CHAMBAL FERTILISERS & CHEMICALS LTD., Kota V. JCIT, Kota

MA 96/JPR/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4630 (ITAT-JAIPUR)
• Duration Of Justice: 2 month(s) 16 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 16-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 31-07-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J C KULHARI
• Keywords: Capital asset; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH FOT; IKY JKO] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI VIJAY PAL RAO, JM & SHRI VIKRAM SINGH YADAV, AM MA NO. 96/JP/2018 (ARISING OUT OF ITA NO. 389/JP/2014) M/S CHAMBAL FERTILIZERS & CHEMICALS LIMITED, DISTRICT- KOTA. CUKE VS. THE JCIT, RANGE -2, KOTA. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAACC 9762 A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI PERCY PARDIWALA (ADV.) JKTLO DH VKSJ LS @ REVENUE BY : SHRI J.C. KULHARI (JCIT) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 14/09/2018 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT: 16/10/2018 VKNS'K@ ORDER PER: VIKRAM SINGH YADAV, A.M. THE PRESENT MISCELLANEOUS APPLICATION HAS BEEN FILE D BY THE ASSESSEE AGAINST THE CONSOLIDATED ORDER PASSED BY T HIS BENCH IN ITA NO. 306/JP/2014 & 389/JP/2014 DATED 31.01.2018. 2. IN ITS MISC. APPLICATION, THE ASSESSEE COMPANY HAS SUBMITTED THAT THEY HAVE RECEIVED THE IMPUNGED ORDER ON 15.02 .2018 AND ON PERUSAL OF THE SAME, CERTAIN APPARENT MISTAKE IN RE LATION TO GROUND NO. 10 OF THE REVENUE'S APPEAL (ITA NO. 389/JP/14) IN T HE MATTER OF LOSS ON IRS TRANSACTION HAS BEEN NOTICED AND ACCORDINGLY , THE PRESENT MISC. APPLICATION UNDER SECTION 254(2) OF THE ACT HAS BEE N MOVED. M.A. NO. 96/JP/2018 M/S CHAMBAL FERTILIZERS & CHEMICALS LTD. VS. JCIT 2 3. IT WAS SUBMITTED BY THE LD AR THAT THE ASSESSING OFFICER IN HIS ORDER DATED 31.12.2012 HAD DISALLOWED PROVISION FOR LOSS ON DERIVATIVE TRANSACTIONS OF RS.92.80 LACS. OUT OF THE LOSS OF R S.92.80 LACS, THE AMOUNT OF RS. 58.55 LACS RELATES TO INTEREST RATE S WAP (IRS) AND THE REMAINING AMOUNT OF RS.34.25 RELATES TO FORWARD COV ER OBTAINED IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION IN THE INTE RNATIONAL MARKET. THE DISALLOWANCE WAS MADE ON THE BASIS THAT THE ENTIRE LOSS IS A FICTIONAL LOSS AND IS CONTINGENT AND AN UNASCERTAINED LIABILI TY. 4. ON APPEAL, THE L'D CIT(A) ALLOWED THE ENTIRE LOS S OF RS.92.80 ON THE FINDING THAT THE ENTIRE LOSS IS IN THE NATURE O F A HEDGING TRANSACTION WHICH IS ALLOWABLE UNDER THE INCOME TAX ACT BASED O N FAVORABLE . RULINGS OF VARIOUS COURTS. 5. IT WAS SUBMITTED THAT THE BENCH IN ITS ORDER DAT ED 31.01.2018 HAS DISALLOWED THE TOTAL LOSS IN RESPECT OF IRS TRA NSACTIONS AMOUNTING TO RS.58.55 LACS. OUT OF THE BALANCE LOSS OF RS.34.25 LACS RELATING TO FORWARD COVER, THE BENCH PARTLY ALLOWED THE LOSS OF RS.16 LACS ON FORWARD COVER ON THE PORTION TAKEN FOR TRADED PRODU CTS AND DISALLOWED REMAINING LOSS OF RS.18.25 LACS ALLEGEDLY TAKEN FOR CAPITAL PURPOSES. 6. IN RESPECT OF IRS TRANSACTION OF RS. 58.55 LACS, THE LD AR SUBMITTED THAT THE ASSESSEE HAD AVAILED A FOREIGN C URRENCY LOAN OF USD 25 MILLION FOR THE PURPOSE OF REVAMP PROJECT FO R ITS FERTILIZER DIVISION. THE INTEREST ON THIS LOAN WAS PAYABLE AT A FLOATING RATE. IN ORDER TO HEDGE THE RISK OF EXPOSURE TO THE VOLATILE INTEREST RATE PREVALENT IN THE INTERNATIONAL MARKET, THE APPELLAN T ENTERED IN TO INTEREST RATE SWAP (IRS) TRANSACTION TO FIX THE INT EREST RATE. M.A. NO. 96/JP/2018 M/S CHAMBAL FERTILIZERS & CHEMICALS LTD. VS. JCIT 3 7. IT WAS SUBMITTED THAT THE TRIBUNAL IN ITS ORDER DATED 31.01.2018 HAS OBSERVED THAT THE IRS TRANSACTION IS RELATED TO FOREIGN CURRENCY BORROWING TAKEN FOR THE PURPOSE OF CAPITALIZATION O F ITS REVAMP PROJECT IN RESPECT OF THE APPELLANT'S FERTILIZER DIVISION. THIS IRS TRANSACTION IS CLOSELY CONNECTED AND LINKED TO TRANSACTION OF FORE IGN CURRENCY LOAN OBTAINED FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSET. JUST LIKE INTEREST ON BORROWINGS FOR THE PURPOSE OF ACQUISITI ON OF A CAPITAL ASSET (TILL THE TIME ASSET IS FIRST PUT TO USE) HAS TO BE CAPITALIZED AND CANNOT BE CLAIMED AS REVENUE EXPENDITURE, ON THE SAME FOOT ING, ANY HEDGING COST OR LOSS INCURRED FOR HEDGING FOR INTEREST RATE RISK ON SUCH FOREIGN CURRENCY BORROWINGS FOR CAPITAL, PURPOSES HAS TO BE ON CAPITAL ACCOUNT AND THE SAME CANNOT BE ALLOWED AS REVENUE EXPENDITU RE. ANY LIABILITY OR LOSS ARISING ON SUCH TRANSACTION SHALL BE THUS O N CAPITAL ACCOUNT. BASED ON SUCH FINDING, THE BENCH HELD THAT THE INTE REST RATE SWAP EXPENDITURE WAS NOT AN ALLOWABLE EXPENDITURE. 8. IN THIS REGARD, THE LD AR SUBMITTED THAT THE TR IBUNAL WAS CORRECT IN OBSERVING THAT 'THIS IRS TRANSACTION IS CLOSELY CONNECTED AND LINKED TO TRANSACTION OF FOREIGN CURRENCY LOAN OBTAINED FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSET. JUST LIKE INTEREST ON BORROWINGS FOR THE PURPOSE OF ACQUISITION OF A CAPI TAL ASSET (TILL THE TIME ASSET IS FIRST PUT TO USE) HAS TO BE CAPITALIZ ED AND CANNOT BE CLAIMED AS REVENUE EXPENDITURE ON THE SAME FOOTING, ANY HEDGING COST OR LOSS INCURRED FOR HEDGING FOR INTEREST RATE RISK ON SUCH FOREIGN CURRENCY BORROWINGS FOR CAPITAL PURPOSES HA S TO BE ON CAPITAL ACCOUNT AND THE SAME CANNOT BE ALLOWED AS R EVENUE EXPENDITURE'. THAT IS TO SAY THAT WHILE THE PARENT INTEREST IS TO BE CAPITALIZED, THE IRS EXPENSE INCURRED FOR STABILIZI NG SUCH INTEREST RATE WOULD ALSO BE CAPITALIZED. HOWEVER, THE FACT I S THAT SINCE THE M.A. NO. 96/JP/2018 M/S CHAMBAL FERTILIZERS & CHEMICALS LTD. VS. JCIT 4 REVAMP PROJECT ITSELF WAS COMPLETED IN APRIL 2009 A ND THE INTEREST THEREON (AFTER CAPITALIZATION) IS BEING CHARGED TO REVENUE. SUCH INTEREST HAS NOT ONLY BEEN CHARGED TO REVENUE IN AY 2010-11 BUT HAS ALSO BEEN ALLOWED BY THE L'D ASSESSING OFFICER. THUS WHAT FOLLOWS IS THAT SINCE THE PARENT INTEREST IS ALLOWA BLE AS A REVENUE EXPENDITURE, THE HEDGING EXPENDITURE (IRS) OF RS.58 .55 LACS THEREON, IS ALSO AN ALLOWABLE REVENUE EXPENDITURE A ND THEREFORE SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE. 9. IT WAS THUS SUBMITTED THAT THERE APPEARS TO BE A N APPARENT MISTAKE IN THE MATTER OF LOSS ON IRS TRANSACTION IN THE GROUND NO. 10 OF THE REVENUES APPEAL WHICH MAY BE RECTIFIED BY PASS ING AN APPROPRIATE ORDER. 10. THE LD DR IS HEARD WHO HAS OPPOSED THE MISC. AP PLICATION SO FILED BY THE ASSESSEE. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PURSUE D THE MATERIAL AVAILABLE ON RECORD. IT IS NOTED THAT IN ITS SUBMI SSION BEFORE THE LOWER AUTHORITIES DATED 24.05.2013, THE ASSESSEE HAS CONT ENDED THAT IT IS FOLLOWING AN ACCOUNTING POLICY WHEREIN THE INTEREST AT FIXED RATE IS CHARGED TO THE EXPENSE ACCOUNT AS THE LIABILITY OF THE ASSESSEE IS FIXED BY VIRTUE OF IRS TRANSACTION. IN ITS PRESENT CONTE NTIONS, THE ASSESSEE HAS SUBMITTED THAT SINCE THE REVAMP PROJECT ITSELF WAS COMPLETED IN APRIL 2009 AND THE INTEREST THEREON (AFTER CAPITALI ZATION) IS BEING CHARGED TO REVENUE. SUCH INTEREST HAS NOT ONLY BEEN CHARGED TO REVENUE IN AY 2010-11 BUT HAS ALSO BEEN ALLOWED BY THE L'D ASSESSING OFFICER. FOLLOWING OUR REASONING IN THE IMPUNGED ORDER DATED 31.01.2018, WE AGREE THAT WHERE THE REVAMP PR OJECT HAS ALREADY BEEN CAPITALIZED, ANY INTEREST AND CORRESPO NDING HEDGING M.A. NO. 96/JP/2018 M/S CHAMBAL FERTILIZERS & CHEMICALS LTD. VS. JCIT 5 COST RELATES TO SUCH INTEREST WOULD BE ON REVENUE A CCOUNT AND WHERE THE INTEREST HAS BEEN CLAIMED AND ALLOWED BY THE REVENUE, THE CORRESPONDING HEDGING COST SHOULD ALSO BE ALLOW ED. IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE ACT, WE DONOT SEE ANY DISALLOWANCE ON ACCOUNT OF INTEREST RELATIN G TO REVAMP PROJECT AND APPARENTLY, THE SAME HAS BEEN ALLOWED B Y THE ASSESSING OFFICER. WE ACCORDINGLY DEEM IT APPROPRI ATE TO RECTIFY OUR ORDER DATED 31.01.2018 AND TO THIS LIMITED EXTENT, OUR FINDINGS CONTAINED IN PARA 23 OF THE ORDER DATED 31.01.2018 STAND MODIFIED AND THE SAME SHOULD NOW BE READ AS UNDER: 23. THE INTEREST RATE SWAP TRANSACTION IS RELATED TO FOREIGN CURRENCY BORROWING FOR THE PURPOSES OF CAPITALIZATION OF REV AMP PROJECT IN RESPECT OF ASSESSEES FERTILIZER DIVISION. SIMILAR LY, TWO FORWARD COVER TRANSACTIONS ARE IN RESPECT OF CAPITAL ITEMS. THES E ALL THESE TRANSACTIONS ARE ON CAPITAL ACCOUNT. THESE INTEREST RATE SWAP TR ANSACTIONS ARE CLOSELY CONNECTED AND LINKED TO THE TRANSACTION OF FOREIGN CURRENCY BORROWINGS FOR THE PURPOSES OF ACQUISITION OF CAPITAL ASSETS. JUST LIKE INTEREST ON BORROWINGS FOR THE PURPOSES OF ACQUISITION OF A CAP ITAL ASSET (TILL THE TIME THE ASSET IS FIRST PUT TO USE) HAS TO BE CAPIT ALIZED AND CANNOT BE CLAIMED AS REVENUE EXPENDITURE, ON SAME FOOTING, AN Y HEDGING COST OR LOSS INCURRED FOR HEDGING THE INTEREST RATE RISK ON SUCH FOREIGN CURRENCY BORROWINGS FOR CAPITAL PURPOSES HAVE TO BE ON CAPIT AL ACCOUNT AND THE SAME CANNOT BE ALLOWED AS REVENUE EXPENDITURE. ANY LIABILITY OR LOSS ARISING IN RESPECT OF SUCH TRANSACTIONS SHALL THUS BE ON CAPITAL ACCOUNT. IN THE INSTANT CASE, WHERE THE REVAMP PROJECT HAS B EEN CAPITALIZED AND INTEREST COST POST CAPITALIZATION HAS BEEN CLAIMED AND ALLOWED BY THE REVENUE, CORRESPONDING HEDGING COST OR LOSS INCURRE D FOR HEDGING THE INTEREST RATE RISK ON SUCH FOREIGN CURRENCY BOR ROWINGS SHOULD BE M.A. NO. 96/JP/2018 M/S CHAMBAL FERTILIZERS & CHEMICALS LTD. VS. JCIT 6 ALLOWED. THE MATTER RELATING TO IRS TRANSACTIONS AM OUNTING TO RS. 58,55,094 IS THUS ALLOWED. TWO FORWARD COVER TRANSA CTIONS ARE RELATED TO IMPORT OF TRADED PRODUCTS AND ARE HOWEVER ON REV ENUE ACCOUNT AND THE LOSS ON ACCOUNT OF SUCH TRANSACTION IS HEREBY A LLOWED. IN THE RESULT, REVENUES GROUND OF APPEAL IS PARTLY ALLOWED. 12. SUBJECT TO ABOVE, WE MAY CLARIFY THAT THERE ARE NO OTHER CHANGES/MODIFICATIONS IN THE FINDINGS AND DIRECTION S AS CONTAINED IN OUR ORDER DATED 31.01.2018. IN THE RESULT, THE MISCELLANEOUS APPLICATION IS DIS POSED OFF IN LIGHT OF ABOVE DIRECTIONS. ORDER PRONOUNCED IN THE OPEN COURT ON 16/10/2018. SD/- SD/- FOT; IKY JKO FOE FLAG ;KNO (VIJAY PAL RAO) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 16/10/2018. * SANTOSH VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S CHAMBAL FERTILISERS & CHEMICALS LIMITED, KOTA. 2. IZR;FKHZ@ THE RESPONDENT- JCIT, RANGE-2, KOTA. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE { M.A. NO. 96/JP/2018} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR