THE PAPER PRODUCTS LTD., MUMBAI V. ADDL.C.I.T. 3(2), MUMBAI

ITA 7761/MUM/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5833 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 28-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHOK SURI
• Assessee Lawyers: C N VAZE
• Keywords: Depreciation; Transactions in derivatives; Cost of acquisition; Revenue expenditure
• Section: 143(3); 260A; 37(1); 12A; 37; 6; 263

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI , , BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEM BER . / ITA NO. 7761 /MUM./2012 ( / ASSESSMENT YEAR : 200 9 10 ) THE PAPER PRODUCTS LTD. 12A 06, B WING, 13 TH FLOOR PARINEE CRESCENZO, C 38/39 G BLOCK, BANDRA KURLA COMPLEX BANDRA (E), MUMBAI 400 051 . . / APPELLANT V/S A DDL . COMMISSIONER OF INCOME TAX C IRCLE 3(2), AAYAKAR BHAVAN 101, M.K. ROAD, MUMBAI 400 020 .... / RESPONDENT ./ PERMANENT ACCOUNT NUMBER AAACT0086E / ASSESS EE BY : MR. C.N. VAZE / REVENUE BY : MR. ASHOK SURI / DATE OF HEARING 13 .0 3 .201 4 / DATE OF ORDE R 28.03.2014 / ORDER , / PER AMIT SHUKLA , J.M. THE AF ORESAID APPEAL S HAVE BEEN PREFERRED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER DATED 12 TH OCTOBER 2012, PASSED BY THE LEARNED COMMISSIONER (APPEALS) IV , MUMBAI, FOR THE QUANTUM OF THE PAPER PRODUCTS LTD. 2 ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) , FOR THE ASSESSMENT YEAR 2009 10. 2 . GROUND NO.1, RELATES TO DISALLOWANCE OF ` 1,13,88,976 ON ACCOUNT OF MARKED TO MARKET LOSSES ON FOREIGN EXCHANGE CONTRACTS. 3 . BRIEF FACTS, QUA THE ISSUE INVOLVED IN GROUND NO.1, ARE THAT THE ASSESSEE HAS CL AIMED ` 1,13,88,976 AS MARKED TO MARKET LOSS ON FOREIGN EXCHANGE CONTRACT AS PER THE DETAILS GIVEN IN SCHEDULE XVII O F THE BALANCE SHEET. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF FLEXIBLE PACKAGING MATERIAL / PAPER FOR WHICH IT HAS TO IMPORT RAW MATERIALS AND ALSO THE EXPORTS. THE ASSESSEE COMPANY HAD ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACT TO HE DGE THE FOR E CAST TRANSACTIONS AGAINST CURRENCY FLUCTUATION. BASED ON THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE, THE UNEXPIRED C ONTRACTS WERE REVALUED AND WERE MARKED TO MARKET VALUE AT THE END OF THE ACCOUNTING YEAR AND THE LOSS DUE TO SUCH REVALUATION WAS CLAIMED AS AN ALLOWABLE EXPENDITURE WHILE COMPUTING THE INCOME FOR THE YEAR. THE ASSESSEE BEFORE THE ASSESSING OFFICER HAD REL IED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN CIT V/S WOODWARD GOVERNOR INDIA P. LTD. [2009] , 312 ITR 254 (SC) AND ALSO THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN DCIT (IT) V/S BANK OF BAHRAIN AND KUWAIT, [2010] 43 DTR (AT) 505 (MUM.) (SB). HOW EVER, THE ASSESSING OFFICER HELD THAT IT IS A NOTIONAL LOSS AND CANNOT BE ALLOWED AS EXPENDITURE TO THE ASSESSEE AND WAS ADDED BACK TO THE TAXABLE INCOME OF THE ASSESSEE. HE FURTHER HELD THAT SIMILAR ADDITION WAS MADE IN THE ASSESSMENT YEAR 2008 09 ALSO. T HE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE EARLIER YEARS ORDER FOR THE ASSESSMENT YEAR 2008 09, IN ASSESSEES OWN CASE, DECIDED THE ISSUE AGAINST THE ASSESSEE. THE PAPER PRODUCTS LTD. 3 4 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH THE APPEAL FOR THE ASSESSMENT YEAR 2008 09 PREFERRED BY THE REVENUE IS PENDING BEFORE THE TRIBUNAL, HOWEVER, THE ISSUE INVOLVED IS SQUARELY COVERED BY THE DECISION OF VARIOUS TRIBUNAL DECISIONS, WHEREIN THE DECISION OF THE HON'BLE SUPREME COURT IN WOODWARD GOVERNOR INDIA P. LTD. (SUPRA) HAS BEEN FOLLOWED. 5 . BEFORE US, HE FILED A COPY OF THE DECISION OF THE TRIBUNAL, MUMBAI BENCHES, IN RELIANCE INDUSTRIES LTD. V/S CIT, ITA NO.7223/MUM./2011, ORDER DATED 20 TH NOVEMBER 2013, AND SUBMITTED THAT THE TRIBUNAL, IN THIS CASE, HAS FOL LOWED VARIOUS DECISIONS AND CAME TO THE CONCLUSION THAT LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN THE FOREIGN CURRENCY TRANSACTIONS HAS TO BE CONSIDERED ON THE LAST DATE OF THE ACCOUNTING YEAR AND IS DEDUCTIBLE AS EXPENDITURE UNDER SECTION 37(1). 6 . LEARNE D DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STRONGLY RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 7 . AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSIONS AND ALSO ON A PERUSAL OF THE RELEVANT FINDINGS OF THE LEARNED COMMISSIONER (APPEALS), WE FIND THAT THIS ISSUE OF MARKED TO MARKET LOSS ON FOREIGN EXCHANGE CONTRACT IS COVERED IN FAVOUR OF THE ASSESSEE NOT ONLY BY THE DECISION OF THE HON'BLE SUPREME COURT IN WOODWARD GOVERNOR INDIA P. LTD. (SUPRA) BUT ALSO SERIES OF DECISIONS OF THE CO ORDINATE BENCH O F THE TRIBUNAL. FOR THE SAKE OF READY REFERENCE, THE RELEVANT FINDINGS OF THE TRIBUNAL IN RELIANCE INDUSTRIES LTD. (SUPRA) , AS RELIED UPON BY THE LEARNED COUNSEL, IS REPRODUCED HEREIN BELOW: 8. WE HAVE CAREFULLY CONSIDERED THE ORDER OF LD. COMMISSIONER OF INCOME TAX AND THE SUBMISSIONS OF LD. REPRESENTATIVES OF THE PARTIES. WE HAVE ALSO CAREFULLY CONSIDERED THE CASES CITED BEFORE US (SUPRA). IT IS RELEVANT TO STATE THAT IN THE CASE OF WOODWARD THE PAPER PRODUCTS LTD. 4 GOVERNOR INDIA (P.) LTD. (SUPRA), THE HONBLE APEX COURT OBSE RVED AND HELD THAT THE ASSESSEE DEBITED TO ITS PROFIT AND LOSS ACCOUNT CERTAIN UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS TOWARDS REVENUE ITEMS AS ON THE LAST DAY OF THE ACCOUNTING YEAR. THE A.O. HELD THAT THE LIAB ILITY AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS NOT AN ASCERTAINED BUT A CONTINGENT LIABILITY. RESULTANTLY, THE SAME WAS ADDED BACK TO THE TOTAL INCOME. THE CIT(A) ECHOED THE ASSESSMENT ORDER. HOWEVER, THE TRIBUNAL HELD THAT THE CLAIM OF THE ASSESSEE FO R DEDUCTION OF UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS DEDUCTIBLE. THE SAID ORDER OF THE TRIBUNAL WAS UPHELD BY THE HONBLE HIGH COURT. ON FURTHER APPEAL BY THE DEPARTMENT, THE HONBLE SUPREME COURT HELD THAT THE LOSS SUFFERED BY THE ASSESSEE IS ON REVENUE ACCOUNT TOWARDS FOREIGN EXCHANGE DIFFERENCE AS ON THE DATE OF BALANCE SHEET AND IS AN ITEM OF EXPENDITUR E DEDUCTIBLE U/S 37(1). IT FURTHER OBSERVED THAN AN ENTERPRISE HAS TO REPORT OUTSTANDING LIABI LITY RELATING TO IMPORT OF RAW MATERIAL USING CLOSING RATE OF FOREIGN EXCHANGE AND ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF SAID LIABILITY AT CLOSING RATE SHOULD BE RECOGNIZED IN PROFIT AND LOSS ACCOUNT FOR REPORTING PERIOD. FROM THE JUDGMENT OF THE HONBLE SUPREME COURT IT CAN BE CLEARLY DEDUCED THAT UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS ON REVENUE ITEM AS ON THE LAST DATE OF THE ACCOUNTING YEAR IS DEDUCTIBLE. 9. ITAT, IN THE CASE OF KOTAK MAHI NDRA INVESTMENT LTD. (SUPRA) ALSO CONSIDERED A SIMILAR ISSUE. IN THE SAID CASE THE ASSESSEE - COMPANY WAS ENGAGED IN THE BUSINESS OF GRANTING OF LOANS AND ADVANCES AGAINST SHARES AND SECURITIES ALSO TRADED IN DERIVATIVE SEGMENT BY ENTERING INTO FUTURE AND OP TION CONTRACT. SOME OF THE FUTURE CONTRACTS COULD NOT BE SQUARED UP AT THE END OF THE FINANCIAL YEAR. THE ASSESSEE BOOKED THE EXPECTED LOSS IN SUCH CONTRACTS ON MTM BASIS. THE ASSESSEE THUS CLAIMED A LOSS AS CALCULATED ON MTM BASIS CLAIMING THAT HE WAS FOL LOWING THIS PRACTICE CONSISTENTLY. THAT IT WAS ALSO AS PER RECOGNIZED ACCOUNTING STANDARD. AO REJECTED THE CLAIM ON THE GROUND THAT THE DERIVATIVE CONTRACTS WERE NOT STOCK IN TRADE AS THERE WAS NO COST OF ACQUISITION. HE FINALLY HELD THAT THE LOSS ON ACCOU NT OF MTM BASIS WAS THUS A NOTIONAL LOSS AND WAS CONTINGENT IN NATURE AND COULD NOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE INCOME. ON APPEAL, THE LD. CIT(A) ALLOWED THE SAME BY AGREEING WITH THE CONTENTION OF THE ASSESSEE THAT SUCH LOSS ON SUCH VALUATI ON WHICH IS CALLED MTM HAS TO BE ALLOWED EVEN THOUGH IT MAY APPEAR TO BE A NOTIONAL LOSS. THE TRIBUNAL WHILE CONFIRMING ORDER OF LD. CIT(A) AND ALLOWING THE SAID LOSS PLACED RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA) AND ALSO THE DECISION OF TRIBUNAL IN THE CASE OF EDELWEISS CAPITAL LTD V/S ITO IN ITA NO.5324/ MUM/2007 (AY - THE PAPER PRODUCTS LTD. 5 2004 - 05) DATED 10.11.2010 AND THE DECISION IN THE CASE OF RAMESH KUMAR DAMANI V/S ADDL.CIT IN ITA NO.1443/MUM/2009 (AY - 2006 - 07) DATED 26.11.2010. COPIES OF WHICH ARE PLACED IN THE COMPILATION OF CASE LAWS AT PAGES 76 TO 84 AND PAGES 85 TO 90 RESPECTIVELY. WE ALSO OBSERVE THAT SIMILAR ISSUE WAS CONSIDERED BY HONBLE APEX COURT IN THE CASE OF ONGC LTD (SUPRA). THE ASSESSEE A PUB LIC SECTOR UNDERTAKING WAS ENGAGED IN THE CAPITAL INTENSIVE EXPLORATION AND PRODUCTION OF PETROLEUM PRODUCTS FOR WHICH IT HAD TO HEAVILY DEPEND ON FOREIGN LOANS TO COVER ITS EXPENSES, BOTH CAPITAL AND REVENUE AND FOR PAYMENT TO NON - RESIDENT CONTRACTORS IN FOREIGN CURRENCY FOR VARIOUS SERVICES RENDERED. THE ASSESSEE MADE THREE TYPES OF FOREIGN EXCHANGE BORROWINGS I.E.(I) ON REVENUE ACCOUNT; (II) ON CAPITAL ACCOUNT, AND (III) FOR GENERAL PURPOSES. SOME OF THE LOANS BECAME REPAYABLE IN THE RELEVANT ACCOUNTING YEAR AND THE DATE OF PAYMENT OF SOME LOANS FELL AFTER THE END OF THE RELEVANT ACCOUNTING YEAR. THE ASSESSEE REVALUED ITS FOREIGN EXCHANGE LOANS IN FOREIGN EXCHANGE ON REVENUE ACCOUNT, ON CAPITAL ACCOUNT AND FOR GENERAL PURPOSES OUTSTANDING AS ON 31 - 3 - 1991, AND CLAIMED THE DIFFERENCES BETWEEN THEIR RESPECTIVE AMOUNTS IN INDIAN CURRENCY AS ON 31 - 3 - 1990 AND 31 - 3 - 1991 AS REVENUE LOSS UNDER SECTION 37(1) IN RESPECT OF LOANS USED IN REVENUE ACCOUNT. THE ASSESSEE ALSO TREATED THE SIMILAR DIFFERENCE IN FOREIGN EXCH ANGE AS AN INCREASED LIABILITY U/S 43A. THE AO ALLOWED THE DEDUCTION CLAIMED U/S 37(1), TAKING INTO CONSIDERATION THE INCREASED FOREIGN EXCHANGE LIABILITY AND REPAID IN THE ACCOUNTING YEAR FOR THE PURPOSE OF DEPRECIATION. HE DID NOT HOWEVER, ALLOW THE CLAI M FOR FOREIGN EXCHANGE LOSS ON LOANS BOTH IN RELATION TO CAPITAL AS WELL AS REVENUE ACCOUNT WHICH WERE OUTSTANDING ON THE LAST DAY OF ACCOUNTING YEAR. ON APPEAL, THE CIT(A) AFFIRMED THE VIEW OF AO IN RELATION TO DEDUCTION U/S 37 OF THE INTEREST ON LOANS OU TSTANDING ON THE LAST DAY OF THE ACCOUNTING YEAR BUT ALLOWED THE BENEFIT OF INCREASED LIABILITY FOR COMPUTATION U/S 43A IN RELATION TO LOSS OUTSTANDING ON THE LAST DAY OF THE ACCOUNTING YEAR. HENCE, THE ASSESSEE AS WELL AS DEPARTMENT TOOK THE MATTER IN APP EAL TO THE APPELLATE TRIBUNAL. THE TRIBUNAL HELD THAT THE LOSS CLAIMED BY THE ASSESSEE ON REVENUE ACCOUNT WAS ALLOWABLE U/S 37(1) AND ALSO REJECTED THE APPEAL OF THE DEPARTMENT AND HELD THAT THE ASSESSEE WAS ENTITLED TO ADJUST ACTUAL COST ON IMPORTED ASSET S ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE IN TERMS OF SECTION 43A. ON APPEAL BY THE DEPARTMENT, THE HONBLE HIGH COURT REVERSED THE DECISION OF THE TRIBUNAL ON BOTH THE ISSUES. ON FURTHER APPEAL TO THE APEX COURT, THE DECISION OF THE HIGH COURT WAS REVERSED AND IT WAS HELD THAT (A) THAT THE LOSS CLAIMED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE - SHEET WAS ALLOWABLE AS AN THE PAPER PRODUCTS LTD. 6 EXPENDITURE U/S 37(1), AND (B) THAT TH E ASSESSEE WAS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH OF THE RELEVANT BALANCE SHEET DATES, PENDING ACTUAL PAYMENT OF THE LIABILITY U/S 43A, PRIOR TO ITS A MENDMENT BY FINANCE ACT, 2002. 11. IN VIEW OF ABOVE DECISIONS, IT IS CLEAR THAT THE LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS IN DERIVATIVES HAS TO BE CONSIDERED ON THE LAST DATE OF ACCOUNTING YEAR AND IT IS DEDUCTIBLE U/S 37(1) OF THE ACT. THEREFORE, IN ALLOWING THE SAID CLAIM OF THE ASSESSEE BY AO, THE ACTION OF THE AO IS IN CONSONANCE WITH THE DECISIONS OF THE HONBLE APEX COURT AND ALSO THE VIEW TAKEN BY THE TRIBUNAL IN THE CASES CITED HEREINABOVE (SUPRA). HENCE, THE VI EW TAKEN BY AO TO ALLOW LOSS OF RS.43.78 CRORES WHILE MAKING ASSESSMENT U/S 143(3) ON ACCOUNT OF DERIVATIVE CONTRACT OUTSTANDING IS NOT AN ERRONEOUS VIEW TAKEN BY AO , NOR THE ACTION OF AO IS PREJUDICIAL TO THE INTEREST OF REVENUE. HENCE, THE ORDER OF COMM ISSIONER OF INCOME TAX U/S 263 OF THE ACT TO HOLD THAT THE ACTION OF AO IS ERRONEOUS TO THE EXTENT THE LOSS CONSIDERED AS ALLOWABLE ON ACCOUNT OF DERIVATIVE CONTRACTS OUTSTANDING AS ON THE DATE OF BALANCE SHEET I.E. 31.3.2008 IS NEITHER JUSTIFIED NOR IN AC CORDANCE WITH LAW. HENCE, WE QUASH THE SAID ORDER OF LD. COMMISSIONER OF INCOME TAX BY ALLOWING THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE. 8 . THUS, FOLLOWING THE AFORESAID DECISIONS, WHICH IN TURN, ARE BASED ON THE RATIO LAID DOWN BY THE HON'BLE SUPREME C OURT IN WOODWARD GOVERNOR (INDIA) P. LD. (SUPRA), WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND DIRECT THE ASSESSING OFFICER TO ALLOW THE LOSS CLAIMED BY THE ASSESSEE ON ACCOUNT OF MARKED TO MARKET LOSS ON FOREIGN EXCHANG E CONTRACT AMOUNTING TO ` 1,13,88,976. THUS, GROUND NO.1, RAISED BY THE ASSESSEE IS ALLOWED. 9 . GROUND NO.2, RELATES TO DISALLOWANCE OF ` 20 LAKHS ON ACCOUNT OF WRITE OFF OF 1/10 TH OF NON COMPETE FEE. 10 . THE ASSESSEE HAS CLAIMED ` 20 LAKHS AS DEFERRED REVENUE EXPENDITURE AMORTISED ON ACCOUNT OF NON COMPETE FEES WHICH HAS BEEN DISALLOWED BY THE ASSESSING OFFICER. THE PAPER PRODUCTS LTD. 7 11 . THE LEARNED COMMISSIONER (APPEALS), FOLLOWING THE DECISION OF THE EARLIER YEARS ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE RIGHT FROM THE A.Y. 19 98 99 TO 2003 04, DECIDED THE ISSUE AGAINST THE ASSESSEE. 12 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH THIS ISSUE IS COVERED AGAINST THE ASSESSEE, BY SERIES OF DECISIONS OF THE TRIBUNAL IN ASSESSEES OWN CASE, HOWEVER, THE ASSESSE ES APPEAL HAS BEEN ADMITTED UNDER SECTION 260A BY THE HIGH COURT. THIS ISSUE IS BEING CONTESTED ONLY TO KEEP THE ISSUE ALIVE. 13 . AFTER CONSIDERING THE RELEVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS), WE FIND THAT THIS IS RE CURRING ISSUE IN ASSESSEES CASE RIGHT FROM THE A.YS 1998 99 TO 2001 02, WHEREIN T HIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE. THUS, FOLLOWING THE JUDICIAL PRECEDENCE OF THE EARLIER YEAR, WE DO NOT FIND ANY MERIT IN THE GROUND RAISED BY THE ASSESSEE AND, AS SUCH, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 14 . 13. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. 28 TH MARCH 2014 ORDER PRONOUNCED IN THE OPEN COURT O N 28 TH MARCH 2014 SD/ - SANJAY ARORA ACCOUNTANT MEMBER SD/ - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 28 TH MARCH 2014 THE PAPER PRODUCTS LTD. 8 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI