M/s. CHIKA P. LTD., MUMBAI V. ITO 1(1)(2), MUMBAI

ITA 4985/MUM/2005

• Counselvise Citation: 498519914 RSA 2005
• Duration Of Justice: 6 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 08-08-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 12-07-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AARTI VISSANJI
• Assessee Lawyers: P C MOURYA
• Keywords: Business income; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI RAJENDRA SI NGH(AM) ITA NO. 4985/M/2005 ASSESSMENT YEAR 2001-02 CHIKA PVT. LTD., INCOME TAX OFFICER, 5 TH FLOOR, INDUSTRIAL ASSURANCE BLDG., VS. 1(1)(2), OPP. CHURCHGATE STATION, MUMBAI. MUMBAI 400 020. PAN: AAACC46094 (APPELLANT) (RESPONDENT) REVENUE BY : MS. AARTI VISSANJI ASSESSEE BY : SHRI P.C. MOURYA DATE OF HEARING : 08-08-2011 DATE OF PRONOUNCEMENT: 12-08-2011 O R D E R PER RAJENDRA SINGH (AM): 1. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 29-09-2004 OF CIT (A)-I FOR THE ASSESSMENT YEAR 2006-07. THE A SSESSEE IN THIS APPEAL HAS RAISED DISPUTES ON TWO DIFFERENT GROUNDS. 2. THE FIRST DISPUTE IS REGARDING THE DISALLOWANCE OF A SUM OF RS. 1,97,961/- BEING THE AMOUNT PAID TO IDBI BANK TOWARDS FORWARD COVER CONTRACT. THE ASSESSEE WHO WAS A MANUFACTURER OF BOATS, HAD IMPOR TED COMPONENTS FROM CATERPILLAR, USA IN CONNECTION WITH WHICH IT HAD TA KEN FOREIGN EXCHANGE COVER CONTRACT WITH IDBI BANK. AS PER THE CONTRACT, THE FOREIGN EXCHANGE COVER LIABILITY WAS TO BE DISCHARGED AT THE DATE OF REMITTANCE WHIC H IN THIS CASE WAS 06.11.2001. ITA 4985 / M / 2005 CHIKA PVT. LTD. 2 THE ASSESSEE, HOWEVER, RESTATED THE LIABILITY ON TH E DATE OF COMPLIANCE ON 31.3.2001 AS PER WHICH THERE WAS A LOSS OF RS. 1,97 ,961/- WHICH WAS CLAIMED AS REVENUE EXPENDITURE. THE AO DISALLOWED THE EXPENDI TURE ON THE GROUND THAT THE LIABILITY HAD NOT CRYSTALISED DURING THE YEAR BUT I N THE NEXT YEAR AND THE PAYMENT WAS ALSO MADE IN THE NEXT YEAR. IN APPEAL, THE LD. CIT (A) AGREED WITH THE AO AND HELD THAT THE LIABILITY WAS ONLY ANTICIPATED AN D NOT ASCERTAINED LIABILITY AND ACCORDINGLY HE CONFIRMED THE DISALLOWANCE AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.1. WE HAVE HEAD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING THE ALL OWABILITY OF EXPENDITURE ON ACCOUNT OF FOREIGN EXCHANGE COVER LIABILITY AT THE END OF RELEVANT YEAR THOUGH THE FOREIGN EXCHANGE COVER WAS EXPIRING IN THE NEXT YEA R. THE ASSESSEE HAD TAKEN THE FOREIGN EXCHANGE COVER CONTRACT IN CONNECTION WITH IMPORT OF COMPONENTS REQUIRED FOR MANUFACTURING OF BOATS. FOREIGN EXCHANGE COVER WAS TO MATURE ON THE DATE OF REMITTANCE IN THE NEXT YEAR I.E., ON 06-11-2001. T HE ASSESSEE, HOWEVER, AS PER THE METHOD OF ACCOUNTING FOLLOWED RESTATED THE LIAB ILITY AT THE END OF THE RELEVANT YEAR I.E., 31.03.2011 ON THE PREVAILING MARKET RATE WHICH RESULTED IN LOSS OF RS. 1,97,961/- WHICH WAS CLAIMED AS A DEDUCTION. THE C LAIM IS ALLOWABLE IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE O F CIT VS. WOODWARD GOVERNOR(I) PVT LTD., (312 ITR 254), IN WHICH IT WA S HELD THAT ANY ADJUSTMENT ON ACCOUNT OF FOREIGN EXCHANGE DIFFERENCE CAN BE MADE AT EACH BALANCE SHEET DATE PENDING ACTUAL PAYMENT AND ANY LOSS / PROFIT ARISIN G THERE FROM HAS TO BE CONSIDERED IN THE RELEVANT YEAR. THEREFORE, THE LO SS ARISING IN THIS CASE ON ACCOUNT OF RESTATEMENT OF THE FOREIGN EXCHANGE LIABILITY ON THE LAST DAY OF ACCOUNTING YEAR HAS TO BE ALLOWED AS DEDUCTION. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT (A) AND ALLOW THE CLAIM OF THE ASSESSEE. ITA 4985 / M / 2005 CHIKA PVT. LTD. 3 3. THE SECOND DISPUTE IS REGARDING NATURE OF INTERE ST INCOME OF RS. 11,91,727/- RECEIVED BY THE ASSESSEE FROM BANKS ON MARGIN MONEY DEPOSITS. THE ASSESSEE HAD DEPOSITED MONEY WITH THE BANKS FOR PRO CURING LETTER OF CREDIT AND / OR OBTAINING BANK GUARANTEE FOR THE PURPOSE OF BUSI NESS. THE PROCUREMENT OF LETTER OF CREDIT WAS FOR IMPORT OF MATERIALS FOR MA NUFACTURE OF BOATS. SIMILARLY THE BANK GUARANTEE WAS GIVEN FOR DIFFERENT BUSINESS PUR POSES. THE INTEREST EARNED ON THESE DEPOSITS HAD BEEN CREDITED BY THE ASSESSEE AS BUSINESS INCOME. IN THE ASSESSMENT YEAR, THE ASSESSING OFFICER OBSERVED THA T THE INTEREST INCOME HAD BEEN EARNED ON THE SURPLUS FUNDS KEPT WITH THE BANK S ON LONG TERM BASIS AND, THEREFORE, HE TREATED THE INTEREST INCOME AS INCOME FROM OTHER SOURCES. IN APPEAL, THE ASSESSEE SUBMITTED BEFORE THE LD. CIT ( A) THAT THE ASSESSEE HAD DEPOSITED THE AMOUNTS WITH BANK AS MARGIN MONEY FOR OBTAINING LETTER OF CREDIT AND / OR FOR FURNISHING BANK GUARANTEE IN FAVOUR OF RELIANCE CAPITAL LIMITED FOR WHOM THEY WERE EXECUTING CONTRACTS FOR MANUFACTURE / CONSTRUCTION OF BOATS. THEREFORE, THE DEPOSITS WERE IN CONNECTION WITH BUS INESS AND THE INTEREST WAS BUSINESS INCOME. IT WAS ALSO SUBMITTED THAT THE AS SESSEE HAD ACCEPTED INTER CORPORATE DEPOSITS (ICD) WHICH HAD BEEN DEPOSITED I N THE BANK ACCOUNTS FROM WHICH DEPOSITS WERE MADE FOR ISSUE OF BANK GUARANTE E / LETTER OF CREDIT. THEREFORE, THE ASSESSING OFFICER WAS NOT CORRECT IN STATING THAT THE DEPOSITS WERE FROM SURPLUS FUNDS. ALTERNATIVELY, IT WAS SUBMITTE D THAT IN CASE INTEREST INCOME WAS ASSESSED AS INCOME FROM OTHER SOURCES, THE AMOU NT PAID FOR ICDS SHOULD BE DEDUCTED FROM THE INTEREST INCOME. THE LD. CIT (A) , HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED AND UPHELD THE ORDER OF ASSESSIN G OFFICER BY TREATING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES AGGRIE VED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3.1. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT (A) THAT LETTER OF CREDIT / BANK GUARANTEE FOR WHICH THE ITA 4985 / M / 2005 CHIKA PVT. LTD. 4 DEPOSITS WERE MADE HAD BEEN ISSUED FOR THE PURPOSE OF BUSINESS AND, THEREFORE, THE INTEREST INCOME HAS TO BE ASSESSED AS BUSINESS INCOME. IT WAS ALSO SUBMITTED THAT BANK DEPOSITS WERE FROM ICDS AND, THEREFORE, T HE INTEREST PAID ON ICDS SHOULD BE ALLOWED AS DEDUCTION IN CASE THE INTEREST INCOME WAS ASSESSED AS INCOME FROM OTHER SOURCES. THE LEARNED AR PLACED R ELIANCE ON THE JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN THE CASE OF CIT VS. INDO SWISS JEWELS LTD. AND ANOTHER (284 ITR 389) AND ON THE JUDGMENT OF HONBL E HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. CHINNA NACHI MUTHU CONSTRUCTION S (297 ITR 70). THE LEARNED DR ON THE OTHER HAND PLACED RELIANCE ON THE FINDING S GIVEN BY THE AUTHORITIES BELOW. 3.2. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING NATURE OF INTEREST INCOME RECEIVED BY THE ASSESSEE FROM THE DEPOSITS MADE IN THE BANK FOR ISSUE OF BANK GUA RANTEE AND / OR LETTER OF CREDIT FOR PURCHASE OF MATERIALS AND OTHER BUSINESS PURPOS ES. THE CLAIM THAT DEPOSITS WERE MADE IN CONNECTION WITH BANK GUARANTEE / LETTE R OF CREDIT ISSUED FOR THE PURPOSE OF BUSINESS HAS NOT BEEN DISPUTED BEFORE US . IN OUR VIEW, INTEREST INCOME ARISING FROM DEPOSITS USED FOR THE PURPOSE OF BUSIN ESS HAS TO BE TREATED AS BUSINESS INCOME. THIS VIEW IS SUPPORTED BY THE JUD GMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDO SWISS JEWELS LTD. AND OTHERS (SUPRA). IN THAT CASE THE ASSESSEE HAD MADE INTER CORPORATE DEPOSITS FROM SURPLUS FUNDS FOR PURCHASE OF IMPORTED MACHINERY. THE INTEREST EARNE D ON THE SHORT TERM DEPOSITS OF THE MONEY KEPT APART FOR THE PURPOSE OF BUSINESS WAS HELD TO BE ASSESSABLE AS BUSINESS INCOME AND NOT AS INCOME FROM OTHER SOURCE S. SAME VIEW HAS TAKEN BY HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. CHINNA NACHI MUTTU CONSTRUCTIONS (SUPRA) WHEREIN IT WAS HELD THAT INTE REST ACCRUED ON FDRS USED AS MARGIN MONEY FOR ISSUE OF BANK GUARANTEE TO ACQUIRE CONTRACT WORK WAS HELD ASSESSABLE AS INCOME FROM BUSINESS AND NOT INCOME F ROM OTHER SOURCES. IN THE ITA 4985 / M / 2005 CHIKA PVT. LTD. 5 CASE OF THE ASSESSEE, THE DEPOSITS WERE USED AS MAR GIN MONEY FOR ISSUE OF BANK GUARANTEE / LETTER OF CREDIT FOR THE PURPOSE OF BUS INESS AND, THEREFORE, FOLLOWING THE ABOVE JUDGMENTS INTEREST INCOME HAS TO BE ASSES SED AS INCOME FROM BUSINESS. AS WE HAVE HELD THAT INTEREST INCOME HAS TO BE ASSE SSED AS BUSINESS INCOME, IT IS NECESSARY FOR US TO GO INTO THE ALTERNATE CLAIM THA T INTEREST PAID ON INTER CORPORATE DEPOSITS SHOULD BE ALLOWED AS DEDUCTION IN CASE THE INTEREST INCOME IS ASSESSED AS INCOME FROM OTHER SOURCES. WE ACCORDINGLY SET ASID E THE ORDER OF LD. CIT (A) AND DIRECT THE ASSESSING OFFICER TO ASSESS THE INTEREST INCOME AS INCOME FROM BUSINESS. 4. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. THE ORDER WAS PRONOUNCED IN OPEN COURT ON 12 TH AUGUST, 2011. SD/- SD/- (D.K. AGARWAL) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 12-08-2011 AT :MUMBAI OKK COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR B BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI