PRATIBHA SHIPPING CO. LTD, MUMBAI V. DCIT CIR-2, MUMBAI

ITA 738/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1398 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 29-03-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 03-02-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Keywords: Capital asset; Business expenditure; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C : MUMBAI BEFORE SHRI D. MANMOHAN, HONBLE VICE PRESIDENT AND SHRI ANANDI LAL GEHLOT, ACCOUNTANT MEMBER ITA. NO. 738/MUM/2009 - ASSESSMENT YEAR 2000-2001 ITA. NO. 739/MUM/2009 - ASSESSMENT YEAR 2001-2002 ITA. NO. 740/MUM/2009 - ASSESSMENT YEAR 2002-2003 M/S. PRATIBHA SHIPPING CO. LTD. MUMBAI 400 021 PAN AAACP-7179-E VS. DCIT, CIRCLE-2 AAYAKAR BHAVAN MUMBAI. (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K. GOPAL FOR REVENUE : SHRI AJIT KUMAR SINHA (CIT-DR) ORDER PER D. MANMOHAN, V.P. 1. THESE THREE APPEALS FILED AT THE INSTANCE OF TH E ASSESSEE- COMPANY ARE DIRECTED AGAINST THE ORDERS PASSED BY T HE CIT(A)-V, MUMBAI. SINCE MAIN ISSUE INVOLVED IN ALL THESE APPE ALS IS COMMON, WE PROCEED TO DISPOSE OF THESE APPEALS BY A COMBINED O RDER FOR THE SAKE OF CONVENIENCE. 2. DISALLOWANCE OF CLAIM OF DEDUCTION REFERABLE TO LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS THE MAIN ISSUE IN DISPUTE BEFORE US IN ALL THE YEARS. FACTS NECESSARY FOR THE DISPOSAL OF THIS ISSUE ARE STATED IN BRIEF. ASSESSEE-COMPANY IS ENGAGED IN SHIPPING BUSINESS. IT HAD TAKEN ONE SHIP VIZ., PRATIBHA GODAVARY ON BAR EBOAT CHARTER CUM DEMISE AGREEMENT (HEREINAFTER CALLED AS BBCD) DAT ED 20-1-1997 FROM M/S. WINDIA AS OF NORWAY. THE VESSEL WAS ACQUIRED F OR A CONSIDERATION OF 15,750,000 US DOLLARS AND THE SAID AMOUNT WAS PAYAB LE IN INSTALLMENTS. ACCORDING TO THE ASSESSEE IT WAS UNABLE TO PAY THE INSTALMENTS AND THEREFORE M/S. WINDIA AS OF NORWAY INTIMATED TO THE ASSESSEE-COMPANY 2 THAT IT IS INVOKING ITS OPTION TO RE-POSSESS ITS VE SSEL. THIS INTIMATION IS DATED 8-6-1999. THEREAFTER ON 17-6-1999 VESSEL WAS RE-POSSESSED BY M/S. WIND AS. 2.1. SIMILARLY ANOTHER VESSEL BY NAME PRATIBHA YA MUNA WAS ALSO ACQUIRED BY THE ASSESSEE IN THE YEAR 2001 BUT RE-POSSESSED BY M/S. WINDIA AS OF NORWAY DURING THE PREVIOUS YEAR RELEVA NT TO THE ASSESSMENT YEAR 2002-2003. 2.2. UP TO THE DATE OF RE-POSSESSION ASSESSEE HAD TO PAY INSTALMENTS OF PRINCIPAL AMOUNT AS WELL AS INTEREST . PRINCIPAL AMOUNT PAYABLE BY THE ASSESSEE IN INSTALMENTS, WAS ALWAYS TREATED AS A CAPITAL EXPENDITURE AND ADDED TO THE COST OF THE ASSET WHER EAS, SUBSEQUENT TO THE REPOSSESSION, ADDITIONAL AMOUNT PAYABLE BY THE ASSESSEE, WITH REFERENCE TO THE PRINCIPAL AMOUNT, ON ACCOUNT OF EX CHANGE FLUCTUATION, WAS CLAIMED AS A REVENUE LOSS. 3. ASSESSING OFFICER OBSERVED THAT THE EXPENDITURE ON PRINCIPAL AMOUNT IS CAPITAL IN NATURE AND HENCE LIABILITY OF EXCHANGE FLUCTUATION ARISING ON AMOUNT PAYABLE OVER AND ABOVE THE PRINCI PAL AMOUNT PAYABLE IN INDIAN RUPEES SHOULD ALSO BE TREATED AS CAPITAL EXPENDITURE. HE ACCORDINGLY DISALLOWED CLAIM OF DEDUCTION OF RS.15, 95,253/- FOR THE ASSESSMENT YEAR 2000-2001. SIMILARLY FOR THE ASSESS MENT YEAR 2001- 2002 CLAIM OF DEDUCTION ON THIS ACCOUNT WORKS OUT T O RS.40,04,960/- WHICH WAS ALSO DISALLOWED ON THE GROUND THAT THE LI ABILITY REFERABLE TO EXCHANGE FLUCTUATION, ARISING ON THE AMOUNT PAYABLE ON ACCOUNT OF PRINCIPAL AMOUNT IS IN THE NATURE OF CAPITAL EXPEND ITURE. IN RESPECT OF THE ASSESSMENT YEAR 2002-2003 ALSO ASSESSEES CLAIM OF DEDUCTION OF RS.1,80,23,700/-, REFERABLE TO THE LOSS ON ACCOUNT OF EXCHANGE FLUCTUATION REFERABLE TO THE PRINCIPAL AMOUNTS PAYA BLE IN RESPECT OF PRATIBHA GODAVARI AND PRATIBHA YAMUNA, WAS NOT ACCEPTED BY THE ASSESSING OFFICER. 3 4. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE CIT(A) THAT AFTER THE TERMINATION OF BBCD AGREEMENTS, AMOUNT PAYABLE TO WINDIA AS OF NORWAY WAS CONVERTED INTO A LOAN AGREEMENT. THOUGH THE LIABILITY WAS A CAPITAL LIABILITY WHEN SHIPS WERE TAKEN ON LEASE, A CCORDING TO THE ASSESSEE, UPON TERMINATION OF THE AGREEMENT THE SAI D LIABILITY CEASED TO BE IN RESPECT OF ACQUISITION OF SHIP AND THE LIABIL ITY BECAME A PART OF THE CIRCULATING CAPITAL OF THE ASSESSEE AND NOT FIXED C APITAL. LEARNED CIT(A) HAVING REJECTED THE CONTENTION OF THE ASSESSEE, ASS ESSEE IS IN APPEAL BEFORE US. 5. LEARNED COUNSEL, APPEARING ON BEHALF OF THE ASS ESSEE, ADVERTED OUR ATTENTION TO PAGES 1, 16 AND 22 TO 25 OF THE PAPER BOOK TO SUBMIT THAT SOONAFTER REPOSSESSION OF THE VESSELS A MOUNT PAYABLE BY THE ASSESSEE WAS CONVERTED TO LOAN ACCOUNT AND THUS ANY LOSS ARISING OUT OF EXCHANGE RATE FLUCTUATION THEREON IS ALLOWABLE AS L OSS ARISING IN THE COURSE OF THE BUSINESS AND CONSEQUENTLY IT HAS TO B E ALLOWED AS DEDUCTION UNDER SECTION 37 OF THE ACT. STRONG RELIA NCE WAS PLACED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (2009) 312 ITR 254 (SC) IN SUPPORT OF HIS CONTENTION THAT THE EXPRESSION ANY EXPENDITURE , USED IN SECTION 37 OF THE INCOME TAX ACT, 1961, COVERS BOTH I.E., EXP ENSES INCURRED AS WELL AS THE AMOUNT WHICH IS REALLY A LOSS, EVEN THOUGH SUCH AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. HE CONTEN DED THAT IN THE INSTANT CASE THOUGH THE INSTALLMENTS PAYABLE BY THE ASSESSEE ON ACQUISITION OF THE SHIPS WERE TREATED AS CAPITAL EX PENDITURE, UPON REPOSSESSION OF THE VESSELS IT LOOSES THE CHARACTER OF CAPITAL ASSET SINCE THE ASSESSEE HAS CONVERTED THE BALANCE AMOUNT PAYAB LE AS LOAN IN WHICH EVENT ANY LOSS ARISING ON ACCOUNT OF FOREIGN EXCHAN GE FLUCTUATION REFERABLE TO THE CIRCULATING CAPITAL HAS TO BE TREA TED AS A REVENUE EXPENDITURE. 4 6. ON THE OTHER HAND LEARNED DR STRONGLY RELIED UP ON THE ORDERS PASSED BY THE TAX AUTHORITIES. HE FURTHER CO NTENDED THAT IN RESPECT OF ASSESSMENT YEAR 2001-2002 ASSESSMENT ORD ER WAS SET ASIDE BY THE COMMISSIONER IN EXERCISE OF POWERS VESTED IN HI M UNDER SECTION 263 OF THE ACT WHEREIN IT WAS CLEARLY STATED AS UNDER : IT IS NOT DISPUTED THAT THE LIABILITY TO THE ASSES SEE AROSE BECAUSE OF THE NON-PAYMENT OF BBCD AGREEMENT FOR ACQUISITIO N OF THE VESSEL PRATIBHA GODAVARI, WHICH IS ON CAPITAL ACCOU NT AND THE FOREIGN EXCHANGE FLUCTUATION LOSS IS CAPITAL LOSS. 7. THIS ORDER WAS UPHELD BY THE ITAT, D BENCH, M UMBAI (ITA. NO. 4076/MUM/2005 DATED 17 TH JULY, 2009) WHEREIN THE TRIBUNAL MADE CERTAIN PERTINENT OBSERVATIONS WITH REGARD TO NATUR E OF THE EXPENDITURE. RELEVANT OBSERVATIONS ARE REPRODUCED FOR IMMEDIATE REFERENCE : WE HAVE HEARD BOTH THE SIDES. QUESTION OF ALLOWING FOREIGN EXCHANGE LOSSES DEPEND ON THE CHARACTER OF THE BASI C UNDERLYING TRANSACTION. IF THE UNDERLYING TRANSACTION IS IN TH E CAPITAL FIELD THEN THE FOREIGN EXCHANGE LOSSES ARISING THEREFROM WILL ALSO BE IN THE CAPITAL FIELD. ON THE OTHER HAND IF THE UNDERLYING TRANSACTION IS IN THE REVENUE FIELD THEN THE FOREIGN EXCHANGE LOSS OR GAIN WILL ALSO BE IN THE REVENUE FIELD. THE APEX COURT IN THE CASE OF WOODWARD GOVERNORS INDIA LTD. 312 ITR 254 HAS LAID DOWN THE PRINCIPLES IN ALLOWING / DEALING WITH FOREIGN EXCHA NGE FLUCTUATIONS. IT IS OBVIOUS THAT THE ASSESSING OFFI CER HAS NOT CONSIDERED THESE ASPECTS OF THE ISSUE AND THEREFORE THE CIT WAS RIGHT IN SETTING ASIDE THE MATTER FOR RECONSIDERATI ON TO THE ASSESSING OFFICER. WE FIND THAT THE REVISIONAL JURI SDICTION U/S 263 HAS BEEN PROPERLY INVOKED AND THE ASSESSEES APPEAL AGAINST THE JURISDICTION OF THE COMMISSIONER TO INVOKE SEC 263 IS DISMISSED. (UNDERLINING IS OURS) 5 8. LEARNED DR SUBMITTED THAT THERE IS NO DISPUTE W ITH REGARD TO THE FACT THAT THE TRANSACTION OF PURCHASE OF VES SELS WAS ORIGINALLY SHOWN IN THE CAPITAL FIELD AND HENCE LOSSES ARISING THEREFROM ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION SHOULD ALSO BE CONS IDERED IN THE CAPITAL FIELD. IT WAS ALSO CONTENDED THAT THE DECISION OF T HE APEX COURT (SUPRA) IS DISTINGUISHABLE ON FACTS. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE RECORD. AS COULD BE NOTICED FROM THE OR DER OF THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A), SO LONG AS T HE VESSELS WERE USED IN THE BUSINESS, PRINCIPAL AMOUNT PAYABLE BY THE ASSES SEE AS WELL AS THE EXCHANGE VARIATION ON THE AMOUNT PAYABLE THEREON WA S RECORDED AS CAPITAL EXPENDITURE. HOWEVER IN THE YEARS UNDER CON SIDERATION THE PLEA OF THE ASSESSEE IS THAT ONCE THE VESSELS WERE RE-POSSE SSED BY M/S. WINDIA AS OF NORWAY PRINCIPAL AMOUNT PAYABLE BY THE ASSESS EE HAS TO BE EQUATED TO CIRCULATING CAPITAL, SINCE IT IS CONVERT ED INTO LOAN AMOUNT AND THUS LOSS ARISING OUT OF EXCHANGE FLUCTUATION SHOUL D BE TREATED AS BUSINESS EXPENDITURE. WE ARE UNABLE TO APPRECIATE T HE CONTENTION OF THE LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE . AMOUNT WAS ORIGINALLY NOT REFERABLE TO THE CIRCULATING CAPITAL OF THE ASSESSEE AND WHAT WAS CONVERTED INTO A LOAN ACCOUNT WAS THE AMOUNT PA YABLE TOWARDS PURCHASE OF CAPITAL ASSETS. PRINCIPAL AMOUNT PAYABL E TOWARDS PURCHASE OF A CAPITAL ASSET ADMITTEDLY FALLS IN THE CAPITAL FIELD IN WHICH EVENT LOSS ARISING ON ACCOUNT OF EXCHANGE FLUCTUATION DESERVES TO BE CONSIDERED IN THE CAPITAL FIELD, AS OBSERVED BY THE ITAT IN ASSES SEES OWN CASE FOR THE ASSESSMENT YEAR 2001-2002 (SUPRA). 10. LEARNED COUNSEL RELIED UPON THE DECISION OF TH E APEX COURT IN THE CASE OF WOODWARD GOVERNORS INDIA LTD. (SUPRA ) WHEREIN THE FACTS ARE ALTOGETHER DIFFERENT. THEIR LORDSHIPS WERE CONS IDERING THE CASE OF VALUATION OF A CLOSING STOCK AT THE END OF PARTICU LAR YEAR AND ANY LOSS 6 ARISING THEREON HAS TO BE NECESSARILY TREATED AS EX PENDITURE FALLING UNDER SECTION 37 OF THE I.T. ACT. IN THE INSTANT CASE, PR INCIPAL AMOUNT PAYABLE BY THE ASSESSEE ADMITTEDLY FALLS IN THE CAPITAL FIE LD AND HENCE WE ARE OF THE OPINION THAT THE CASE LAW RELIED UPON BY THE AS SESSEE HAS NO APPLICATION TO THE FACTS OF THIS CASE. THIS DISPOSE S OF THE APPEAL FOR THE ASSESSMENT YEAR 2001-2002 AND GROUND NO.1 IN THE AP PEALS FOR THE ASSESSMENT YEARS 2000-2001 AND 2002-2003. 11. GROUND NO.2 IN THE APPEALS FOR THE ASSESSMENT YEAR 2000- 2001 AND 2002-2003 IS WITH REGARD TO CONFIRMATION O F DISALLOWANCE TO THE EXTENT OF 10% OF THE BUSINESS PROMOTION EXPENSE S. HUGE EXPENDITURE WAS INCURRED MAINLY ON ENTERTAINING THE CLIENTS IN THE HOTELS. CONSIDERING THE NATURE OF EXPENDITURE ASSESSING OFF ICER DISALLOWED 25% OF THE TOTAL CLAIM BY TREATING IT AS EXPENDITURE IN CURRED FOR NON-BUSINESS PURPOSES WHEREAS, TAKING OVERALL VIEW OF THE MATTER , LEARNED CIT(A) RESTRICTED THE DISALLOWANCE TO 10%. 12. LEARNED COUNSEL, STRONGLY SUBMITTED THAT THE B OOKS WERE AUDITED AND NO SPECIFIC DEFECT WAS POINTED OUT IN T HE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. MERELY BECAUSE THE ASSE SSING OFFICER ENTERTAINED A DOUBT, CONSIDERING THE VOLUME OF EXPE NDITURE, DISALLOWANCE CANNOT BE MADE ON MERE SUSPICION. HE THUS SUBMITTED THAT THERE IS NO CASE MADE OUT EVEN FOR DISALLOWANCE OF 10%. 13. ON THE OTHER HAND LEARNED DR STRONGLY RELIED U PON THE ORDER PASSED BY THE LEARNED CIT(A). 14. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS AND PERUSED THE RECORD. ADMITTEDLY ASSESSEE-COMPANY MAI NTAINED BOOKS OF ACCOUNTS WHICH WERE DULY AUDITED AND NO SPECIFIC DE FECT WAS POINTED OUT WITH REGARD TO THE EXPENDITURE CLAIMED BY THE ASSES SEE. IN OTHER WORDS ASSESSING OFFICER HAS NOT POINTED OUT THAT A PARTIC ULAR EXPENDITURE WAS 7 INCURRED FOR NON-BUSINESS PURPOSES. UNDER THESE CIR CUMSTANCES, MERELY BECAUSE THE ASSESSING OFFICER FINDS IT DIFFICULT TO VERIFY ALL THE EXPENDITURE, EXPENDITURE CLAIMED BY THE ASSESSEE SH OULD NOT BE DISALLOWED. CONSIDERING THE OVERALL CIRCUMSTANCES, WE SET ASIDE THE DISALLOWANCE OF 10% AND DIRECT THE ASSESSING OFFICE R ACCORDINGLY. 15. THIS LEAVES US WITH THE FOLLOWING GROUNDS IN A SSESSMENT YEAR 2002-2003. 3. THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANC E OF RS.7,118/- BEING DAMAGES PAID TO PROVIDENT FUND AUTHORITIES WHICH WERE COMPENSATORY IN NATURE AND NOT PENAL. 4(A) THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLO WANCE OF RS.6,18,911/- TREATING IT AS PRIOR PERIOD EXPENDITU RE. (B) HE OUGHT TO HAVE APPRECIATED THAT THE CLAIM WAS SETTLED DURING THE YEAR AND WAS THUS NOT PRIOR PERI OD EXPENDITURE. 5. THE LEARNED CIT(A) ERRED IN CONFIRMING THE D ISALLOWANCE OF RS.1,13,58,388/- ON ACCOUNT OF BAD DEBTS . 16. IN SO FAR AS GROUND NO.5 IS CONCERNED, ADMITTE DLY ASSESSEE HAS NOT WRITTEN OFF IN THE BOOKS OF ACCOUNT. UNDER THESE CIRCUMSTANCES CLAIM OF DEDUCTION UNDER SECTION 36 (1) (VII) OF TH E ACT IS NOT IN ACCORDANCE WITH LAW. WE, THEREFORE, AFFIRM THE ORDE R OF THE LEARNED CIT(A). 17. FACTS CONCERNING GROUND NO.3 ARE THAT THE ASSE SSEE PAID DAMAGES TO THE P.F. AUTHORITIES WHICH WAS NOT ALLOW ED AS DEDUCTION BY THE ASSESSING OFFICER ON THE GROUND THAT IT IS IN T HE NATURE OF PENALTY. THOUGH THE ASSESSEE PLEADED BEFORE THE TAX AUTHORIT IES AS WELL AS BEFORE US THAT OUT OF THE TOTAL PAYMENT OF RS.34,078/- A S UM OF RS.7,118/- IS 8 NOT IN THE NATURE OF PENALTY, IN THE ABSENCE OF ANY EVIDENCE TO PROVE THE SAME WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE LEARNED COUNSEL AND ACCORDINGLY REJECT GROUND NO. 3 OF THE ASSESSEE . 18. VIDE GROUND NO. 4 ASSESSEE CONTENDS THAT A SUM OF RS.6,18,911/- REFERABLE TO THE EXPENDITURE INCURRED IN THE PRECEDING YEAR DESERVES TO BE ALLOWED AS DEDUCTION IN THE YEAR UND ER CONSIDERATION SINCE BILLS WERE RECEIVED IN THIS YEAR ONLY. LEARNE D COUNSEL CONTENDED THAT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING PRIO R PERIOD EXPENSES CAN BE CLAIMED AS DEDUCTION IN THIS YEAR IF THE BIL LS WERE RECEIVED SUBSEQUENTLY. HOWEVER, IN THE ABSENCE OF ANY EVIDEN CE FURNISHED BEFORE THE ASSESSING OFFICER AND THE CIT(A) TO PROVE THE S AME, CLAIM OF THE ASSESSEE WAS REJECTED BY THE TAX AUTHORITIES. EVEN BEFORE US NO EVIDENCE WHATSOEVER WAS FILED TO SUPPORT THE CONTENTION OF T HE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE REJECT GROUND NO. 4 OF THE ASSESSEE. 16. IN THE RESULT, APPEALS FILED BY THE ASSESSEE F OR THE ASSESSMENT YEAR 2000-2001, 2002-2003 ARE PARTLY ALL OWED AND APPEAL FOR THE ASSESSMENT YEAR 2001-2002 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT, ON THIS THE 3 0 TH DAY OF JUNE, 2010. SD/- SD/- (ANANDI LAL GEHLOT) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATE 30 TH JUNE, 2010. VBP/- 9 COPY TO 1. M/S. PRATIBHA SHIPPING CO. LTD., 1201/1202 ARCAD IA, NCPA ROAD, MUMBAI 400 021 PAN AAACP-7179-E 2. DCIT, CIRCLE-2, AAYAKAR BHAVAN, MUMBAI. 3. CIT (A)-V, MUMBAI. 4. CIT, M.C-V, MUMBAI. 5. D.R. C BENCH 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, MUMBAI BENCHES MUMBAI.