M/s. Wheels India Limited, CHENNAI V. ACIT, CHENNAI

ITA 43/CHNY/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73765 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-02-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 11-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOBADDL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Business expenditure; Additional depreciation; Speculation loss; Capital expenditure
• Section: 14A; 37(1); 32; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . , , !' # , $ % BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ I.T.A.NO.06/MDS./2012 & 43/MDS./2010 ( / ASSESSMENT YEAR :2006-07) M/S.WHEELS INDIA LTD . PADI, CHENNAI 600 050. VS. THE DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI 600 101. PAN AAACW 0315 K ( &' / APPELLANT ) ( #(&' / RESPONDENT ) ./ I.T.A.NO.251/MDS./2010 ( / ASSESSMENT YEAR :2006-07) THE DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI 600 101. VS. M/S. WHEELS INDIA LTD . PADI, CHENNAI 600 050. PAN AAACW 0315 K ( &' / APPELLANT ) ( #(&' / RESPONDENT ) M/S.WHEELS INDIA LTD. 2 / ASSESSEE BY : MR.R.VIJAYARAGHAVAN,ADVOCATE / REVENUE BY : MR.SHAJI P.JACOB,ADDL.CIT D.R / DATE OF HEARING : 25.02.2014 ! /DATE OF PRONOUNCEMENT : 14.03.2014 ) / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THESE ARE TWO APPEALS FILED BY THE ASSESSEE AGAINS T THE APPELLATE ORDER OF THE LD. CIT (A), DATED 30.11.200 9 IN ITA NO.32/08- 09/LTU(A) AND THE ORDER OF THE LD. CIT (A) DATED 24 .11.2011 IN ITA NO.2/10-11/LTU(A) BEING THE APPELLATE ORDER AGAINST THE ORDER OF THE LD. ASSESSING OFFICER GIVING EFFECT TO THE ORDER OF LD. CIT (A), BOTH FOR THE ASSESSMENT YEAR 2006-07 AND THE APPEAL OF T HE REVENUE FOR THE SAME ASSESSMENT YEAR AGAINST THE APPELLATE ORDE R PASSED BY THE LD. CIT (A) DATED 30.11.2009. 2. THE ASSESSEE AND THE REVENUE HAVE RAISED THE SEV ERAL GROUNDS IN THE RESPECTIVE APPEALS AND THEY ARE CONC ISED HEREIN- BELOW FOR REFERENCE:- M/S.WHEELS INDIA LTD. 3 2.1. CONCISED GROUNDS OF THE ASSESSEE IN ITA NO.43/MDS./10 :- (I) THE LD. CIT (A) HAD ERRED IN CONFIRMING THE OR DER OF THE LD. ACIT DISALLOWING THE CLAIM OF ` 3,74,00,160/- BEING THE ADDITIONAL DEPRECIATION NOT ALLOWED IN THE PRECEDIN G YEAR ON THE ASSET PUT TO USE BY THE ASSESSEE FOR LESS THAN 180 DAYS. (II) THE LD. CIT (A) HAD ERRED IN DIRECTING THE L D. ACIT TO APPLY RULE 8D FOR THE PURPOSE OF DISALLOWANCE U/S. 14A OF THE ACT, EVEN WHEN THE SAID RULE HAS BEEN INTRODUCED IN THE STATUTE ONLY W.E.F 24.03.2008 AND HENCE NOT APPLICABLE TO T HE RELEVANT ASSESSMENT YEAR. ADDITIONAL GROUNDS : (III) THE REVENUE HAD ERRED BY TREATING THE REM ISSION OF SALES TAX LIABILITY AS INCOME OF THE ASSESSEE U/S. 41(1) OF THE ACT. 2.2. CONCISED LONE GROUND OF THE ASSESSEE IN ITA NO.06/MDS./10 :- (I) THE LD. CIT (A) HAD ERRED IN DISALLOWING E XPENSES OF ` 7,24,785/- RELATED TO EARNINGS FROM DIVIDEND INCOME BY APPLYING RULE 8D OF THE ACT. M/S.WHEELS INDIA LTD. 4 2.3. CONCISED LONE GROUND OF THE REVENUE IN ITA NO.251/MDS./10 :- (I) THE LD. CIT (A) HAD ERRED IN HOLDING THAT LO SS ON ACCOUNT OF EXCHANGE FLUCTUATION SHOULD BE ALLOWED TO THE ASSES SEE AS CLAIMED BY IT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A LIMITED COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURING OF AUTO-COMPONENTS, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 ON 08.11.2006 DECLARING TOTAL INCOME OF ` 27.56 CRORES APPROXIMATELY. THE CASE WAS SELECTED FOR SCRUTINY U NDER CASS AND FINALLY ASSESSMENT U/S. 143(3 WAS MADE ON 17.11.200 8 WHEREIN LD. ASSESSING OFFICER MADE CERTAIN ADDITIONS. 3.1. GROUNDS OF THE ASSESSEE IN ITA NO.43/MDS./10 :- 3.1.(I) DISALLOWANCE OF ADDITIONAL DEPRECIATION OF ` 3,74,00,160/- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE LD. ASSESSING OFFICER THAT THE ASSESSEE HAD CLA IMED ADDITIONAL DEPRECIATION U/S. 32(1)(IIA) OF THE ACT AMOUNTING T O ` 3,74,160/- IN M/S.WHEELS INDIA LTD. 5 RESPECT OF THE PRECEDING ASSESSMENT YEAR @ 7.5% BEI NG 50% OF 15%. THE ASSESSEE HAD SUBMITTED BEFORE THE LD. AS SESSING OFFICER THAT:- SECTION 32(1)(IIA) USES THE EXPRESSION SHALL BE A LLOWED. VESTED RIGHTS CANNOT GET DIVESTED THOUGH SECTION 32(1) SECOND PRO VISO RESTRICTS IT TO 50%, IT DOES NOT SAY THE BALANCE OF 50% WILL NOT BE ALLOWED IN THE SUCCEEDING YEAR, BECAUSE IN THE NORMAL CASE IT GETS ALLOWED AS PART OF THE BLOCK DEPRECIATION. WHAT IS ALLOWED U/S. 32(1)(IIA ) IS AN EXTRA DEPRECIATION WHICH HAS BEEN EARNED IN THE YEAR OF ACQUISITION AN D REQUIRING TO BE FULLY ALLOWED, SO THAT OVER AND ABOVE, THE NORMAL DEPRECI ATION OF THE ENTIRE BLOCK, THE ARREAR DEPRECIATION OF UNABSORBED 7.5% SHOULD BE AVAILABLE. IT IS THE ONLY WAY SECTION 32(1)(IIA) CAN BE RECONCILE D WITH SECOND PROVISO TO SECTION 32(1)(II). THE STATUTORY ALLOWANCE U/S. 32 (1)(IIA) GETS STAGGERED IN TWO YEARS FOR WHICH THERE IS NO BAR. IN A NORMAL C ASE, NO SEPARATE CALCULATION IS REQUIRED BECAUSE THERE ARE NO TWO SE T OF DEPRECIATION AS IN THE CASE ONE FOR NORMAL DEPRECIATION AS PART OF THE BLOCK AND EXTRA DEPRECIATION U/S. 32(1)(IIA) SUBJECT TO SECOND PROV ISO TO SECTION 32(1)(II). THIS COULD BE GIVEN EFFECT BY TREATING THE ARREAR D EPRECIATION AS EXTRA DEPRECIATION U/S. 32(1)(IIA) IN THE NEXT SUCCEEDING YEAR. M/S.WHEELS INDIA LTD. 6 3.1. (II) AFTER CONSIDERING THE SUBMISSIONS OF THE LD. A.R., AND PERUSING THE PROVISIONS OF THE ACT, LD. ASSESSING OFFICER CAME TO A CONCLUSION THAT SINCE THE ADDITIONAL DEPRECIATION CLAIMED RELATED TO THE ASSETS ADDED DURING PRECEDING ASSESSMENT YEAR, THE SAME IS NOT ALLOWED DEDUCTION FOR THE RELEVANT ASSESSMENT YEAR. ON APPEAL, THE LD. CIT (A) ALSO ENDORSED THE VIEW OF THE LD. ASS ESSING OFFICER BY OBSERVING AS UNDER:- 4.2. I HAVE CAREFULLY CONSIDERED THE FACTS OF TH E CASE AND THE VARIOUS SUBMISSIONS MADE BY THE AR. I FIND THAT THE PROVIS IONS OF THE ACT ARE VERY CLEAR. THE SECOND PROVISO TO SECTION 32(1), WHICH R ESTRICTS THE DEPRECIATION TO 50% OF THE PERCENTAGE PRESCRIBED IN RESPECT OF A SSETS USED FOR LESS THAN 180 DAYS IS APPLICABLE FOR ADDITIONAL DEPRECIA TION ALSO. THERE IS NO PROVISION IN THE ACT TO CARRY FORWARD AND ALLOW THE BALANCE DEPRECIATION IN THE NEXT YEAR. FURTHER THE ADDITIONAL DEPRECIATION IS ALLOWABLE ONLY IN RESPECT OF NEW MACHINERY OR PLANT THAT HAS BEEN ACQ UIRED, WHEN THE BALANCE 50% OF THE ADDITIONAL DEPRECIATION IS PROPO SED TO BE CLAIMED, THE ASSETS ARE NOT NEW MACHINERY OR PLANT ELIGIBLE FOR ADDITIONAL DEPRECIATION. THESE ASSETS FORM PART OF THE OPENING WRITTEN DOWN VALUE OF THE ASSETS. THEREFORE, THESE ARE NOT ENTITLED FOR THE SAID ADDI TIONAL DEPRECIATION. I AM THEREFORE OF THE CONSIDERED OPINION THAT THE CLAIM OF THE APPELLANT ON THIS GROUND CANNOT BE ALLOWED. THIS GROUND OF APPEAL IS THEREFORE DISMISSED. M/S.WHEELS INDIA LTD. 7 3.1 .(III) AFTER HEARING BOTH SIDES AND ON CAREFULLY EXAMINI NG THE ISSUE, WE FIND THAT THE MATTER IS HELD AGAINST THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.2136/MDS. /2010 FOR THE ASSESSMENT YEAR 2007-08 VIDE ORDER DATED 26.11.2013 . THE RELEVANT PORTION OF THE ORDER IS REPRODUCED HEREIN BELOW FOR REFERENCE:- 7. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPR ESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHOR ITIES BELOW AS WELL AS THE JUDGMENTS /ORDERS RELIED UPON BY THE REPRESENTA TIVES OF BOTH THE SIDES. WE FIRST TAKE UP THE APPEAL OF THE ASSESSEE I.E. I TA NO.2136/MDS/2010. THE ASSESSEE IS CLAIMING ADDITIONAL DEPRECIATION AM OUNTING TO ` 3,15,48,837/- IN RESPECT OF PLANT & MACHINERY CARRI ED FORWARD FROM THE PRECEDING YEAR. WE FIND THAT THE CLAIM OF THE ASSE SSEE FOR CARRY FORWARD OF ADDITIONAL DEPRECIATION CANNOT BE ALLOWED AS THERE IS NO PROVISION IN THE ACT TO ALLOW CARRY FORWARD OF UNABSORBED ADDITIONAL D EPRECIATION IN THE NEXT YEAR. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ITA NO.1069/MDS./2010 IN THE CASE OF DCIT VS. BRAKES INDIA LTD . HAS HELD THAT: ADDITIONAL DEPRECIATION IS ALLOWABLE ON THE PLANT & MACHINERY ONLY FOR THE YEAR IN WHICH THE CAPACITY EXPANSION HAS TA KEN PLACE WHICH HAS RESULTED IN THE SUBSTANTIAL INCREASE IN THE INS TALLED CAPACITY. IN THE INSTANT CASE, IT IS AN ADMITTED FACT THAT TH E PLANT & MACHINERY HAS BEEN INSTALLED IN THE PRECEDING YEAR AND THE ASSESS EE INTENDS TO CARRY FORWARD UNABSORBED ADDITIONAL DEPRECIATION IN THE A SSESSMENT YEAR UNDER REFERENCE, WHICH IS NOT PERMISSIBLE. HENCE, THIS GR OUND OF APPEAL OF THE ASSESSEE IS DISMISSED. M/S.WHEELS INDIA LTD. 8 FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH, WE HEREBY HOLD THAT, SINCE THE ASSESSEE HAD INSTALLED THE MACHINERY DURI NG THE PRECEDING ASSESSMENT YEAR, THE ASSESSEE SHALL NOT BE ENTITLED TO CARRY FORWARD THE UNABSORBED ADDITIONAL DEPRECIATION FOR THE RELE VANT ASSESSMENT YEAR. ACCORDINGLY, THIS GROUND RAISED BY THE ASSESS EE IS DISMISSED. 3. 2.(I) DISALLOWANCE OF EXPENDITURE U/S. 14A BY APPLYING RU LE 8D: DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, IT WAS NOTICED BY THE LD. ASSESSING OFFICER WHILE PERUSING THE PR OFIT & LOSS ACCOUNT, THE ASSESSEE HAD SHOWN INCOME BY WAY OF DI VIDEND TO THE TUNE OF ` 36,36,982/-. THIS AMOUNT OF DIVIDEND WAS CLAIMED BY THE ASSESSEE AS INCOME EXEMPT U/S. 10(34) OF THE ACT. SINCE THE ASSESSEE HAD NOT SHOWN ANY EXPENDITURE RELATED TO T HE INCOME EARNED FROM THE DIVIDEND, LD. ASSESSING OFFICER OPI NED THAT 2% OF DIVIDEND INCOME AS DECIDED BY THE TRIBUNAL ON EARLI ER OCCASIONS, WHICH AMOUNTED TO ` 72,740/- CAN BE ESTIMATED AS THE EXPENSES RELATED FOR EARNING THE DIVIDEND INCOME AND ACCORD INGLY DISALLOWED THE SAME. HOWEVER, WHEN THE MATTER CROPPED UP BEF ORE THE LD. CIT (A), THE LD. CIT (A) HELD THAT, RULE 8D OF INCOME T AX RULES, 1962 HAS M/S.WHEELS INDIA LTD. 9 TO BE APPLIED IN MAKING SUCH DISALLOWANCE. BEFORE U S, LD. A.R. POINTED OUT THAT THE RULE 8D OF THE RULES IS NOT AP PLICABLE FOR THE RELEVANT ASSESSMENT YEAR 2006-07 SINCE IT CAME INTO FORCE W.E.F 24.03.2008 BY THE 5 TH AMENDMENT RULES, 2008. LD. A.R. FURTHER RELIED ON THE DECISION OF THE GODREJ & BOYCE VS. DC IT [2010] 328 ITR 81 (BOM.), WHEREIN IT WAS HELD THAT THE AO CAN ADOP T A REASONABLE BASIS FOR APPORTIONING THE DISALLOWABLE EXPENSES. LD. D.R. SUPPORTED THE ORDER OF THE LD. CIT (A). AFTER HEARING BOTH SIDES AND CAREFULLY PERUSING THE MATERIALS ON RECORD, WE FIND THAT RULE 8D OF THE INCOME TAX RULES IS NOT APPLICABLE IN THE CASE OF THE ASSE SSEE BECAUSE IT CAME INTO EFFECT ONLY W.E.F 24.03.2008. PRIOR TO T HIS DATE THE DECISION POINTED OUT BY THE LD. A.R. WOULD BE APPLICABLE. I N THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT L D. ASSESSING OFFICER REASONABLY ESTIMATED THE DISALLOWABLE EXPEN SES BEING 2% OF DIVIDEND INCOME EARNED BY THE ASSESSEE AMOUNTING TO ` 72,740/-. THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT (A ) AND CONFIRM THE ORDER OF THE LD. ASSESSING OFFICER ON THIS ISSUE. M/S.WHEELS INDIA LTD. 10 3. 3.(I) ADDITIONAL GROUND SALES TAX LIABILITY TREATED AS INCOME OF THE ASSESSEE U/S. 41(1):- THE LD. A.R. SUBMITTED BEFORE US THAT THE APPELLANT HAD OPTED FOR THE SALES TAX DEFERRAL SCHEME INTRODUCED BY THE GOV ERNMENT OF MAHARASHTRA. AS PER THE SCHEME THE APPELLANT WAS AL LOWED TO RETAIN THE SALES TAX COLLECTED FROM THE CUSTOMERS FOR THE SALES AFFECTED DURING THE YEARS 1988-89 TO 2004-05 AS INTEREST FRE E LOAN. THIS LOAN WAS TO BE REPAID TO THE GOVERNMENT IN FIVE EQUAL AN NUAL INSTALLMENTS COMMENCING FROM 2008-09 (TEN YEARS FROM THE YEAR OF COLLECTION). THE GOVERNMENT ALSO ENCOURAGES EARLY REPAYMENT ON V OLUNTARY BASIS CALCULATING THE LIABILITY OF LOAN REPAYMENT A T NET PERCENT VALUE BASIS, WHICH WOULD RESULT IN A LESSER AMOUNT THAN T HE LOAN. THE ASSESSEE HAD UTILIZED THIS OPPORTUNITY AND REPAID T HE LOAN WHICH RESULTED BENEFIT TO THE ASSESSEE FOR ` .4,77,76,079/-. THE ASSESSEE HAD TREATED THIS AS INCOME OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR U/S. 41(1) OF THE ACT. 3. 3.(II) NOW BEFORE US, THE ASSESSEE ARGUED THAT THERE WAS NO REMISSION OF LIABILITY U/S. 41(1) OF THE ACT AS THE AMOUNT WAS PREPAID M/S.WHEELS INDIA LTD. 11 ON THE NET PRESENT VALUE BASIS AND THEREFORE, SHOU LD NOT BE INCLUDED IN THE PROFITS AND GAINS OF THE ASSESSEE AS HELD B Y THE SPECIAL BENCH IN THE CASE OF M/S.SULZER INDIA LTD VS. JCIT VIDE ORDER DT.10.11.2010 REPORTED IN TIOL 670 -ITATMUM-SB. 3. 3.(III) THE LD. A.R. FURTHER SUBMITTED THAT THIS ISSUE WA S NOT RAISED BEFORE THE LOWER AUTHORITIES AND THE DECISIO N OF SPECIAL BENCH WAS NOT CITED ON EARLIER OCCASIONS BEFORE THE REVEN UE. LD. A.R. ARGUED THAT THIS OMISSION ON THE PART OF THE ASSESS EE WAS INADVERTENT AND NOT DELIBERATE AND SINCE THIS ISSUE IS A LEGAL ISSUE, THE GROUND OF THE ASSESSEE MAY BE ADMITTED AND ADJUDICATED IN THE LIGHT OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF NATIO NAL THERMAL POWER CO. LTD 229 ITR 383 (SC). 3. 3.(IV) LD. D.R VEHEMENTLY OPPOSED BY STATING THAT THE AS SESSEE HAD ITSELF ADMITTED THE SAME AS THE INCOME U/S. 41( 1) OF THE ACT AND AT THIS STAGE, SUCH PRAYER OF THE ASSESSEE CANNOT B E ENTERTAINED. M/S.WHEELS INDIA LTD. 12 3. 3.(V) WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. AS POIN TED OUT BY THE LD. A.R., THIS ISSUE WAS HELD IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ITA NO.91/MDS,/2011 FOR THE ASSESSM ENT YEAR 2007- 08 WHICH IS REPRODUCED HEREIN-BELOW FOR REFERENCE:- 8. THE ASSESSEE HAS RAISED ADDITIONAL GROUNDS OF APPEAL WITH REGARD TO DEFERRED PAYMENT OF SALES TAX COLLECTED. THIS ISSUE WAS NOT RAISED BEFORE THE LOWER AUTHORITIES. THE ASSESSEE HAS RETAINED SALES TAX COLLECTED FROM CUSTOMERS DURING THE PERIOD BETWEEN 1998-99 TO 2004-05 TO BE PAID TO THE GOVERNMENT IN THE YEAR 2008-09 ONWARDS IN ACCORDANCE WITH THE SCH EME INTRODUCED BY THE GOVERNMENT OF MAHARASHTRA. THE STATE GOVERNMENT FOR EARLY RECOVERY OF SALES TAX COLLECTED, GAVE LIBERTY TO THE ASSESSEES TO PRE CEDING ASSESSMENT YEAR FUTURE SALES TAX LIABILITY ON NET PRESENT VALUE BASIS. UND ER THE SCHEME, THE ASSESSEE OPTED FOR EARLY REPAYMENT AT DISCOUNTED VALUE AND T HUS, DIFFERENCE OF ` 87,21,582/- AROSE, WHICH WAS TREATED AS INCOME FRO M OTHER SOURCES. THE LD. COUNSEL HAS CONTENDED THAT THE SAID DIFFERENCE DOES NOT AMOUNT TO REMISSION OF LIABILITY U/S. 41(1) OF THE ACT. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SUZLER INDIA LTD. VS. JCIT (SUPRA), HAS HELD THAT P AYMENT OF NET PRESENT VALUE FO THE FUTURE LIABILITY CANNOT BE CLASSIFIED AS REMISS ION OR CESSATION OF THE LIABILITY, THEREFORE, PROVISIONS OF SECTION 41(1)(A) OF THE A CT ARE NOT ATTRACTED. THE RELEVANT EXTRACT OF THE ORDER OF THE SPECIAL BENCH IS REPROD UCED HEREIN-UNDER:- NOW COMING BACK TO THE CASE BEFORE US, THE ASSESSE E WAS LIABLE TO PRECEDING ASSESSMENT YEAR SALES TAX AMOUNTS COLLECT ED FROM 1.11.1989 TO 31.10.1996, PAYMENTS OF WHICH WERE DEF ERRED UNDER THE M/S.WHEELS INDIA LTD. 13 SCHEME, AND THE AMOUNTS WERE PAYABLE AFTER TWELVE Y EARS IN SIX EQUAL ANNUAL INSTALMENTS COMMENCING FROM 1.5.2013, WHICH MEANS THAT THE LIABILITY WAS PAYABLE IN FUTURE. LATER ONE , THE STATE GOVERNMENT CAME WITH A SCHEME BY WHICH IT WAS PROVI DED THAT IS SOME DEALER OPTS, THEN THEY COULD PRECEDING ASSESSM ENT YEAR THE FUTURE LIABILITY AT A DISCOUNTED VALUE OR WHAT WE M AY CALL NET PRESENT VALUE IMMEDIATELY. THUS, IN THIS SITUATION, IT CAN NOT BE CONSTRUED AS REMISSION OF LIABILITY; BECAUSE THE STATE GOVERNMEN T HAS NOT WAIVED ANY OF THE LIABILITY AS GIVEN IN THE ILLUSTRATIONS. HAD THE STATE GOVERNMENT ACCEPTED LESSER AMOUNT AFTER TWELVE YEAR S OR REDUCED SUCH INSTALLMENTS, THEN IT COULD HAVE BEEN A CASE O F REMISSION OR CESSATION. HOWEVER, IN THE CASE BEFORE US THE STATE GOVERNMENT HAS CHOSEN TO RECEIVE THE MONEY IMMEDIATELY WHICH WAS R ECEIVABLE FROM 1.5.2003 TO 1.5.2008. THE AMOUNT OF ` 3,37,393/- WAS ACTUALLY PAID TO SICOM ON 20.12.2002. THUS, THE AMOUNT WHICH WAS PAYABLE FROM 1.5.2003 TO 1.5.2008 HAS BEEN PAID ON 30.12.2002. THUS, IT DOES NOT SATISFY THE CONDITION OF ACTUAL REMISSION IN PRESEN T AS OPINED BY THE LEARNED AUTHORS IN THE ABOVE COMMENTARY. IT IS A SI MPLE CASE OF COLLECTING THE AMOUNT AT NET PRESENT VALUE WHICH IS DUE LATER ON AND EVEN THE FORMULA FOR COLLECTING THE NET PRESENT VAL UE WAS ALSO GIVEN BY THE SICOM AND THE AMOUNTS HAVE BEEN PAID AS PER THAT FORMULA. THEREFORE, SUCH PAYMENT OF NET PRESENT PROVISIONS O F SECTION 41(1)(A) OF THE INCOME TAX ACT, 1961 WE ARE FULLY CONSCIOUS THAT ISSUE BEFORE US IS REGARDING STATUTORY LIABILITY AND THE ABOVE D ISCUSSION AND PROVISIONS OF THE INDIAN CONTRACT ACT REFERRED TO B Y US IN THE ABOVE PARA RELATE TO THE CONTRACTUAL LIABILITY. HOWEVER, WE HAVE REFERRED TO THESE PROVISIONS JUST TO UNDERSTAND THE MEANING OF THE EXPRESSION REMISSION FOR THE PURPOSE OF DECIDING THE CASE BE FORE US UNDER THE M/S.WHEELS INDIA LTD. 14 INCOME TAX ACT AND OUR DECISION IS BASED ON THE PRO VISIONS OF THE INCOME TAX ACT, 1961. WE FIND THAT THE ISSUE IN HAND IS SIMILAR TO THE ON E ADJUDICATED BY THE SPECIAL BENCH OF THE TRIBUNAL. THEREFORE, RESPECTFULLY FOLL OWING THE SAME, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 3.3.(VI) HOWEVER, FROM THE ABOVE IT IS APPARENT TH AT THIS ISSUE WAS NEITHER BEFORE THE LD. ASSESSING OFFICER NOR BEFO RE THE LD. CIT (A) FOR CONSIDERATION. THEREFORE, IN THE INTEREST OF J USTICE WE HEREBY REMIT THE MATTER BACK TO THE FILE OF LD. ASSESSING OFFICE R FOR CONSIDERATION AND TO DECIDE THE MATTER ACCORDING TO LAW AND MERIT S. 4. GROUNDS OF THE ASSESSEE IN ITA NO.06/MDS./10 :- 4.1. DISALLOWANCE OF EXPENDITURE U/S. 14A BY APPL YING RULE 8D: SINCE IN THE ASSESSEES APPEAL IN ITA NO. 43/MDS./ 10 FOR THE RELEVANT ASSESSMENT YEAR 2006-07, THIS ISSUE IS DEC IDED BY US HEREINABOVE BY CONFIRMING THE ORDER OF THE LD. ASSE SSING OFFICER, THIS APPEAL HAS BECOME INFRUCTUOUS AND DISMISSED AS SUCH. M/S.WHEELS INDIA LTD. 15 5. GROUNDS OF THE REVENUE IN ITA NO.251/MDS./10 :- 5.1. DISALLOWANCE OF LOSS ON ACCOUNT OF EXCHANGE FLUCTUATION DURING THE COURSE OF ASSESSMENT PROCEEDINGS , IT WAS NOTICED BY THE LD. ASSESSING OFFICER THAT IN THE NOTES TO ACCO UNTS OF THE ASSESSEE IN ACCORDANCE WITH AS-11 FOR DISCLOSURE OR FOREIGN CURRENCY TRANSACTION, AN AMOUNT OF ` 109 LAKHS APPROXIMATELY RELATING TO FOREIGN EXCHANGE LOSS ON DERIVATIVE INSTRUMENTS WA S DISCLOSED AS DEBITED IN THE PROFIT & LOSS ACCOUNT OF THE ASSESS EE. ON QUERY BY THE LD. ASSESSING OFFICER, IT WAS SUBMITTED BY THE ASSESSEE THAT:- THE COMPANY IS HAVING SUBSTANTIAL DEALINGS IN FOREI GN EXCHANGE BOTH FOR IMPORTS AND EXPORTS. THE COMPANY IS NET GAINER IN FOREIGN EXCHANGE (RS.9665 LAKHS). AS THE FOREIGN CURRENCY RATES ARE SUBJECT TO WIDE FLUCTUATIONS, THE COMPANY AS A POLICY OF ENTERING I NTO FORWARD CONTRACTS TO HEDGE AGAINST CURRENCY FLUCTUATION RESULTING IN HUG E LOSSES TO THE COMPANY. THE SAID CONTRACTS WILL RESULT IN LOSS/GAIN AT THE TIME OF SETTLEMENT OR CANCELLATION AND THEY ARE ACCOUNTED AS SUCH IN THE BOOKS OF ACCOUNT. THE COMPANY HAS BEEN CONSISTENTLY FOLLOWS MERCANTILE/AC CRUAL SYSTEM OF ACCOUNTING BOTH FOR THE PURPOSES OF INCOME TAX ACT AND COMPANIES ACT. THE LOSS OR GAIN IN RESPECT OF FOREIGN CURRENCY TRA NSACTIONS ARE DULY TAKEN INTO CONSIDERATION FOR THE PURPOSE OF COMPUTATION O F INCOME UNDER THE INCOME TAX ACT. AS THE LOSS HAS BEEN INCURRED IN TH E CASE OF CARRYING ON BUSINESS AND FOR THE PURPOSE OF INSURING THE LOSS A RISING ON FOREIGN CURRENCY TRANSACTIONS RELATING TO EXPORT/IMPORT OF THE COMP ANY AND THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED IN RESPECT OF THESE T RANSACTIONS HAS BEEN M/S.WHEELS INDIA LTD. 16 ACCEPTED BY THE DEPARTMENT, THE AMOUNT CANNOT BE DI SALLOWED. IT SHOULD BE ALLOWED IN FULL. THE PARTICULARS OF THE TRANSACTIONS ARE AS FOLLOWS: ` IN LAKHS EXCHANGE GAIN OR LOSS FCNR B LOAN REPAYMENT ACTUAL LY 61.00 INCURRED (LOAN AVAILED FOR WORKING CAPITAL PURPOSES ) CANCELLATION LOSS PAID TO BANKS 5.10 MARK-TO-MARKET LOSS PROVIDED ON 31.3.08 42.39 TOTAL 1,08,49,000/ - 5.2. THE LD. ASSESSING OFFICER AFTER CONSIDERING T HE SUBMISSIONS OF THE ASSESSEE CAME TO A CONCLUSION THAT THE AMOUNT O F APPROXIMATELY OF ` 109 LAKHS WAS PURELY RELATED TO THE LOSS ON DERIVA TIVES AS IT WAS EVIDENT FROM THE DIRECTORS RESPONSIBILITY REPORT F ORMING PART OF THE ANNUAL ACCOUNT OF THE ASSESSEES STATEMENT OF ACCOU NTS FOR THE RELEVANT PREVIOUS YEAR. FURTHER THERE ARE NO PROV ISIONS IN THE ACT TO ALLOW SUCH LOSSES AS BUSINESS EXPENDITURE. THE LD. ASSESSING OFFICER ALSO OBSERVED THAT IT IS NOT CLEAR FROM THE FACTS OF THE CASE THAT HOW THE ASSESSEE WAS CLAIMING THE LOSS OF ` 42.39 LAKHS WHICH WAS IN THE NATURE OF PROVISION ON ACCOUNT OF MARKET T O MARKET TO DERIVATIVE INSTRUMENTAL TRANSACTIONS AS AN EXPENSES INCURRED FOR THE M/S.WHEELS INDIA LTD. 17 PURPOSES OF BUSINESS, SINCE IT IS CONTINGENT IN NAT URE. FOR THE AFORESAID REASONS, THE LD. ASSESSING OFFICER ADDED THE AMOUNT OF ` 1,08,49,000/- TO THE INCOME OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. 5.3. THE LD. CIT (A) AFTER EXAMINING THE ISSUE ARR IVED AT THE FOLLOWING CONCLUSION:- 3.6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE VARIOUS SUBMISSIONS MADE BY THE APPELLANT. MERELY BECAUSE T HERE IS NO SPECIFIC PROVISION IN THE ACT, IT CANNOT BE SAID TH AT A PARTICULAR EXPENDITURE OR LOSS CAN BE DISALLOWED. EACH EXPENDI TURE OR LOSS HAS TO BE SEEN IN THE CONTEXT IN WHICH IT WAS INCURRED. I T IS NOT DISPUTED THAT THE APPELLANT HAD SUBSTANTIAL TRANSACTIONS IN FOREI GN EXCHANGE AND THEREFORE, IT IS NATURAL THAT IT HAD TO TAKE HEDGE AGAINST POTENTIAL LOSS. THOUGH THE TERM USED DERIVATIVE THE TRANSACTIONS ARE BASICALLY TAKING FOREIGN EXCHANGE CONTRACT HEDGE AGAINST FLUCTUATION S. 3.7. THE VARIATION IN THE RATE OF EXCHANGE IN THE CURRENCIES ARISE MAINLY ON ACCOUNT OF (1) DEMAND AND SUPPLY OF CURRE NCIES IN THE INTERNATIONAL MARKET BASED ON THEIR INTRINSIC VALUE AND (2) ON ACCOUNT OF DEVALUATION DONE BY THE APEX BANK OF THE CONCERN ED NATION. THE TAX M/S.WHEELS INDIA LTD. 18 TREATMENT OF GAINS OR LOSSES ON ACCOUNT OF FLUCTUAT IONS IN THE RATE OF EXCHANGE DEPENDS ON THE CLASSIFICATION OF TRANSACTI ONS GIVING RISE TO SUCH GAINS/LOSSES VIZ., CAPITAL OR REVENUE. GENERA LLY, A LOSS (GAIN) ARISING IN THE PROCESS OF CONVERSION OF FOREIGN CUR RENCY WHICH IS PART OF THE TRADING ASSET OF THE ASSESSEE IS A TRADING LOSS (GAIN). AS PER THE HONBLE SUPREME COURT DECISION IN THE CASE OF LD. C IT V. WOODWARD GOVERNOR INDIA PVT. LTD [ 312 ITR 254 (SC) ], A LOS S SUFFERED BY THE ASSESSEE ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON TH E DATE OF THE BALANCE SHEET IS AN ALLOWABLE EXPENDITURE U/S. 37 O F THE ACT. FURTHER, THE LOSS RESULTING FROM DEPRECIATION OF FOREIGN EXC HANGE WHICH IS UTILIZED OR INTENDED TO BE UTILIZED ON BUSINESS AND IS PART OF CIRCULATING CAPITAL WOULD BE A TRADING LOSS, BUT DEPRECIATION O F FIXED CAPITAL ON ACCOUNT OF ALTERATION IN EXCHANGE RATE WOULD BE CAP ITAL LOSS. IN DETERMINING WHETHER LOSS IS REVENUE OR CAPITAL, WHA T IS RELEVANT IS THE UTILIZATION OF THE AMOUNT AT THE TIME OF REVALUATIO N AND NOT THE OBJECT FOR WHICH THE LOAN WAS OBTAINED. LOSSES ON FORWARD CONTRACTS WHICH ARE NOT SPECULATIVE IN NATURE ARE TREATED IN A MANN ER SIMILAR TO THE TREATMENT OF LOSSES ON FOREIGN CURRENCY LOAN. IF FO RWARD CONTRACT FALLS WITHIN THE AMBIT OF SPECULATIVE TRANSACTIONS, LOSSE S ARISING THERE-FROM WILL BE CLASSIFIED AS SPECULATIVE LOSSES WHICH CAN BE SET OFF ONLY AGAINST SPECULATIVE GAINS UNDER PROVISIONS OF SEC.7 3 OF THE ACT. M/S.WHEELS INDIA LTD. 19 3.8. FURTHER AS EXPLAINED BY THE AR THE LOSSES HA S ARISEN ON ACCOUNT OF SETTLED CONTRACTS AND CONTRACTS WHICH WE RE OUTSTANDING AT THE END OF THE YEAR. IN RESPECT OF SETTLED CONTRACT S THE LOSS HAS ALREADY BEEN INCURRED AND HENCE THESE CANNOT BE DISALLOWED. AS EXPLAINED BY THE AR ALL THESE LOSSES AROSE ON ACCOUNT OF ITS CUR RENT ASSETS AND CURRENT LIABILITIES AND THESE CANNOT BE SAID TO HAV E BEEN INCURRED FOR CAPITAL PURPOSES IN WHICH CASE THESE WILL BE TREATE D AS CAPITAL EXPENDITURE. THEREFORE, I AM OF THE OPINION, THAT THE LOSS ARISING ON ACCOUNT OF FCNRB LOAN AND FORWARD CONTRACT CANCELLA TION CHARGES CANNOT BE DISALLOWED. 3.9. WITH REGARD TO THE LOSS IN RESPECT OF MARK TO MARKET LOSSES OF DERIVATIVE CONTRACTS, AS EXPLAINED BY THE AR, THESE WERE ENTERED INTO FOR THE PURPOSE OF HEDGING THE CURRENT ASSETS AND C URRENT LIABILITIES WHICH FORM PART OF THE CIRCULATING CAPITAL OF THE A PPELLANT. IT WAS HELD BY THE SUPREME COURT IN THE CASE OF LD. CIT VS CAN ANAR BANK (63 ITR 328) THAT THE LOSS ON ACCOUNT OF FLUCTUATION OF EXCHANGE WHICH ARISE IN THE COURSE OF TRADING OPERATIONS AND WHICH IS INCIDENTAL TO TRADING OPERATIONS IS ALLOWABLE AS DEDUCTION. IN T HE INSTANT CASE THE LOSS HAS ARISEN IN THE COURSE OF APPELLANTS TRADING OPERATION ONLY. THIS VIEW IS ALSO SUPPORTED BY THE DECISION OF BOMBAY HI GH COURT IN THE CASE OF CIT VS. BANK OF INDIA (218 ITR 371). FUR THER THE DECISION OF APEX COURT IN CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (312 ITR M/S.WHEELS INDIA LTD. 20 254) ALSO FORTIFIES THE CASE OF THE APPELLANT. THE HONBLE COURT IN THAT CASE HAD OBSERVED AS UNDER:- LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCT UATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE BALANCE SHEET DATE IS AN ITEM OF EXPENDITURE U/S. 37(1) OF THE INCOME TAX ACT, 1961. AS CLEARLY LAID DOWN BY THE SUPREME COURT THE LOSS INCURRED BY THE APPELLANT ON ACCOUNT OF EXCHANGE FLUCTUATIONS HAS TO BE ALLOWED AS DEDUCTION. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, THE CLA IM OF THE APPELLANT IS ALLOWED . 5.4. BEFORE US LD. A.R. SUBMITTED THAT THE APPE LLANT WAS ENGAGED IN THE BUSINESS OF AUTO COMPONENTS AND FOR THAT PURPOSE HE HAD ACQUIRED FOREIGN CURRENCY RECEIVABLE AND INCURR ED FOREIGN CURRENCY LIABILITY ON ACCOUNT OF ITS EXPORT PRODUCT S AND IMPORT OF RAW MATERIALS. IT WAS EXPLAINED THAT THE ASSESSEE HAD INCURRED EXCHANGE LOSS ON FCNR-B LOAN REPAYMENT FOR ` 61 LAKHS. IT WAS FURTHER SUBMITTED THAT THE LOAN WAS AVAILED FOR ITS WORKING CAPITAL REQUIREMENTS FROM THE BANKERS. THE ASSESSEE HAD AL SO SUFFERED FORWARD CANCELLING CHARGES PAID TO BANKS FOR ` 5 LAKHS. FURTHER THE APPELLANT HAD ENTERED INTO FOREIGN CURRENCY OPTION AGREEMENT WITH M/S.WHEELS INDIA LTD. 21 STANDARD CHARTERED BANK DATED 6 TH MAY 2005 IN RELATION TO FOREIGN CURRENCY RECEIVABLES. THE AGREEMENT PROVIDED FOR AN OPTION ON THE PART OF THE APPELLANT SO AS TO HEDGE THE FOREIGN CU RRENCY RECEIVABLE ON MONTHLY BASIS. THE ACCRUED LIABILITY TOWARDS THE BANK AS ON 31.03.2006 IN RESPECT OF THE ABOVE AGREEMENT WORKED OUT TO ` 42.33 LAKHS. THUS THE AGGREGATE AMOUNT OF ` 108.39 LAKHS WERE EXPENSES INCURRED BY THE ASSESSEE IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE AND DID NOT RELATE TO ANY SPECULATIVE TRAN SACTION AS DEFINED UNDER THE ACT. IT WAS THEREFORE SUBMITTED THAT THE AMOUNT CLAIMED BY THE ASSESSEE WAS ALLOWABLE DEDUCTION. THE LD. A.R. ALSO POINTED OUT THAT FOR THE SUBSEQUENT ASSESSMENT YEAR 2007-08 IN ASSESSEES OWN CASE THE MATTER WAS REMITTED BACK TO THE FILE OF LD . ASSESSING OFFICER FOR VERIFYING THE NATURE AND QUANTUM OF DEDUCTION F OR THE AMOUNT CLAIMED BY THE APPELLANT. 5.5. LD. D.R RELIED ON THE ORDER OF THE LD. ASSE SSING OFFICER AND STOUTLY ARGUED THAT THE AMOUNT CLAIMED BY THE A SSESSEE WAS SPECULATIVE IN NATURE AND THE LOSS ON THE SAME CAN BE SET OFF ONLY M/S.WHEELS INDIA LTD. 22 FROM SPECULATIVE GAINS AND NOT FROM PROFIT AND GAIN S DERIVED BY THE ASSESSEE FROM ITS BUSINESS TRANSACTIONS. 5.6. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LD. A.R. HAS SP ECIFICALLY POINTED OUT THAT THE CLAIM MADE BY THE ASSESSEE DIRECTLY RE LATES TO THE ASSESSEES BUSINESS TRANSACTION. RS. 61 LAKHS WAS STATED TO BE LOSS ON EXCHANGE FLUCTUATION FOR REPAYMENT OF LOAN, ` 5 LAKHS BEING FORWARD CONTRACT CANCELLATION CHARGES PAID TO THE BANK WHIC H WAS DIRECTLY RELATED TO PROTECT THE FOREIGN EXCHANGE FLUCTUATION LOSS WITH REGARD TO FOREIGN TRANSACTIONS RELATING TO THE BUSINESS OF TH E ASSESSEE AND ` 42.39 LAKHS BEING THE LIABILITY INCURRED FOR HEDGIN G THE FOREIGN CURRENCY RECEIVABLES ON MONTHLY BASIS. IF THE FACT S ARE SO, THESE TRANSACTIONS CANNOT BE CONSIDERED AS SPECULATIVE TR ANSACTION OF THE ASSESSEE. THESE TRANSACTIONS HAD ARISEN ONLY DUE TO THE INTERNATIONAL BUSINESS TRANSACTION OF THE ASSESSEE IN ORDER TO PR OTECT ITSELF FROM FOREIGN EXCHANGE FLUCTUATION. ACCORDINGLY, ANY EXP ENDITURE RELATED TO THE SAME HAS TO BE TREATED AS EXPENDITURE INCURRED IN THE ORDINARY COURSE OF THE BUSINESS OF THE ASSESSEE AND SHALL BE ALLOWED AS AN M/S.WHEELS INDIA LTD. 23 DEDUCTION UNDER THE PROVISIONS OF THE ACT AND SHALL NOT BE CONSIDERED AS SPECULATIVE BUSINESS TRANSACTION. SINCE THE FA CTS ARE NOT CLEAR FROM THE ORDER OF THE LD. ASSESSING OFFICER AND THE LD. CIT (A); LIKE OUR PREDECESSORS WE HEREBY REMIT BACK THE MATTER TO THE FILE OF LD. ASSESSING OFFICER FOR VERIFYING THE NATURE OF LOSS INCURRED AND CONSIDER THE ISSUE ON TRANSACTION TO TRANSACTION BA SIS AND DECIDE ACCORDING TO LAW AND MERITS. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.43/MDS./10 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, THE APP EAL OF ASSESSEE IN ITA NO.06/MDS./12 IS DISMISSED AS INFRUCTUOUS AND THE APPEAL OF THE REVENUE IN ITA NO.251/MDS./10 IS ALLOWED FOR STAT ISTICAL PURPOSES AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED ON 14 TH MARCH, 2014 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD ) (A.MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 14 TH MARCH, 2014. K S SUNDARAM. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE M/S.WHEELS INDIA LTD. 24