2012 (11) TMI 56 - AT - Income Tax

Appeal challenges exchange loss compensation deduction denial based on agreement terms. Termination fee allowed.

The appeal was filed by the Revenue against the order of the CIT(A)-III, Chennai, challenging the deletion of disallowance made towards exchange loss ... Whether Administrative & Other Expenses on account of exchange loss compensation and termination fee due to premature termination of contract deduction would be allowable to the assessee. Premature termination of Contract - Following the judgement of Supreme Court in case of [Bharat Earth Movers Vs. CIT 2000 (8) TMI 4 - SUPREME COURT] if a business liability has definitely arisen in the accounting year, deduction should be allowed although the liability may have to be quantified and discharged at a future date. Therefore, in the interest of justice and equity, and in the light of the judgement of the Hon’ble Supreme Court of India, the amount paid as termination fee has to be allowed to the assessee in the assessment year 2004-05 and not in subsequent years - in favour of assessee. Exchange rate fluctuations - Held that:- As there is no written covenant with regard to the same, it cannot be construed that either of the parties are liable to compensate for loss on account of fluctuation in exchange rates. Therefore, the amount paid by the assessee to M/s. SMTPL on account of compensation for loss suffered due to exchange rates cannot be held to be an allowable expenses in the hands of the assessee – in favour of revenue. Issues:1. Disallowance made towards exchange loss compensation and termination fee.Analysis:The appeal was filed by the Revenue against the order of the CIT(A)-III, Chennai, challenging the deletion of disallowance made towards exchange loss compensation and termination fee. The assessee had filed the return of income for the assessment year 2004-05, admitting income of Rs. 92,91,066. The Assessing Officer disallowed the expenditure claimed by the assessee under the head 'Administrative & Other Expenses' for exchange loss compensation and termination fee. The disallowance was based on the grounds that the assessee was not liable to compensate for loss due to exchange rates, and the termination fee was paid in the financial year 2005-06, not in the assessment year 2004-05.The CIT(A) allowed the appeal of the assessee, leading to the Revenue appealing before the Tribunal. The Revenue contended that there were no terms in the agreement related to compensation for exchange loss and that the termination fee was paid in the subsequent financial year. The counsel for the assessee argued that the termination of the agreement was forced due to certain circumstances, and the amount was treated as a contingent liability in the books of accounts. The Tribunal analyzed the terms of the agreement between the parties and found no clause for compensation on account of exchange rate fluctuation. It was observed that the agreement only provided for compensation in case of premature termination. Therefore, the payment made by the assessee for exchange loss compensation was not allowable as an expense.Regarding the termination fee, the Tribunal noted that SMTPL had acknowledged receiving the amount, even though part of it was received in the subsequent financial year. The Tribunal referred to the Supreme Court judgment in Bharat Earth Movers case, stating that if a business liability arises in the accounting year, the deduction should be allowed, even if the liability is quantified and discharged later. Consequently, the termination fee paid by the assessee was allowed as an expenditure for the assessment year 2004-05. The appeal of the Revenue was partly allowed based on the above analysis.