ITO, Ward - 12(3), Kolkata V. UMT Investment Ltd., Kolkata

ITA 554/KOL/2009

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100302 (ITAT-KOLKATA)
• Duration Of Justice: 6 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2015
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 30-04-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 13-04-2009
• Court: TRIBUNAL
• Department Lawyers: G MALLIKAR JUN CITLD
• Assessee Lawyers: NAGESWAR RAO
• Keywords: Depreciation

Judgement Text

ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 1 IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH, K OLKATA BEFORE : SHRI MAHAVIR SINGH, JUDICIAL MEMBER, AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER ITA NO. 554/KOL/2009 A.Y 2004-05 I.T.O WARD 12(3), KOLKATA VS. M/S. UMT INVESTME NT LTD PAN: AACU6421 G (APPELLANT) (RESPONDENT) FOR THE APPELLANT/DEPARTMENT: SHRI G.MALLIKAR JUN, CIT/LD. DR FOR THE RESPONDENT/ASSESSEE: S/SHRI NAGESW AR RAO, ADVOCATE AMIT PODDAR, LD.ARS DATE OF HEARING: 16-11 -2015 DATE OF PRONOUNCEMENT: 30 -12- 2015 ORDER SHRI M.BALAGANESH, AM : THIS APPEAL OF THE REVENUE ARISES OUT OF THE ORDER OF THE LEARNED CIT(A)-XII, KOLKATA IN APPEAL NO. 207/XII/12(3)/06-07 DATED 19- 01-2009 FOR THE ASST YEAR 2004- 05 AGAINST THE ORDER OF ASSESSMENT FRAMED U/S 143( 3) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE FOREIGN EXCHANGE GAIN OF RS. 6,71,12,500/- IN RESPECT OF FO REIGN CURRENCY LOAN WHICH HAS BEEN RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT IN ACCORD ANCE WITH ACCOUNTING STANDARD 11 (AS 11) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA (ICAI) BY THE ASSESSEE IS CHARGEABLE TO TAX IN THE FACTS AND CIRC UMSTANCES OF THE CASE. ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 2 3. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSES SEE IS A COMPANY ENGAGED IN THE BUSINESS OF INVESTMENT AND FINANCE ACTIVITY AND DER IVING INTEREST INCOME. THE ASSESSEE BORROWED INTEREST FREE LOAN OF USD 2 CRORE S FROM ITS SHAREHOLDER M/S ASIAN TELE COMMUNICATION INVESTMENTS (MAURITIUS) LTD AND GAVE ADVANCE OF RS. 94,58,50,000/- TO ITS SUBSIDIARY M/S USHA MARTIN TE LEMATICS LTD. THIS FOREIGN CURRENCY LOAN WAS TO BE REPAID ON 13.6.2006 AS PER THE TERMS OF THE LOAN AGREEMENT. THE LOAN AGREEMENT SPECIFIES THE PURPOSE OF THE LOA N AS MEANT FOR GENERAL CORPORATE PURPOSES. THE SAID FOREIGN CURRENCY LOAN WAS RESTA TED AT THE EXCHANGE RATE PREVAILING AT THE END OF THE YEAR IN ORDER TO COMPLY WITH THE REQUIREMENTS OF ACCOUNTING STANDARD (AS 11) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA (ICAI) WHICH IS MANDATORILY TO BE FOLLOWED BY THE ASSESSEE COMPANY. THIS RESTATEMENT RESULTED IN A FOREIGN EXCHANGE GAIN OF RS. 6,71,12,500/- AND THE SAME WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT BY THE ASSESSEE IN ITS BOOKS OF ACCOUN TS. THE ASSESSEE HOWEVER CHOSE TO REDUCE THE SAME IN THE STATEMENT OF TOTAL INCOME AS THE RESULTANT FOREIGN EXCHANGE GAIN IS ONLY NOTIONAL GAIN AND NOT ACTUALLY REALIZED BY THE ASSESSEE. AS ONLY THE REAL INCOME SHOULD BE TAXABLE FOR INCOME TAX PURPOSES, THIS RED UCTION WAS MADE BY THE ASSESSEE. HOWEVER , THIS CONTENTION DID NOT HOLD WATER IN THE MIND OF THE LEARNED AO WHO ADDED THE SAME ON THE FOLLOWING GROUNDS:- A) THE ASSESSEE ITSELF HAD CREDITED THE EXCHANGE GAIN IN ITS PROFIT AND LOSS ACCOUNT AS INCOME. B) THE ASSESSEE HAD BORROWED MONIES FROM ITS FOREIGN S HAREHOLDER AND UTILIZED THE SAME FOR ADVANCING TO ITS SUBSIDIARY COMPANY IN THE ORDINARY COURSE OF ITS BUSINESS AS THE ASSESSEE ITSELF IS ENGAGED IN T HE BUSINESS OF INVESTMENT AND FINANCING ACTIVITY. HENCE THE LOAN WAS TAKEN ONLY ON REVENUE ACCOUNT. C) THE MAIN BUSINESS OF THE ASSESSEE IS FINANCING AND INVESTMENT ACTIVITIES. SINCE THE BORROWED FUNDS HAVE BEEN DEPLOYED BY THE ASSESSEE IN ITS FINANCING ACTIVITIES IN THE ORDINARY COURSE OF BUSI NESS, THE BORROWED FUNDS ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 3 WOULD BE CONSTRUED AS THE BUSINESS LIABILITIES OF T HE ASSESSEE. THE ONLY INCOME DERIVED BY THE ASSESSEE IS INTEREST INCOME. D) AS PER ACCOUNTING STANDARD (AS) 11 ISSUED BY THE IN STITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), ALL FOREIGN EXCHANGE F LUCTUATIONS ON RESTATEMENT AT THE END OF THE YEAR, BE IT GAIN OR L OSS, NEEDS TO BE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT. E) AS PER AS 1 ISSUED BY ICAI UNDER THE HEADING PRUDE NCE, EVEN THE UNREALIZED GAINS ARE TO BE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT WHICH HAS BEEN RIGHTLY DONE BY THE ASSESSEE IN ITS BOOKS. HENCE THE ASSESSEE TRYING TO TAKE A SHIFT IN THE TREATMENT OF THE SAID GAIN FOR TAX PURPOSES IS NOT IN ACCORDANCE WITH LAW. 4. ON FIRST APPEAL, THE LEARNED CITA DELETED THE ADDITION BY MAKING THE FOLLOWING OBSERVATIONS :- A. ASSESSEES ACTION OF CREDITING THE GAIN TO P&L A/ C IS NOT THE DECISIVE TEST TO DECIDE THE TRUE NATURE OF THE TRANSACTION. THIS HAS TO BE DECIDED AS PER THE PRINCIPLES OF LAW. B. EVEN BORROWED FUNDS TO BE TREATED AS BUSINESS LIABI LITIES AS OBSERVED BY AO, THERE IS NO REAL ACCRETION TO THE CAPITAL / LOA N AND THE LIABILITY IS OUTSTANDING AND NOT SETTLED. C. REFERENCE TO RULE 115 OF IT RULES READ WITH SECTION 145(2) OF THE ACT AND DRAWING INFERENCES WITH REFERENCE TO ACCRUAL OF INC OME IS NOT IN AGREEMENT WITH THE LEGISLATIVE INTENT. WHAT IS TO BE TAXED I S REAL INCOME AND NOT THE NOTIONAL INCOME AS HELD BY JUDICIAL FORUMS. D. WITH REGARD TO CASE LAWS (VIZ. INDIAN OVERSEAS BANK LTD VS CIT 246 ITR 206 AND CIT VS IOB 151 ITR 446 ) RELIED UPON BY THE ASSESSEE, THE AO WRONGLY DISTINGUISHED LOSS ON UNSETTLED CONTRACTS. IN FACT THE REFERRED CASES ARE IN FAVOUR OF THE ASSESSEE. ON THE OTHER HAND, THE CASE LAW RELIED BY THE ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 4 AO (VIZ COCA COLA EXP. CORPN 158 ITR 446 ) IS IN FAVOUR OF THE ASSESSEE. E. THE CASE ON WHICH RELIANCE PLACED BY THE AO ON THE PRINCIPLE OF REVENUE RECOGNITION (63 ITR 328) CAN BE DISTINGUISHED ON FA CTS. F. SUTLEJ COTTON MILLS LTD CASE (116 ITR 1) , THE CASE ON WHICH AO PLACED RELIANCE TO DISTINGUISH CAPITAL ACCOUNT WITH THAT O F REVENUE ACCOUNT, THE APEX COURT ONLY LAID DOWN THE GENERAL PRINCIPLES FO R DECIDING THE NATURE OF GAIN AND THE FACTS CAN BE DISTINGUISHED. G. FOREIGN EXCHANGE GAIN IS ON ACCOUNT OF FIXED CAPITA L AND NOT CIRCULATING CAPITAL. H. THE GAIN IS ONLY CONTINGENT AND NOTIONAL AS HELD BY UTTARAKHAND HIGH COURT IN THE CASE OF CIT VS ONGC LTD (301 ITR 415) AND THIS VIEW IS FURTHER SUPPORTED BY HONBLE KOLKATA ITAT (EIH HOTELS LTD) . I. FOREIGN EXCHANGE GAIN IS ONLY HYPOTHETICAL IN NATUR E AND NOT REALIZED BY THE ASSESSSEE. 5. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF THE RS. 6,71,12,5 00/- THOUGH THERE HAS BEEN A VIOLATION OF ACCOUNTING STANDARD AS -11 WHIC H IS MANDATORY FOR COMPANIES. 6. THE ARGUMENTS OF THE LEARNED DR COULD BE SUMMA RIZED AS UNDER:- A. THE ASSESSEE HAD BORROWED MONIES FROM ITS SHAREHOLD ER WITHOUT ANY INTEREST AND HAD ADVANCED THE SAME TO ITS SUBSIDIAR Y COMPANY WITHOUT ANY INTEREST IN THE ORDINARY COURSE OF ITS BUSINESS. M OREOVER, THE LOAN AGREEMENT FILED BY THE ASSESSEE CLEARLY STIPULATES THAT THE FOREIGN CURRENCY LOAN IS MEANT FOR GENERAL CORPORATE PURPOSES. HENC E THE LOAN IS UTILIZED ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 5 ONLY ON REVENUE ACCOUNT. ACCORDINGLY THE RESULTANT FOREIGN EXCHANGE GAIN ARISING OUT OF RESTATEMENT OF FOREIGN CURRENCY LOAN AT THE END OF THE YEAR IS TO BE BROUGHT TO TAX IN THE LIGHT OF DECISION RENDE RED BY THE HONBLE APEX COURT IN THE CASE OF OIL & NATURAL GAS CORPORATION LTD VS CIT REPORTED IN 322 ITR 180 (SC) WHICH HAD FOLLOWED THE PREVIOUS DECISION OF THE APEX COURT IN THE CASE OF WOODWARD GOVERNOR OF INDIA LTD REPORTED IN 312 ITR 254 (SC). B. HE FURTHER ARGUED THAT THE ASSESSEE IS ENGAGED IN T HE INVESTMENT AND FINANCING ACTIVITY AND THIS LENDING TO SUBSIDIARY C OMPANY HAD BEEN MADE AS PART OF ITS BUSINESS ACTIVITIES AND HENCE THE FOREI GN CURRENCY LOAN HAS BEEN UTILIZED ONLY ON REVENUE ACCOUNT. ADMITTEDLY, THE FOREIGN CURRENCY LOAN HAS NOT BEEN UTILIZED FOR PURCHASE OF FIXED ASSETS. MOREOVER, THE PROVISIONS OF SECTION 43A OF THE ACT WOULD NOT BE APPLICABLE T O THE FACTS OF THE INSTANT CASE AS THE LOAN HAS BEEN BORROWED AND UTILIZED ON REVENUE ACCOUNT. C. HE FURTHER ARGUED THAT EVEN UNDER THE CONCEPT OF PR UDENCE AS PER AS 1 ISSUED BY ICAI, THE ASSESSEE IS SUPPOSED TO RECOGNI ZE THE FOREIGN EXCHANGE GAINS IN ITS PROFIT AND LOSS ACCOUNT AND OFFER THE SAME TO TAX. D. HE FURTHER ARGUED THAT THE ASSESSEE ITSELF HAD CRED ITED THE FOREIGN EXCHANGE GAIN AS ITS INCOME IN THE PROFIT AND LOSS ACCOUNT B UT STRANGELY CHOSE TO WITHDRAW THE SAME FROM THE AMBIT OF TAXATION WHILE FILING THE RETURN TREATING IT AS NOTIONAL GAIN. HE ARGUED THAT ONCE THE ASSESSEE ITSELF HAD CREDITED THIS GAIN IN ITS PROFIT AND LOSS ACCOUNT, THE CONCEPT OF PRUDENCE AUTOMATICALLY FAILS. 7. IN RESPONSE TO THIS, THE LEARNED AR ASSAILED THE IMPUGNED ISSUE ON SEVERAL COUNTS AND THE VARIOUS ARGUMENTS OF THE LEARNED AR COULD B E SUMMARIZED AS UNDER:- A. INTEREST FREE ADVANCE GIVEN TO SUBSIDIARY COMPANY B Y THE ASSESSEE. FROM THE BREAK UP OF INTEREST INCOME EARNED BY THE ASSES SEE, IT COULD BE SEEN THAT ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 6 THE ASSESSEE HAS NOT RECEIVED ANY INTEREST INCOME O N THE ADVANCE MADE TO SUBSIDIARY COMPANY OUT OF BORROWINGS FROM ITS SHARE HOLDER. THE LEARNED AR ARGUED THAT HENCE EVEN THOUGH THE ASSESSEE IS AN INVESTMENT COMPANY, THIS LENDING WAS NOT MADE WITH A VIEW TO EARN INTER EST INCOME AND ACCORDINGLY CANNOT BE CONSTRUED AS AMOUNTS LENT IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE. HENCE HE ARGUED THAT THE TRANSACTION CANNOT BE TREATED AS LOAN UTILIZED ON REVENUE ACCOUNT AND HAS TO BE TREATED AS LOAN UTILIZED ON CAPITAL ACCOUNT. B. THE LEARNED AR ARGUED THAT ASSESSEE DURING THE ASST YEAR UNDER APPEAL HAD DERIVED NOTIONAL FOREIGN EXCHANGE GAIN ON RESTATEME NT OF THE FOREIGN CURRENCY LOAN AT THE END OF THE YEAR. SIMILARLY IT HAD INCURRED NOTIONAL EXCHANGE LOSS IN THE SUBSEQUENT ASSESSMENT YEARS , THE DETAILS OF WHICH ARE STATED IN PG 56 OF THE PAPER BOOK. HE STATED THAT THESE NOTIONAL EXCHANGE LOSSES WERE NOT CLAIMED AS DEDUCTION BY THE ASSESSE E IN LINE WITH THE CONSISTENT METHOD FOLLOWED BY THE ASSESSEE FOR TAX PURPOSES. IN OTHER WORDS, NOTIONAL GAIN IS NOT OFFERED TO TAX AND SIMI LARLY NOTIONAL LOSS IS NOT CLAIMED AS DEDUCTION. HE STATED THAT EVEN THE DEC ISIONS OF ONGC LTD (322 ITR 180 SC) AND WOODWARD GOVERNOR CASE (312 I TR 254-SC) RELIED ON BY THE LEARNED DR , AFFIRMS THE VIEW OF C ONSISTENCY AND METHOD OF ACCOUNTING SYSTEM ADOPTED BY THE ASSESSEE. C. HE ARGUED THAT ACCOUNTING STANDARD 1 (AS 1) ISSUED BY ICAI IS NOTIFIED U/S 145(2) OF THE ACT. IN AS 1, THE PRINCIPLE OF PRUDE NCE STATES THAT UNREALIZED GAINS SHOULD NOT BE RECOGNIZED IN THE BOOKS AND WHE REAS THE PROVISION SHOULD BE MADE FOR KNOWN LIABILITIES INCLUDING FUTU RE LIABILITIES ON THE BASIS OF PRINCIPLE OF CONSERVATISM. HE ARGUED THAT THE LEARNED AO COMPLETELY ERRED IN UNDERSTANDING THE CONCEPT OF PRUDENCE AS P ER AS 1 AND PRESENTED MISLEADING FACTS IN PAGE 3 PARA 1 OF HIS ORDER WIT H REGARD TO INCOME RECOGNITION. HE FURTHER ARGUED THAT EVEN THE DECIS ION OF WOODWARD GOVERNOR (312 ITR 254 SC) STATES THAT THE UNREALI ZED PROFITS IN THE SHAPE ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 7 OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT T HE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUN T IN A CONTINUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH, AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW C OST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACTUALLY. D. THE LEARNED AR ARGUED THAT THE LEARNED AO PROCEEDS TO UNDERSTAND THE RECOGNITION OF FOREIGN EXCHANGE GAINS ON RESTATEMEN T AT THE END OF THE YEAR ON THE MISTAKEN PREMISE THAT THE LOAN IS SETTLED DU RING THE ASST YEAR UNDER APPEAL, WHICH IS FACTUALLY INCORRECT. THE LOAN IS DUE FOR SETTLEMENT ONLY IN JUNE 2006 AS PER THE LOAN AGREEMENT AND THE ASSESSE E HAD NOT CHOSEN TO PREPAY THE LOAN. E. HE ARGUED THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR CASE REPORTED IN 312 ITR 254(SC) IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEE CASE. HE S TATED THAT THE ISSUE BEFORE THE SUPREME COURT WAS REGARDING THE NOTIONAL EXCHAN GE LOSS / GAIN DUE TO RESTATEMENT OF LOANS AT THE END OF THE YEAR IF THE LOAN IS UTILIZED ON REVENUE ACCOUNT. THE HONBLE SC HELD THAT SINCE THE LOAN IS UTILIZED ON REVENUE ACCOUNT, THE RESULTANT EXCHANGE GAIN / LOSS EVEN TH OUGH UNREALIZED, SHOULD BE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT AND CO NSIDERED FOR TAX PURPOSES. HE FURTHER ARGUED THAT WITH REGARD TO TH E LOAN UTILIZED ON CAPITAL ACCOUNT, THE HONBLE SC ONLY DECIDED WHETHER THE PR OVISIONS OF SECTION 43A OF THE ACT INTRODUCED IN THE STATUTE WITH EFFEC T FROM 1.4.2003 WOULD HAVE PROSPECTIVE OR RETROSPECTIVE APPLICATION. ADM ITTEDLY, THIS IS NOT THE ISSUE BEFORE US IN THE ASST YEAR UNDER APPEAL. HEN CE WOODWARD GOVERNOR CASE WOULD NOT COVER THE MATTER IN THE IMPUGNED ISS UE. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE. W E FIND THAT THE SHORT POINT THAT ARISES FOR CONSIDERATION IS AS TO WHETHER THE FOREIGN CURR ENCY LOAN HAS BEEN UTILIZED ON ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 8 REVENUE ACCOUNT OR CAPITAL ACCOUNT BY THE ASSESSEE. THIS IS THE ENTIRE CRUX OF THE ISSUE AND VARIOUS ARGUMENTS OF THE COUNSELS OF BOTH THE S IDES. WE FIND THAT THE LEARNED AR IS TRYING TO ASSAIL THE ISSUE BEFORE US BASED O N CERTAIN FACTS WHICH WERE MISTAKENLY UNDERSTOOD BY THE LEARNED AO SUCH AS :- (A) INTEREST INCOME HAS BEEN EARNED BY THE ASSESSEE OUT OF ADVANCES MADE TO SUBSIDIARY COMPANY (USHA MARTIN TELEMATICS LTD) IN THE ORDINARY COURSE OF BUSINESS, WHICH IS FACTUALLY INC ORRECT. (B) SIMILARLY THE CONCEPT OF PRUDENCE AS PER AS -1 ISSU ED BY ICAI FURTHER NOTIFIED U/S 145(2) OF THE ACT HAS BEEN MIS TAKENLY STATED BY THE LEARNED AO THAT IT STATES THAT EVEN THE UNREALI ZED GAINS SHOULD BE RECOGNIZED IN THE PROFIT AND LOSS ACCOUNT, WHICH IS FACTUALLY INCORRECT. IN THIS REGARD, IT WOULD BE RELEVANT TO GET INTO AS -1 DISCLOSURE OF ACCOUNTING POLICIES UNDER THE HEADI NG PRUDENCE, THE REVENUE RECOGNITION IS MADE ON THE FOLLOWING BA SIS:- PARA 17 A. IN VIEW OF THE UNCERTAINITY ATTACHED T O FUTURE EVENTS , PROFITS ARE NOT ANTICIPATED BUT RECOGNIZED ONLY WHE N REALIZED THOUGH NOT NECESSARILY IN CASH. PROVISION IS MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNO T BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BES T ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. (C ) THAT THE FOREIGN EXCHANGE GAIN ON RESTATEMENT IS OUT OF A SETTLED LOAN TRANSACTION AND HENCE IT IS NOT NOTIONAL. THIS FIN DING IS FACTUALLY INCORRECT AS THE LOAN IS OUTSTANDING AT THE END OF THE YEAR AND THE SAME IS REPAYABLE ONLY IN JUNE 2006. THE LEARNED AR WAS ONLY TRYING TO TAKE ADVANTAGE OF THESE MISTAKES BY TRYING TO SWEEP THE BASIC AND REAL FACTS UNDER THE CARPET. W E HOLD THAT THE REAL FACT IS THAT BORROWINGS WERE MADE FROM SHAREHOLDER FOR BUSINESS PURPOSES AND THE SAME WAS UTILIZED BY ADVANCING TO SUBSIDIARY COMPANY USHA MA RTIN TELEMATICS LTD IN THE ORDINARY COURSE OF ITS BUSINESS BY THE ASSESSEE. THE FACT THAT THE ASSESSEE DID NOT ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 9 RECEIVE ANY INTEREST INCOME ON THIS LENDING WOULD N OT SHIFT THE BUSINESS PURPOSE FOR WHICH THE ASSESSEE ADVANCED MONIES TO USHA MARTIN T ELEMATICS LTD. WE FIND IN THE INSTANT CASE, THAT SINCE THE ASSESSEE DOES NOT HAVE ANY COST FOR ITS BORROWED FUNDS AND THAT IS WHY THE ASSESSEE HAS TRIED TO TAKE THIS STA ND THAT THE LENDING IS NOT MEANT FOR BUSINESS PURPOSES OF THE ASSESSEE AS THERE IS NO QU ESTION OF DISALLOWANCE OF INTEREST ON BORROWED CAPITAL U/S 36(1)(III) OF THE ACT. THE FO LLOWING FACTS ARE INDISPUTABLE IN THE PRESENT CASE :- A) THE ASSESSEE IS ENGAGED IN FINANCING AND INVESTM ENT ACTIVITIES. B) INTEREST FREE FUNDS BORROWED BY ASSESSEE FROM IT S SHAREHOLDER. C) INTEREST FREE FUNDS ADVANCED BY ASSESSEE TO ITS SUBSIDIARY COMPANY USHA MARTIN TELEMATICS LTD IN THE ORDINARY COURSE OF ITS BUSINE SS. AS THE SAID ADVANCE IS INTEREST FREE, THERE IS NO QUESTION OF CHARGING ANY INTEREST THEREON. D) THE LOAN AGREEMENT CLEARLY SPECIFIES THAT THE BO RROWINGS ARE MEANT FOR GENERAL CORPORATE PURPOSES. E) THE FOREIGN EXCHANGE GAIN HAD AROSE DUE TO RESTA TEMENT OF THE LOAN BALANCE OUTSTANDING AT THE END OF THE YEAR BASED ON EXCHANG E RATE PREVAILING AT THE END OF THE YEAR AMOUNTING TO RS. 6,71,12,500/-. F) THE ASSESSEE HAD CREDITED THE SAID FOREIGN EXCHA NGE GAIN IN ITS PROFIT AND LOSS ACCOUNT AS INCOME. BUT FOR TAX PURPOSES, THE ASSES SEE HAD TREATED THE SAME AS UNREALIZED GAINS AND HENCE NOT CHARGEABLE TO TAX AS IT IS ONLY NOTIONAL GAIN. G) THE ASSESSEE HAD SIMILARLY RESTATED THE LOAN OUT STANDING IN THE SUBSEQUENT YEARS AT THE END OF THE YEAR AND HAD INCURRED FOREIGN EXC HANGE LOSS AS BELOW:- ASST YEAR 2005-06 72,00,000 ASST YEAR 2006-07 1,72,00,000 ASST YEAR 2007-08 4,64,00,000 ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 10 THE LEARNED AR FAIRLY CONCEDED THAT THESE FOREIGN E XCHANGE LOSSES THOUGH BOOKED AS LOSS IN THE BOOKS OF ACCOUNTS HAD NOT BEEN CLAIMED AS DEDUCTION FOR TAX PURPOSES IN THE SUBSEQUENT ASSESSMENT YEARS. 8.1. WE AGREE THAT WOODWARD GOVERNOR CASE DEALT W ITH FOREIGN CURRENCY BORROWED ON CAPITAL ACCOUNT FROM THE PERSPECTIVE OF PROSPECTIVE APPLICABILITY OF SECTION 43A W.E.F 1.4.2003 AND NO DECISION WAS RENDERED BY THE HONBL E APEX COURT IN THIS CASE WITH REGARD TO THE FOREIGN EXCHANGE FLUCTUATIONS ARISING OUT OF LOAN BORROWED ON CAPITAL ACCOUNT. BUT THE SAID DECISION DULY CONSIDERED THE RECOGNITION OF FOREIGN EXCHANGE GAINS FOR TAX PURPOSES IF THE LOAN IS UTILIZED ON R EVENUE ACCOUNT. ADMITTEDLY, THE LOAN IN THE INSTANT CASE HAS BEEN UTILIZED ONLY ON REVEN UE ACCOUNT. HENE THE RESULTANT FOREIGN EXCHANGE GAIN ARISING DUE TO RESTATEMENT AT THE END OF THE YEAR NEEDS TO BE BROUGHT TO TAX. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD VS CIT REPORTED IN 116 ITR 1 (SC) WHEREIN IT WAS HELD THAT: THE LAW MAY , THEREFORE, NOW BE TAKEN TO BE WELL SE TTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATI ON OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY , SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PRO FIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSI NESS. 8.2. WE AGREE WITH THE ARGUMENTS OF THE LEARNED AR THAT MERELY BECAUSE THE ASSESSEE HAD RECOGNIZED THE EXCHANGE GAIN IN ITS PROFIT AND LOSS ACCOUNT , IT WOULD NOT AUTOMATICALLY TAKE THE CHARACTER OF INCOME FOR TAX PURPOSES. ENTRIES IN THE BOOKS OF ACCOUNTS ARE NOT DETERMINATIVE OF THE QUESTION WHET HER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS. WE ARE NOT APPROACHING THE IMPUGNED ISSUE BASED ON THE ENTRIES MADE BY ASSESSEE IN ITS BOOKS OF ACCOUNTS. 8.3. THE LOAN AGREEMENT CLEARLY MENTIONS THAT THE LOAN IS MEANT FOR GENERAL CORPORATE PURPOSES ONLY WHICH MEANS IT IS MEANT FOR REVENUE A CCOUNT. IF IT IS MEANT FOR ANY CAPITAL INVESTMENT, THEN THE LOAN AGREEMENT WOULD H AVE BEEN DIFFERENTLY WORDED ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 11 SPECIFYING THE PURPOSE OF MAKING THE INVESTMENTS AN D IN WHICH CASE, THE LOAN WOULD BE CATEGORIZED AS A SPECIFIC PURPOSE LOAN. BUT IN THE INSTANT CASE, IT IS MENTIONED AS GENERAL CORPORATE PURPOSES MEANING THAT THE LOAN IS MEANT FOR GENERAL BUSINESS PURPOSES OF THE ASSESSEE. THE AMOUNTS ADVANCED TO USHA MARTIN TELEMATICS LTD IS MEANT FOR BUSINESS PURPOSES OF THE ASSESSEE AND HAS TO BE CONSTRUED AS AMOUNTS LENT IN THE ORDINARY COURSE OF BUSINESS ONLY . THE BUSINE SS OF THE ASSESSEE ITSELF IS MAKING INVESTMENTS IN OTHER COMPANIES. WE HOLD THAT JUST BECAUSE NO INTEREST INCOME IS DERIVED IN THIS TRANSACTION, THE CHARACTER OF THE T RANSACTION FOR BUSINESS PURPOSES ( I.E THE LOAN UTILIZATION ON REVENUE ACCOUNT) WOULD NOT CHANGE. HENCE THE ARGUMENT OF THE LEARNED AR THAT THE UTILIZATION OF BORROWINGS IS MA DE ON CAPITAL ACCOUNT IS NOT APPRECIATED. ONCE THIS IS LOST, THEN THE DECISION OF WOODWARD GOVERNOR CASE (312 ITR 254 SC) WOULD AUTOMATICALLY COME INTO PLAY ON WHICH POINT, THE COUNSELS OF BOTH THE SIDES ARE AGREEABLE. THE CONCEPT OF PRUDE NCE HAS BEEN CONSIDERED IN THE JUDGEMENT OF SUPREME COURT IN WOODWARD GOVERNOR CAS E. ONCE THE UTILIZATION OF BORROWINGS ARE HELD TO BE ON REVENUE ACCOUNT, THEN THE RESULTANT EXCHANGE GAIN OR LOSS AT THE END OF THE YEAR DUE TO RESTATEMENT OF FOREIG N CURRENCY LOAN WOULD AUTOMATICALLY TAKE THE REVENUE RECEIPT / EXPENDITURE AS THE CASE MAY BE. 8.4. HOWEVER, WE FIND THAT THE ASSESSEE HAD INCURRE D EXCHANGE LOSSES DUE TO RESTATEMENT OF THE SUBJECT MENTIONED FOREIGN CURREN CY LOAN AT THE END OF THE YEAR IN SUBSEQUENT ASSESSMENT YEARS AND HAD NOT CLAIMED AS DEDUCTION AS IT IS NOTIONAL IN NATURE IN LINE WITH THE CONSISTENT STAND TAKEN BY T HE ASSESSEE. IN THIS REGARD, WE DEEM IT FIT AND APPROPRIATE IN THE INTEREST OF JUSTICE A ND FAIR PLAY, TO GIVE DIRECTIONS TO THE LEARNED AO TO GRANT DEDUCTION OF NOTIONAL EXCHANGE LOSS IN THE SUBSEQUENT ASSESSMENT YEARS TO BE IN CONSONANCE WITH OUR FINDINGS HEREINA BOVE. OTHERWISE, IT WOULD ONLY RESULT IN REVENUE TRYING TO BLOW HOT AND COLD SIMUL TANEOUSLY. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS AL LOWED SUBJECT TO THE DIRECTION CONTAINED HEREINABOVE. ITA NO. 554/KOL/09-C-AM M/S. UMT INVESTMENT LTD 12 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED SUBJECT TO THE DIRECTION CONTAINED HEREINABOVE. 1. THE APPELLANT: I T O WARD 12(3), 3 GOVT PLACE ( WEST), KOL-1 2 THE RESPONDENT-M/S. UMT INVESTMENT LIMITED 2A. L AND MARK, 228A, AJC BOSE ROAD, KOL - 20. 3 /THE CIT, 4.THE CIT(A ) 5. DR, KOLKATA BENCH 6. GUARD FILE. TRUE COPY, BY ORDER, ASSTT REGISTRAR **PRADIP/SPS ORDER PRONOUNCE D ON 30.12.15 SD/- ( MAHAVIR SINGH, JUDICIAL MEMBER ) SD/- (M. BALAGANESH, ACCOUNTANT MEMBER) DATE 30 /12/2015 COPY OF THE ORDER FORWARDED TO: