M/s. Power Build Ltd., Anand V. The DCIT, Anand Circle, Anand

ITA 23/AHD/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4770 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 20-02-2020
• Assessment Year: 2014-2015
• Appeal Filed On: 01-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKRAM SINGH SHARMA
• Keywords: Earning of tax free income; Notional interest; Capital receipt; Rule 8D
• Section: 143(3); 14A; 250

Judgement Text

, D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD , JUDICIAL MEMBER ./ I.T.A. NO. 23/AHD/2018 ( ASSESSMENT YEAR : 2014-15) M/S. POWER BUILD LTD. POST BOX NO. 28, VITHAL UDYOGNAGAR, ANAND 388121 / VS. DCIT ANAND CIRCLE, ANAND ./ ./ PAN/GIR NO. : AABCP2464K ( APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI SUNIL TALATI, A.R / RESPONDENT BY : SHRI VIKRAM SINGH SHARMA, SR.D.R. DATE OF HEARING 20/02/2020 !'# / DATE OF PRONOUNCEMENT 21/02/2020 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-4, VADODARA (CIT(A) IN SHORT), DATED 30.10.2017 ARIS ING IN THE ASSESSMENT ORDER DATED 23.12.2016 PASSED BY THE ASSESSING OFFI CER (AO) UNDER S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) CONCER NING AY 2014-15. ITA NO. 23/AHD/18 [M/S. POWER BUILD LTD. VS. DCIT] A.Y. 2014-15 - 2 - 2. THE SUBSTANTIVE GROUNDS OF APPEAL RAISED BY ASSE SSEE READ HEREUNDER: 1. THE CIT(A) -4 BARODA HAS ERRED IN CONFIRMING TH E DISALLOWANCE OF RS. 2,50,000/- ON ADHOC AND ESTIMATED BASIS BY I NVOKING PROVISION OF SECTION 14A OF THE ACT, WHICH IS AGAIN ST THE PROVISIONS OF THE ACT. THE LD CIT(A) BARODA HAS ERR ED IN INTERPRETING THE PROVISIONS OF SECTION 14A R.W.R 8D OF THE ACT BY NOT APPRECIATING THE SUBMISSION MADE DURING THE COU RSE OF HEARING. THUS, THE ADDITION MADE IN THIS BEHALF IS UNJUST AND UNCALLED FOR AND BE DELETED NOW. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED THAT TH E APPELLANT HAS ITSELF DISALLOWED RS 2,87,076/- WHICH BE CONSIDERED AND NO ADDITION CAN BE MADE AS HELD BY CIT(A) BARODA. 2. THE CIT(A)-4 BARODA HAS ERRED IN CONFIRMING THE ADDITION OF RS. 1,50,50,000/- ON ACCOUNT OF UNREALIZED GAIN ARISING ON ACCOUNT OF FLUCTUATION OF EXCHANGE RATE AS ON BALANCE SHEET DATE. IT IS SUBMITTED THAT THE GAIN IS ACCOUNTED IN THE BOOKS O F THE ACCOUNTS AS PER AS 11 ISSUED BY ICAI. THUS THE GAIN IN EXCHA NGE FLUCTUATION RATE IS NOT REALIZED AND THE SAME DOES NOT AMOUNT TO INCOME FOR THE YEAR AS PER INCOME TAX ACT SINCE THI S IS ONLY A BOOK ENTRY AS PER THE PROVISIONS OF THE COMPANIES A CT (AS 11). THE UNREALIZED GAIN/LOSS IF ANY TO BE OFFERED TO TA X AS AND WHEN ACTUALLY REALIZED. 2. THE FIRST ISSUE RELATES TO DISALLOWANCE OF RS.2, 50,000/- ON AD HOC AND ESTIMATED BASIS BY INVOKING PROVISIONS OF SECTI ON 14A OF THE ACT. 3. WE HAVE HEARD RIVAL SUBMISSIONS ON THE ISSUE. AS POINTED OUT ON BEHALF OF THE ASSESSEE, THE ASSESSEE HAS CLAIMED EX EMPT INCOME TO THE EXTENT OF RS.2,87,076/-. AS AGAINST THE AFORESAID EXEMPT INCOME, ASSESSEE ITSELF HAS DISALLOWED EQUIVALENT AMOUNT OF RS.2,87,076/- UNDER S.14A OF THE ACT. THEREFORE, NO ADDITIONAL DISALLO WANCE IS PERMISSIBLE IN VIEW OF THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY P. LTD. 372 ITR 97 (GUJ.) . IN ANOTHER JUDGMENT IN THE CASE OF CIT VS. VISION FINSTOCK LTD. TAX APPEAL NO. 486 OF 2017 DATED 31.07.2017 THE HONBLE GUJARAT HIGH COURT HAS ONCE AGAIN EXPRESSED THE SIMILAR VIEW AND HELD THAT DISALLOWAN CE OF EXPENDITURE IN TERMS OF SECTION 14A R.W. RULE 8D CANNOT EXCEED THE EXEMPT INCOME ITSELF. IT IS NOTICED THAT SLP(CIVIL) [DIARY NO. 13152/2018 ] FILED BY THE ITA NO. 23/AHD/18 [M/S. POWER BUILD LTD. VS. DCIT] A.Y. 2014-15 - 3 - REVENUE AGAINST THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN VISION FINSTOCK LTD. (SUPRA) HAS BEEN DISMISSED ON MERITS BY THE HONBLE SUPREME COURT VIDE ORDER DATED 07.05.2018. THE REFERENCE IS ALSO MADE TO THE DECISION OF HONBLE SUPREME COURT OF INDIA IN CIT VS. CHETTINAD LOGISTICS (P.) LTD. (2018) 95 TAXMANN.COM 250 (SC). THUS, IN THE LIGHT OF JUDICIAL PRECEDENTS NOTED ABOVE, NO AD DITIONAL DISALLOWANCE IS CALLED FOR UNDER S.14A OF THE ACT IN EXCESS OF E XEMPT INCOME. GROUND NO.1 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWE D. 4. AS THE ASSESSEE HAS ALREADY DISALLOWED EXPENSES IN EXCESS OF THE EXEMPT INCOME, WE DO NOT SEE ANY MERIT IN THE ACTIO N OF THE CIT(A) FOR CONFIRMING A FURTHER SUM BY WAY OF AD HOC DISALLOWA NCE IN CONTROVERSY. THE APPEAL OF THE ASSESSEE IS ACCORDINGLY ALLOWED. 5. THE SECOND ISSUE RELATES TO ADDITION OF RS.1,50 ,50,000/- ON ACCOUNT OF INTEREST EARNED ON INVESTMENT MADE IN A FOREIGN SUBSIDIARY AND TRANSFER TO FOREIGN CURRENCY TRANSLATION RESER VE UNDER THE HEAD RESERVE AND SURPLUS IN THE BALANCE SHEET WITHOUT ROUTING THE SAME THROUGH THE P&L ACCOUNT. IN THE COURSE OF THE ASSE SSMENT, THE AO INTER ALIA OBSERVED THAT THE ASSESSEE HAS CREDITED IN ITS RE SERVE AND SURPLUS ACCOUNT AN AMOUNT TO THE TUNE OF RS.150.50 LAKHS U NDER THE HEAD FOREIGN CURRENCY TRANSLATION RESERVE. ON ENQUIRY INTO SUCH CREDIT MADE BY THE ASSESSEE IN ITS BOOK, THE AO FOUND THAT THE RESERVE PERTAINS TO INTEREST ACCRUED ON INVESTMENT MADE IN FOREIGN CURR ENCY THAT; I. THAT THE RESERVE PERTAINS TO INTEREST ACCRUED O N INVESTMENT MADE IN A FOREIGN SUBSIDIARY. II. THE SAME HAS BEEN TRANSFERRED TO THE FOREIGN CU RRENCY TRANSLATION RESERVE IN VIEW OF ACCOUNTING STANDARD AS-11 III. THE SAME SHALL BE RECOGNIZED AS INCOME ONLY WH EN THE ASSESSEE DEMANDS REPAYMENT OF ENTIRE LOAN FROM THE SUBSIDIAR Y. 6. THE AO OBSERVED THAT THE ASSESSEE IS FOLLOWING M ERCANTILE SYSTEM OR ACCRUAL SYSTEM OF ACCOUNTING AND CONSEQUENTLY, T HE ASSESSEE WAS ITA NO. 23/AHD/18 [M/S. POWER BUILD LTD. VS. DCIT] A.Y. 2014-15 - 4 - UNDER OBLIGATION TO RECORD SUCH CREDIT AS REVENUE I TEM IN P&L ACCOUNT AND OFFER TAXES THEREON. THE AO ACCORDINGLY ADDED THE AFORESAID AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE AS REVENUE RECE IPT WHILE FRAMING THE ASSESSMENT UNDER S.143(3) OF THE ACT. 7. IN THE FIRST APPEAL, AGAINST THE AFORESAID ADDIT ION, THE ASSESSEE COULD NOT GET ANY RELIEF. 8. FURTHER AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE TRIBUNAL. 9. THE LEARNED AR FOR THE ASSESSEE SUBMITTED AT THE OUTSET THAT THE IMPUGNED INCOME OF RS.150.50 LAKHS HAS BEEN RECOGNI ZED AS CAPITAL RECEIPT UNDER THE HEAD RESERVE & SURPLUS OWING TO UNCERTAINTY IN INTERPRETATION OF COMPLEX PROVISIONS OF ACCOUNTING STANDARD 11 (AS-11) NOTIFIED BY THE ICAI. IT WAS POINTED OUT THAT SIMI LAR PROVISIONS WERE MADE FOR NOTIONAL INTEREST ACCRUED ON MONEY ADVANCE D IN THE SUBSEQUENT YEAR AS WELL. A LEGAL OPINION WAS OBTAINED THEREAF TER AND THE AFORESTATED FOREIGN CURRENCY CREDIT PLACED IN THE RESERVE & SUR PLUS AS CAPITAL ITEM WAS DULY OFFERED FOR TAXATION AS INCOME IN AY 2018- 19 APPLYING THE PREVAILING FOREIGN CURRENCY RATE. A COMPUTATION OF INCOME FOR AY 2018- 19 WAS PLACED BEFORE THE TRIBUNAL TO SUPPORT THE CL AIM TOWARDS DECLARATION OF IMPUGNED INCOME (WITH MINOR DIFFEREN CES) IN THE LATER YEAR WHEN THE CONFUSION CLOUDING THE APPLICABILITY OF AS-11 WAS DRIFTED. THE LEARNED AR THUS FINALLY SUBMITTED THAT THE IMPU GNED INCOME FROM FOREIGN CURRENCY FLUCTUATION HAS BEEN ULTIMATELY DE CLARED ALBEIT IN THE LATER YEAR. IT WAS THUS CONTENDED THAT WHEN IT DOE S NOT MAKE A DIFFERENCE TO THE DEPARTMENT, IT SHOULD NOT CONTEST WHETHER A PARTICULAR YEAR IS TAXABLE IN ONE YEAR OR OTHER. THE LEARNED AR ACCOR DINGLY URGED THAT ADDITION SO MADE TOWARDS FOREIGN CURRENCY TRANSLATI ON RESERVE SHOULD BE REVERSED. ITA NO. 23/AHD/18 [M/S. POWER BUILD LTD. VS. DCIT] A.Y. 2014-15 - 5 - 10. LEARNED DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE REVENUE AUTHORITIES AND SUBMITTED THAT THE INCOME W HICH OUGHT TO HAVE BEEN TAXED IN AY 2014-15 COULD NOT BE DEFERRED TO A Y 2018-19 EVEN IF THE AVERMENTS OF THE ASSESSEE ARE FOUND TO BE TRUE, AS IT WILL CAUSE LOSS OF INTEREST ON TAX TO THE REVENUE. THE LEARNED DR ACC ORDINGLY SUBMITTED THAT REMEDY LIES, IF ANY, IN AY 2018-19 WHERE THE I NCOME HAS BEEN DECLARED. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE CONTROVERSY IS ESSENTIALLY INVOLVED TOWARDS YEAR OF TAXABILITY OF INTEREST ACCRUED ON INVESTMENT MADE BY THE ASSESSEE IN A FOR EIGN SUBSIDIARY. IT IS THE CASE OF THE ASSESSEE THAT AS-11 PROVIDES FOR TR EATMENT OF SUCH UNREALIZED INTEREST ACCRUED ON INVESTMENTS. THE AS -11 WAS UNDERSTOOD BY THE MANAGEMENT AS WELL AS STATUTORY AUDITORS IN A PARTICULAR MANNER AND THE UNREALIZED SURPLUS WAS CREDITED IN THE RESE RVE AND SURPLUS ACCOUNT. ON RECEIVING CLARITY AT A SUBSEQUENT STAG E, THE ASSESSEE HAS VOLUNTEERED THE INCOME FROM SUCH TRANSACTIONS IN AY 2018-19. IT IS THUS THE CASE OF THE ASSESSEE THAT SO LONG AS THE INCOME HAS BEEN ALREADY TAXED BY THE DEPARTMENT, THE ACTION OF THE ASSESSEE SHOULD NOT BE DISTURBED MERELY ON THE GROUND OF YEAR OF DEDUCTIBI LITY WHERE THE ENTIRE EXERCISE IS REVENUE NEUTRAL. WE FIND THAT IN THE L ONG LINE OF JUDICIAL PRECEDENTS, THE COURTS HAVE ECHOED IN CHORUS THAT T HE REVENUE AUTHORITIES SHOULD DESIST FROM MAKING ADJUSTMENTS I N THE RETURNED INCOME WHERE THE ENTIRE EXERCISE IS REVENUE NEUTRAL. THE DECISION RENDERED IN THE CASE OF CIT VS. BILAHARI INVESTMENT PVT. LTD. [2008] 299 IT R 1 AND CIT VS. NAGRI MILLS CO. LTD. 33 ITR 681 WOULD BE RELEVANT TO TAKE NOTE OF. THE DEPARTMENT HAS ALREADY COLLECTED THE TAX I N THE SUBSEQUENT YEAR AND THEREFORE, IN THE GIVEN SET OF CIRCUMSTANCES, W HERE THE APPLICABILITY OF THE ACCOUNTING STANDARD WAS UNDERSTOOD IN A MANN ER NOT COMPATIBLE WITH THE VIEW OF THE DEPARTMENT, THE BONAFIDE ACTIO N OF THE ASSESSEE SHOULD NOT BE ALTERED IN VIEW OF THE LARGER TAX NEU TRALITY. ITA NO. 23/AHD/18 [M/S. POWER BUILD LTD. VS. DCIT] A.Y. 2014-15 - 6 - 12. HAVING ADJUDICATED THE ISSUE IN FAVOUR OF THE A SSESSEE ON FIRST PRINCIPLES, WE HOWEVER CONSIDER IT JUST AND EXPEDIE NT TO RESTORE THE ISSUE BACK TO THE FILE OF THE AO FOR VERIFICATION OF THE NEW FACT BROUGHT TO OUR NOTICE FOR THE FIRST TIME THAT THE INCOME IN QUESTI ON FROM FOREIGN CURRENCY TRANSLATION HAS ALREADY BEEN OFFERED FOR T AX IN THE SUBSEQUENT ASSESSMENT YEAR AS NOTED ABOVE. THE AO IS DIRECTED TO DELETE THE ADDITION ON BEING SATISFIED THAT THE INCOME IN CONT ROVERSY IS DULY INCLUDED IN THE LATER ASSESSMENT YEAR. IT SHALL BE OPEN TO THE ASSESSEE TO SUPPORT ITS CLAIM BEFORE THE AO IN THIS REGARD IN T HE LIGHT OF AFORESAID OBSERVATIONS. 13. IN THE RESULT, GROUND NO.2 OF THE ASSESSEES AP PEAL IS ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. SD/- SD/- (MAHAVIR PRASAD) (PRADIP KUMAR K EDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: DATED 21/02/2020 TRUE COPY S. K. SINHA !'#' / COPY OF ORDER FORWARDED TO:- &. / REVENUE 2. / ASSESSEE (. )*+ , / CONCERNED CIT 4. ,- / CIT (A) /. 012 33*+4 *+#4 56) / DR, ITAT, AHMEDABAD 7. 289 : / GUARD FILE. BY ORDER / 4 /5 *+#4 56) THIS ORDER PRONOUNCED IN OPEN COURT ON 21/02/202 0