NLC Nalco India Ltd., Kolkata V. ACIT, CIR-11, KOLKATA, Kolkata

ITA 527/KOL/2008

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 99816 (ITAT-KOLKATA)
• Duration Of Justice: 7 year(s) 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Assessment Year: 2001-2002
• Appeal Filed On: 15-04-2008
• Court: TRIBUNAL
• Department Lawyers: SOUMESH KUMAR DAS JCITSR
• Assessee Lawyers: A K GHOSH; R N BAJORIA SR
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Wholly owned subsidiary; Speculation loss; Scheme of amalgamation; Capital receipt; Revised return; Unabsorbed depreciation
• Section: 143(3); 37(1); 139(5); 145; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B , KOLKATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI M.BALAGANESH, AM ] ITA NO. 527/KOL/2008 ASSESSMENT YEAR : 2001 - 02 ( A PPELLANT ) (RESPONDENT) NLC NALCO INDIA LIMITED - VERSUS - D.C .I.T., CIRCLE - 10, KOLKATA KOLKATA (PAN: AAACO 4994 N) FOR THE APPELLANT : SHRI R.N.BAJORIA, SR.COUNSEL & SHRI A.K.GHOSH FOR THE RESPONDENT : SHRI SOUMESH KUMAR DAS, JCIT,SR.DR DATE OF HEARING : 27.08 .2015. DATE OF PRONOUNCEMENT : 21.09.2015. . ORDER PER SHRI M.BALAGANESH, AM 1. THIS APPEAL OF THE ASSESSEE ARISES OUT OF THE ORDER OF THE LEARNED CITA IN APPEAL NO .177/CIT(A) - XXXVI/KOL/WD - 2(3),HOOGHLY/07 - 08 DATED 07.03.2011 FOR THE ASST YEAR 2005 - 06 ARISING OUT OF THE ORDER OF THE LEARNED ASSESSING OFF ICER FRAMED U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). 2. SHRI.R.N.BAJORIA , SENIOR ADVOCATE, AND SHRI.A.K.GUPTA , THE LEARNED ARS ARGUED ON BEHALF OF THE ASSESSEE AND SHRI.SOUMESH KUMAR DAS, JCIT, THE LEARNED SENIO R DR ARGUED ON BEHALF OF THE REVENUE. 3. THE FIRST GROUND RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND HENCE IS NOT ADJUDICATED HEREIN. 4. THE FIRST ISSUE TO BE DECIDED IN THIS CASE IS AS TO WHETHER THE REVISED RETURN FILED BEYOND THE PERMISS IBLE DATE NOT CONSIDERED BY THE LEARNED AO AND LEARNED CIT ( A ) REGARDING THE BENEFIT OF SET OFF OF BROUGHT FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION OF AMALGAMATING COMPANY. ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 2 4.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ORIGINAL RETURN OF INCOME OF AQUA CHEMICALS & SYSTEMS (MFG) LTD (IN SHORT ACS ) WAS FILED WITH DCIT, RANGE 1, NUNGAMBAKKAM, CHENNAI FOR THE ASST YEAR 2001 - 02 ON 29.10.2001 DECLARING TOT AL LOSS OF RS. 2,24,85,438/ - . THE ORIGINAL RETURN OF INCOME OF ASSESS EE COMPANY WAS FILED WITH DCIT, CIRCL E - 10, KOLKATA ON 19.10.2001 SHOWING TOTAL INCOME OF RS. 4,10,84,370/ - . PURSUANT TO THE SCHEME OF AMALGAMATION APPROVED BY CAL CUTTA HIGH COURT ON 24.2.2003, THE COMPANY ACS WAS MERGED WITH ASSESSEE COMPANY WITH EFFECT FROM 1.4.2000 (I.E THE EFFEC TIVE DATE OF MERGER AS PER THE COURT APPROVED ORDER IS 1.4.2000) AND ACCORDINGLY, THE ASSESSEE IN ORDER TO REFLECT THE CONSOLIDATED RESULTS OF THE AMALGAMATED ENTITY, FILED A REVISED RETURN ON 28.3.2003 SHOWING TOTAL INCOME OF RS. 1,85,98,930/ - . THE ASSESSE E STATED THAT THE HON BLE MADRAS HIGH COURT HAD APPROVED THE SCHEME OF MERGER ON 2.9.2002 AND HON BLE CALCUTTA HIGH COURT HAD APPROVED THE SCHEME OF MERGER ON 24.2.2003 WITH EFFECTIV E DATE OF MERGER AS 1.4.2000. AFTER THE MERGER, THE NAME OF THE ASSESSEE W AS CHANGED FROM NALCO CHEMICALS INDIA LTD TO ONDEO NALCO INDIA LTD WITH EFFECT FROM 14.3.2002. THE REVISED RETURN WAS FILED BY THE ASSESSEE REFLECTING THE CONSOLIDATED RESULTS OF AMALGAMATED ENTITY IN THE NAME OF ONDEO NALCO INDIA LTD ON 28.3.2003. A CCORDINGLY, THE ASSESSEE REQUESTED THE LEARNED AO TO CONSIDER THE REVISED RETURN . THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF HON BLE SUPREME COURT IN THE CA S E OF MARSHAL SONS AND CO. (INDIA) LTD VS ITO REPORTED IN 223 ITR 809 (SC) IN SUPPORT OF ITS CONTENTIONS. 4.2. THE LEARNED AO IGNORED THE REVISED RETURN FILED BY THE ASSESSEE CONSOLIDATING THE RESULTS THEREBY IGNORING THE LOSS RETURNED BY THE AMALGAMATING COMPANY IN THE SUM OF RS. 2,24,85,438/ - IGNORING THE FACT OF MERGER AND THE COURT OR DER APPROVING THE SCHEME OF MERGER. THIS ACTION WAS ALSO UPHELD BY THE LEARNED CIT ( A ) . V. THIS RAISES AN IMPORTANT QUESTION ON THE IMPLICATION OF THE DECISIONS OF THE MADRAS HIGH COURT AND KOLKATA HIGH COURT APPROVING AS SUCH THE SCHEME OF MERGER. N O DOUBT THE DECISIONS OF THE HIGH COURTS ARE BINDING. BUT WHAT IS THE IMPORT OF HIGH COURT APPROVAL? WHY IS IT THAT APPROVAL OF HIGH COURT IS REQUIRED IN A SCHEME OF MERGER? FIRSTLY, INTER SE INTERESTS OF SHAREHOLDERS, PARTICULARLY OF MINORITY SHA REHOLDER S ARE IMPORTANT, AND THE HIGH COURT PLAYS AN IMPORTANT ROLE IN ENSURING THAT THE INTEREST OF SHAREHOLDERS OF MERGING ENTITIES ARE SAFEGUARDED BY WAY OF PUBLIC HEARING. THIS IS NOT ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 3 AN ISSUE IN THE MERGER OF A 100% SUBSIDIARY WITH THE PARENT COMPANY, I.E. TH E APPELLANT HERE. SECONDLY, INTERESTS OF THE THIRD PARTY CREDITORS HAVE TO BE PROTECTED. NO ISSUE HAS BEEN RAISED HERE ON THIS, SO THIS IS ALSO NOT AN ISSUE. THIRDLY, THERE SHOULD BE NO HARM TO PUBLIC PURPOSE. THIS ISSUE HAS NOT BEEN IN FOCUS, BUT MAY BE IMPORTANT. THE HON BLE HIGH COURT APPROVED THE MERGER ON 22 - 2 - 2003 W.E.F. 1 - 4 - 2000. WHAT IS THE REAL IMPACT OF MERGER? THE TWO BALANCE SHEETS GET MERGED, WITH ADJUSTMENT OF SHARE CAPITAL, WITHOUT DETRIMENT OF THE THIRD PARTIES, INCLUDING CREDITORS, AND EV EN THE REVENUE. THE APEX COURT IN MARSHALL SONS AND COMPANY (INDIA) LIMITED VS. INCOME TAX OFFICER 233 ITR 809 HAS HELD, IN THE LAST PARA OF THE ORDER, FOR THE ABOVE REASONS, THE APPEALS ARE ACCORDINGLY ALLOWED. THE WRIT PETITIONS FILED BY THE APPELLANT I N THE HIGH COURTS SHALL BE DEEMED TO HAVE BEEN ALLOWED. WE, HOWEVER, MAKE IT CLEAR THAT WE HAVE NOT EXPRESSED ANY OPINION ON THE PLEA OF THE LEARNED COUNSEL FOR THE REVENUE THAT THE AMALGAMATION ITSELF IS A DEVICE DESIGNED TO EVADE TAXES LEGITIMATELY PAYAB LE BY THE SUBSIDIARY COMPANY. IF THE INCOME TAX AUTHORITIES THINK THAT THEY ARE ENTITLED TO RAISE THIS QUESTION IN THE PROCEEDINGS UNDER THE INCOME TAX ACT, IT IS OPEN TO THEM TO DO SO BY WAY OF SEPARATE PROCEEDING ACCORDING TO LAW. NO COSTS. THE ABOVE REMARKS MAKE IT ABUNDANTLY CLEAR THAT THE SCHEME OF MERGER IF APPROVED BY THE HIGH COURT IN A DIFFERENT CONTEXT, AND IF THE FACTS WARRANT IT, THE LAW SHALL BE ALLOWED TO TAKE ITS DUE COURSE, INCLUDING UNDER THE INCOME TAX ACT, 1961. IT IS ABUNDANTLY CLEAR , THAT BY FILING AN INVALID REVISED RETURN BEYOND THE PERMISSIBLE DATE TO REVISE THE RETURN OF INCOME, THE APPELLANT AHS TRIED TO REDUCE ITS TAXABLE INCOME AND EVADE TAXES. BESIDES, IT HAS NOT ALSO FULFILLED THE CONDITIONS LAID DOWN IN SECTION 72A READ WIT H RULE 9C AND NECESSARY DETAILS IN FORM 62 HAVE NOT BEEN FILED. THEREFORE, I HAVE NO HESITATION IN DECIDING THAT THE REVISED RETURN IS INVALID, AND THE TAX BENEFITS IN TERMS OF CURRENT OR PAST BUSINESS LOSSES AND UNABSORBED DEPRECIATION CANNOT BE ALLOWED T O THE APPELLANT. THIS HAS NO BEARING IN MAINTAINING THE CONSOLIDATED BALANCE SHEET, ETC. AND PROTECTING THE INTERESTS OF THIRD PARTY CREDITORS AS PER THE SCHEME OF MERGER APPROVED BY THE RESPECTIVE HON BLE HIGH COURTS. 4.3. WE HAVE HEARD THE RIVAL SUBM ISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE LOWER AUTHORITIES HAD NOT APPRECIATED AND UNDERSTOOD THE LEGAL POSITION ON THE IMPUGNED SUBJECT BY DISREGARDING THE FACT OF MERGER OF AQUA CHEMICALS & SYSTEMS (MFG) LTD WITH THE ASSES SEE MORE SO WHEN THE SCHEME OF MERGER HAS BEEN APPROVED BY HON BLE CALCUTTA AND MADRAS HIG H COURT WITH EFFECTIVE DATE AS 1.4.2000. WE HOLD THAT WHATEVER OBJECTIONS, IF ANY, IN THE MINDS OF THE INCOME TAX DEPARTMENT, TO THE SCHEME OF MERGER, THE REVENUE IS SUPPOSED TO RAISE THE SAME IN THE COURT CONVENED CREDITORS MEETING. WHEN NO OBJECTIONS ARE RAISED BY THE REVENUE TO THE SCHEME OF MERGER, THEN THE REVENUE IS DUTY BOUND TO FOLLOW THE ORDERS OF THE COURT STRICTLY. ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 4 WE FIND THAT THE REVISED RETURN REFLEC TING THE CONSOLIDATED RESULTS OF THE AMALGAMATED ENTITY WAS FILED BEYOND THE PERMISSIBLE TIME LIMIT U/S 139(5) OF THE ACT. THIS IS DUE TO THE FACT OF DELAYED PASSING OF THE ORDER OF THE HIGH COURT APPROVING THE SCHEME OF MERGER WITH EFFECTIVE DATE AS 1.4. 2000. THIS DELAY IS DEFINITELY NOT ATTRIBUTABLE TO THE ASSESSEE AND IT IS NOT WITHIN THE CONTROL OF THE ASSESSEE. WE ALSO FIND THE REVISED RETURN HAS BEEN FILED HEREIN BEFORE THE COMPLETIO N OF ASSESSMENT PROCEEDINGS. THE DECISION OF GOETZE INDIA REPORTED IN 284 ITR 323 (SC) IS NOT APPLICABLE TO APPELLATE AUTHORITIES. IN VIEW OF THE AFORESAID FACTS AND CIRCUMSTANCES, WE DIRECT THE LEARNED AO TO KINDLY FRAME THE ASSESSMENT BY CONSIDERING THE LOSS RETURNED BY AQUA CHEMICALS & SYSTEMS (MFG) LTD I.E BY CONS IDERING THE CONSOLIDATED RESULTS REFLECTED IN THE REVISED RETURN. ACCORDINGLY, THE GROUND NO. 2 RAISED BY THE ASSESSEE IN THIS REGARD IS ALLOWED. 5. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE COMPENSATION RECEIVED BY THE ASSES SEE FOR RESTRAINT OF TRADE IS TO BE TREATED AS CAPITAL RECEIPT OR REVENUE RECEIPT. 5.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE RECEIVED A SUM OF RS. 1,52,16,000/ - FROM NALCO CHEMICAL CO. USA (PARENT COMPANY) AND CLAIMED THE SAME TO BE A CAPI TAL RECEIPT. THE LEARNED AO OBSERVED THAT THE PURSUANT TO THE ASSET PURCHASE AGREEMENT BETWEEN NALCO CHEMICAL COMPANY USA (SELLER ) AND D.A.STUART COMPANY (PURCHASER) DATED 25.3.1999, THE LUBRICANT BUSINESS OF NALCO GROUP WAS SOLD GLOBALLY WITH EFFECT F ROM 6.4.1999 AND UNDER THE TERMS OF THE AGREEMENT, NALCO USA AND ITS SUBSIDIARIES WERE TO EXIT FROM THIS BUSINESS IN EVERY FORM AND THE ASSESSEE WAS REQUIRED TO CO MPLETE THE EXIT BY 1.5.2000. THE FOLLOWING CORRESPONDENCES IN THIS REGARD WARRANT UTMOST IMPO RTANCE: - LETTER DATED 20.4.1999 ADDRESSED BY NALCO CHEMICAL COMPANY ILLINOIS TO NALCO CHEMICALS INDIA LIMITED, CALCUTTA 20 TH APRIL, 1999 NALCO CHEMICALS INDIA LIMITED 20/A PARK STREET ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 5 CALCUTTA 700016. INDIA. D E AR SIR, RE: SALE OF LUBRICANT BUSINESS AS YOU ARE AWARE, THAT EFFECTIVE APRIL 6, 1999, WE HAVE SOLD OUR WORLD WIDE LUBRICANT BUSINESS TO M/S. D.A.STUART, USA UNDER THE AGREEMENT OF SALE WITH M/S. D.A. STUART, USA. NALCO CHEMICAL COMPANY, USA ALONG WITH ALL ITS SUBSIDIARIES WILL HAVE TO DISCONTINUE MANUFACTURE AND SALE OF LUBRICANTS GLOBALLY. A TERRITORY WISE TIME SCHEDULE IS BEING AGREED UPON WITH THE BUYER OF THE LUBRICANT BUSINESS BY WHICH TIME NALCO CHEMICAL COMPANY, USA, ALONG WITH ITS SUBSIDIARIES WILL HAVE TO COMPLETELY WITHDRAW FROM THIS BUS INESS. FOR TAKING AWAY YOUR RIGHT TO SELL LUBRICANTS IN YOUR TERRITORY AND FOR THE RESULTANT LOSS OF YOUR SOURCE OF INCOME FROM THE ABOVE, IT HAS BEEN DECIDED TO PAY YOU SUITABLE COMPENSATION AS MAY BE DECIDED IN DUE COURSE. THE DATE FOR YOUR WITHDRAWING F ROM THE LUBRICANT BUSINESS WILL BE INTIMATED TO YOU IN DUE COURSE. THANKING YOU, YOURS FAITHFULLY SD/ - CHRIS TRUNCK MANAGER, INTERNATIONAL TAX NALCO CHEMICAL COMPANY. LETTER DATED 4.1.2000 ADDRESSED BY NALCO CHEMICAL COMPANY ILLINOIS TO NALCO CHEMICALS I NDIA LIMITED, CALCUTTA 4 TH JANUARY, 2000 NALCO CHEMICALS INDIA LIMITED 20/A PARK STREET CALCUTTA 700016. INDIA. D E AR SIR, RE: SALE OF LUBRICANT BUSINESS THIS IS FURTHER TO OUR LETTER DATED 20 TH APRIL, 1999 ON THE ABOVE SUBJECT WHEREIN WE HAVE MENTIONED THAT THE LUBRICANT BUSINESS HAS BEEN SOLD GLOBALLY TO M/S. D.A, STUART, USA WITH EFFECT FROM 6 TH APRIL, 1999. UNDER THE TERMS OF THE AGREEMENT NALCO CHEMICAL COMPANY, USA & ITS SUBSIDIARIES THROUGHOUT THE WORLD ARE REQUIRED TO EXIT FROM THE LUBRICANT BUSI NESS AND THE SAME BUSINESS CANNOT BE UNDERTAKEN BY YOU IN ANY FORM OR MANNER WHATSOEVER. WE HAVE NOW DECIDED THAT NALCO INDIA WILL TOTALLY EXIT FROM THE LUBRICANT BUSINESS IN INDIA EFFECTIVE 1 ST MAY, 2000. PLEASE CONFIRM TO US THAT YOU ARE ADHERING TO THE ABOVE DATE FOR TOTAL EXIT FROM THE LUBRICANT BUSINESS IN INDIA. THANKING YOU, YOURS FAITHFULLY SD/ - CHRIS TRUNCK MANAGER, INTERNATIONAL TAX NALCO CHEMICAL COMPANY. ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 6 LETTER DATED 10.4.2000 ADDRESSED BY NALCO CHEMICALS INDIA LIMITED, CALCUTTA TO NALCO CHEM ICAL COMPANY ILLINOIS 10 TH APRIL, 2000 NALCO CHEMICALS COMPANY ONE NALCO CENTRE, NAPERVILLE ILLINOIS 60563 - 1198 USA RE: SALE OF LUBRICANT BUSINESS D E AR SIR, PLEASE REFER TO YOUR LETTER DATED 4 TH JANUARY, 2000. WE CONFIRM THAT WE WOULD TOTALLY EXIT FROM THE LUBRICANT BUSINESS IN INDIA FROM THE TARGET DATE FIXED BY YOU I.E. 1 ST MAY, 2000. IN THIS REGARD, WE REFER TO THE PENULTIMATE PARA OF YOUR LETTER DATED 20 TH APRIL, 1999 WHEREIN YOU DECIDED TO PAY US COMPENSATION FOR GIVING UP OUR RIGHT TO PROCESS /PURCHASE/SALE OF LUBRICANTS. WE SHALL BE GRATEFUL IF YOU KINDLY LET US KNOW WHEN WE WOULD BE RECEIVING THE ABOVE COMPENSATION. THANKING YOU, YOURS FAITHFULLY FOR NALCO CHEMICALS INDIA LIMITED SD/ - N.KHANNA DIRECTOR & SECRETARY LETTER DATED 20.11.2000 A DDRESSED BY NALCO CHEMICAL COMPANY ILLINOIS TO NALCO CHEMICALS INDIA LIMITED, CALCUTTA 20 TH NOVEMBER, 2000 NALCO CHEMICALS INDIA LIMITED 20/A PARK STREET CALCUTTA 700016. INDIA. D E AR SIR, RE: SALE OF LUBRICANT BUSINESS WE THANK YOU FOR YOUR LETTER D ATED 10 TH APRIL, 2000. IT HAS BEEN DECIDED TO COMPENSATE YOU ON THE BASIS OF DIRECT CONTRIBUTION OF YOUR INDIAN ENTITY. ON THIS BASIS, WE HAVE ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 7 WORKED OUT YOUR COMPENSATION FOR CANCELLATION OF YOUR TOTAL RIGHT TO DEAL WITH THE LUBRICANT BUSINESS IN INDIA AT US DOLLARS 326374. PLEASE LET US HAVE YOUR BANK DETAILS SO THAT WE MAY REMIT THE COMPENSATION AMOUNT TO YOU. THANKING YOU, YOURS FAITHFULLY SD/ - CHRIS TRUNCK MANAGER, INTERNATIONAL TAX NALCO CHEMICAL COMPANY. 5.2. PURSUANT TO THESE CORRESPONDENCES, T HE ASSESSEE WAS IN RECEIPT OF USD 326374 (EQUIVALENT TO RS. 1,52,16,000/ - ) AS COMPENSATION RECEIVED FOR RESTRAINT OF TRADE AND COMPENSATION FOR CANCELLATION OF TOTAL RIGHT TO DEAL WITH THE LUBRICANT BUSINESS IN INDIA. THE LEARNED AO CONCLUDED THE SAID RECE IPT TO BE A BUSINESS RECEIPT AND ACCORDINGLY BROUGHT THE SAME TO TAX WHICH WAS UPHELD BY THE LEARNED CIT ( A ) . AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND: - 3. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING T HAT THE COMPENSATION RECEIVED BY THE APPELLANT ON ACCOUNT OF LOSS OF A SOURCE OF INCOME WAS REVENUE RECEIPT LIABLE TO TAX AND NOT CAPITAL RECEIPT AS CLAIMED BY THE APPELLANT. 5.3. THE LEARNED AR ARGUED THAT THE CORRESPONDENCES BETWEEN THE ASSESSEE AND I TS US PARENT COMPANY CLEARLY PROVES THAT THE ASSESSEE HAD GOT ONLY COMPENSATION FOR LOSS OF BUSINESS AND PAYMENTS WERE RECEIVED BY ASSESSEE FOR ENTERING INTO RESTRICTIVE COVENANTS OF NOT ENTERING INTO COMPETITIVE BUSINESS. HE ARGUED THAT HENCE THE SAID RE CEIPT IS TO BE CONSTRUED ONLY AS A CAPITAL RECEIPT. HE FURTHER ARGUED THAT THE PROVISIONS OF SECTION 28(VA) OF THE ACT WERE INTRODUCED IN THE STATUTE BY FINANCE ACT 2002 WITH EFFECT FROM 1.4.2003 ONLY, WHEREIN, THE NON - COMPETE FEES RECEIVED UNDER AN AGR EEMENT FOR NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS IS CONSTRUED AS BUSINESS INCOME OF THE ASSESSEE. THE SAID AMENDMENT IS NOT RETROSPECTIVE IN OPERATION. HE ALSO PLACED RELIANCE ON THE DECISION OF GUFFIC CHEM P LTD VS CIT AND CIT AND A NOTHER VS MANDALAY INVESTMENT P LTD REPORTED IN 332 ITR 602 (SC) IN SUPPORT OF ALL HIS CONTENTIONS. IN RESPONSE TO THIS, THE LEARNED DR VEHEMENTLY RELIED ON THE OLD ITAT ORDER. IN DEFENCE, THE LEARNED AR ARGUED THAT THE OLD ITAT ORDER HAS BEEN APPEALED BY THE ASSESSEE BEFORE THE HON BLE CALCUTTA HIGH COURT AND THE ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 8 HON BLE CALCUTTA HIGH COURT HAD SET ASIDE THIS ISSUE TO THIS TRIBUNAL TO DECIDE THIS ISSUE AFRESH IN ACCORDANCE WITH LAW AS PROPER FACTS W E RE NOT BROUGHT OUT IN THE EARLIER TRIBUNAL ORDER AND H ENCE NO RELIANCE SHOULD BE PLACED ON THE OLD TRIBUNAL ORDER. 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE EARLIER TRIBUNAL ORDER RELIED UPON BY THE LEAR NED DR IS NOT WELL PLACED AS THE SAME HAS BEEN SET ASIDE BY THE HON BLE HIGH COURT TO DECIDE THE ISSUE BY BRINGING OUT THE FULL FACTS OF THE CASE. WE FIND THAT THE ASSESSEE HAD RECEIVED THE COMPENSATION FROM ITS US PARENT COMPANY AMOUNTING TO USD 326374 H AS BEEN RECEIVED FOR ENTERING INTO RESTRICTIVE COVENANTS OF NOT ENTERI NG INTO COMPETITIVE BUSINESS. WE ALSO FIND THAT THE PROVISIONS OF SECTION 28(VA) OF THE ACT HAD BEEN INTRODUCED IN THE STATUTE BOOK BY FINANCE ACT 2002 WITH EFFECT FROM 1.4.2003 (RELEVAN T TO ASST YEAR 2003 - 04) ONLY AND NOT EARLIER. ACCORDINGLY, THE NON - COMPETE FEES WOULD BECOME TAXABLE ONLY FROM ASST YEAR 2003 - 04 AND NOT EARLIER. THE YEAR UNDER APPEAL BEFORE US IS ASST YEAR 2001 - 02 , DURING WHICH YEAR, THE PROVISIONS OF SECTION 28(VA) OF THE ACT WERE NOT IN THE STATUTE. WE ALSO HOLD THAT THE PAYMENTS RECEIVED FOR IMPAIRMENT OF INCOME EARNING APPARATUS, STERLISATION OF SOURCE OF INCOME OR TRANSFER OF A CAPITAL ASSET WOULD GENERALLY FALL IN THE CATEGORY OF CAPITAL RECEIPTS. FURTHER THE CORRESPONDENCES DATED 20.4.1999; 4.1.2000 ; 10.4.2000 & 2 0.11.2000 AS REPRODUCED SUPRA, CLEARLY GOES TO PROVE THAT THE COMPENSATION RECEIVED FOR UNDERTAKING RESTRICTIVE COVENANTS OF NOT COMPETING WITH THE BUSINESS OF THE ASSESSEE FALL IN THE NATURE OF CAP ITAL RECEIPT. WE FIND THAT THE ISSUE UNDER IS SQUARELY COVERED BY THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF GUFFIC CHEM P LTD VS CIT AND CIT AND ANOTHER VS MANDALAY INVESTMENT P LTD REPORTED IN 332 ITR 602 (SC), WHEREIN IT WAS HELD AS BELOW: - 3. DURING THE ASSESSMENT YEAR 1997 - 98 THE ASSESSEE RECEIVED RS.50,00,000 (RUPEES FIFTY LAKHS ONLY) FROM RANBAXY AS NON - COMPETITION FEE. THE SAID AMOUNT WAS PAID BY RANBAXY UNDER AN AGREEMENT DATED MARCH 31, 1997. THE ASSESSEE IS A PART OF THE GUF FIC GROUP. THE ASSESSEE AGREED TO TRANSFER ITS TRADE MARKS TO RANBAXY AND IN CONSIDERATION ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 9 OF SUCH TRANSFER THE ASSESSEE AGREED THAT IT SHALL NOT CARRY ON DIRECTLY OR INDIRECTLY THE BUSINESS HITHERTO CARRIED ON BY IT ON THE TERMS AND CONDITIONS APPEARING I N THE AGREEMENT. THE ASSESSEE WAS CARRYING ON THE BUSINESS OF MANUFACTURING, SELLING AND DISTRIBUTION OF PHARMA CEUTICAL AND MEDICI NAL PREPARATIONS INCLUDING PRODUCTS MENTIONED IN THE LIST IN SCHEDULE A TO THE AGREEMENT. THE AGREEMENT DEFINED THE PERIOD, I. E., A PERIOD OF 20 YEARS COMMENCING FROM THE DATE OF THE AGREEMENT. THE AGREEMENT DEFINED THE TERRITORY AS TERRITORY OF INDIA AND REST OF THE WORLD. IN SHORT, THE AGREEMENT CONTAINED PROHIBITIVE/RESTRICTIVE COVENANT IN CONSIDERATION OF WHICH A NON - COMPETIT ION FEE OF RS.50 LAKHS WAS RECEIVED BY THE ASSESSEE FROM RANBAXY. THE AGREEMENT FURTHER SHOWED THAT THE PAYMENT MADE TO THE ASSESSEE WAS IN CONSIDERATION OF THE RESTRICTIVE COVENANT UNDERTAKEN BY THE ASSESSEE FOR A LOSS OF SOURCE OF INCOME. 5. THE POS ITION IN LAW IS CLEAR AND WELL SETTLED. THERE IS A DICHOTOMY BETWEEN RECEIPT OF COMPENSATION BY AN ASSESSEE FOR THE LOSS OF AGENCY AND RECEIPT OF COMPENSATION ATTRIBUTABLE TO THE NEGATIVE/RESTRICTIVE COVENANT. THE COMPENSATION RECEIVED FOR THE LOSS OF AGEN CY IS A REVENUE RECEIPT WHEREAS THE COMPENSATION ATTRIBUTABLE TO A NEGATIVE/RESTRICTIVE CO VENANT IS A CAPITAL RECEIPT. 7. TWO QUESTIONS AROSE FOR DETERMINATION, NAMELY, WHETHER THE AMOUNTS RECEIVED BY THE APPELLANT FOR LOSS OF AGENCY WAS IN NORMAL COU RSE OF BUSINESS AND THEREFORE WHETHER THEY CONSTITUTED REVENUE RECEIPT ? THE SECOND QUESTION WHICH AROSE BEFORE THIS COURT WAS WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE (COMPENSATION) ON THE CONDITION NOT TO CARRY ON A COMPETITIVE BUSINESS WAS IN THE NA TURE OF CAPITAL RECEIVED? IT WAS HELD THAT THE COMPENSATION RECEIVED BY THE ASSESSEE FOR LOSS OF AGENCY WAS A REVENUE RECEIPT WHEREAS COMPENSATION RECEIVED FOR REFRAINING FROM CARRYING ON COMPETITIVE BUSINESS WAS A CAPITAL RECEIPT. THIS DICHOTOMY HAS NOT BEEN APPRECIATED BY THE HIGH COURT IN ITS IMPUGNED JUDGMENT. THE HIGH COURT HAS MISINTERPRETED THE JUDGMENT OF THIS COURT IN GILLANDERS CASE (SUPRA). IN THE PRESENT CASE, THE DEPARTMENT HAS NOT IMPUGNED THE GENUINENESS OF THE TRANSACTION. IN THE PRESENT CASE, WE ARE OF THE VIEW THAT THE HIGH COURT HAS ERRED IN INTERFERING WITH THE CONCURRENT FINDINGS OF FACT RECORDED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) AND THE TRIBUNAL. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. PAYMENT RECEIVED AS NON - COMPETITION F EE UNDER A NEGATIVE COVENANT WAS ALWAYS TREATED AS A CAPITAL RECEIPT TILL THE ASSESSMENT YEAR 2003 - 04. IT IS ONLY VIDE THE FINANCE ACT, 2002 WITH EFFECT FROM APRIL 1, 2003 THAT THE SAID CAPITAL RECEIPT IS NOW MADE TAXABLE (SEE SECTION 28(VA)). THE FINANCE ACT, 2002 ITSLE3F INDICATES THAT DURING THE RELEVANT ASSESSMENT YEAR COMPENSATION RECEIVED BY THE ASSESSEE UNDER NON - COMPETITION AGREEMENT WAS A CAPITAL RECEIPT, NOT TAXABLE UNDER THE 1961 ACT. IT BECAME TAXABLE ONLY WITH EFFECT FROM APRIL 1, 2003. IT IS W ELL SETTLED THAT A LIABILITY CANNOT BE CREATED RETROSPECTIVELY. IN THE PRESENT CASE, COMPENSATION RECEIVED UNDER THE NON - COMPETITION AGREEMENT BECAME TAXABLE AS A CAPITAL RECEIPT AND NOT AS A REVENUE RECEIPT BY SPECIFIC LEGISLATIVE MANDATE VIDE SECTION 28 (VA) AND THAT TOO WITH EFFECT FROM APRIL 1, 2003. HENCE, THE SAID SECTION 28(VA) IS AMENDATORY AND NOT CLARIFICATORY. LASTLY, IN CIT V. RAI BAHADUR JAIRAM VALJI REPORTED IN [1959] 35 ITR 148 IT WAS HELD BY THIS COURT THAT IF A CONTRACT IS ENTERED INTO IN T HE ORDINARY COURSE OF BUSINESS, ANY COMPENSATION RECEIVED FOR ITS TERMINATION (LOSS OF AGENCY) WOULD BE A REVENUE RECEIPT. IN THE PRESENT CASE, BOTH THE COMMISSIONER OF INCOME - TAX (APPEALS) AS WELL AS THE TRIBUNAL, CAME TO THE CONCLUSION THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH RANBAXY LED TO LOSS OF SOURCE OF BUSINESS; THAT PAYMENT WAS RECEIVED UNDER THE NEGATIVE COVENANT AND THEREFORE THE RECEIPT OF RS.50 LAKHS BY THE ASSESSEE FROM RANBAXY WAS IN THE NATURE OF A CAPITAL RECEIPT. IN FACT, IN OR DER TO PUT AN END TO THE LITIGATION, PARLIAMENT STEPPED IN TO SPECIFICALLY TAX SUCH RECEIPTS UNDER NON - COMPETITION AGREEMENT WITH EFFECT FROM APRIL 1, 2003. ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 10 RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENT CITED SUPRA, WE HOLD THAT THE SUBJECT MENTIONED NO N - COMPETE FEES RECEIVED BY THE ASSESSEE FOR RESTRAINT OF TRADE IN THE SUM OF RS. 1,52,16,000/ - IS TO BE TREATED AS A CAPITAL RECEIPT AND WE HAVE NO HESITATION IN DIRECTING THE LEARNED AO TO DELETE THIS ADDITION. ACCORDINGLY, THE GROUND NO. 3 RAISED BY THE ASSESSEE IS ALLOWED. 6. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS TREATMENT OF EXCHANGE FLUCTUATION LOSS ARISING OUT OF RESTATEMENT OF EXCHANGE COMMERCIAL BORROWINGS (ECB) FROM HOLDING COMPANY OF THE ASSESSEE UTILIZED FOR GENERAL CORPORATE OBJECT IVES. 6.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE AVAILED ECB LOAN OF USD 50,00,000 FROM THE PARENT COMPANY (EQUIVALENT TO RS. 23,21,50,000/ - ) WITH DUE APPROVAL OF RBI FOR THE PURPOSE OF GENERAL CORPORATE OBJECTIVES. ON THIS FACT OF UTILIZ ATION OF ECB LOAN THERE IS NO DISPUTE. THE TENURE OF ECB LOAN IS FOR 6 YEARS AND REPAYMENT SCHEDULE IS IN 9 INSTALMENTS. THE SAID LOAN WAS RESTATED BASED ON THE EXCHANGE RATE PREVAILING AT THE END OF THE YEAR AND IT RESULTED IN A EXCHANGE LOSS OF RS. 1,8 3,12,000/ - WHICH WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT BY THE ASSESSEE AND CLAIMED AS DEDUCTION. THE LEARNED AO ASSUMED THAT THE UTILIZATION OF THE ECB LOAN WAS TOWARDS CAPITAL PURPOSES AND HENCE THE NOTIONAL LOSS ARISING OUT OF RESTATEMENT AT THE EN D OF THE YEAR SHOULD BE TREATED ONLY AS CAPITAL IN NATURE. BUT STRANGELY, THE LEARNED AO HAVING CONSTRUED SO DID NOT BOTHER TO GRANT DEPRECIATION ON THE SAME IN THE ASSESSMENT. THIS ACTION OF THE LEARNED AO WAS ALSO UPHELD BY THE LEARNED CITA WITHOUT ADD UCING ANY REASONS. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS: - 4. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT THE LOSS ARISING DUE TO FLUCTUATION IN RATE OF EXCHANGE IS SPECULATION LOSS AND/OR A ME RE PROVISION AND SHOULD BE CARRIED FORWARD TO BE SET OF IN FUTURE YEARS AGAINST SIMILAR GAIN. 5. FOR THAT THE COMMISSIONER OF INCOME TAX (APPEALS) SHOULD HAVE DIRECTED THE ALLOWANCE OF LOSS ARISING DUE TO FLUCTUATION IN RATE OF EXCHANGE AS BUSINESS LOSS AN D THERE WAS NO BASIS OF MATERIAL TO HOLD THAT THE SAID LOSS WAS SPECULATIVE IN NATURE. ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 11 6.2. THE LEARNED AR ARGUED THAT THE LEARNED AO HAVING STATED IN THE ASSESSMENT ORDER ITSELF THAT THE ECB LOAN WAS UTILIZED FOR GENERAL CORPORATE OBJECTIVES OF THE ASS ESSEE COMPANY IN PAGE 5 FIRST PARA OF HIS ORDER, OUGHT NOT TO HAVE STATED THAT NO DETAILS OF UTILIZATION OF ECB LOAN WAS FURNISHED BY THE ASSESSEE AS PER SECOND PARA IN PAGE 5 OF HIS ORDER. HE ARGUED THAT THIS FINDING OF THE LEARNED AO IN SECOND PARA PAGE 5 OF THE ASSESSMENT ORDER IS TOTALLY CONTRADICTORY TO THE FACTS MENTIONED BY HIM IN FIRST PARA PAGE 5 OF HIS ORDER. HE ARGUED THAT THE LOAN WAS UTILIZED FOR WORKING CAPITAL PURPOSES OF THE ASSESSEE AND HENCE THE SAME IS UTILISED ONLY ON REVENUE ACCOUNT. THIS LOAN WAS OUTSTANDING AS ON 31.3.2005 AND THE SAME WAS RESTATED AT THE EXCHANGE RATE PREVAILING AT THE END OF THE YEAR IN CONSONANCE WITH THE ACCOUNTING STANDARD 11 (AS - 11) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) BY THE ASSESS EE COMPANY. THE ASSESSEE INCURRED A NOTIONAL EXCHANGE LOSS OF RS. 1,83,12,000/ - ON SUCH RESTATEMENT IN VIEW OF INCREASE IN LIABILITY P AYABLE ON THE LOAN ACCOUNT. IN ANY CASE, THIS ISSUE IS NOW COVERED BY THE DECISION OF THE HON BLE SUPREME COURT IN THE C ASE OF CIT VS WOODWARD GOVERNOR OF INDIA LTD REPORTED IN 312 ITR 254 (SC). IN RESPONSE TO THIS, THE LEARNED DR VEHEMENTLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 6.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECO RD. IT IS OBSERVED FROM THE FINDING GIVEN IN THE ASSESSMENT ORDER THAT THE ECB LOAN OF USD 50,00,000 WAS UTILIZED FOR GENERAL CORPORATE OBJECTIVES AND NOT FOR ACQUISITION OF ANY FIXED ASSETS BY THE ASSESSEE, THOUGH CONTRADICTORY FINDING IS TAKEN BY THE LE ARNED AO IN HIS ORDER. HENCE WE HOLD THAT THE BORROWINGS WERE UTILIZED ON REVENUE ACCOUNT. BASED ON THIS, IT COULD LOGICALLY BE CONCLUDED THAT ANY EXCHANGE FLUCTUATION ARISING OUT OF RESTATEMENT OF THE SAID LOAN AT THE END OF THE YEAR, BE IT GAIN OR LO SS, WOULD ALSO FALL ON REVENUE ACCOUNT AND HENCE AUTOMATICALLY COMES UNDER THE AMBIT OF TAXATION IF IT IS A GAIN AND ALLOWABLE AS AN EXPENDITURE IF IT IS A LOSS. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS WOO DWARD GOVERNOR INDIA P LTD REPORTED IN 312 ITR 254 (SC) WHEREIN THE QUESTIONS RAISED BEFORE THEIR LORDSHIPS WERE AS UNDER: - ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 12 (I) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ADDITIONAL LIABILITY ARISING ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE IN RESPECT OF LOANS TAKEN FOR REVENUE PURPOSES COULD BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) IN THE YEAR OF FLUCTUATION IN THE RATE OF EXCHANGE OR WHETHER THE SAME COULD ONLY BE ALLOWED IN THE YEAR OF REPAYMENT OF SUCH LOANS? (II) WHETHER, THE ASSESSEE IS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH BALANCE SHEET DATE, PENDING ACTUAL PAYMENT OF THE VARIED LIABILITY? THEIR LORDSHIPS HAD CATEGORICALLY HELD THAT SINCE THE LOAN WAS BORROWED FOR GENERAL BUSINESS PURPOSES I.E ON REVENUE ACCOUNT, ANY LOSS ARISING OUT OF RESTATEMENT AT THE END OF THE YEAR WOULD BE SQUARELY ALLOWABLE U/S 37(1) OF THE ACT. 13. AS STATED ABOVE, ONE OF THE MAI N ARGUMENTS ADVANCED BY THE LEARNED ADDITIONAL SOLICITOR GENERAL ON BEHALF OF THE DEPARTMENT BEFORE US WAS THAT THE WORD 'EXPENDITURE' IN SECTION 37(1) CONNOTES 'WHAT IS PAID OUT' AND THAT WHICH HAS GONE IRRETRIEVABLY. IN THIS CONNECTION, HEAVY RELIANCE WA S PLACED ON THE JUDGMENT OF THIS COURT IN THE CASE OF INDIAN MOLASSES COMPANY (SUPRA). RELYING ON THE SAID JUDGMENT, IT WAS SOUGHT TO BE ARGUED THAT THE INCREASE IN LIABILITY AT ANY POINT OF TIME PRIOR TO THE DATE OF PAYMENT CANNOT BE SAID TO HAVE GONE IRR ETRIEVABLY AS IT CAN ALWAYS COME BACK. ACCORDING TO THE LEARNED COUNSEL, IN THE CASE OF INCREASE IN LIABILITY DUE TO FOREIGN EXCHANGE FLUCTUATIONS, IF THERE IS A REVALUATION OF THE RUPEE VIS - ` - VIS FOREIGN EXCHANGE AT OR PRIOR TO THE POINT OF PAYMENT, THEN THERE WOULD BE NO QUESTION OF MONEY HAVING GONE IRRETRIEVABLY AND CONSEQUENTLY, THE REQUIREMENT OF 'EXPENDITURE' IS NOT MET. CONSEQUENTLY, THE ADDITIONAL LIABILITY ARISING ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE WAS MERELY A CONTINGENT/NO TIONAL LIABILITY WHICH DOES NOT CRYSTALLIZE TILL PAYMENT. IN THAT CASE, THE SUPREME COURT WAS CONSIDERING THE MEANING OF THE EXPRESSION 'EXPENDITURE INCURRED' WHILE DEALING WITH THE QUESTION AS TO WHETHER THERE WAS A DISTINCTION BETWEEN THE ACTUAL LIABILIT Y IN PRESENTI AND A LIABILITY DE FUTURO. THE WORD 'EXPENDITURE' IS NOT DEFINED IN THE 1961 ACT. THE WORD 'EXPENDITURE' IS, THEREFORE, REQUIRED TO BE UNDERSTOOD IN THE CONTEXT IN WHICH IT IS USED. SECTION 37 ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITUR E OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS'. IN SECTIONS 30 TO 36 , THE EXPRE SSIONS EXPENSES INCURRED' AS WELL AS 'ALLOWANCES AND DEPRECIATION' HAS ALSO BEEN USED. FOR EXAMPLE, DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN SECTION 32. THEREFORE, PARLIAMENT HAS USED THE EXPRESSION 'ANY EXPENDITURE' IN SECTION 37 TO COVER BOTH. THERE FORE,THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MAY, IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVER AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. 14. IN THE CASE OF M.P. FINANCIA L CORPORATION V. CIT REPORTED IN 165 ITR 765 THE MADHYA PRADESH HIGH COURT HAS HELD THAT THE EXPRESSION 'EXPENDITURE' AS USED IN SECTION 37 MAY, IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVER AN AMOUNT WHICH IS A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NO T GONE OUT FROM THE POCKET OF THE ASSESSEE. THIS VIEW OF THE MADHYA PRADESH HIGH COURT HAS BEEN APPROVED BY THIS COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CIT REPORTED IN 225 ITR 802. ACCORDING TO THE LAW AND PRACTICE OF INCOME TAX BY KANGA AND PALKHIVALA, SECTION ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 13 37(1) IS A RESIDUARY SECTION EXTENDING THE ALLOWANCE TO ITEMS OF BUSINESS EXPENDITURE NOT COVERED BY SECTIONS 30 TO 36 . THIS SECTION, ACCORDING TO THE LEARNED AUTHOR, COVERS CASES OF BUSINESS EXPENDITURE ONLY, AND NOT O F BUSINESS LOSSES WHICH ARE, HOWEVER, DEDUCTIBLE ON ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING. (SEE PAGE 617 OF THE EIGHTH EDITION). IT IS THIS PRINCIPLE WHICH ATTRACTS THE PROVISIONS OF SECTION 145 . THAT SECTION RECOGNIZES THE RIGHTS OF A TRADER TO ADO PT EITHER THE CASH SYSTEM OR THE MERCANTILE SYSTEM OF ACCOUNTING. THE QUANTUM OF ALLOWANCES PERMITTED TO BE DEDUCTED UNDER DIVERSE HEADS UNDER SECTIONS 30 TO 43C FROM THE INCOME, PROFITS AND GAINS OF A BUSINESS WOULD DIFFER ACCORDING TO THE SYSTEM ADOPTED. THIS IS MADE CLEAR BY DEFINING THE WORD 'PAID' IN SECTION 43(2) , WHICH IS USED IN SEVERAL SECTIONS 30 TO 43C , AS MEANING ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING UPON THE BASIS ON WHICH PROFITS OR GAINS ARE COMPUTED UNDER SECTION 28 / 29 . THAT IS WHY IN DECIDING THE QUESTION AS TO WHETHER THE WORD 'EXPENDITURE' IN SECTION 37(1) INCLUDES THE WORD 'LOSS' ONE HAS TO READ SECTION 37(1) WITH SECTION 28 , SECTION 29 AND SECTION 145(1) . ONE MORE PRINCIPLE NEEDS TO BE KEPT IN MIND. ACCOUNTS REG ULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. UNDER SECTION 28(I) , ONE NEEDS TO DECIDE THE PROFITS AND GA INS OF ANY BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR. THEREFORE, ONE HAS TO TAKE INTO ACCOUNT STOCK - IN - TRADE FOR DETERMINATION OF PROFITS. THE 1961 ACT MAKES NO PROVISION WITH REGARD TO VALUATION OF STOCK. BUT THE ORDINARY PRINC IPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE P&L ACCOUNT THE VALUE OF THE STOCK - IN - TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. THIS IS HOW BUSINESS PROFITS ARISING DURING THE Y EAR NEEDS TO BE COMPUTED. THIS IS ONE MORE REASON FOR READING SECTION 37(1) WITH SECTION 145 . FOR VALUING THE CLOSING STOCK AT THE END OF A PARTICULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT. THIS IS BECAUSE PROFITS/LOSS IS EMBEDDED IN THE CLOSING STOCK. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASE PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE THEORY UNDERLYING THE RULE THAT CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. AS PROFITS FOR INCOME - TAX PURPOSES ARE TO BE COMPUTED IN ACCORDANCE WITH ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS, SUCH PRINCIPLE S STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS, UNREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUNT IN A CONTINUING BUSINESS ARE NOT BROU GHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACTUALLY. AT THIS STAGE, WE NEED TO EMPHASISE ONCE AGAIN THAT THE ABOVE SYSTEM OF COMMERCIAL ACCOUNTING CAN BE SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENT. THIS IS WHERE SECTION 145(2) COMES INTO PLAY. UNDER THAT SECTION, THE CENTRAL GOVERNMENT IS EMPOWERED TO NOTIFY FROM TIME TO TIME THE ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF AS SESSEES OR IN RESPECT OF ANY CLASS OF INCOME. ACCORDINGLY, UNDER SECTION 209 OF THE COMPANIES ACT, MERCANTILE SYSTEM OF ACCOUNTING IS MADE MANDATORY FOR COMPANIES. IN OTHER WORDS, ACCOUNTING STANDARD WHICH IS CONTINUOUSLY ADOPTED BY AN ASSESSEE CAN BE SUPE RSEDED OR MODIFIED BY LEGISLATIVE INTERVENTION. HOWEVER, BUT FOR SUCH INTERVENTION OR IN CASES FALLING UNDER SECTION 145(3) , THE METHOD OF ACCOUNTING UNDERTAKEN BY THE ASSESSEE CONTINUOUSLY IS SUPREME. IN THE PRESENT BATCH OF CASES, THERE IS NO FINDING GIV EN BY THE AO ON THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. EQUALLY, THERE IS NO FINDING GIVEN BY THE AO STATING THAT THE ASSESSEE HAS NOT COMPLIED WITH THE ACCOUNTING STANDARDS. ITA NO. 527/KOL/2008 NLC NALCO INDIA LTD. A.YR. 2001 - 02 14 15. FOR THE REASONS GIVEN HEREINABOVE, WE HOLD THAT, IN THE PRESENT CASE ,THE 'LOSS' SUFFERED BY THE ASSESSEE ON ACCOUNT OF THE EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE 1961 ACT . IN VIEW OF THE AFORESAID JUDG MENT OF THE APEX COURT, WE HOLD TH AT THE SUM OF RS. 1,83,12,000/ - BEING THE EXCHANGE LOSS WOULD BE ALLOWED AS A DEDUCTION U/S 37(1) OF THE ACT FOR THE ASST YEAR 2001 - 02. ACCORDINGLY, THE GROUND NOS. 4 & 5 RAISED BY THE ASSESSEE ARE ALLOWED. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNC ED IN TH E COURT ON 2 1.09.2015. SD/ - SD/ - [MAHAVIR SINGH] [M.BALAG ANESH] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 21.09.2015. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO : 1 . NLC N ALCO INDIA LTD., 20A, PARK STREET, KOLKATA - 700016. 2 THE A.C.I.T. CIRCLE - 11, KOLKATA 3 . THE CIT - IV , KOLKATA , 4. THE CIT(A) - XI, KOLKATA. 5 . DR, KOLKATA BENCHES, KOLKATA TRUE COPY , BY ORDER, DEPUTY / ASST. REGISTRAR , ITAT, KOLKATA BENCHES