D.C.I.T. RG. 8(2), MUMBAI V. IPSA TEXCHEM PVT LTD., MUMBAI

ITA 5113/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78997 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-05-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 10-04-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 10-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEEPAK SUTARIYA
• Keywords: Depreciation; Earning of tax free income
• Section: 14A; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL I, BENC H MUMBAI .. , . . , !' # BEFORE SHRI H.L.KARWA, PRESIDENT & SHRI B.R.BASKARA N, AM ./ ITA NO.5113/MUM/2012 ( $ $ $ $ / ASSESSMENT YEAR :2008-09) DCIT, RG.8(2), MUMBAI-20 VS. IPSA TEXCHEM PVT. LTD. , 141, LAXMI PLAZA INDUSTRIAL ESTATE, NEW LINK ROAD, ANDHERI (W), MUMBAI - 400 053 % !' ./ &' ./ PAN/GIR NO. : AAACI 5746 C ( %( / APPELLANT ) .. ( )*%( / RESPONDENT ) AND ./ ITA NO.4363/MUM/2012 ( $ $ $ $ / ASSESSMENT YEAR :2008-09) IPSA TEXCHEM PVT. LTD., 141, LAXMI PLAZA INDUSTRIAL ESTATE, NEW LINK ROAD, ANDHERI (W), MUMBAI-400 053 VS. DCIT, RG.8(2), MUMBAI-20 % !' ./ &' ./ PAN/GIR NO. : AAACI 5746 C ( %( / APPELLANT ) .. ( )*%( / RESPONDENT ) & + ++ + , , , , ! !! ! /REVENUE BY : MR. DEEPAK SUTARIYA -. + ++ + , , , , ! !! ! /ASSESSEE BY : MR. TARUN GHIA + ./' / DATE OF HEARING : 26 TH MAY, 2014 01$ + ./' / DATE OF PRONOUNCEMENT : 28 TH MAY, 2014 #!2 #!2 #!2 #!2 / O R D E R PER B.R.BASKARAN (A.M.) : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 10.05.2012 PASSED BY LD. CIT(A) - 17, MUMBAI AND TH EY RELATE TO THE ASSESSMENT YEAR 2008-09. ITA NOS.5113/12 & 4363/12 2 2 . IN THE APPEAL FILED BY THE REVENUE, THE ONLY ISSUE URGED RELATES THE DISALLOWANCE OF RS.20,27,115/- RELATING TO CLAIM OF UNREALIZED FOREIGN EXCHANGE LOSS. THE REVENUE IS AGGRIEVED BY THE DEC ISION OF LD CIT(A) IN DELETING THE SAME. 3 . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO TOOK THE VIEW THAT THE UNREALIZED FOREIGN EXCHANGE LOSS CLAIMED B Y THE ASSESSEE IS NEITHER AN ACCRUED LOSS NOR AN ACTUAL LOSS. ACCORD INGLY HE DISALLOWED THE CLAIM. HOWEVER, THE LD CIT(A) ALLOWED THE CLAIM WI TH THE FOLLOWING OBSERVATIONS:- 6.3 I HAVE PERUSED THE FACTS AND THE POSITION OF LA W IN THIS REGARD. OUT OF RS.20,27,115, DISALLOWED BY THE AO AS UNREAL IZED FOREIGN EXCHANGE LOSS, RS. 4,51,010 WAS ON ACCOUNT OF FLUCT UATION IN FOREIGN EXCHANGE LIABILITY ON ACCOUNT OF BILLS PAYA BLE UNDER LETTER OF CREDIT OPENED BY THE BANK FOR IMPORTING RAW MATE RIALS, FOR WHICH NO FORWARD COVERS WERE BOOKED BY THE ASSESSEE AND HENCE, THE SAME HAVE BEEN WRONGLY CONSIDERED AS UNR EALIZED FOREIGN EXCHANGE LOSS BY THE LEARNED AO. MOREOVER, THE LEARNED AO HAS WRONGLY DISALLOWED UNREALIZED FOREIGN EXCHAN GE LOSS OF RS.20,27,115 (INCLUDING RS.4,51,010 AS STATED ABOVE ) ON THE GROUNDS THAT IT IS A LOSS OF CONTINGENT NATURE AND A NOTIONAL LOSS. 'THE APPELLANT HAS BEEN FOLLOWING MERCANTILE BASIS OF ACCOUNTING SINCE INCEPTION. EXCHANGE DIFFERENCE ARISING ON FOR EIGN CURRENCY TRANSACTIONS HAVE TO BE CONSIDERED AS INCOME / EXPE NSE IN THE PERIOD IN WHICH THEY ARISE. PARA 9, OF ACCOUNTING S TANDARD 11, RECOGNIZES EXCHANGE RATE DIFFERENCES AS INCOME OR E XPENSE. ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE SAID LIABILITY ON THE CLOSING RATE, SHOULD BE RECOGNIZED IN THE P& L ACCOUNT FOR THE REPORTING PERIOD. THE ASSESSEE HAS REFERRED TO THE JUDGMENT OF ITAT, MUMBAI, SPECIAL BENCH IN DCIT (INT'I TAXAT ION) VS. BANK OF BAHRAIN & KUWAIT (2010) 5 ITR 301, WHERE IT WAS HELD THAT 'ANTICIPATED LOSSES ON ACCOUNT OF EXISTING OBLIGATI ON AS ON 31 ST MARCH, DETERMINABLE WITH REASONABLE ACCURACY, BEING IN THE NATURE OF EXPENDITURE / ACCRUED LIABILITY, HAVE TO BE TAKEN INTO ACCOUNT WHILE PREPARING FINANCIAL STATEMENTS'. BEDS IDES, THE ASSESSEE HAS ALSO RELIED ON APEX COURT'S JUDGEMENTS IN THE CASES OF CIT VS. WOODWARD GOVERNER INDIA (P) LTD. ( 2009) 312 ITR 254 (SC) AND ONGC VS. CIT (2010) 322 ITR 180 (S C).. HENCE, LOSS SUFFERED BY THE ASSESSEE IN RESPECT OF A REVENUE LIABILITY, ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF BALANCE SHEET, IS AN ITEM OF EXPENDITURE ALLOWABLE U/S 37(1) IN THE YEAR OF ACCRUAL. THIS GROUND OF APPEAL IS, THER EFORE, ALLOWED ITA NOS.5113/12 & 4363/12 3 THE REVENUE IS AGGRIEVED BY THE DECISION RENDERED B Y LD CIT(A) ON THIS ISSUE. 4 . WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISSU E. A CAREFUL PERUSAL OF THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE, WHICH IS EXTRACTED IN THE EARLIER PARAGRAPH, WOULD SHOW THAT THE FIRST APPELL ATE AUTHORITY HAS FOLLOWED THE DECISION RENDERED BY THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF DCIT VS. BANK OF BAHRAIN & KUWAIT, REPORTED IN (2010) 5 ITR 301 AND ALSO THE DECISION RENDERED BY THE HONBLE APEX COURT IN THE CASES OF WOODWARD GOVERNER INDIA PVT. LTD., (2009) 312 ITR 254 (SC) AND ONGC VS. CIT, REPORTED IN (2010) 322 ITR 180 (S C) . BESIDES THE ABOVE, THE LEARNED CIT(A) HAS ALSO GIVEN A FINDING THAT THE ASSESSEE HAS BEEN FOLLOWING THIS ACCOUNTING SYSTEM CONSISTENTLY AND THE SAME IS IN ACCORDANCE WITH THE AS-11 ISSUED BY THE INSTITUTE O F CHARTERED ACCOUNTANTS OF INDIA. WE NOTICE THAT THE LEARNED CI T(A) HAS TAKEN CONSCIOUS DECISION ON THIS ISSUE BY BRINGING ON REC ORD THE AUTHORITY ON WHICH HE IS PLACING RELIANCE UPON. UNDER THESE CIRC UMSTANCES, WE DO NOT FIND ANY REASON TO INTERFERE WITH THIS ORDER ON THI S ISSUE AND ACCORDINGLY AFFIRM THE SAME. 5 . WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSE SSEE. THE ONLY GROUND URGED BY THE ASSESSEE RELATES TO THE DISALLO WANCE OF INTEREST OF RS.99,537/- U/S.14A OF THE ACT. 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS MADE THE INVESTMENT OUT OF ITS OWN FUNDS AND NO T OUT OF BORROWED FUNDS. ACCORDINGLY HE SUBMITTED THAT THERE IS NO R EQUIREMENT OF MAKING ITA NOS.5113/12 & 4363/12 4 DISALLOWANCE OF ANY INTEREST UNDER RULE 8D(2)(II) O F THE I.T. RULES. HE SUBMITTED THAT THE ASSESSEE HAS FURNISHED NECESSARY DETAILS RELATING TO THE AVAILABILITY OF OWN FUNDS BEFORE THE ASSESSING OFFICER; BUT THE ASSESSING OFFICER DID NOT CONSIDER THE SAME DURING THE COURSE OF ASSESSMENT PROCEEDINGS. HE FURTHER SUBMITTED THAT T HE DETAILS OF OWN FUNDS WERE NOTICED BY THE LEARNED CIT(A) AND THEY W ERE ALSO EXTRACTED IN PARA 13.1 OF HIS ORDER, BUT THE LEARNED CIT(A) HAS CONFIRMED THE DISALLOWANCE WITHOUT APPRECIATING THE FACT OF AVAIL ABILITY OF OWN FUNDS FOR MAKING THE INVESTMENT. THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY THE CO-ORDINATE BENCH OF TRIBUNAL IN TH E CASE OF ACIT K. RAHEJA CORPORATION PVT LTD (ITA NO.4855/M/07 AND IT A NO.4823/M/07) 7 ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE DISA LLOWANCE OF INTEREST HAS BEEN MADE IN ACCORDANCE WITH RULE 8D AND, HENCE , THERE IS NO NECESSITY TO INTERFERE WITH THE ORDER OF LD CIT(A) ON THIS ISSUE. THE LD D.R SUBMITTED THAT THE LD CIT(A) HAS HELD THAT THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE CASE OF RAHEJA CORPORATION PVT LTD (SUPRA), IS NOT APPLICABLE TO THE ISSUE UNDER CONSI DERATION. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULLY P ERUSED THE RECORD. IN THE RECENT DECISION RENDERED BY HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. DEEPAK MITTAL, REPORTED IN (2014) 361 ITR 131 (P&H) , HAS CONSIDERED THE ISSUE OF MAKING DISALLOWANCE U /S 14A OF THE ACT. THE ASSESSEE BEFORE THE HIGH COURT WAS CONTENDING BEFORE THE AO THAT HE DID NOT INCUR ANY EXPENDITURE FOR EA RNING THE DIVIDEND INCOME. THE HONBLE HIGH COURT HELD AS UNDER :- ITA NOS.5113/12 & 4363/12 5 HELD : DISMISSING THE APPEALS, THAT THE ONUS WAS U PON THE ASSESSEE TO PROVE THE QUANTUM OF EXPENDITURE INCURR ED ON EARNING OF TAX FREE INCOME OF DIVIDEND. WHEN THE CO NSISTENT CASE OF THE ASSESSEE, DESPITE THE NOTICE GIVEN BY THE AS SESSING OFFICER TO GIVE DETAILS OF THE EXPENDITURE MADE ON EARNING OF EXEMPTED INCOME IN THE NATURE OF DIVIDEND, WAS THAT HE HAD NOT MADE ANY EXPENDITURE ON EARNING SUCH INCOME, THE AS SESSING OFFICER IN TERMS OF SUB-SECTION (2) OF SECTION 14A HAD TO PROCEED FURTHER TO COLLECT SUCH MATERIAL OR EVIDENCE TO DET ERMINE THE EXPENDITURE, IF ANY, INCURRED BY THE ASSESSEE BUT T HE ASSESSING OFFICER INSTEAD, RELYING ON RULE 8D OF THE RULES, A PPLIED AS A FORMULA, APPLICABLE TO AN ASSESSEE WHO HAS INCURRED EXPENDITURE BY WAY OF INTEREST WHICH WAS NOT DIRECTLY ATTRIBUTA BLE TO ANY PARTICULAR INCOME OR RECEIPT WHICH WAS NOT THE CASE OF THE PRESENT ASSESSEE, WHICH WAS CLEARLY A WRONG APPLICA TION INTRODUCED AS A SUBSTITUTE FOR SUB-SECTION (2) OF S ECTION 14A AND THUS WAS NOT PERMISSIBLE IN LAW. A CAREFUL PERUSAL OF THE PROVISIONS OF SEC. 14A WOU LD SHOW THAT THE ONUS IS PLACED UPON THE ASSESSEE TO PROVE THE QUANTUM OF EXPENDITURE INCURRED ON EARNING OF TAX FREE INCOME OF DIVIDEND. HOWEVER, AS PER THE PROVISIONS OF SUB. SEC (2) OF SEC. 14A OF THE ACT, THE AO IS REQUIRED TO EXAMINE THE CLAIM OF THE ASSESSEE IN RESPECT OF SUC H EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND IF HE IS NOT SATISFIED WITH THE CORRECTNESS OF CLAIM ONLY, H E CAN PROCEED TO DETERMINE THE AMOUNT OF EXPENDITURE IN TERMS OF SEC . 14A(2) OF THE ACT. THE HONBLE PUNJAB & HARYANA HIGH COURT, IN THE ABO VE CITED CASE, HAS ALSO HELD THAT WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, IS A QUESTION OF FACT. 9 . IN THE INSTANT CASE ALSO, THE CONTENTION OF T HE ASSESSEE IS THAT IT DID NOT USE ANY OF ITS BORROWED FUNDS FOR MAKING INVEST MENTS. THE LD CIT(A) HAS EXTRACTED THE DETAILS OF OWN FUNDS AVAILABLE WI TH THE ASSESSEE AS UNDER:- ITA NOS.5113/12 & 4363/12 6 03.1 IN THIS CONTEXT THE APPELLANT HAS SUBMITTED AS FOLLOWS: (I) TOTAL INVESTMENTS AS ON 1.4.2007 WAS RS. 95,69, 430 AND AS ON 31.3.2008 WAS RS. 11,79,037. THE APPELLANT HAD I NTEREST FREE FUNDS AT IT'S DISPOSAL AMOUNTING TO RS. 4,43,83,389 AS ON 31/3/2007 AND RS. 5,68,13,514 AS ON 31/3/2008, AS S HOWN BELOW :- AS ON 31/3/2007 AS ON 31/3/2008 SHARE CAPITAL 4,94,000 4,94,000 RESERVES AND SURPLUS 3,71,46,360 4,77,33,083 DEPRECIATION RESERVES 67,43,029 85,86,431 TOTAL INTEREST FREE FUNDS 4,43,83,389 5,68,13,514 SECURED CASH CREDIT BORROWINGS 3,01,33,988 1,53,31, 273 (II) DURING FY 2007-08, THE ASSESSEE COMPANY GENERA TED OWNED INTEREST FREE FUNDS AMOUNTING TO RS. 1,25,72,726 FR OM IT'S OPERATIONS, WHICH WAS EVENLY DISTRIBUTED, COMPRISIN G OF PAT AND DEPRECIATION. INVESTMENTS MADE BY THE COMPANY WERE IN REGULAR COURSE OF BUSINESS. THE COMPANY HAD BORROWED FUNDS IN CASH CREDIT A/C AMOUNTING TO RS. 3,01,33,988 AS ON 31.03 .2007 AND RS.1,53,31,273 AS ON 31.03.2008. THUS, THERE WAS AC TUALLY A NET REDUCTION IN BORROWED FUNDS DURING THE YEAR AMOUNTI NG BY RS. 1,48,02,715. THE FURTHER CONTENTION OF THE ASSESSEE IS THAT THE PRESUMPTION OF USAGE OF OWN FUNDS SHOULD BE MADE WHEN BOTH OWN FUNDS AND BO RROWED FUNDS WERE PUT INTO COMMON POOL AND IN THIS REGARD, THE A SSESSEE HAS PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD (200 9)(313 ITR 340). 10 . AS ALREADY NOTICED, THE ASSESSING OFFICER HAS NOT CONSIDERED ALL THESE ASPECTS, WHERE AS, AS PER THE DECISION OF HON BLE PUNJAB & HARYANA HIGH COURT (REFERRED SUPRA), THE ASSESSING OFFICER IS REQUIRED TO PROCEED FURTHER TO COLLECT MATERIALS OR EVIDENCE TO DETERMINE EXPENDITURE, IF ANY, INCURRED BY THE ASSESSEE. HENCE, IN OUR VI EW, THIS ISSUE REQUIRES ITA NOS.5113/12 & 4363/12 7 FRESH EXAMINATION AT THE END OF THE ASSESSING OFFIC ER. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND REST ORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAM INE THE ISSUE AFRESH BY DULY CONSIDERING ALL THE CLAIMS OF THE ASSESSEE AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 11 . IN THE RESULT, THE APPEAL FILED BY THE ASSESS EE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVE NUE IS DISMISSED. - .3 -. + 4+ 56!7 ! 8. + &. 9: & + '-& + &. 9: ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH MAY, 2014. #!2 + 01$ ' ! ; <# 3 28 TH MAY,2014 1 + = SD/- SD/- ( . . ) (H.L. KARWA) ( . . ) (B.R.BASKARAN ) / PRESIDENT !' # !' # !' # !' # / ACCOUNTANT MEMBER MUMBAI ; <# DATED 28/05/2014 ). . /PKM , . / PS #!2 #!2 #!2 #!2 + ++ + ).> ).> ).> ).> ?!>$. ?!>$. ?!>$. ?!>$. / COPY OF THE ORDER FORWARDED TO : #!2 #!2 #!2 #!2 / BY ORDER, 5 55 5 / 9 9 9 9 & & & & ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. %( / THE APPELLANT 2. )*%( / THE RESPONDENT. 3. @ ( ) / THE CIT(A), MUMBAI. 4. @ / CIT 5. >A= ). , , / DR, ITAT, MUMBAI 6. =B C / GUARD FILE. *>. ). //TRUE COPY//