ACIT 14(2)(1), MUMBAI V. LEIGHTON INDIA CONTRACTORS P.LTD, MUMBAI

ITA 2346/MUM/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2982 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 25-08-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 24-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIDISHA KALRA
• Assessee Lawyers: TUSHAR HATHIRAMANIAR
• Keywords: Transfer pricing; Cost of acquisition
• Section: 37(1); 37

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -GBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./ITA/2346/MUM/2015, /ASSESSMENT YEARS: 2010-11 ASTT.CIT-14(2)(1) 432, AAYAKAR BHAVAN,4 TH FLOOR M.K. MARG MUMBAI-400 020. VS. M/S. LEIGHTON INDIA CONTRACTORS PRIVATE LTD. 7/F, TOWER-3, EQUINOX BUSINESS PARK, (PENINSULA TECHNO PARK) OFF-BANDRA-KURLA COMPLEX, LBS MARG KURLA (W), MUMBAI-400 070. PAN:AAECL 3338 D ( /APPELLANT ) ( / RESPONDENT) REVENUE BY: MS. VIDISHA KALRA-(CIT-DR) ASSESSEE BY: SHRI SUNIL MOTI LALA & SHRI TUSHAR HATHIRAMANI-AR / DATE OF HEARING: 25.08.2016 / DATE OF PRONOUNCEMENT: 14.09.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE DIRECTIONS OF THE DISPUTE RESOLUTIO N PANEL-III,MUMBAI,DATED 30.12.2014, THE ASSESSING OFFICER (AO), HAS FILED THE PRESENT A PPEAL.ASSESSEE -COMPANY ENGAGED IN THE BUSINESS OF CONSTRUCTION CONTRACTS EXECUTING FACILI TIESAND THE CONSTRUCTION OF OFF SHORE PIPELINES,FILED ITS RETURN OF INCOME ON 15.10.2010, DECLARING THE INCOME OF RS.180.61 CRORES. THE MATER WAS SELECTED FOR SCRUTINY AND WAS REFERRE D TO THE TRANSFER PRICING OFFICER(TPO), WHO RECOMMENDED TP ADJUSTMENT OF RS.702.01 CRORES.T HE AO,IN THE DRAFT ASSESSMENT ORDER, MADE THE ADDITION AS SUGGESTED BY THE TPO,BESIDES M AKING AN ADDITION OF RS.13,00,34,360/- ON ACCOUNT OF MARKED TO MARKET LOSSES(MTML). 2.AGGRIEVED BY THE DRAFT ORDER THE ASSESSEE FILED O BJECTION BEFORE THE DRP.WITH REGARD TO THE MTNL IT WAS ARGUED THAT THE AO HAD RELIED UPON THE INSTRUCTION NO.3/2010 DATED 23.03.2010 FOR MAKING THE ADDITION,THAT THE INSTRUCTION REFERR ED TO BY HIM WAS AGAINST THE DECISION OF WOODWARD GOVERNOR(312ITR254)OF THE HONBLE APEX COU RT.CONSIDERING THE SAID JUDGMENT OF THE HONBLE COURT THE DRP DIRECTED THE AO TO DEL ETE THE PROPOSED ADDITION. 3.BEFORE US,THE DEPARTMENTAL REPRESENTATIVE(DR)STAT ED THAT THE MATTER COULD BE DECIDED ON MERITS.THE AUTHORISED REPRESENTATIVE(AR)SUPPORTED T HE ORDER OF THE DRP AND RELIED UPON 2346/M/15 LEIGHTON INDIA 2 FOUR CASES DELIVERED BY THE VARIOUS BENCHES OF THE TRIBUNAL WHEREIN JUDGMENT OF WOODWARD GOVERNOR(SUPRA)WAS REFERRED TO IN THE CASES OF MTML . WE FIND THAT THE ISSUE OF LOSS ON MARKED TO MARKET LOSSES HAS BEEN CONCLUSIVELY DECIDED BY THE HONBLE APEX COURT IN THE MATTER OF WOODWARD GO VERNOR(SUPRA AS UNDER: LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCT UATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE-SHEET IS AN ITEM OF EXPENDI TURE UNDER SECTION 37(1) OF THE INCOME-TAX ACT, 1961. FOR VALUING THE CLOSING STOCK AT THE END OF A PARTI CULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT. THIS IS BECAUSE PROFIT/LOSS IS EM BEDDED IN THE CLOSING STOCK. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN T HE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TR ADER WOULD CARE TO SHOW INCREASE IN PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE THEORY UNDER LYING THE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. THE EXPRESSION ANY EXPENDITURE HAS BEEN USED IN S ECTION 37 OF THE INCOME-TAX ACT, 1961, TO COVER BOTH EXPENSES INCURRED AS WELL AS AN AMOUNT WHICH IS REALLY A LOSS EVEN THOUGH SUCH AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. PROFITS AND GAINS OF THE PREVIOUS YEAR ARE REQUIRED TO BE COMPUTED IN ACCORDANCE WITH THE RELEVANT ACCOUNTING STANDARD. ON GENERAL PRINCIPLES OF COMMERCIAL ACCOUNTING, THE VALUE OF THE STOCK-IN-TRADE AT THE BEGINNING AND AT THE END OF T HE ACCOUNTING YEAR SHOULD BE ENTERED IN THE PROFIT AND LOSS ACCOUNT AT COST OR MARKET PRICE, WH ICHEVER IS LOWER THE MARKET VALUE BEING ASCERTAINED ON THE LAST DATE OF THE ACCOUNTING YEAR , NOT AT ANY INTERMEDIATE DATE. NO GAIN OR PROFIT CAN ARISE UNTIL A BALANCE IS STRUCK BETWEEN THE COST OF ACQUISITION AND THE PROCEEDS OF SALE. THE WORD PROFITS IMPLIES A COMPARISON BETWE EN THE STATE OF BUSINESS AT TWO SPECIFIC DATES, USUALLY SEPARATED BY AN INTERVAL OF TWELVE M ONTHS. STOCK-IN-TRADE IS AN ASSET : IT IS A TRADING ASSET. THEREFORE, THE CONCEPT OF PROFITS AN D GAINS MADE BY A BUSINESS DURING THE YEAR CAN ONLY MATERIALIZE WHERE A COMPARISON OF THE ASSE TS OF THE BUSINESS AT TWO DIFFERENT DATES ARE TAKEN INTO ACCOUNT. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, WHAT IS DUE IS BROUGHT INTO CREDIT BEFORE IT IS ACTUALLY RECEIVED : IT BRINGS INTO DEBIT AN EXPENDI TURE FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED. THE ACCOUNTING METHOD FOLLOWED BY AN ASSESSEE CONTI NUOUSLY FOR A GIVEN PERIOD OF TIME HAS TO BE PRESUMED TO BE CORRECT TILL THE ASSESSING OFFICE R COMES TO THE CONCLUSION FOR REASONS TO BE GIVEN THAT THE SYSTEM DOES NOT REFLECT TRUE AND COR RECT PROFITS. AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FO R THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. AS-11 DEALS WITH EFFECTS OF EXCHANGE DIFFERE NCES. UNDER PARAGRAPH 2, REPORTING CURRENCY IS DEFINED TO MEAN THE CURRENCY USED IN PRESENTING THE FINANCIAL STATEMENTS. SIMILARLY, THE WORDS ' MONETARY ITEMS' ARE DEFINED TO MEAN MONEY H ELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS, E.G., CASH, RECE IVABLES AND PAYABLES. THE WORD ' PAID' IS DEFINED UNDER SECTION 43(2). THIS HAS BEEN DISCUSSE D EARLIER. SIMILARLY, IT IS IMPORTANT TO NOTE THAT FOREIGN CURRENCY NOTES, BALANCE IN BANK ACCOUN TS DENOMINATED IN A FOREIGN CURRENCY, AND RECEIVABLES/PAYABLES AND LOANS DENOMINATED IN A FOR EIGN CURRENCY AS WELL AS SUNDRY CREDITORS ARE ALL MONETARY ITEMS WHICH HAVE TO BE VALUED AT T HE CLOSING RATE UNDER AS-11. UNDER PARAGRAPH 5, A TRANSACTION IN A FOREIGN CURRENCY HA S TO BE RECORDED IN THE REPORTING CURRENCY BY APPLYING TO THE FOREIGN CURRENCY AMOUNT THE EXCH ANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSAC TION. THIS IS KNOWN AS ' RECORDING OF TRANSACTION ON INITIAL RECOGNITION' . PARAGRAPH 7 O F AS-11 DEALS WITH REPORTING OF THE EFFECTS OF CHANGES IN EXCHANGE RATES SUBSEQUENT TO INITIAL REC OGNITION. PARAGRAPH 7(A), INTER ALIA, STATES THAT ON EACH BALANCE- SHEET DATE MONETARY ITEMS, EN UMERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPORTED USING THE CLOSING RATE. IN CASE OF REVENUE ITEMS FALLING UNDER SECTION 37(1), PARAGRAPH 9 OF AS-11 WHICH DEALS WIT H RECOGNITION OF EXCHANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THAT PARAGRAPH, EXCHA NGE DIFFERENCES ARISING ON FOREIGN 2346/M/15 LEIGHTON INDIA 3 CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCO ME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE, EXCEPT AS STATED IN PARAGRAPH 10 AND PA RAGRAPH 11 WHICH DEALS WITH EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INC URRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TOPIC FALLS UNDER SECTION 43A OF THE 1961 ACT. AT THIS STAGE, WE ARE CONCERNED ONLY WITH PARAGRAPH 9 WHICH DEALS WITH REVENUE ITEMS. PA RAGRAPH 9 OF AS-11 RECOGNISES EXCHANGE DIFFERENCES AS INCOME OR EXPENSE. IN CASES WHERE, E .G., THE RATE OF DOLLAR RISES VIS-A-VIS THE INDIAN RUPEE, THERE IS AN EXPENSE DURING THAT PERIO D. THE IMPORTANT POINT TO BE NOTED IS THAT AS-11 STIPULATES EFFECT OF CHANGES IN EXCHANGE RATE VIS-A-VIS MONETARY ITEMS DENOMINATED IN A FOREIGN CURRENCY TO BE TAKEN INTO ACCOUNT FOR GIVIN G ACCOUNTING TREATMENT ON THE BALANCE SHEET DATE. THEREFORE, AN ENTERPRISE HAS TO REPORT THE OU TSTANDING LIABILITY RELATING TO IMPORT OF RAW MATERIALS USING THE CLOSING RATE OF EXCHANGE. ANY D IFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE SAID LIABILITY AT THE CLOSING RAT E, SHOULD BE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT FOR THE REPORTING PERIOD. RESPECTFULLY FOLLOWING THE ABOVE JUDGMENT,WE HOLD T HAT THE DIRECTIONS OF THE DRP DOES NOT SUFFER FROM ANY DEFECT.CONFIRMING THE SAME,WE DECID E THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. AS A RESULT,APPEAL FIELD BY THE AO STANDS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH SEPTEMBER,2016. 14 , 2016 SD/- SD/- ( / R.L.NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 14 .09.2016. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR G BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.