MILTONS P.LTD, MUMBAI V. ASST CIT CIR 6(3), MUMBAI

ITA 2307/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8070 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 18-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL -HBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./2307/MUM/2015 , /ASSESSMENT YEAR: 2009-10 M/S. MILTONS PVT. LTD. ARVIND HOUSE, DARUKHANA,QUAY STREET REAY ROAD (E),MUMBAI-400 010. PAN:AABCM 6689 D VS. ACIT-6(3) REVISED JURISDICTION BY CIT-7(2)(1) 6TH FLOOR, AAYAKAR BHAVAN MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI M.C. OMI NINGSHEN-DR ASSESSEE BY: SHRI HIRO RAI-AR / DATE OF HEARING: 21.02.2017 / DATE OF PRONOUNCEMENT: 07.03.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 27/02/2015 OF THE CIT ( A)-13,MUMBAI, THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY,ENGAGED IN THE BUSI NESS OF MANUFACTURING AND EXPORTING OF READY-TO-WEAR GARMENTS,FILED ITS RETURN OF INCOME O N 20/09/2009,DECLARING LOSS OF RS.3.98 CRORES.THE ASSESSING OFFICER (AO) COMPLETED THE ASS ESSMENT ON 23.12.2011 U/S.143 (3) OF THE ACT,DETERMINING ITS INCOME AT RS. (-)1.27 CRORE S.DURING THE COURSE OF HEARING BEFORE US, THE AUTHORIZED REPRESENTATIVE (AR) OF THE ASSESSEE STATED THAT GROUND NO.2 TO 4 SHOULD BE TREATED AS NOT PRESSED.HENCE,SAME STAND DISMISSED. 2. EFFECTIVE GROUND OF APPEAL IS ABOUT DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF RS.2.20 CRORES.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOU ND THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.2,20,94,804/- TOWARDS FOREIGN EXCHANGE LOSS I.E. EXCHANGE LOSS DUE TO ECB LOAN, THAT THE ASSESSEE HAD SHOWN THE LOSS AS OUTS TANDING AS ON 31.3.2009.HE OBSERVED THAT THE ASSESSEE HAD MERELY BOOKED FOREIGN EXCHANGE LO SS, THAT IT WAS ONLY NOTIONAL LOSS, THAT NO TRANSACTION WAS CARRIED OUT WITH THE PARTY WHO HAD ADVANCED THE LOAN, THAT THE LIABILITY HAD NOT BEEN REPAID DURING THE YEAR UNDER APPEAL, THAT ASSESSEE HAD REDUCED THE TAX LIABILITY IN ITS BOOKS OF ACCOUNT, THOUGH NO ACTUAL TRANSACTION HAD TAKEN PLACE.HE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE ASKING IT AS TO WHY THE FOREIGN EXC HANGE LOSS SHOULD NOT BE DISALLOWED. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,D ATED 21.12.201,THE AO HELD THAT THE FOREIGN EXCHANGE LOSS HAD BEEN SHOWN IN THE BOOKS O N A NOTIONAL BASIS, THAT IT HAD PAID THE DIFFERENCE DUE TO FOREIGN EXCHANGE FLUCTUATION, THA T LIABILITY ARISING OUT OF FOREIGN EXCHANGE 2307/M/15(09-10)- MILTONS PVT.LTD. 2 FLUCTUATION WAS A CONTINGENT LIABILITY THAT SAME HA D NOT CRYSTALLIZED DURING THE YEAR.FINALLY, HE MADE AN ADDITION OF RS.2.20 CRORES TO THE TOTAL INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE ORDER OF THE AO, ASSESSEE PREFERR ED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM,IT WAS ARGUED THAT LOAN WAS TAKEN FOR THE PURPOSE OF WORKING CAPITAL OF THE COMPANY,THAT IT WAS UTILISED FOR PRO DUCTION OF READYMADE GARMENTS, THAT IN THE NOTES FORMING PART OF ACCOUNTS IT WAS MENTIONED THA T LOAN WAS TAKEN FOR WORKING CAPITAL AND THAT GAIN/LOSSES WERE TO BE TAKEN TO THE P&L ACCOUN T, THAT AS ON 1.4.2008 OUTSTANDING LOAN WAS USD 22,49,980 (RS.9.10 CRORES), THAT ASSESSEE W AS FOLLOWING THE METHOD MENTIONED IN THE AS-II WITH REGARD TO FOREIGN EXCHANGE GAINS/LOS S, THAT ON 31.3.2009 THE CLOSING BALANCE WAS USD 11.31 CRORES,THAT THE DIFFERENCE OF RS.2.20 CRORES WAS DEBITED TO THE P&L ACCOUNT, THAT IT WAS NOT A CONTINGENT LIABILITY, THAT IN EAR LIER YEARS METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE WAS ACCEPTED BY THE DEPARTMENT.THE ASSESS EE RELIED UPON THE CASE OF WOODWARD GOVERNOR INDIA PVT.LTD.(312ITR254);OIL AND NATURAL GAS CORPN. LTD.(322ITR 180); MOTO ROLA INDIA PVT.LTD.(112TAXMANN.COM136). AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE A ND THE ASSESSMENT ORDER,THE FAA HELD THAT THERE WAS NO ACTUAL FOREIGN EXCHANGE TRANSACTION DU RING THE YEAR, THAT THE IMPUGNED TRANSACTION IN NATURE OF FOREIGN CURRENCY LOAN HAD TAKEN PLACE FEW YEARS BACK, THAT NO PAYMENTS WERE MADE BY THE ASSESSEE DURING THE YEAR UNDER APPEAL,THAT NO ACTUAL TRANSACTION HAD TAKEN PLACE NOR ANY PAYMENT WAS MADE, REFERRING TO THE CASE LAWS REFERRED TO BY ASSESSEE THE FAA HELD THAT THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. (312ITR254); OIL AND NATURAL GAS CORPN. (SUPRA ), HAVE DEALT WITH SECTION 43A W.E.F. 1.4.2003, THAT AS PER AMENDED PROVISIONS PAYMENT WA S A PRE-CONDITION FOR ALLOWANCE OF ANY EXPENDITURE, THAT UNDER THE UNAMENDED SECTION 43A A CTUAL PAYMENT WAS NOT A CONDITION FOR MAKING NECESSARY ADJUSTMENT IN CARRYING COST OF THE FIXED ASSETS ACQUIRED IN FOREIGN CURRENCY, THAT LOAN TRANSACTION WAS CAPITAL IN NATURE, THAT T HE LOSS WAS INCIDENTAL TO CAPITAL TRANSACTION AND WAS NOT ALLOWBLE .FINALLY, HE UPHELD THE ORDER OF THE AO. 4. DURING THE COURSE OF HEARING BEFORE US,THE AR ARGUE D THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING,THAT LOSS SUFFERED BY IT DUE TO FOREIGN EXCHANGE LOSS WAS DEBITED TO P&L ACCOUNT,THAT IN THE EARLIER YEARS FO REIGN EXCHANGE GAINS WERE OFFERED FOR TAXATION AND THE AO HAD TAXED THE SAME ACCORDINGLY, THAT PROVISIONS OF SECTION 43A DID NOT DEAL WITH THE FOREIGN EXCHANGE LOSS, THAT THE SAME PERTAINED TO ACQUISITION OF CAPITAL ASSET IN FOREIGN CURRENCY.THE DEPARTMENTAL REPRESENTATIVE(DR )SUPPORTED THE ORDER OF THE FAA. 2307/M/15(09-10)- MILTONS PVT.LTD. 3 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE HAD TAKEN EXTERNAL COMMERCIAL BORROWING /L OANS(ECB) OF USD 20 LAKHS IN THE EARLIER YEAR FOR THE PURPOSE OF WORKING CAPITAL REQ UIREMENT,THAT IT COMPUTED FOREIGN EXCHANGE LOSS OF RS.2.20 CRORES ON THE BASIS OF OPENING BAL ANACE AND CLOSING BALANCE AS ON FIRST AND LAST DAY OF THE YEAR UNDER CONSIDERATION, THAT THE AO AND THE FAA HELD THAT LOSS CLAIMED BY THE ASSESSEE WAS NOTIONAL/CONTINGENT. WE FIND THAT THE ASSESSEE IS FOLLOWING THE MANDATE OF ACCOUNTING STANDARD ISSUED BY THE ICAI,THAT IN THE EARLIER AY.S FROM 2003-04 TO 2008-09 THE FOREIGN EXCHANGE GAINS WERE OFFERED BY IT FOR TAXAT ION, THAT THE AO HAD TAXED SUCH GAINS IN THOSE YEARS,THAT IN THE AY.S 2001-02, 2002-03 IT HA D SUFFERED LOSS ON ACCOUNT OF FLUCTUATION OF EXCHANGE RATE.WE ARE OF THE OPINION,THAT IF THE AO HAD TAXED THE FOREIGN EXCHANGE GAINS IN THE EARLIER YEARS THEN HE SHOULD NOT MAKE A DISALLO WANCE OF FOREIGN EXCHANGE LOSS SUFFERED BY IT ON ACCOUNT OF FLUCTUATION. IN THOSE YEARS ALSO T HE ASSESSEE WAS FOLLOWING AS-11 AND IT HAD NOT RECEIVED ANY MONEY FROM THE PERSONS WHO HAD ADV ANCED LOANS.IN OTHER WORDS, IT WAS ONLY A NOTIONAL INCOME IN THOSE YEARS ALSO BY THE LOGIC ADVANCED BY THE AO FOR THAT YEAR.THE AO CANNOT APPLY DIFFERENT STANDARD FOR SAME KIND OF TR ANSACTIONS.TAXATION JURISPRUDENCE DOES NOT APPROVE TO APPROBATE AND TO REPROBATE BY EITHER OF THE PARTIES I.E. AO AND THE ASSESSEE.THE FAA HAS NOT MENTIONED A SINGLE WORD ABOUT THE TAXIN G OF FOREIGN EXCHANGE GAINS BY THE AO DURING THE EARLIER YEARS,WHILE PASSING ORDERS U/S.1 43(3)OF THE ACT. AS FAR AS SECTION 43A IS CONCERNED, IT DEALS WITH M ACHINERY PURCHASED IN FOR EXCHANGE AND ITS ACTUAL COST.IN THE CASE BEFORE US, THE ISSUE IS OF WORKING CAPITAL AND NOT OF PURCHASE OF PLANT AND MACHINERY.THEREFORE, WE ARE OF THE OPINION THAT THE AO AND THE FAA WAS NOT JUSTIFIED IN TREATING THE LIABILITY AS CONTINGENT OR NOTIONAL.IN THE CASE OF OIL AND NATURAL GAS CORPN. (SUPRA) THE HON'BLE SUPREME COURT HAS HELD THAT TH E LOSS CLAIMED BY THE APPELLANT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS O N THE DATE OF THE BALANCE-SHEET WAS ALLOWABLE AS EXPENDITURE U/S.37(1)OF THE ACT. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT,WE DECIDE THE EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS A LLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH MARCH, 2017. 07 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 07.03.2017. JV.SR.PS. 2307/M/15(09-10)- MILTONS PVT.LTD. 4 / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR H BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.