2016 (10) TMI 624 - AT - Income Tax

Tax Appeals Decisions: Mumbai ITAT 2004-06, 2009-10, Legal Adherence, Provident Fund, Foreign Exchange, Expense Dismissal

The ITAT Mumbai partially allowed the appeals for assessment years 2004-05 and 2005-06, while dismissing the appeal and cross-appeal for 2009-10. The ... Adjustment of exchange fluctuation gain/loss to the cost of capital asset under section 43A - deductibility of employer's contribution to Provident Fund and ESIC where payment is delayed under section 36(1)(va) - treatment of notional foreign exchange gain/loss on loan restructuring as capital or revenue receipt - maintainability of appeal in view of CBDT circular where tax effect is below thresholdDeductibility of employer's contribution to Provident Fund and ESIC where payment is delayed under section 36(1)(va) - Whether the assessee is entitled to deduction of employer's contributions to Provident Fund and ESIC though paid after the statutory due date but on or before the due date of filing the return for the relevant assessment year. - HELD THAT: - The Tribunal, having noted the Supreme Court's decision on the retrospective effect of deletion of the proviso to section 43B, directed that the matter be restored to the file of the Assessing Officer for verification of the date on which the contributions were actually paid. If payments are found to have been made on or before the due date of filing the return for the relevant assessment year, no disallowance is to be made. The Tribunal did not decide entitlement on the facts itself but required factual verification by the AO in light of the legal position. [Paras 7]Issue remanded to the Assessing Officer for verification whether contributions were paid on or before the due date of filing the return; if so, disallowance to be deleted.Adjustment of exchange fluctuation gain/loss to the cost of capital asset under section 43A - treatment of notional foreign exchange gain/loss on loan restructuring as capital or revenue receipt - Whether notional gain arising from foreign exchange fluctuation on a new foreign currency loan received for repayment of earlier foreign-currency term loans (originally used for acquisition of capital assets) is taxable as revenue or allowable to be adjusted to the cost of capital assets under section 43A. - HELD THAT: - The Tribunal found on undisputed facts that the new external commercial borrowing was utilized by the new lender to repay the earlier high-cost term loans which had originally financed import and acquisition of plant and machinery and other capital assets. The transaction was a consolidation/transfer of the existing loan liability rather than fresh borrowing for a new revenue purpose. Given that the predecessor loans were connected with acquisition of capital assets and that corresponding exchange fluctuation adjustments had been made earlier under section 43A, the Tribunal held that the assessee was entitled to adjustment of the notional gain/loss under section 43A and that the gain could not be treated as a revenue receipt. The alternate plea for directing allowance of depreciation without reducing the adjusted exchange gain was rendered infructuous in view of this conclusion. [Paras 11]Notional foreign exchange gain on the restructuring/transfer of loans is to be adjusted under section 43A as relating to capital asset; the assessee's claim allowed.Adjustment of exchange fluctuation gain/loss to the cost of capital asset under section 43A - Whether the assessee for A.Y. 2009-10 could claim notional loss on account of foreign exchange fluctuation in respect of loans used for capital assets. - HELD THAT: - The Tribunal observed that the Assessing Officer's treatment for the year under consideration was inconsistent with the departmental stand in earlier years and with the Tribunal's reasoning allowing adjustments under section 43A. Applying the same legal position as decided for earlier assessment years, the Tribunal directed that the assessee is eligible to claim adjustments under section 43A for A.Y. 2009-10. [Paras 17]Assessee entitled to claim adjustments under section 43A for A.Y. 2009-10; appeal dismissed subject to that direction.Maintainability of appeal in view of CBDT circular where tax effect is below threshold - Whether the Revenue's cross-appeal for A.Y. 2009-10 is maintainable where the tax effect is below the threshold specified in CBDT Circular No.21/2015. - HELD THAT: - The Departmental Representative conceded that the tax effect in the Revenue's appeal was less than the threshold and relied on CBDT Circular No.21/2015 to contend that the appeal was not maintainable or not pressed. On that basis the Tribunal dismissed the Revenue's cross-appeal. [Paras 19, 20]Revenue's cross-appeal dismissed as not maintainable / not pressed in view of CBDT Circular No.21/2015.Final Conclusion: The Tribunal partly allowed the assessee's appeals: directions were given to the AO to verify delayed PF/ESIC payments for A.Y. 2004-05 and 2005-06 and grant deduction if paid on or before the return filing due date; the notional foreign exchange gains/losses on loan consolidation/transfer relating to loans originally applied to capital assets are adjustable under section 43A and not taxable as revenue for the assessment years considered; the Revenue's cross-appeal for A.Y. 2009-10 was dismissed as not maintainable under the cited CBDT circular. Issues involved:1. Disallowance of Employees contributions to Provident Fund and ESIC2. Taxation of notional gain due to fluctuation in foreign exchange rates3. Disallowance of expenses incurred and accounted in a subsequent yearIssue 1: Disallowance of Employees contributions to Provident Fund and ESICThe Assessing Officer (AO) disallowed the contribution made by the assessee to Employees' Provident Fund and ESIC after the due date, under section 36(1)(va) of the Act. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this disallowance. However, the assessee cited a Supreme Court case to argue that if the contributions were made on or before the due date of filing the return, the disallowance should not apply. The ITAT Mumbai restored this issue to the AO to verify the timing of the contributions based on the Supreme Court ruling.Issue 2: Taxation of notional gain due to fluctuation in foreign exchange ratesThe AO taxed the notional gain from fluctuation in foreign exchange rates on foreign currency loans used for capital purposes as a revenue receipt. The CIT(A) also upheld this decision. The assessee demonstrated that the new loan was used to repay existing loans taken for capital assets, not for any other purpose. The ITAT Mumbai found that it was a case of shifting the loan liability and allowed the adjustment of gains under section 43A of the Act. The issue of allowing depreciation on fixed assets became moot after this decision.Issue 3: Disallowance of expenses incurred and accounted in a subsequent yearThe AO disallowed expenses incurred and accounted for in a subsequent year. The assessee did not press this ground during the appeal, leading to its dismissal.The ITAT Mumbai addressed the issues raised in the appeals for assessment years 2004-05, 2005-06, and 2009-10. The decisions varied based on the specific circumstances of each issue. The appeals for 2004-05 and 2005-06 were partly allowed, while the appeal and cross-appeal for 2009-10 were dismissed. The ITAT Mumbai emphasized the importance of following legal provisions and relevant case law in determining tax liabilities and allowable deductions.