DCIT, Kanpur V. M/s Standard Surfactants Ltd, Kanpur

ITA 186/LKW/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48372 (ITAT-LUCKNOW)
• Duration Of Justice: 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2002-2003
• Appeal Filed On: 15-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AKSHAY KUMAR GUPTA
• Keywords: Depreciation; Proportionate interest; Speculation loss; Bad and doubtful debts; Valuation report; Notional interest; Commercial expediency
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE HONBLE SHRI H.L. KARWA AND HONBLE SHRI N.K. SAINI ITA NO.186/LKW/2011 ASSESSMENT YEAR:2002-03 DY. CIT-4 KANPUR V. M/S STANDARD SURFACTANTS LTD. 8/15, ARYA NAGAR, KANPUR PAN:AABC9608N (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI. VIVEK GUPTA, D.R. RESPONDENT BY: SHRI. AKSHAY KUMAR GUPTA, CA O R D E R PER N.K. SAINI: THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE ORDER DATED 20.1.2011 OF THE CIT(A)-II, KANPUR. 2. VIDE GROUND NO.1, THE GRIEVANCE OF THE DEPARTMENT RELATES TO RELIEF OF ` 31,60,273OUT OF DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROPORTIONATE INTEREST ON ADVANCES GIVEN TO M/S STANDARD SULPHONATORS LTD. AND M/S UNIFLEX INDUSTRIES LTD. 3. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE FILED RETURN OF INCOME ON 31.10.2002 DECLARING LOSS OF ` 1,56,82,812. THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE RECEIVED AN INTEREST OF ` 117,82,929 FROM BANKS ON FDRS AND FROM VARIOUS PARTIES. HE ALSO NOTICED THAT THE ASSESSEE PAID INTEREST OF ` 1,84,04,244 AGAINST THE TERM LOAN FROM BANK AND TO CERTAIN OTHER PARTIES. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD NOT CHARGED INTEREST FROM M/S STANDARD SULPHONATORS LTD. AGAINST DEPOSIT AND FROM M/S UNIFLEX INDUSTRIES LTD. AGAINST LOANS AND DEPOSITS. HE ALSO NOTICED THAT THE ASSESSEE HAD CHARGED INTEREST FROM SISTER CONCERN, M/S INDUSTRIAL ENTERPRISES AND PAID INTEREST TO M/S KUTEER FINANCE AND M/S KASHI PRASAD ROOP KISHORE WHICH WERE ALSO SISTER :-2-: CONCERNS OF THE ASSESSEE GROUP. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY INTEREST PAID ON LOANS/DEPOSITS MAY NOT BE DISALLOWED PROPORTIONATELY ON THE ADVANCES GIVEN TO M/S STANDARD SULPHONATORS LTD. AND M/S UNIFLEX INDUSTRIES LTD. THE ASSESSEE SUBMITTED THAT THE SECURITY DEPOSIT OF ` 50 LAKHS WAS GIVEN TO M/S STANDARD SULPHONATORS LTD. FOR THE USE OF LAND PAPER WHICH WERE MORTGAGED TO THE STATE BANK OF INDIA. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE AND DISALLOWED THE INTEREST ON SECURITY DEPOSIT FOR LAND @14.50%ON ` 50 LAKHS. THE SAID DISALLOWANCE WAS WORKED OUT AT ` 7.25 LAKHS. THE ASSESSING OFFICER ALSO DISALLOWED INTEREST IN CASE OF M/S UNIFLEX INDUSTRIES LTD. AT ` 7,69,931 AND OF ` 16,65,342 IN CASE OF M/S STANDARD SULPHONATORS LTD. ACCORDINGLY DISALLOWANCE OF ` 31,60,273 WAS MADE. 4. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER:- 1. 'THE APPELLANT HAD BORROWED MONEY FOR BUSINESS PURPOSES FROM IDBI, STATE BANK OF INDIA, KUTEER FINANCE & INVESTMENTS LTD. AND KASHI PRASAD ROOP KISHORE. 2. TERM LOANS BORROWED FROM IDBI IN EARLIER YEARS WERE UTILIZED FOR PURCHASE OF FIXED ASSETS AND NO FRESH MONEY WAS BORROWED FROM IDBI IN THE YEAR UNDER CONSIDERATION OR IN THE IMMEDIATE TWO PRECEDING YEARS. 3. SBI HAS SANCTIONED CASH CREDIT FACILITIES OF RS.150 LACS FOR ACQUISITION OF STOCK AND OF RS.550 LACS FOR FINANCING THE BOOKS DEBTS OF THE COMPANY. THESE OVERDRAFT FACILITIES ARE OF CONTINUING NATURE AND THE DRAWING POWER KEEP FLUCTUATING ON THE BASIS OF STOCK AND BOOK DEBTS OF EACH MONTH. SANCTION NOTE OF SBI IS ATTACHED AT PAGE NO. 16-23 OF THE PAPER BOOK ALREADY SUBMITTED. THE MONEY BORROWED FROM SBI COULD NOT BE DIVERTED FOR MAKING ADVANCE AS DRAWING POWER FOR EACH MONTH IS FIXED BY THE BANK ON THE BASIS OF STOCK AND BOOK DEBTS STATEMENT SUBMITTED BY THE APPELLANT AFTER DEDUCTING THE STIPULATED MARGIN. SBI HAS CHARGED INTEREST @14.5% :-3-: P.A. ON CASH CREDIT LIMIT DURING THE YEAR. HOWEVER IN DEC. 2001, CASH CREDIT FACILITIES EQUIVALENT TO US$ 0.75 MILLION HAS BEEN CONVERTED INTO FCNRB DEMAND LOAN AT A RATE OF INTEREST OF LIBOR + 2.25% I.E. 4.60% P.A. THE AVERAGE RATE OF INTEREST FOR THE YEAR WORKS OUT AT 13.25%. 4. THE APPELLANT HAD ALSO BORROWED CAPITAL FROM SISTER CONCERNS VIZ. KUTEER FINANCE & INVESTMENT LTD. AND KASHI PRASAD ROOP KISHORE AT A INTEREST RATE OF 10% P. A. THE AVERAGE AMOUNT OF BORROWING DURING THE YEAR WAS RS.49.30 LACS AND THE AMOUNT OF INTEREST PAID TO THESE PARTIES WAS RS.4.93 LACS. 5. THE APPELLANT HAD PAID SECURITY DEPOSIT OF RS.50 LACS TO STANDARD SULPHONATORS PVT. LTD. ON 31 ST MARCH 1999 FOR USE OF LAND SITUATED AT 68 A DADA NAGAR KANPUR. THE APPELLANT HAS NOT PAID ANY RENT FOR THE SAME AND THE PROPERTY IS ALSO MORTGAGE TO THE SBI AS SECURITY FOR THE CASH CREDIT LIMITS. THE LEARNED ACIT HAS DISALLOWED THE PROPORTIONATE INTEREST ON THE GROUND THAT NO EVIDENCE HAS BEEN FILED TO PROVE THAT THE PROPERTY HAS BEEN MORTGAGE TO SBI. THE LEARNED ACIT FAILED TO APPRECIATE THAT THE APPELLANT HAD FILED SANCTIONED NOTE OF SBI WHICH CLEARLY MENTIONED THAT THE ABOVE MENTIONED PROPERTY IS CHARGED TO BANK AS COLLATERAL SECURITY. SINCE THE DEPOSIT HAS BEEN MADE FOR THE PURPOSE OF THE BUSINESS, THE PROPORTIONATE DISALLOWANCE OF RS.7,25,000/- IS NOT CALLED FAR. 6. THE APPELLANT HAD SUPPLIED DETERGENTS TO STANDARD SULPHONATORS PVT. LTD.(SSPL) AND PROCURED PACKAGING MATERIALS FROM UNIFLEX INDUSTRIES PVT. LTD. IN EARLIER YEARS. SSPL HAS SUFFERED HUGE LOOSES IN THE BUSINESS AND DEBIT BALANCE IS IN RESPECT OF GOODS SUPPLIED AS WELL AS MONEY ADVANCED. UNIFLEX HAS EXPANDED ITS CAPACITY ON OUR ASSURANCE OF ENHANCED SUPPLIES BUT DUE TO DISCONTINUANCE OF CONTRACT WITH P&G WITH US, WE COULD NOT PROCURE MATERIAL FROM THEM AND MONEY WAS ADVANCED TO HELP THEM OUT IN THE CRISES. HOWEVER, UNIFLEX :-4-: HAS REPAID THE AMOUNT DURING THE YEAR. COPY OF ACCOUNT OF BOTH THE PARTIES IS ATTACHED. THE AVERAGE BALANCE IN THE ACCOUNT OF UNIFLEX INDUSTRIES PVT. LTD. WAS RS.53.03 LACS AND IN THE ACCOUNT OF STANDARD SULPHONATORS PVT. LTD. WAS RS.114.82 LACS. THE MONEY WAS ADVANCED DUE TO COMMERCIAL EXPEDIENCY AS SURVIVAL OF BOTH THE COMPANY WILL RESULT IN OPTIMUM CAPACITY UTILIZATION OF THE APPELLANT'S BUSINESS. HENCE DISALLOWANCE OF INTEREST AMOUNTING TO RS.7,69,931/- ON THE DEBIT BALANCE IN THE ACCOUNT OF UNIFLEX INDUSTRIES PVT. LTD. AND OF RS.16,65,342/- ON 'THE DEBIT BALANCE IN THE ACCOUNT OF STANDARD SULHONATORS PVT. LTD IS NOT CALLED FOR. 7. WITHOUT PREJUDICE TO THE AFORESAID, THE APPELLANT SUBMIT THAT IT HAD NOT DIVERTED ANY MONEY BORROWED FOR MAKING THE ABOVE MENTIONED ADVANCE. THE APPELLANT HAD SUFFICIENT NON INTEREST BEARING FUNDS IN FORM OF SHARE CAPITAL, DEPRECIATION RESERVES AND ACCUMULATED PROFITS AGGREGATING TO RS.1980.38 LACS AT THE BEGINNING OF THE YEAR AS AGAINST THE AVERAGE OUTSTANDING OF RS.220 LACS IN FORM OF INTEREST FREE ADVANCE OR DEPOSITS IN THE NAME OF THE ABOVE MENTIONED PARTIES. THE APPELLANT ONCE AGAIN SUBMIT THAT THE MONEY BORROWED FROM THE SBI, IDBI AND OTHERS WERE NOT DIVERTED BECAUSE MONEY BORROWED FROM IDBI HAS ALREADY BEEN INVESTED IN THE ASSETS IN EARLIER YEARS AND SBI IS FINANCING ONLY STOCK AND BOOK DEBTS OF THE COMPANY, HENCE IT CAN NOT BE PRESUMED THAT THE INTEREST BEARING MONEY BORROWED HAD BEEN DIVERTED FOR NON INTEREST BEARING ADVANCE. IN CIT V RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BOM) IT HAS BEEN HELD THAT IF THERE BE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE RAISES A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAILABLE, THE PRINCIPLE THEREFORE WOULD THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTEREST FREE AND OVERDRAFT AND /OR LOANS TAKEN THEN A PRESUMPTION WOULD ARISE :-5-: THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 8. WITHOUT PREJUDICE TO THE AFORESAID, THE LEARNED ACIT HAD CALCULATED THE DISALLOWANCE ON THE MAXIMUM RATE OF INTEREST OF BANK BORROWING OF 14.5%, WHEREAS THE AVERAGE RATE OF INTEREST AFTER CONSIDERING THE FCNR(DL) IS 13.25%. FURTHER THE APPELLANT HAD BORROWED CAPITAL OF RS.49.30 LACS FROM SISTER CONCERNS AT 10% P. A. RATE OF INTEREST. THEREFORE, DISALLOWANCE, IF ANY, SHOULD BE CALCULATED @ 10% ON RS.49.30 LACS AND ON BALANCE @13.25% AND NOT @14.5% P.A. HAD THE DISALLOWANCE BEEN CALCULATED AT THE AFORESAID RATES, THE TOTAL DISALLOWANCE IN THE CASE OF UNIFLEX INDUSTRIES AND STANDARD SULPHONATORS WOULD HAVE BEEN RS.20,63 787/- INSTEAD OF RS.24,35,273/- AND DISALLOWANCE IN CASE OF SECURITY DEPOSIT WOULD HAVE BEEN RS.6,62,500/- INSTEAD OF RS.7,25,000/-.' THE ASSESSEE ALSO FURNISHED STATEMENT OF ACCOUNTS OF THE PARTIES IN QUESTION AND THE SANCTION NOTE OF STATE BANK OF INDIA IN SUPPORT OF ITS CONTENTION THAT THE LAND OF M/S STANDARD SULPHONATORS LTD. WAS PROVIDED AS SECURITY AND THE LOANS WERE AGAINST STOCKS AND BOOK DEBITS OF THE ASSESSEE. 5. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE SECURITY DEPOSIT OF ` 50 LAKHS WITH M/S STANDARD SULPHONATORS LTD. WAS FOR THEIR LAND MORTGAGED WITH BANK TO SECURE THE LOANS TO THE ASSESSEE AND THAT THE DEBIT BALANCE OF M/S UNIFLEX INDUSTRIES LTD. WAS IN RESPECT OF ADVANCES FOR PURCHASE OF PACKING MATERIAL, ETC. IN THE EARLIER YEARS WHICH HAD BEEN RECEIVED BACK DURING THIS YEAR. HE FURTHER OBSERVED THAT THE OTHER DEBITS IN THE ACCOUNT OF M/S STANDARD SULPHONATORS LTD. WERE RELATED TO THE SALE OF DETERGENTS AND OCCASIONAL ADVANCES IN THE COURSE OF BUSINESS WITH THEM. THE LD. CIT(A) WAS OF THE VIEW THAT THE INTEREST FREE DEBITS WERE IN THE COURSE OF BUSINESS ACTIVITY OF THE ASSESSEE AND IT WAS NOT OPEN FOR THE ASSESSING OFFICER TO OVERRIDE BUSINESS PRUDENCE OF THE ASSESSEE IN MAKING SUCH BUSINESS TRANSACTIONS. HE FURTHER :-6-: OBSERVED THAT THE ASSESSEE HAD EXPLAINED THAT THE BORROWED FUNDS WERE UTILIZED AND APPLIED IN THE BUSINESS ASSETS OF THE COMPANY AND THERE WAS NO MATERIAL ON RECORD TO JUSTIFY THE DIVERSION OF INTEREST BEARING FUNDS TO MAKE ADVANCES TO SISTER CONCERNS. ACCORDING TO HIM, THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS WHICH WERE FAR IN EXCESS OF THE DEBIT BALANCES OF THE TWO CONCERNS AND THERE WAS NO NEXUS OF INTEREST BEARING FUNDS TO INTEREST FREE ADVANCES. ACCORDINGLY THE ADDITION MADE BY THE ASSESSING OFFICER WAS DELETED. 6. NOW THE DEPARTMENT IS IN APPEAL. 7. THE LD. D.R STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. HE FURTHER SUBMITTED THAT M/S STANDARD SULPHONATORS LTD. PROVIDED LAND TO THE BANK AS COLLATERAL SECURITY AGAINST WHICH THE ASSESSEE RAISED LOANS FROM THE BANK AND IN LIEU OF THAT THE ASSESSEE PROVIDED SECURITY DEPOSIT TO THE SAID COMPANY I.E. M/S STANDARD SULPHONATORS LTD. SO, IT CANNOT BE SAID THAT THE ASSESSEE PROVIDED INTEREST FREE LOAN/ADVANCE TO M/S STANDARD SULPHONATORS LTD. IT WAS FURTHER STATED THAT THE ASSESSEE MADE ADVANCE AGAINST PURCHASES TO M/S UNIFLEX INDUSTRIES LTD. AND LATER ON PURCHASED GOODS FROM THE SAID COMPANY AND THE BALANCE OF THE AMOUNT ADVANCED WHICH REMAINED UNADJUSTED RECEIVED BACK, THEREFORE, THE TRANSACTION WAS RELATED TO THE BUSINESS ACTIVITIES AND CANNOT BE TERMED AS INTEREST FREE LOAN. AS REGARDS TO THE BALANCE OUTSTANDING IN THE NAME OF M/S STANDARD SULPHONATORS LTD., IT WAS SUBMITTED THAT THE ASSESSEE SOLD GOODS TO THE SAID COMPANY, SO THE AMOUNT OUTSTANDING REPRESENTED TRADE DEBT. AS SUCH, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING IT AS INTEREST FREE ADVANCE. HE ACCORDINGLY SUBMITTED THAT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE, IT APPEARS THAT THE ASSESSING OFFICER CONSIDERED THE DEBIT BALANCE OUTSTANDING IN THE NAME OF M/S STANDARD SULPHONATORS LTD. AND M/S UNIFLEX INDUSTRIES LTD. AS INTEREST FREE ADVANCE AND MADE THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST BY PRESUMING THAT :-7-: THE INTEREST SHOULD HAVE BEEN CHARGED BY THE ASSESSEE ON THE AMOUNT OUTSTANDING IN THE ACCOUNTS OF THE AFORESAID COMPANIES BECAUSE THE ASSESSEE WAS CHARGING AND ALSO PAYING INTEREST TO OTHER CONCERNS TO WHOM LOANS WERE GIVEN OR DEPOSITS WERE RECEIVED AS THE CASE MAY BE. IN THE PRESENT CASE, IT IS NOTICED THAT THE ASSESSEE UTILIZED LAND BELONGING TO M/S STANDARD SULPHONATORS LTD. AS A SECURITY AGAINST LOAN RAISED FROM THE BANK, THIS FACT IS ALSO CLEAR FROM PAGE 17 OF THE ASSESSEES COMPILATION, WHICH IS A COPY OF CERTIFICATE ISSUED BY THE STATE BANK OF INDIA, CIVIL LINES, KANPUR WHEREIN IT IS CERTIFIED THAT THE PROPERTY OWNED BY M/S STANDARD SULPHONATORS LTD. WAS PLEDGED WITH THE BANK AS SECURITY AGAINST LOAN PROVIDED TO THE ASSESSEE. THE VALUE OF THE SAID PROPERTY AS PER VALUATION REPORT DATED 20.9.2007 WAS ` 2.25 CRORES. SINCE THE COMPANY, M/S STANDARD SULPHONATORS LTD. HAD PROVIDED ITS LAND AS SECURITY TO THE BANK AGAINST LOAN TAKEN BY THE ASSESSEE AND IN LIEU OF THAT THE ASSESSEE DEPOSITED A SUM OF ` 50 LAKHS WITH THE SAID COMPANY I.E. M/S STANDARD SULPHONATORS LTD., SO IT CANNOT BE SAID THAT THE SAID AMOUNT OF ` 50 LAKHS WAS AN INTEREST FREE ADVANCE OR LOAN. THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE ON ACCOUNT OF NOTIONAL INTEREST ON THE SAID DEPOSIT. IT IS ALSO NOTICED THAT THE ASSESSEE WAS DEALING WITH M/S UNIFLEX INDUSTRIES LTD. AND PURCHASING GOODS FROM THE SAID COMPANY. THE ASSESSEE HAD GIVEN ADVANCES AGAINST PURCHASES. THE COPY OF ACCOUNTS OF THE SAID COMPANY IS AVAILABLE AT PAGE 16 OF THE ASSESSEES COMPILATION WHICH REVEALS THAT AS ON 1.4.2001 THE OPENING BALANCE WAS AT ` 55,69,854 AND CLOSING BALANCE WAS AT ` 2,14,742 AS ON 31.3.2002. THE ASSESSEE WAS PURCHASING ADHESIVE TAPE ETC. FROM THE SAID COMPANY. SINCE THE AMOUNT WAS GIVEN ON ACCOUNT OF BUSINESS TRANSACTION, SO THE ADDITION MADE BY THE ASSESSING OFFICER WAS NOT JUSTIFIED PARTICULARLY WHEN THIS CONTENTION OF THE ASSESSEE THAT ADVANCE WAS GIVEN TO PURCHASE THE MATERIAL WAS NOT REBUTTED. SIMILARLY, IN THE CASE OF M/S STANDARD SULPHONATORS LTD., THE ASSESSEE WAS SELLING GOODS TO THE SAID COMPANY AND THE CLOSING BALANCE IN THE NAME OF THAT COMPANY AS ON 31.3.2002 WAS AT ` 30,22,594.33 AS AGAINST OPENING BALANCE AS ON 1.4.2001 AT 1,48,033.33. THE COPY OF ACCOUNT OF THE SAID COMPANY IS PLACED AT PAGES 12 TO 15 OF THE ASSESSEES COMPILATION WHICH REVEALS THAT THE ASSESSEE WAS SELLING :-8-: GOODS TO THE SAID COMPANY. AS THE TRANSACTION WITH M/S STANDARD SULPHONATORS LTD. WAS A BUSINESS TRANSACTION AND THE DEBIT BALANCE IN THE NAME OF M/S STANDARD SULPHONATORS LTD. REPRESENTED OUTSTANDING OF BUSINESS TRANSACTION. MOREOVER, IN THE INSTANT CASE, THE ASSESSING OFFICER HAS NOT ESTABLISHED THAT INTEREST BEARING LOAN WERE DIVERTED BY THE ASSESSEE AS INTEREST FREE ADVANCES TO THE PARTIES IN QUESTION. THEREFORE, THE LD. CIT(A) RIGHTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. GROUND NO. 1 OF THE APPEAL IS DISMISSED. 9. VIDE GROUND NO. 2, THE GRIEVANCE OF THE DEPARTMENT RELATES TO THE DELETION OF ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF BAD AND DOUBTFUL DEBITS AND BALANCE WRITTEN OFF. 10. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE DEBITED A SUM OF ` 43,68,324 UNDER THE HEAD BAD AND DOUBTFUL DEBTS IN THE PROFIT AND LOSS ACCOUNT, OUT OF WHICH ` 18.50 LAKHS HAVE BEEN DISALLOWED BY THE ASSESSEE HIMSELF IN COMPUTATION OF INCOME AND THE REMAINING AMOUNT OF ` 25,18,324 HAD BEEN CLAIMED BY THE ASSESSEE AS BAD DEBTS. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE FILED DETAILS AND COPY OF ACCOUNTS OF FEW PARTIES, BUT THE NATURE OF TRANSACTION IN FEW OF THE CASES COULD NOT BE VERIFIED IN THE ABSENCE OF DETAILS. THE ASSESSING OFFICER POINTED OUT THAT IN THE FOLLOWING CASES THE TRANSACTION COULD NOT BE VERIFIED:- S. NO. NAME OF THE PARTY AMOUNT IN RS. S. NO. NAME OF THE PARTY AMOUNT IN RS. 1. JAI MATA DI AGENCY RS.6,212/- 2. GAURAV AGENCIES RS.5,287/- 3. BANSAL RS.5,569/- 4. BIBBBNL RS.3,378/- 5. JAI BAJRANG RS.5,173/- 6. AMBEY TRADING RS.8,138/- 7. DEVENDRA RS.5,372/- 8. AJAI KUMAR RS.4,069/- :-9-: 9. SHIV AGENCY RS. 5,591/- 10. SRI HARIT RS.8559/- 11. SHAMBHU NATH RS.25,266/- 12. SWARNIMA RS.6,200/- 12. PROVISION FOR EXPENSES RS.85,000/- 13. BABA MAHA RS.9,686/- 14. AFZARUL RS.2,160/- 15. BHAGWAN RS.9,943/- 16. TAKE CH RS.7,418/- 17. MOHIT TRADING RS.8,675/- 18. MADHU GENERAL RS.9,459/- TOTAL RS.1,57,220/- TOTAL RS.63,935/- 11. THE ASSESSING OFFICER MADE THE DISALLOWANCE OF ` 5,81,875 BY OBSERVING AS UNDER:- 5.1. THE NATURE OF TRANSACTION IN THE ABOVE CASES COULD NOT BE VERIFIED IN ABSENCE OF DETAIL. BAD DEBTS CAN ONLY BE ALLOWED IN THE CASES WHICH ARE RELATED TO THE TRADING/MANUFACTURING ACCOUNT/ P&L A/C. THE NATURE OF ACCOUNT HAS NOT BEEN EXPLAINED BY ASSESSEE. FURTHER, IN THE CASE OF GUJARAT HEAVY CHEMICALS LTD. A SUM OF RS.3,60,720/- HAS BEEN WRITTEN OFF. THE ASSESSEE HAS FILED COPY OF ACCOUNT IN THIS CASE. IT HAS BEEN NOTICED FROM COPY OF ACCOUNT OF M/S GUJARAT HEAVY CHEMICALS LTD. THAT ASSESSEE HAS GIVEN CHEQUE NO. 448779 DATED 22.06.2001 FOR PURCHASE OF SODA ASH. ASSESSEE FURTHER MADE ADVANCE OF RS.5,01,000/- VIDE CHEQUE NO. 462126 DATED 29.06.2001. THEREAFTER, ASSESSEE HAS WRITTEN OFF RS.3,60,720/- ON 30.09.2001 AND NARRATED AS 'BEING AMOUNT PAID FOR OLD ACCOUNT SETTLEMENT NOW ADJUSTED FROM BACK DATE.' ASSESSEE HAS MADE PURCHASES OF RS.4,92,210/- ON 31.12.2001, AND WRITTEN OFF RS.3,60,720/- ON 30.09.2001 BEFORE MAKING PURCHASES FROM THE PARTY. IN THIS ACCOUNT CLOSING BALANCE AS ON 31.03.2002 IS AT RS.8,790/-. IN THIS CONNECTION ASSESSEE HAS NOT FILED ANY DETAILS :-10-: REGARDING SETTLEMENT AND ALSO NOT FILED DETAILS OF SETTLEMENT IN RESPECT OF OLD ACCOUNT. THEREFORE, CLAIM OF RS.3,60,720/- AS BACK DATE IS NOT ADMISSIBLE. DISALLOWANCE OF (RS.1,57,220/- + RS.63,935/- + RS.3,60,720/-) TOTAL DISALLOWANCE OF RS.5,81,875/- 12. THE ASSESSING OFFICER ALSO ADDED A SUM OF ` 10,73,604 WHICH WERE WRITTEN OFF AND DEBITED IN THE PROFIT AND LOSS ACCOUNT BY OBSERVING AS UNDER:- 6.1 BALANCE WRITTEN OFF:- ASSESSEE HAS FILED A LIST OF CASES IN WHICH BALANCES HAVE BEEN WRITTEN OFF AND DEBITED IN P & L A/C TOTAL AT RS.24,98,616/-. COPIES OF ACCOUNT IN MOST OF THE CASES HAVE BEEN FILED EXCEPT IN THE CASES OF SENIOR BOX FACTORY FOR RS.23,203/-, KAUSHAL COMMERCIAL ARTIST FOR RS.1,100/-, VIJAY TRANSPORT AGENCY FOR RS.1,950/-. KAMLA TRADERS FOR RS.22,612/-, A. Z. ZAFARIFORRS.33,733/-. 6.2. IN THE CASE OF IPCL ASSESSEE VIDE HIS REPLY DATED 22.02.2005 HAS SUBMITTED THAT A SPECIAL DISCOUNT OF RS.350 PER MT ON PURCHASES OF LAB WAS CLAIMED IN F.Y. 2000-01 AND REDUCED THE COST OF PURCHASES. M/S IPCL DID NOT ALLOW THE DISCOUNT CLAIMED BY THE ASSESSEE. THEREFORE, THE SAME HAS BEEN WRITTEN OFF DURING THE PREVIOUS YEAR. SIMILARLY IN THE CASE OF M/S VISHWA ARGANICS (P.) LTD. RATE DIFFERENCE WAS CLAIMED BY THE ASSESSEE IN F. Y. 1999-00. LATER ON, ON SETTLEMENT OF ACCOUNT A SUM OF RS.1,84,708/- HAS BEEN WRITTEN OFF BY THE ASSESSEE. HOWEVER, AS REGARDS RS.3,23,521/- RELATED TO M/S TRIVEDI OIL TANKERS (OLD), ASSESSEE HAS WRITTEN OFF AND MENTIONED AS 'BEING DEBIT BALANCE OF PARTY AS ON 31.03.2002 WRITTEN OFF AS NO LONGER RECEIVABLE IN EARLIER YEAR THE PARTY ACCOUNT WAS DEBITED BY RS.3,00,000/- (NET) TOWARDS OVER CLAIM OF SHORTAGE :-11-: IN TRANSIT WHICH PARTY DID NOT ACCEPT AND ULTIMATELY THE AMOUNT WAS PAID TO THE PARTY'. 6.3. IN THIS CONNECTION ASSESSEE HAS FILED REPLY DATED 22.02.2005 THAT THEY HAVE DEDUCTED FROM THE FREIGHT BILLS OF THE TRANSPORTS AND DEBITED PARTY ACCOUNT IN RESPECT OF SHORTAGE. NOW THE SAME HAS BEEN WRITTEN OFF. IN THIS CONNECTION ASSESSEE WAS SPECIFICALLY REQUIRED TO FILE CONFIRM COPY OF ACCOUNT OF M/S TRIVEDI OIL TANKERS SO THAT THE TRANSACTIONS AS MENTIONED IN REPLY MAY BE VERIFIED. ASSESSEE COULD NOT FILE THE DESIRED INFORMATION; THEREFORE, THE CLAIM OF ASSESSEE IS NOT ADMISSIBLE. CONSEQUENTLY, A SUM OF RS.3,23,521/- WRITTEN OFF IN THE ACCOUNT OF M/S TRIVEDI OIL TANKERS IS NOT ALLOWABLE. FURTHER, SINCE THE ASSESSEE HAS NOT FILED CONFIRMED COPY OF ACCOUNT; THEREFORE, THE CREDIT BALANCE STANDING AS ON 31.03.2002 AT RS.4,88,308/- IS NOT VERIFIABLE. THEREFORE, IT IS ADDED U/S 41 BEING INFRACTUOUS LIABILITY. 6.4. IN THE CASES OF SENIOR BOX FACTORY FOR RS.23,203/-, KAUSHAL COMMERCIAL ARTIST FOR RS.1,100/-, VIJAY TRANSPORT AGENCY FOR RS.1,950/-, KARHLA TRADERS FOR RS.22,612/-, A. Z. ZAFARI FOR RS.33,733/- ASSESSEE COULD NOT FILE DETAILS WITH JUSTIFICATION OF CLAIM; THEREFORE, THESE AMOUNTS ARE DISALLOWED. 6.5. THE ASSESSEE HAS WRITTEN OFF BALANCE OF RS.1,52,177/-, RS.10,000/- AND RS.17,000/-STANDING IN THE NAMES OF SRI R. K. AGARWAL, SRI VIJAY DIXIT AND SRI SHANKER LAL AGARWAL RESPECTIVELY. THE ASSESSEE COULD NOT EXPLAIN THE REASONS FOR WRITING OFF THE BALANCES WITH DOCUMENTARY EVIDENCES, HENCE, THE SAME IS DISALLOWED. DISALLOWANCE OF (RS.3,23,521/- + RS.4,88,308/- + RS.23,302/- + RS.1,100/- + RS.1,950/- + RS.22,612/- + RS.33,733/- + RS.1,52,177/- + RS.10,000/- + RS.1,70,007/- = RS.10,73,604/-) TOTAL DISALLOWANCE OF RS.10,73,604/- :-12-: 13. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND THE SUBMISSIONS MADE BEFORE HIM ARE REPRODUCED VERBATIM AS UNDER:- '1. THE APPELLANT HAD WRITTEN OFF CERTAIN ACCOUNTS AS BAD DEBTS DURING THE YEAR. THE APPELLANT HAD FILED COMPLETE DETAILS OF THE ACCOUNTS WRITTEN OFF AND ALSO FILED COPY OF ACCOUNTS OF MAJOR ACCOUNTS. THE APPELLANT HAD PRODUCED COMPLETE BOOKS OF ACCOUNTS FOR VERIFICATION OF THE AMOUNT WRITTEN OFF. THE LEARNED ACIT HAD DISALLOWED RS.2,27,755/- ON THE GROUND THAT THE COPIES OF ACCOUNT WERE NOT FILED. THE DISALLOWANCE OF BAD DEBTS WRITTEN OFF AMOUNTING TO RS.2,27,755/- IS TOTALLY UNJUSTIFIED WHEN ALL THE BOOKS WERE VERIFIED BY THE LEARNED ACIT. 2. DURING THE YEAR THE APPELLANT HAD SETTLED OLD DISPUTE WITH GUJRAT HEAVY CHEMICALS LTD. AND PAID THE SETTLED AMOUNT. GUJRAT HEAVY CHEMICALS LTD. WAS THE SUPPLIER OF RAW MATERIALS. SINCE THE AMOUNT WAS SETTLED AND PAID DURING THE YEAR, THE APPELLANT HAD CLAIMED THE SAME AS EXPENDITURE UNDER THE HEAD BAD DEBTS/ BALANCE WRITTEN OFF. THE LEARNED ACIT HAD DISALLOWED THE SAME ON THE GROUND THAT DETAILS OF SETTLEMENT WERE NOT FILED THOUGH HE HAD VERIFIED FROM THE BOOKS OF ACCOUNTS THAT THE AMOUNT WAS PAID TO SETTLE THE OLD DISPUTE. THE LEARNED ACIT FAILED TO NOTE THAT A CONTRACTUAL LIABILITY CRYSTALLIZES ONLY WHEN THE ASSESSEE AGREES TO PAY. RELIANCE IS PLACED ON CIT V. ORIENTAL MOTORS CAR CO. PVT. LTD. (1980) 124 ITR 74 (ALL), CIT V. PHALTON SUGAR WORKS LTD. (1986) 162 ITR 622 (BOM.). THE DISALLOWANCE OF RS.3,60,720/- IS TOTALLY UNJUSTIFIED AND LIABLE TO BE DELETED. 3. THE APPELLANT HAD WRITTEN OFF RS.3,23,527/- DEBIT BALANCE IN THE ACCOUNT OF TRIVEDI OIL TANKER DURING THE YEAR. THE APPELLANT HAD FILED THE COPY OF PARTY ACCOUNT FOR THE CURRENT AS WELL AS FOR THE :-13-: EARLIER YEARS. THE DEBIT BALANCE OF THE PARTY ACCOUNT HAD ARISEN DUE TO THE DEBIT TO THE PARTY ACCOUNT OF RS.3,00,000/- ON ACCOUNT OF OUR CLAIM FOR SHORTAGE IN TRANSIT AND OTHER DEDUCTIONS MADE FROM THE FREIGHT BILLS. SINCE, THE PARTY HAD NOT ACCEPTED OUR CLAIM, WHICH HAD BEEN TAKEN AS INCOME IN THE IMMEDIATELY PRECEDING YEAR, THE AMOUNT WAS PAID AND CLAIMED AS BALANCE WRITTEN OFF DURING THE YEAR. THE LEARNED ACIT HAD VERIFIED ALL THE FACTS BUT DISALLOWED THE BALANCE WRITTEN OFF ON THE GROUND THAT THE CONFIRMED COPY OF ACCOUNT OF THE PARTY HAD NOT BEEN SUBMITTED. THE LEARNED ACIT FAILED TO NOTE THAT THE LIABILITY HAD CRYSTALLIZED DURING THE YEAR AFTER SETTLEMENT OF DISPUTE AND HENCE SHOULD BE ALLOWED AS DEDUCTION. THE DISALLOWANCE OF RS.3,23,521/- IS TOTALLY UNJUSTIFIED AND LIABLE TO BE DELETED. 4. THE APPELLANT HAD WRITTEN OFF VARIOUS OTHER DEBIT BALANCES AS BAD DEBTS DURING THE YEAR AMOUNTING TO RS.2,61, 775/- WHICH WERE DISALLOWED BY THE LEARNED ACIT. THE APPELLANT SUBMITTED BEFORE THE LEARNED ACIT THAT ALL THESE ACCOUNTS HAVE BEEN ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNT AND ARE AN ALLOWABLE EXPENDITURE U/S 36(1) (VII) AND/OR SECTION 28 OF THE ACT. AS PER AMENDED PROVISIONS OF SECTION 36(1) (VII) THE AMOUNT WRITTEN OFF SHOULD BE ALLOWED AS DEDUCTION BUT THE LEARNED ACIT DISALLOWED THE SAME ON THE GROUND THAT THE APPELLANT COULD NOT JUSTIFIED THE REASONS OF WRITING IT OFF. THE LEARNED ACIT FAILED TO APPRECIATE THAT UNDER AMENDED PROVISION OF SECTION 36(1) (VII), THE ASSESSEE IS NO LONGER REQUIRED TO ESTABLISH THAT DEBT IS BAD; HE HAS ONLY TO PROVE THAT HE HAS WRITTEN OFF DEBT IN HIS BOOKS OF ACCOUNT AS BAD DEBTS; ONCE HE WRITES OFF DEBTS AS BEING IRRECOVERABLE, HIS CLAIM FOR DEDUCTION CANNOT BE REJECTED ON GROUND THAT DEBTS HAS NOT BEEN ESTABLISHED TO HAVE BECOME IRRECOVERABLE DEBT. RELIANCE IS PLACED ON (2009) 314 ITR 297 (PAT), (2009) 222 CTR (HP) 96, (2009) 313 ITR 128 (BOM). :-14-: 5. THE LEARNED ACIT HAD VERIFIED THAT IN ALL THE CASES OF BALANCE WRITTEN OFF THE AMOUNT HAD BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AND CREDITED TO THE PARTY ACCOUNT. HENCE ALL THE BALANCE WRITTEN OFF SHOULD BE ALLOWED AS A DEDUCTION. 14. IT WAS FURTHER SUBMITTED AS UNDER:- THE LEARNED ACIT HAD ALSO ADDED RS.4,88,308/-, CREDIT BALANCE OUTSTANDING IN THE ACCOUNT OF TRIVENI OIL TANKER U/S 41 BEING INFRACTUOUS LIABILITY BECAUSE CONFIRMED COPY OF ACCOUNT WAS NOT FILED. THE LEARNED ACIT FAILED TO UNDERSTAND THAT UNLESS THE APPELLANT HAD OBTAINED BENEFIT IN RESPECT OF ANY LIABILITY BY WAY OF REMISSION OR CESSATION, THE SAME COULD NOT BE TREATED AS INCOME U/S 41 OF THE INCOME TAX ACT. THE AFORESAID AMOUNT WAS NEITHER WRITTEN BACK BY THE APPELLANT NOR ANY BENEFITS BY WAY OF REMISSION OR CESSION WERE OBTAINED BY THE APPELLANT. IN FACT THE CREDIT BALANCE WAS PAID IN THE SUBSEQUENT PERIOD. IN THESE CIRCUMSTANCES, THE ADDITIONS OF RS.4,88,308/- U/S 41 OF THE ACT IS TOTALLY UNJUSTIFIED AND LIABLE TO BE DELETED'. 15. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE WRITE OFFS WERE IN RESPECT OF CUSTOMERS BALANCES, SETTLEMENT OF CLAIMS AND DISPUTED RECOVERIES OF ADVANCES FOR SUPPLIES AND SERVICES FOR THE PURPOSES OF BUSINESS AND IN THE ORDINARY COURSE OF BUSINESS. IT WAS ALSO OBSERVED THAT THE AMOUNTS HAVE BEEN ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNT AND DEBITED TO THE PROFIT AND LOSS ACCOUNT. SUCH WRITE OFFS WERE COVERED UNDER THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT READ WITH SECTION 28 OF THE ACT. THEREFORE, SUCH WRITE OFFS WERE DEFINITELY ALLOWABLE AS BAD DEBTS. HE FURTHER OBSERVED THAT THE LIABILITY OF ` 4,88,038 WAS INCURRED AND ACCOUNTED FOR IN THE EARLIER YEARS AND WAS LYING CREDITED IN THE BOOKS OF THE ASSESSEE. THE SAME WERE NOT WRITTEN OFF. AS SUCH, THERE WAS NO QUESTION OF CESSATION OR REMISSION OF THE LIABILITY. THE SAME COULD :-15-: NOT BE ADDED UNDER SECTION 41 OF THE ACT. ACCORDINGLY, THE IMPUGNED ADDITIONS MADE BY THE ASSESSING OFFICER WERE DELETED. 16. NOW THE DEPARTMENT IS IN APPEAL. 17. THE LD. D.R STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND REITERATED THE OBSERVATIONS MADE IN THE ASSESSMENT ORDER DATED 25.2.2005. 18. IN HIS RIVAL SUBMISSIONS, THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT(A) AND SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A). 19. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD WRITTEN OFF THE BAD DEBTS AND THE BALANCES OUTSTANDING WHICH WERE NOT RECOVERABLE. THE ASSESSING OFFICER ALSO ACCEPTED THIS FACT THAT THOSE AMOUNTS WERE WRITTEN OFF IN THE BOOKS OF ACCOUNT. THE HON'BLE SUPREME COURT IN THE CASE OF T.R.F. LTD. V. CIT [2010] 323 ITR 397 (SC) HAS HELD AS UNDER:- AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961 WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE: IT IS ENOUGH IF THE BAD DEBIT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 20. IN THE INSTANT CASE ALSO, BAD DEBTS HAD BEEN WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE, THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED IN MAKING THE ADDITION AND THE LD. CIT(A) RIGHTLY DELETED THE SAME. WE DO NOT SEE ANY MERIT IN THIS GROUND OF DEPARTMENTAL APPEAL. HENCE, GROUND NO. 2 IS DISMISSED. 21. THE LAST ISSUE AGITATED BY THE DEPARTMENT VIDE GROUND NO. 3 RELATES TO THE DELETION OF ADDITION MADE BY THE ASSESSING OFFICER OUT OF DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION. :-16-: 22. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE DEBITED A SUM OF ` 5,63,427 IN THE PROFIT AND LOSS ACCOUNT AS EXCHANGE RATE DIFFERENCE. THE EXPLANATION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS AS UNDER:- 'FOREIGN EXCHANGE FLUCTUATION AMOUNTING TO RS.5,63,427/- REPRESENTS THE PREMIUM PAID IN RESPECT OF FORWARD PURCHASE OF USD 7,30,000 RELATABLE TO THE PERIOD UNDER CONSIDERATION. WE ARE ENJOYING CASH CREDIT LIMIT FROM THE STATE BANK OF INDIA. DURING THE YEAR WE HAVE CONVERTED PART OF THE RUPEE CASH CREDIT LIMIT IN TO FOREIGN CURRENCY LOAN (FCNRB) AND TO HEDGE THE EXCHANGE RISK WE HAVE TAKEN FORWARD COVER IN RESPECT OF 730000 USD. THE ONE FOURTH OF THE TOTAL PREMIUM PAID HAS BEEN CHARGED TO THE PROFIT AND LOSS ACCOUNT. THE WORKING AND THE EVIDENCES HAVE ALREADY BEEN SUBMITTED.' 23. THE ASSESSEE ALSO FILED A COPY OF LETTER WRITTEN TO THE CHIEF MANAGER (COMMERCIAL), STATE BANK OF INDIA, OVERSEAS BRANCH, VARANSI. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD MADE CONTRACT FOR FORWARD BUSINESS IN FOREIGN EXCHANGE AS PER EXCHANGE CONTRACT DATED 31.12.2001 AND THAT THE TRANSACTIONS MADE BY THE ASSESSEE WERE NOT RELATED TO THE BUSINESS OF THE ASSESSEE. ACCORDING TO HIM, IT WAS SPECULATION LOSS, THEREFORE, COULD NOT BE SET OFF AGAINST THE INCOME DERIVED FROM INCOME OTHER THAN SPECULATION BUSINESS. THE ASSESSING OFFICER MADE DISALLOWANCE OF ` 5,63,427. 24. THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER:- THE APPELLANT HAD BORROWED WORKING CAPITAL LIMIT FROM STATE BANK OF INDIA. PART OF THE LIMIT HAS BEEN CONVERTED INTO FCNRB DEMAND LOAN AND TO COVER THE CURRENCY RISK THE APPELLANT HAS TAKEN FORWARD COVERAGE FOR THE FOREIGN CURRENCY BORROWED. COPY OF AGREEMENT IS :-17-: ENCLOSED. ALL THESE FACTS WERE SUBMITTED ALONG WITH THE EVIDENCE BEFORE THE LEARNED ACIT BUT THE LEARNED ACIT HAD DISALLOWED THE EXPENDITURE STATING THAT THE TRANSACTION IS NOT RELATED TO THE BUSINESS OF THE APPELLANT AND IT IS A SPECULATIVE TRANSACTION. THE LEARNED ACIT FAILED TO UNDERSTAND THAT THE MONEY BORROWED IN US$ WERE USED FOR THE BUSINESS AND ONLY TO COVER THE CURRENCY FLUCTUATION RISK, THE APPELLANT HAD ENTERED INTO FORWARD CONTRACT AND BOUGHT THE US$ OF FUTURE DATE BY PAYING PREMIUM OVER THE SPOT PRICE. THE US$ HAS BEEN REPAID ON DUE DATE AT PREDETERMINED FORWARD RATE IRRESPECTIVE OF THE MARKET RATE OF THE CURRENCY AT THE TIME OF REPAYMENT. SINCE THE LOAN IN FOREIGN CURRENCY HAD BEEN TAKEN FOR THE WORKING CAPITAL PURPOSES, THE PROPORTIONATE PREMIUM IS AN ALLOWABLE EXPENDITURE. THE DISALLOWANCE OF RS.5,63,427/- IS TOTALLY UNJUSTIFIED AND LIABLE TO BE DELETED' 25. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITION BY OBSERVING AS UNDER:- THE FACTS OF THE CASE AS WELL AS SUBMISSIONS MADE BY THE APPELLANT HAVE BEEN CAREFULLY CONSIDERED. IT IS OBSERVED THAT THE ASSESSEE COMPANY BORROWED A SUM OF USD 730000 FROM SBI IN THE MONTH OF DECEMBER 2001 WHICH WAS REPAYABLE AFTER 11 MONTHS IN USD. TO COVER THE RISK OF UPWARD FLUCTUATION OF THE USD RATE IT ENTERED INTO FORWARD EXCHANGE CONTRACT THROUGH SBI FOR PURCHASE OF 730000 USD AFTER 11 MONTHS AT A FIXED PRICE AND PAID FIXED PREMIUM OF 2.830 USD (AMOUNTING TO RS.20,65,900/-) OVER THE SPOT RATE. THE PROPORTIONATE AMOUNT I.E. 3/11 PERTAINING TO 3 MONTHS PERIOD DURING THE YEAR AMOUNTING TO RS.5634277/- IS CHARGED TO THE PROFIT & LOSS ACCOUNT. THE AMOUNT OF PREMIUM PAID IS FIXED AND THERE IS NO ELEMENT OF SPECULATION IN THE TRANSACTION. RATHER THE TRANSACTION OF :-18-: FORWARD CONTRACT TO PURCHASE THE EQUIVALENT AMOUNT OF USD HAS SET TO REST THE POSSIBLE FLUCTUATION LIABILITY OF THE ASSESSEE COMPANY AT THE TIME OF REPAYMENT OF LOAN IN USD. FURTHER BY ENTERING INTO THE SAID FOREIGN CURRENCY BORROWING AND THE COVERAGE THROUGH FORWARD CONTRACT, THE ASSESSEE COMPANY HAS REDUCED ITS COST OF BORROWINGS TO 11.021% INCLUDING THE PREMIUM COST AS AGAINST 14.5% INTEREST CHARGED BY THE BANK ON CASH CREDIT INDIAN CURRENCY ACCOUNT. THE DETAILED CALCULATIONS HAVE BEEN FURNISHED BY THE APPELLANT. THUS, THERE IS NO ELEMENT OF SPECULATION IN THE TRANSACTION AND IT IS HELD THAT THE TRANSACTION IS FOR THE BUSINESS OF THE ASSESSEE COMPANY. IN VIEW OF ABOVE OBSERVATIONS, THE AO WAS NOT JUSTIFIED TO MAKE ADDITION OF RS.5,63,427/- ON ACCOUNT OF FOREIGN EXCHANGE RATE DIFFERENCE. THE SAME IS DIRECTED TO BE DELETED. GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 26. NOW THE DEPARTMENT IS IN APPEAL. 27. THE LD. D.R SUPPORTED THE ORDER OF THE ASSESSING OFFICER WHILE THE LD. COUNSEL FOR THE ASSESSEE IN HIS RIVAL SUBMISSIONS REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT(A) AND STRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY HIM. 28. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, IT IS NOTICED THAT THE ASSESSEE BORROWED A SUM OF USD 7,30,000 FROM STATE BANK OF INDIA IN THE MONTH OF DECEMBER 2001 WHICH WAS REPAYABLE AFTER 11 MONTHS IN USD. THE ASSESSEE ALSO ENTERED INTO FORWARD EXCHANGE CONTRACT THROUGH STATE BANK OF INDIA FOR PURCHASE OF 7,30,000 USD AFTER 11 MONTHS AT A FIXED PRICE TO COVER UP THE RISK OF UPWARD FLUCTUATION OF THE USD RATE AND PAID FIXED PREMIUM OVER THE SUPPORT RATE. PROPORTIONATE AMOUNT FOR THE PERIOD FALLING IN THE ASSESSMENT YEAR UNDER CONSIDERATION WAS AT ` 5,63,427. THAT AMOUNT WAS CHARGED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT. SINCE THE AMOUNT OF PREMIUM PAID WAS FIXED AND THERE WAS NO ELEMENT OF SPECULATION IN THE TRANSACTION, THE AMOUNT SO PAID SET TO REST THE POSSIBLE FLUCTUATION LIABILITY OF THE ASSESSEE COMPANY AT THE TIME OF REPAYMENT OF LOAN. WHILE DOING SO, THE ASSESSEE-COMPANY REDUCED ITS COST OF BORROWINGS TO :-19-: 11.021% INCLUDING THE PREMIUM COST AS AGAINST 14.5% INTEREST CHARGED BY THE BANK ON CASH ACCOUNT. THE LD. CIT(A) VERIFIED THE CALCULATIONS FURNISHED BY THE ASSESSEE AND CAME TO THE CONCLUSION THAT NO ELEMENT OF SPECULATION IN THE TRANSACTION WAS THERE. SINCE THE TRANSACTION IN QUESTION WAS A BUSINESS TRANSACTION, THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS NOT JUSTIFIED AND THE LD. CIT(A) RIGHTLY DELETED THE SAME. WE DO NOT SEE ANY VALID GROUND TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE. HENCE, GROUND NO. 3 IS DISMISSED. 29. GROUNDS NO.4 AND 5 ARE GENERAL IN NATURE WHICH DO NOT REQUIRE SPECIFIC ADJUDICATION. 30. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT ON 4.7.2011) SD/- SD/- [H. L. KARWA] [ N. K. SAINI] VICE PRESIDENT ACCOUNTANT MEMBER DATED:4.7.2011 JJ:0407 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR