCHANGE DIFFERENCE S ARISING FROM CURRENCY BORROWING TO THE EXTENT ADJUSTED TOWARDS INTEREST COSTS. SO, THE ASSESSEE DID NOT CAPITALIZE THE SAME BUT CONSIDERED THE SAME AS REVENUE EXPENSES. THE LD. COUNSEL ALSO REFERS TO AS - 11 WHICH DEALS WITH THE EFFECTS OF CHAN GES IN FOREIGN EXCHANGE RATES. HE SUBMITS THAT THE ACCOUNTING TREATMENT OF EXCHANGE DIFFERENCES CONTAINED IN AS - 11 IS REQUIRED TO BE FOLLOWED IRRESPECTIVE OF THE RELEVANT PROVISIONS OF SCHEDULE - VI TO THE COMPANIES ACT, 1956. THE LD. COUNSEL ALSO REFERS T O THE RECOGNITION OF EXCHANGE DIFFERENCES AS PER INCOME COMPUTATION AND DISCLOSURE STANDARD (ICDS) - 1 RELATING TO ACCOUNTING POLICIES WHICH IS EFFECTIVE FROM 01.04.2015 AND APPLICABLE TO THE AY 2016 - 17 AND SUBSEQUENT ASSESSMENT YEARS. 6. PER CONTRA THE LD. DR SUBMITS THAT THE ASSESSEE - COMPANY IN THE INSTANT CASE IS NOT HOLDING THE USD AND NOT UTILIZING THE SAME IN BUSINESS ON REVENUE ACCOUNT OR ON TRADING ACCOUNT AND HENCE THE CLAIM OF THE ASSESSEE THAT THE ABOVE LOSS AROSE WHILE CARRYING ON THE BUSINESS CAN NOT BE ACCEPTED. HE SUPPORTS THE ORDER PASSED BY THE LD. CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE REASONS OF OUR DECISIONS ARE GIVEN BELOW. WE BEGIN WITH THE DECISIONS RELIED ON BY THE LD. COUNSEL . I N THE CASE OF CHALLAPALLI SUGARS LTD . (SUPRA), IT HAS BEEN HELD THAT FOR THE ITA NO. 156/MUM/2014 6 PURPOSE OF DEDUCTION ON ACCOUNT OF DEPRECIATION AND DEVELOPMENT REBATE, INTEREST PAID BEFORE COMMENCEMENT OF PRODUCTION ON AMOUNT BORROWED FOR ACQUISITION AND INSTALLATION OF PLAN T AND MACHINERY CAN BE CONSIDERED TO BE PART OF ACTUAL COST OF ASSETS TO THE ASSESSEE. IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. (SUPRA), THE HONBLE SUPREME COURT HAS HELD THAT INTEREST EARNED ON SHORT - TERM INVESTMENT OF FUNDS BORRO WED FOR SETTING - UP OF FACTORY DURING CONSTRUCTION OF FACTORY BEFORE COMMENCEMENT OF BUSINESS HAS TO BE ASSESSED AS INCOME FROM OTHER SOURCES AND IT CANNOT BE SAID THAT INTEREST INCOME IS NOT TAXABLE ON THE GROUND THAT IT WOULD GO TO REDUCE INTEREST ON BORR OWED AMOUNT WHICH WOULD BE CAPITALIZED. IN THE CASE OF COOPER CORPORATION PVT. LTD. (SUPRA), IT HAS BEEN HELD THAT WHERE ASSESSEES ACT OF CONVERSION OF INDIAN CURRENCY LOAN AVAILED FOR ACQUISITION OF ASSETS, ETC., INTO FOREIGN CURRENCY LOAN WAS DICTATED BY REVENUE CONSIDERATIONS TOWARDS SAVING INTEREST COSTS, ETC., FOREIGN EXCHANGE FLUCTUATION LOSS BEING ON REVENUE ACCOUNT WAS AN ALLOWABLE EXPENDITURE UNDER SECTION 37(1). IN THE CASE OF MADDI LAKSHMAIAH & COMPANY LTD . (SUPRA) IT IS HELD THAT CONVERSION OF INDIAN CURRENCY LOANS INTO FOREIGN CURRENCY LOANS FOR PURPOSE OF REDUCING COST OF INTEREST COULD NOT BE CONSIDERED AS FOREIGN CURRENCY LOANS ACQUIRED FOR PURPOSE OF ACQUIRING AN ASSET FROM A COUNTRY OUTSIDE INDIA AND, HENCE, PROVISION OF SECTION 43A WO ULD NOT APPLY. ITA NO. 156/MUM/2014 7 WE MAKE IT CLEAR THAT THERE IS NO DISPUTE ABOUT THE RELEVANCE OF SECTION 209 OF THE COMPANIES ACT, 1956 WHICH DEALS WITH BOOKS OF ACCOUNT TO BE KEPT BY COMPANY OR SECTION 145 OF THE INCOME TAX ACT WHICH DEALS WITH METHOD OF ACCOUNTING. WE REMIND OURSELVES TO THE FOLLOWING OBSERVATION OF THE HON'BLE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. : IT IS TRUE THAT THIS COURT HAS VERY OFTEN REFERRED TO ACCOUNTING PRACTICE FOR ASCERTAINMENT OF PROFIT MADE BY A COMPANY OR VALUE OF THE ASSETS OF A COMPANY. BUT WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE PERMISSIBLE IN LAW OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN A CCORDANCE WITH ACCOUNTANCY PRACTICE. ACCOUNTING PRACTICE CANNOT OVERRIDE SECTION 56 OR ANY OTHER PROVISION OF THE ACT. AS WAS POINTED OUT BY LORD RUSSELL IN THE CASE OF B.S.C. FOOTWEAR LTD. V. RIDGWAY (INSPECTOR OF TAXES) [1970] 77 ITR 857 (CA), THE INCOME - TAX LAW DOES NOT MARCH STEP BY STEP IN THE FOOTPRINTS OF THE ACCOUNTANCY PROFESSION. AT THIS JUNCTURE LET US REFER TO THE RELEVANT DECISIONS. IN SUTLEJ COTTON MILLS LTD. (SUPRA), THE HONBLE SUPREME COURT HAS HELD THAT QUESTION WHETHER THE LOSS SUFFERED BY THE ASSESSEE WAS A TRADING LOSS OR A CAPITAL LOSS CANNOT BE ANSWERED UNLESS IT IS FIRST DETERMINED WHETHER THESE TWO AMOUNTS WERE HELD BY THE ASSESSEE AS PART OF THE FIXED CAPIT AL OR OF CIRCULATING CAPITAL. IT CONCLUDED THAT LOSS ON DEVALUATION OF CURRENCY IS A TRADING LOSS IF IT IS A LOSS ARISING TO ASSESSEE ON CONVERSION ITA NO. 156/MUM/2014 8 OF FOREIGN CURRENCY INTO ANOTHER CURRENCY HELD AS PART OF CIRCULATING CAPITAL. IN THE CASE OF V.S. DEMPO A ND CO. PVT. LTD . (SUPRA) , THE HONBLE BOMBAY HIGH COURT HAS HELD THAT AT THE TIME OF DEVALUATION THE AMOUNTS OF LOAN WAS UTILIZED BY THE ASSESSEE AS CIRCULATING CAPITAL AND LOSS OCCURRED DUE TO DEVALUATION OF THE INDIAN RUPEE WAS CLEARLY A REVENUE LOSS AND ALLOWABLE AS A DEDUCTION IN COMPUTATION OF THE INCOME OF THE ASSESSEE FOR THE ASSESSMENT YEAR CONCERNED. IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA) , IT HAS BEEN HELD THAT THE LOSS SUFFERED BY THE ASSESSEE IN RESPECT OF A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABLE U/S 37(1) IN THE YEAR OF ACCRUAL. SO WHAT IS THE DIFFERENCE BETWEEN FIXED CAPITAL AND WORKING CAPITAL. FIXED CAPITAL REFERS TO THE INVESTMENT OF THE ENTERPRISE IN LONG TERM ASSETS OF THE COMPANY. IT COMPRISES OF DURABL E GOODS WHOSE USEFUL LIFE IS MORE THAN ONE ACCOUNTING PERIOD. IT IS COMPARATIVELY ILLIQUID. ON THE OTHER HAND, WORKING CAPITAL MEANS THE CAPITAL INVESTED IN THE CURRENT ASSETS OF THE COMPANY. IT COMPRISES OF SHORT TERM ASSETS AND LIABILITIES. IT IS HIGHL Y LIQUID. THE MAIN DIFFERENCE BETWEEN WORKING CAPITAL AND OTHER TYPES OF CAPITAL IS THAT WORKING CAPITAL, BY DEFINITION, CIRCULATES THROUGH THE ITA NO. 156/MUM/2014 9 BUSINESS, UNAVAILABLE FOR OTHER USES. IT IS NOT MACHINERY, LAND AND BUILDINGS, WHICH ARE FIXED ASSETS. IN TH E INSTANT CASE, THE ASSESSEE HAS ACQUIRED THE PLANT AND MACHINERY FROM LOCAL MARKET BY AVAILING THE FCTL. THE EXCHANGE FLUCTUATION LOSS IS A TRADING LOSS IF IT IS A LOSS ARISING TO ASSESSEE ON CONVERSION OF FOR EIGN CURRENCY INTO ANOTHER CURRENCY HELD AS PART OF CIRCULATING CAPITAL. IN THE INSTANT CASE THE ASSESSEE HAD AVAILED FCTL FOR ACQUISITION OF PLANT AND MACHINERY AND HENCE THE LOSS AROSE ON ACCOUNT OF FIXED CAPITAL. THE LOSS IS NOT ON REV ENUE ACCOUNT OR TRADING ACCOUNT. AS THE LOSS AROSE ON ACCOUNT OF FIXED CAPITAL FOLLOWING THE RATIO LAID DOWN IN SUTLEJ COTTON MILLS LTD . ; V.S. DEMPO AND CO. PVT. LTD . ; WOODWARD GOVERNOR INDIA (P.) LTD , WE UPHOLD THE ORDER OF THE LD. CIT(A). 8. IN THE RESULT, THE APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 27/09/2017. SD/ - SD/ - ( MAHAVIR SINGH ) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 27/09/2017 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . ITA NO. 156/MUM/2014 10 BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI