DCIT (OSD) 8(2), MUMBAI V. HAFELE INDIA P.LTD, MUMBAI

ITA 2429/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 101229 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2010-2011
• Appeal Filed On: 10-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M MOHANDAS
• Assessee Lawyers: BRIJMOHAN P AGARWAL
• Keywords: Capital asset; Depreciation; Cost of acquisition; Revenue expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI B.R.BASKARAN, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.2429/MUM/2014 ASSESSMENT YEAR: 2010-11 DCIT (OSD) 8(2), R. NO. 218, 2 ND FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 VS. M/S HAFELE INDIA PVT. LTD. OFFICE NO.3, BUILDING A BETA, I0THINK TECHNOCAMPUR KANJURMARG, MUMBAI-400042 PAN: AABCH2726A (APPELLANT) (RESPONDENT) REVENUE BY : SHRI M. MOHANDAS, (DR) ASSESSEE BY SHRI BRIJMOHAN P. AGAR WAL DATE OF HEARING : 05.10.2015 DATE OF PRONOUNCEMENT : 05.10.2015 O R D E R PER PAWAN SINGH, JM: THE PRESENT APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A)-17, MUMBAI DATED 10.01.2014 ON THE FOLLOWING GROUNDS: 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF ` . 13,28,852/- ON ACCOUNT ON UNREALIZED FOREIGN EXCHANGE LOSS IGNORING THAT T HE SAID LOSS IS NEITHER ACTUAL NOR AN ACCRUED LOSS AND HENCE NOT AL LOWABLE UNDER THE PROVISIONS OF INCOME-TAX ACT. 2 ITA NO. 2429/M/13 M/S. HAFELE INDIA PVT. LTD. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT IN TH E BOOKS OF ACCOUNTS, THE ASSESSEE ACTUALLY REVERSES THE ENTRY OF UNREALI ZED FOREIGN EXCHANGE LOSS CLAIM ON THE FIRST DAY OF THE CURRENT YEAR AND THE FOREIGN EXCHANGE LOSS/GAIN IS COMPUTED ON THE BASIS OF THE EXCHANGE RATES AT THE CLOSE OF THE ACCOUNTING YEAR. THE ASSESSEE CLAIM FOR UNRE ALIZED GAIN/LOSS IS CALCULATED AFRESH EVERY YEAR. THEREFORE, THE LOSS C LAIMED IN ANY PARTICULAR YEAR CANNOT BE ALLOWED AS A DEDUCTION. 3) THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FI LED HIS RETURN OF INCOME ON 11.10.2010 IN RESPECT OF AY-2010-11, DECLARING T OTAL INCOME OF RS. 10,95,74,723/-. THE RETURN WAS SELECTED FOR SCRUTIN Y AND AFTER SCRUTINY THE AO MADE THE ADDITIONS OF RS. 8,15,965/- ON ACCOUNT OF EXCESS DEPRECIATION CLAIMED ON LEASE HOLD IMPROVEMENTS AND OF RS. 13,28,852/- ON ACCOUNT OF UNREALIZED FOREIGN EXCHANGE LOSS VIDE ORDER DATED 1 0.09.2012. 3. AGAINST THE ORDER OF AO, THE ASSESSEE FILED AN A PPEAL BEFORE THE CIT(A)- 17, MUMBAI. THE CIT(A) DELETED THE ADDITION MADE ON ACCOUNT OF UNREALIZED FOREIGN EXCHANGE LOSS AND REMANDED THE FINDING OF A DDITION MADE ON ACCOUNT OF DEPRECIATION IN THE LEASE HOLD PROPERTY ON THE B ASIS OF ITA NO. 8606/MUM/2010 IN THE CASE OF ASSESSEE ITSELF IN THE IMPUGNED ORDER DATED 10.01.2014 AGAINST WHICH THE PRESENT APPEAL IS FILE D. 4. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATIV E (DR) AND AUTHORIZED REPRESENTATIVE (AR) OF BOTH THE REVENUE AND ASSESSEE. THE LD DR RELIED UPON THE ORDER OF AO AND STRONGLY ARGUED TH AT THE ORDER OF THE AO IS REASONED ONE AND THE ORDER PASSED BY THE CIT(A) IS ILLEGAL AND IS LIABLE TO BE SETASIDE. 5. THE LD. CIT(A) WHILE DELETING THE ADDITION ON AC COUNT OF ADDITION OF RS. 13,28,850/- ON ACCOUNT OF UNREALIZED FOREIGN EXCHAN GE LOSS OBSERVED AS UNDER: 3 ITA NO. 2429/M/13 M/S. HAFELE INDIA PVT. LTD. IN THE CASE OF INDUSIND BANK LTD. VS. ADDL. CIT, T HE LD.AO MADE A DISALLOWANCE OF LOSS AMOUNTING TO RS. 98,27,032/- O N UN-MATURED FOREIGN EXCHANGE CONTRACTS CIT(A) CONFIRMED THE ORDER OF THE AO. IN APPEAL IS WAS CONTENDED BY THE ASSESSEE THAT THE APPELLANT MA INTAINED THE MERCANTILE SYSTEM WHERE LIABILITY ALREADY ACCRUED T HOUGH DISCHARGED AT A FUTURE DATE AND WAS A PROPER DEDUCTION ACCEPTING TH E PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. THE HON'BLE MU MBAI ITAT FOLLOWING THE DECISION OF SPECIAL BENCH IN THE CASE OF DOT (INTERNATIONAL TAXATION) VS. BANK OF BAHRAIN AND KUWAIT, HELD THAT NO ADDITION CAN BE MADE WHERE A FORWARD CONTRACT IS ENTERED INTO BY TH E ASSESSEE TO SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DAT E FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD, THE LOSS IS INCURRED TO THE ASSESSEE ON ACCOUNT OF EVALUATION OF THE CONTRACT ON THE LAST DATE OF T HE ACCOUNTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT . IN THE CASE OF CIT VS. WIPRO FINANCE LTD. 2010-TIOL -766-HC- KAR-IT, THE ASSESSEE AVAILS LOAN IN FOREIGN CURRENC Y AND SUFFERS LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY RATE, CLAIMS THE SAME AS REVENUE EXPENDITURE. AO DISALLOWS THE SAME AND THE CIT(A) CONFIRMS THE ORDER. TRIBUNAL ALLOWS ASSESSEE'S APPEAL BY HOL DING THAT IT IS SETTLED LAW THAT THE LOSS ARISING OUT OF FLUCTUATIO N IN THE FOREIGN EXCHANGE RATE IS ALLOWABLE AS REVENUE EXPENDITURE. THE COURT FURTHER HELD THAT THE APEX COURT IN THE CASE OF CALCUTTA CO . LTD VS. CIT (37 ITR 1) AND BHARAT EARTH MOVERS LTD. VS. CIT (245 IT R 428) ALLOWED THE CLAIM OF THE ASSESSEE TO CLAIM ITS INCREASE IN THE PAYMENT BY VIRTUE OF FLUCTUATION IN THE RATE OF FOREIGN EXCHAN GE. THE APEX COURT HAS HELD THAT AN ASSESSEE CAN CLAIM THE LOSS ACCRUE D BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS O N THE DATE OF BALANCE SHEET FILED BY THE ASSESSEE AND THEREFORE, THE CLAIM OF THE REVENUE HAS TO BE REJECTED IN THIS CASE AND BY VIRT UE OF THIS OPINION. THE HON'BLE SUPREME COURT IN THE CASE OF ACIT VS. E LECON ENGINEERING COMPANY LTD REPORTED IN 322 ITR 20(SC) CONSIDERED THE IMPACT OF SEC. 43A BOTH BEFORE AMENDMENT AND AFTER AMENDMENT. THE COURT WAS IN FACT EXAMINING THE DEDUCTIBILITY O F ROLL OVER PREMIUM IN RESPECT OF FOREIGN EXCHANGE FORWARD CONT RACTS. THE COURT HAS HELD THAT WHEREVER THE FOREIGN EXCHANGE LOANS W ERE AVAILED FOR SECURING CAPITAL ASSETS, THE DECREASE OR INCREASE W OULD AFFECT THE CAPITAL ASSET. IF THE FOREIGN EXCHANGE LOAN WAS ACQ UIRED FOR WORKING CAPITAL OR OTHER REVENUE COMMITMENTS, THE FLUCTUATI ON EFFECT SHALL BE ADJUSTED IN REVENUE ACCOUNT. TILL THE AMENDMENT BRO UGHT IN BY THE 4 ITA NO. 2429/M/13 M/S. HAFELE INDIA PVT. LTD. FINANCE ACT 2002, THIS ADJUSTMENT HAS TO BE MADE ON YEARLY BASIS EVALUATING THE POSITION ON THE LAST DAY OF THE CONC ERNED PREVIOUS YEAR. BUT AFTER THE AMENDMENT, THE ADJUSTMENT SHALL BE MADE ON THE ACTUAL PAYMENT OR SETTLEMENT OF CONTRAC TS AND DUES. THIS POSITION HAS BEEN MADE CLEAR BY THE HON'BLE CO URT IN THE ABOVE CASE. THE HON'BLE COURT HAS FURTHER DELIBERATED UPO N THE CAPITAL NATURE AND REVENUE NATURE OF SUCH ADJUSTMENTS ARISI NG OUT FOREIGN EXCHANGE FLUCTUATION. APART FROM THE ABOVE GENERAL PROPOSITION OF LAW, THE HON'BLE COURT FURTHER EXAMINED WHETHER THE ROLL OVER PREMIUM IN RESPECT OF FOREIGN EXCHANGE FORWARD CONT RACT IS ELIGIBLE FOR DEPRECIATION IN THE NATURE OF EXPENDITURE TO BE ADDED TO THE COST OF THE CAPITAL ASSET; OR TO BE DEBITED IN THE PROFI T AND LOSS ACCOUNT, IF IT IS IN THE REVENUE ACCOUNT. IF ROLL OVER PREMIUM ON FORWARD CONTRACT BY ITSELF IS HELD TO BE ADMISSIBLE AS A DE DUCTION OR ADJUSTMENT, THEN THERE IS NO DOUBT THAT THE LOSS AR ISES OUT OF THE FORWARD CONTRACTS WOULD BE VERY MUCH ENTITLED FOR D EDUCTION OR ADJUSTMENT IF IT IS A LOSS. OIL & NATURAL GAS CORPORATION LTD. VS CIT (2010) 32 2 ITR 180(SC), THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKIN G, ENGAGED IN EXPLORATION AND PROSPECTING OIL. IT LARGELY DEPENDS ON FOREIGN LOANS TO COVER ITS CAPITAL AND REVENUE EXPENSES. FLUCTUAT ION IN FOREIGN CURRENCY RATES RESULTS IN LOSS AND ASSESSEE CLAIMS DEDUCTION U/S 37(1) IN THE YEAR OF FLUCTUATION APART FROM ADJUSTI NG THE ACTUAL COST OF IMPORTED CAPITAL ASSETS ACQUIRED IN FOREIGN CURR ENCY ON ACCOUNT OF FLUCTUATION AT EACH BALANCE-SHEET DATE, PENDING ACT UAL PAYMENT OF THE VARIED LIABILITY. AO DISALLOWED THE CLAIM AND L D. CIT(A) GOES WITH THE AO ON THE ASSESSEE'S CLAIM FOR FOREIGN EXCHANGE LOSS IN REVENUE ACCOUNT BUT ACCEPTS THE ASSESSEE'S STAND RELATING T O CAPITAL ACCOUNT. TRIBUNAL DISAGREES WITH THE AO BUT HIGH COURT REVER SES THE TRIBUNAL'S ORDER - HELD, IN VIEW OF THE APEX COURT DECISION IN THE WOODWARD GOVERNOR CASE AND THE FACT THAT THIS CASE PERTAINS TO THE PERIOD PRIOR TO THE AMENDMENT IN SEC 43A, BOTH THE ISSUES WERE S ETTLED IN FAVOUR OF THE ASSESSEE. SIMILARLY IN THE CASE OF CIT VS. I NDUSTRIAL FINANCE CORPORATION 2010-TIOL-42-HC-DEL-IT ASSESSEE ENTERED INTO FORWARD CONTRACTS FOR PURCHASE OF FOREIGN CURRENCY, THE HON 'BLE DELHI HIGH COURT HAS HELD THAT DIFFERENCE BETWEEN FORWARD CONT RACT RATE AND EXCHANGE RATE ON DATE OF ENTERING INTO CONTRACT HAS TO BE RECOGNIZED AS INCOME OR EXPENSE SINCE IT IS ASCERTAINED AND DE FINITE AS PER THE TERMS OF THE CONTRACT. IT WAS HELD FURTHER THAT THE EXPENSE IS TO BE ALLOWED AS A BUSINESS EXPENSE IN THE YEAR OF ENTERI NG INTO THE FORWARD CONTRACT ALTHOUGH AS PER THE TERMS OF THE C ONTRACT PART PAYMENT IS TO BE MADE IN THE SUBSEQUENT YEAR. IN VI EW OF THE FORGOING THE CLAIM OF THE APPELLANT CANNOT BE SAID TO BE CONTINGENT IN NATURE AND HENCE ALLOWABLE. THIS GROUND OF APPEAL I S THUS ALLOWED. 5 ITA NO. 2429/M/13 M/S. HAFELE INDIA PVT. LTD. 6. THE AR OF ASSESSEE HAS RELIED UPON THE CASE OF HONBLE APEX COURT IN CIT VS. M/S WOODWARD GOVERNOR INDIA P. LTD. DATED 08/04 /2009 REPORTED IN (2009) 312 ITR 254, AND ARGUED THAT THE CASE OF AS SESSEE IS SQUARELY COVERED BY THE ABOVE JUDGMENT. 7. IN CIT VS. M/S WOODWARD GOVERNOR INDIA P. LTD. T HE HONBLE APEX COURT HELD THAT THE L OSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUA TION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE-SHEE T IS AN ITEM OF AN EXPENDITURE UNDER SECTION 37(1) OF THE INCOME TAX A CT. FOR VALUING THE CLOSING STOCK AT THE END OF A PARTI CULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT. THIS IS BE CAUSE PROFIT/LOSS IS EMBEDDED IN THE CLOSING STOCK. WHILE ANTICIPATED LOSS IS TAK EN INTO ACCOUNT, ANTICIPATED PROFIT IN SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW IN CREASE IN PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE THEORY UNDERLYING T HE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWE R. DECISION OF THE DELHI HIGH COURT AFFIRMED. 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. PROFIT AND GAINS OF THE PREVIOUS YEAR ARE REQUIRED TO BE COMPUTED IN ACCORDANCE WITH THE RELEVANT ACCOUNTING STANDARD. O N GENERAL PRINCIPLES OF COMMERCIAL ACCOUNTING, THE VALUE OF THE STOCK-IN-TR ADE AT THE BEGINNING AND AT THE END OF THE ACCOUNTING YEAR SHOULD BE ENTERED IN THE PROFIT AND LOSS ACCOUNT AT COST OR MARKET PRICE, WHICHEVER 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 I S STRUCK BETWEEN THE COST OF ACQUISITION AND THE PROCEEDS OF SALE. THE WORD 'PRO FITS' IMPLIES A COMPARISON BETWEEN THE STATE OF BUSINESS AT TWO SPECIFIC DATES , USUALLY SEPARATED BY AN 6 ITA NO. 2429/M/13 M/S. HAFELE INDIA PVT. LTD. INTERVAL OF TWELVE MONTHS. STOCK-IN-TRADE IS AN ASS ET: IT IS A TRADING ASSET. THEREFORE, THE CONCEPT OF PROFITS AND GAINS MADE BY A BUSINESS DURING THE YEAR CAN ONLY MATERIALIZE WHERE A COMPARISON OF THE ASSETS 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 IN TO DEBIT AN EXPENDITURE FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED. 8. THE RATIO DECIDED BY HONBLE APEX COURT SQUARE LY COVERED BY THE ISSUES /GROUNDS NO. 1 AND 2 RAISED IN THE PRESENT APPEAL. THE GROUND NO3 RAISED IN THE PRESENT APPEAL IS GENERAL IN NATURE AND DOES NO T REQUIRE ANY SPECIFIC FINDING. 9. IN VIEW OF THE ABOVE DISCUSSION THE APPEAL FILED BY THE REVENUE HAS NO MERIT AND THUS THE SAME IS DISMISSED. AS A RESULT, APPEAL FILED BY THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY 5 TH OF OCTOBER, 2015. SD/- SD/- (B.R.BASKARAN) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 05.10.2015 SHARWAN P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR H BENCH //TRUE COPY// BY ORDER DY/ASSTT.REGISTRAR, ITAT, MUMBAI