ZMG WARDHOWELL INDIA P.LTD, MUMBAI V. ITO 7(3)(4), MUMBAI

ITA 2577/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8820 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2009-2010
• Appeal Filed On: 05-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G NANTHAKUMAR
• Keywords: Capital asset; Cost of acquisition; Revenue expenditure
• Section: 142(1); 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI . . , , BEFORE SHRI C.N. PRASAD , JM AND SHRI RAJESH KUMAR, AM ITA NO. 2577 / MUM/ 20 1 5 ( / ASSESSMENT YEAR: 20 0 9 - 10 ) M/S ZMG WARDHOWELL INDIA PVT LTD, 202, CENTRAL WING, DURVANKUR CHS LTD, SANT JANABAI ROAD, NEAR GREATER BANK, VILE PARLE (E), MUMBAI - 400057 / VS. INCOME TAX OFFICER - 7(3)(4), MUMBAI. ./ ./ PAN : AAACZ2077K ( / APPELLANT) : ( / RESPONDENT ) / APPELLANT BY : SHRI TANMAY PHADKE /RESPONDENT BY : SHRI G NANTHA KUMAR / DATE OF HEARING : 28 .12. 20 1 6 / DATE OF PRONOUNCEMENT : 16. 1.2017 / O R D E R PER RAJESH KUMAR, A. M: THIS IS AN APPEAL FILED BY THE ASSESSEE CHALLENGING THE ORDER DATED 6.2. 201 5 PASSED BY THE LD.CIT(A) - 1 4 , MUMBAI FOR THE ASSESSMENT YEAR 20 09 - 10. 2 ITA NO. 2577 /MUM/201 5 2. THE SOLE ISSUE RAISED IN THE VARIOUS GROUNDS OF APPEAL IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF LOSS ON FOREX FLUCTUATION OF RS.12,37,512/ - ON ECB LOAN BY THE LD.CIT(A) AS MADE BY THE AO BY CONSIDERING THE SAME AS NOTIONAL LOSS A ND FURTHER THE LD.CIT(A) ERRED IN APPLYING THE PROVISIONS OF SECTION 43A OF THE INCOME TAX ACT, 1961 WHILE UPHOLDING THE ORDER OF THE AO, WHEREAS AS A MATTER OF FACTS THE LOSS IS NEITHER NOTIONAL NOR PROVISIONS OF S ECTION 43A OF THE ACT ARE APPLICABLE AS THE ASSETS WE RE ACQUIRED IN INDIA AND NOT OUTSIDE THE COUNTRY. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME ON 26.09.2009 DECLARING A TOTAL LOSS OF RS.19,46,456 / - . THE SAME WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND THEREAFTER THE CA SE WAS SELECTED F OR SCRUTINY AND STATUTORY NOTICES UNDER SECTION 143(2) AND 142(1) WERE ISSUED AND SERVED UPON THE ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED FROM THE PROFIT AND LOSS ACCOUNT THAT THE ASSESSEE HAS DEBITED AN A MOUNT OF RS.12,37,512/ - UNDER THE HEAD FOREX VARIANCE LOSS . THE AO ASKED THE ASSESSEE TO GIVE BASIS FOR CLAIMING THE SAID LOSS AS EXPENSES IN PROFIT AND LOSS ACCOUNT. IN REPLY, THE ASSESSEE SUBMITTED THAT IT HAS RECEIVED ECB LOAN IN FINANC IAL YEAR 20 04 - 05 FROM (1) ZMG SIGNIUM WARD HOWELL 67,000 US$ AND (2) ARGOSY PARTNER INC 33,000 US$, WHICH IN TERMS OF INDIAN CURRENCY AT THE TIME OF TAKING OF LOAN WORKED OUT TO 3 ITA NO. 2577 /MUM/201 5 RS.30,89,930/ - AND RS.5,13,450/ - AGGREGATING TO RS.46,03,380/ - . THE SAID LOANS W ERE PARTLY USED FOR THE PURPOSE OF PURCHASE OF FIXED ASSETS IN INDIA AND ALSO USED FOR THE ROUTINE BUSINESS OF THE ASSESSEE. SINCE THE LOANS WERE COMING OVER ALL ALONG FROM THE EARLIER YEARS AND OUTSTANDING AT THE YEAR END , THE ASSESSEE RES TATED THE LOAN LIABILITY IN TERMS OF FOREIGN EXCHANGE RATE PREVALENT ON THE CLOSE OF THE YEAR AND ACCORDINGLY THE DIFFERENCE ON ACCOUNT OF INCREASED LIABILITY W A S WRITTEN OFF AMOUNTING TO RS.12,37,512/ - UNDER THE HEAD FOREX VARIANCE LOSS AND THE LOAN WAS SHOWN AT RS. 52,17,000/ - IN THE BALANCE SHEET AT THE CLOSE OF THE YEAR . THE AO NOT CONVINCED WITH THE REPL IES AND CONTENTIONS OF THE ASSESSEE , DISALLOWED AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE FOR THE REASONS THAT THE SAME WAS NOT REVENUE EXPENDITURE AS THE LOAN S W ERE NOT REPAID AND IT WAS A NOTIONAL LOSS WHICH WAS WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD FOREX VARIANCE LOSS IN THE CURRENT ASSESSMENT YEAR I.E 2010 - 11 BY ASSESSING THE TOTAL INCOME AT RS.7,08,950/ - AS AGAINST RETU RNED LOSS OF RS.19,46,456/ - BY MAKING VARIOUS DISALLOWANCES INTER ALIA FOREX VARIATION LOSS OF RS.12,37,512/ - . AGGRIEVED BY THE ORDER OF THE AO , THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY, WHO NOT ONLY UPHELD THE ORDER OF THE AO BUT WENT A STEP AHEAD BY HOLDING THAT THE LOSS WAS NOT ADMISSIBLE AS REVENUE LOSS IN VIEW OF THE PROVISIONS OF SECTION 43A OF THE ACT BY OBSERVING AND HOLDING AS UNDER : 4 ITA NO. 2577 /MUM/201 5 3.3 3 I HAVE GONE THROUGH THE FACTS AND SUBMISSIONS. THE LOAN WAS TAKEN BY THE APP ELLANT FROM ITS SISTER CONCERN IN THE YEAR 2004 - 05 WHICH HAS REMAINED UNPAID TILL DATE . THE COMP ANY IS A RECRUITMENT AGENCY AND THE LOAN WAS TAKEN FROM ITS FOREIGN SHARE HOLD ERS IN INI TIAL YEARS. IT IS ALSO NOT DISPUTED THAT. THE ADDITIONS MADE IN THE F IXED ASSETS YEAR AFTER YEAR WERE MET FROM FOREIGN CURRENCY LOAN AS SHARE CAPITAL WAS ONLY RS 4,95 ,000/ - . ON THESE GIVEN FACTS, THE LOAN IS THOUGH SAID TO HAVE BEEN UTILIZED PARTLY ON REVENUE ACCOUNT AND PARTY ON CAPITAL ACCOUNT, SAME IS NOT SUPPORTED BY AN Y FUND FLOW STATE MENT. THEN THE ENTIRE LOAN HAS REMAINED UNPAID AND SO HAS BEEN ADJUSTED IN THE COST DUE TO FLUCTUATION IN FOREIGN EXCHANGE. ON THESE GIVEN FACTS, IT CANNOT BE SAID THAT THE LOSS IS ON REVENUE ACCOUNT AS SAME WAS UTILIZED TOWARDS PURCHASE OF FIXED ASSETS IN A.Y. 200 5 - 06, 2006 - 07, 2007 - 08, 2008 - 09 AND 2009 - 10 AND THUS PROVISIONS OF SECTION 43A ARE ATTRACTED IN THE CASE .. I HAVE ALSO GONE THROUGH SECTION 43A WHICH SAYS AS UNDER. - 43A. SPECIAL PROVISIONS CONSEQUENTIAL TO CHANGES IN RATE OF EXCHANGE OF CURRENCY 43A NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, WHERE AN ASSESSEE HAS ACQUIRED ANY ASSET FROM A COUNTRY OUTSIDE INDIA FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND, IN CONSEQUENCE OF A CHANGE IN THE RATE OF EXCHANGE AT ANY TIME AFTER THE ACQUISITION OF SUCH ASSET, THERE IS AN INCREASE OR REDUCTION IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIAN CURRENCY FOR MAKING PAYMENT ( A ) TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSET ; ( B ) TOWARDS REPAYMENT OF THE WHOLE OR A PART OF THE MONEYS BORROWED BY HIM FROM ANY PERSON, DIRECTLY OR INDIRECTLY, IN ANY FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THE ASSET ALONG WITH INTEREST, IF ANY, THE AMOUNT BY WHICH THE LIABILITY AFORESAID IS SO INCREAS ED OR REDUCED DURING SUCH PREVIOUS YEAR AND WHICH IS TAKEN INTO ACCOUNT AT THE TIME OF MAKING THE PAYMENT, IRRESPECTIVE OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE, SHALL BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED FROM ; ( I ) THE ACTUAL COST OF THE ASSET AS DEFINED IN CLAUSE (1) OF SECTION 43 OR ; 5 ITA NO. 2577 /MUM/201 5 ( II ) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUB - SECTION (1) OF SECTION 35 ; ( III ) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN SECTION 35A; OR ( IV ) THE AMOUNT OF EX PENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IX) OF SUB - SECTION (1) OF SECTION 36, OR ( V ) THE COST OF ACQUISITION OF THE CAPITAL ASSET (NOT BEING A CAPITAL ASSET REFERRED TO IN SECTION 50) FOR THE PURPOSES OF SECTION 48, AND THE AMOUNT ARRIVED AT AFTE R SUCH ADDITION OR DEDUCTION SHALL BE TAKEN TO BE THE ACTUAL COST OF THE ASSET OR THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE, OR AS THE CASE MAY BE, THE COT OF ACQUISITION OF THE CAPITAL ASSET AS AFORESAID PROVIDED ************ 4. THE LEARNED AR VEHEM ENTLY SUBMITTED BEFORE US THAT THE ORDER PASSED BY THE LD.CIT(A) SUFFERS FROM SERIOUS LEGAL INFIRMITY AS THE LD CIT(A) HAS WRONGLY UPHELD THE ORDER OF THE AO BY HOLDING THAT LOSS WRITTEN OFF RS.12,37,512/ - WAS COVERED UNDER THE PROVISIONS OF SECTION 43A OF THE ACT AND THAT THE FLUCTUATION LOSS COULD NOT BE ALLOWED AS REVENUE LO SS UNDER SECTION 37 OF THE ACT. 5. THE LD. AR STATED THAT THE ASSESSEE HAS ALSO RECOGNIZED THE GAIN ON THE SAID LOANS IN THE EARLIER THREE YEAR S ON THE BASIS OF EXCHANGE RATE B Y RES TATING THE LIABILITY OUTSTANDING AT THE YEAR END ALSO AND SHOWING THE SAME AS GAIN OF FOREX VARIATION IN PROFIT AND LOSS ACCOUNT WHICH WAS DULY ASSESSED AND ACCEPTED BY THE DEPARTMENT AS PER DETAILS BELOW: - 6 ITA NO. 2577 /MUM/201 5 AY FOREX GAIN FOREX LOSS 2006 - 07 14023 0 2007 - 08 119342 2008 - 09 326046 THE LD. AR SUBMITTED THAT THE LOSS ON ACCOUNT OF FOREX VARIATION RESULTING FROM RESTATEMENT OF LOAN LIABILITIES HAS OCCURRED DUE TO FOREIGN EXCHANGE RATE UPWARD FLUCTUATION WHICH WAS NEITHER THE CAPITAL EXPENSES N OR NOTIONAL LOSS BUT IN FACT REPRESENTED THE ACTUAL LOSS ON THE BASIS OF EXCHANGE RATE AT THE YEAR END AND VERY MUCH CONSTITUTE D REVENUE EXPENSES UNDER SECTION 37 OF THE ACT AS WHOLLY AND EXCLUSIVELY INCURRED OR THE BUSINESS PUR POSES . THE LD. AR DREW OUR ATTENTION TO TH E PROVISIONS OF SECTION 43A OF THE ACT BY SUBMITTING THAT THE SECTION 43A HAS NOT APPLICATION WHERE THE ASSETS WERE PURCHASED WITHIN THE COUNTRY AND THEREFORE THE OBSERVATIONS OF THE LD. CIT(A) WERE TOTALLY AGAINST TH E F A CTS ON RECORD AND WAS ALSO CONTRARY TO THE FINDINGS OF THE AO DURING T HE CO URSE OF ASSESSMENT PROCEEDINGS WHO MADE THE ADDITION ON A DIFFE RE NT FOOTING. IT W A S ALSO SUBMI TT ED BY THE LD.AR THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE AND OTHER FUNDS WHEREAS THE FIXED ASSETS PURCHASED BY THE ASSESSEE IN ALL AMOUNTED TO RS.13 , 61 , 349 / - OVER A PERIOD COMMENCING FROM AY S 2005 - 06 TO 2009 - 10 WHICH PROVED THAT THE OBSERVATION OF THE LD.CIT(A) WAS ALSO WRONG THAT FOREX ECB LOAN WAS USED FOR MAKING ADDITION TO FIXED ASSETS. F INALLY, THE LD.AR PRAYED BEFORE THE BENCH 7 ITA NO. 2577 /MUM/201 5 THAT THE ORDER OF THE LD.CIT(A) BE SET ASIDE AND THE AO BE DIRECTED TO ALLOW FOREX VARIANCE LOSS AS REVENUE EXPENDITURE. 6. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED T HAT IT WAS NOT CLEAR FROM THE ASSESSMENT ORDER WHETHER THE ASSETS WERE PURCHASED WITHIN OR OUTSIDE INDIA. 7 . WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US INCLUDING THE ORDERS OF AUTHORITIES BELOW. IT IS UNDIS PUTED FACT THAT THE ASSESSEE BORROWED ECB LOANS FROM TWO SHARE HOLDERS IN ASSESSMENT YEAR 2005 - 06 WHICH WAS OUTSTANDING TILL THE YEAR END UNDER CONSIDERATION AND THE LOSS ON ACCOUNT UPWARD MOVEMENT IN FLUCTUATION RATE COMES TO RS.12,27,430/ - . THE COMPAR ATIVE CHART SHOWING THE LOANS TAKEN AND OUTSTANDING IN TERMS OF FOREIGN EXCHANGE ARE AS UNDER: NAME OF THE PARTY US$ AMOUNT AS ON 31.3.2005 AMOUNT AS ON 31.3.2008 AMOUNT AS ON 31.3.2009 ARGOUSY PARTNERS INC 33000 1513450 1318578 1724207 ZMG SIGNIUM WA RD HOWELL 67000 3089930 2672813 3494614 4603380 3991391 5218821 LOSS BOOKED AS ON 31.3.2009 1227430 WE ALSO FIND THAT DURING THE ASSESSMENT YEARS 2006 - 07, 2007 - 08 AND 2008 - 09 THE ASSESSEE HAD BOOKED THE FOREX FLUCTUATION GAIN ON THESE LOANS AMO UNTING TO RS.140,230/ - , RS.1,19,342/ - AND RS.3,26,046/ - RESPECTIVELY ON THE BASIS OF EXCHANGE RA T E AT THE RESPECTIVE YEAR END THEREBY STATING THE 8 ITA NO. 2577 /MUM/201 5 AMOUNT OF LOAN AT THE YEAR END AT REDUCED AMOUNT AND SHOWING THE GAIN ON RE - STATEMENT ON THE INCOME SIDE OF THE PROFIT AND LOSS ACCOUNT WHICH WAS ACCEPTED AND ASSESSED BY THE REVENUE . BUT DURING THE YEAR, THE AO DID NOT ACCEPT THE FOREX VARIANCE LOSS FOR THE REASON THAT THE SAME WAS NOT REVENUE IN NATURE AND ALSO THAT IT REPRESENTED THE NOTIONAL LOSS AS THE L OAN LIABILITY WAS NOT REPAID DURING THE YEAR. 8 . IN THE APPEAL PROCEEDINGS, THE LD.CIT(A) WHILE UPHOLDING THE ORDER OF THE AO ALSO RECORDED THE FINDING THAT THE ASSETS WERE ACQUIRED OUTSIDE INDIA AND THE LOAN WAS UTILIZED FOR MAKING THE ADDITION TO THE F IXED ASSET WHICH ACCORDING TO THE FACTS ON RECORD WAS NOT CORRECT AS THE MONEY BORROWED BY THE ASSESSEE WAS PARTLY USED FOR THE PURPOSE OF PURCHASE OF ASSETS IN INDIA AND ALSO USED FOR WORKING CAPITAL AS THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF PROVIDI NG RECRUITMENT SERVICES WHICH IS APPARENT FROM THE FOLLOWING : AY ADD TO FIXED ASSETS FOREIGN CURRENCY LOANS SHARE CAPITAL SALES DURING THE YEAR 2005 - 06 729281 4603380 495000 250464 2006 - 07 438570 0 0 2080003 2007 - 08 17850 0 0 4761638 2008 - 09 64480 0 0 6390197 2009 - 10 111168 0 0 5659735 FROM THE ABOVE IT IS CLEAR THAT TOTAL ADDITION OVER A PERIOD OF 5 YEARS WERE RS.13,61,349/ - TO THE FIXED ASSETS WHEREAS THE MONEY BORROWED IN THE ASSESSMENT YE A R 2005 - 06 WAS RS. 46,03,380/ - . THE ABOVE TABLE SHOWS THE 9 ITA NO. 2577 /MUM/201 5 YEAR - WISE INVESTMENT IN FIXED ASSETS . W E ALSO FIND MERIT IN THE ST ATE MENT OF THE LD. AR THAT THE ASSESSEE W A S ENGAGED IN THE BUSINESS OF RECRUITMENT AGENCY AND NO SPECIAL PLANT AND MACHINERY OR ASSE T S WERE REQUIRED AND ADDITIONS /PURCHASES WERE MADE IN INDIA . UNDER THESE FACTS AND CIRCUMSTANCES OF TH E CASE WE ARE OF THE VI EW THA T THE ORDER PASSED BY THE LD.CIT(A) IS INCORRECT AND CANNOT BE SUSTAINED AS THE LOSS ON RE - STATEMENT OF BORROWINGS MADE OUTSIDE COUNTRY IN TERMS OF FER IS A REVENUE LOSS AND ALLOWABLE U/S 37 OF THE ACT. WE THEREFORE INCLINED TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECT THE AO TO ALLOW THE FOREX LOSS AS BUSINESS LOSS. 9 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16TH JAN, 2017. S D SD ( C.N. PRASAD ) ( RAJESH KUMAR) / J UDICIAL MEMBER / A CCOUNTANT MEMBER MUMBAI ; DATED : 16. 1.2017 SRL,SR.PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER, T RUE COPY / ( DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI