2018 (6) TMI 88 - AT - Income Tax

Tribunal remands issues under Sections 40A(3), 40(a)(ia), and 43B for verification

The Tribunal remanded the issues under Sections 40A(3), 40(a)(ia), and 43B to the AO for verification and allowed the assessee's claim regarding FCCB ... Loss on account of fluctuation of foreign currency - allowable busniss expenditure - notional loss or not - Held that:- Loss on account of fluctuation of foreign currency on the date of balance sheet is not a notional loss as held by the A.O and the CIT(A) and in allowable as expenditure if it is on revenue account. Loss disallowed on the ground that it is capital loss - whether the FCCB issue expenses are in the nature of capital or Revenue? - Held that:- Till the bonds are converted into share capital, they remain as a loan fund and cannot be held as equity fund and thus capital in nature [See M/s Crane Software Ind Ltd.- 2011 (2) TMI 1414 - ITAT BANGALORE]. From the financial statements for the F.Y 2008-09, and schedule 4 thereof, it is seen that unsecured loans include FCCBs worth ₹ 101,72,00,000/- The assessee has stated that the disallowance is made only in A.Y 2009.10, whereas the balance of the expenditure which has been claimed in subsequent assessment years, has been allowed as a deduction in the assessment completed u/s 143(3) r.w.s 147 of the IT Act for the A.Y 2010-11. We hold that the assessee, which is following a uniform and consistence method of accounting, and has claimed the expenditure in accordance with the notification of the Min of Corporate Affairs and the A.O has allowed the same in the subsequent assessment years, the revenue cannot take a contrary stand only for the A.Y 2009-10. In the result, the grounds of the appeal of the assessee on this issue are allowed. Issues Involved:1. Disallowance under Section 40A(3) of the IT Act.2. Disallowance under Section 40(a)(ia) of the IT Act.3. Disallowance under Section 43B of the IT Act.4. Disallowance of FCCB expenditure.Detailed Analysis:1. Disallowance under Section 40A(3) of the IT Act:The issue pertains to the disallowance of Rs. 1,42,84,760 under Section 40A(3) due to cash payments exceeding Rs. 20,000. The assessee argued that these payments were made to small vendors without bank accounts, and due to the nature of the hotel business, payments in cash were necessary. The Tribunal found that similar issues had arisen in the assessee's own case for the A.Y 2008-09, where it was held that payments made to employees for business expenses should not be disallowed under Section 40A(3). The Tribunal remanded the issue back to the AO for verification, directing that if payments were made to employees for business expenses, no disallowance should be made under Section 40A(3).2. Disallowance under Section 40(a)(ia) of the IT Act:The assessee contested the disallowance of Rs. 5,03,20,862 under Section 40(a)(ia) for non-deduction of TDS. The Tribunal noted that the CIT(A) had directed the AO to verify whether the payments were paid or payable before the end of the accounting year, following the Special Bench decision in Merilyn Shipping & Transports vs. ACIT. The Tribunal highlighted the Supreme Court's decision in Palam Gas Service vs. CIT, which upheld disallowance under Section 40(a)(ia) irrespective of the payment status. However, the Tribunal also considered the applicability of the second proviso to Section 40(a)(ia), which provides relief if the recipient has paid the tax on the income. The Tribunal remanded the issue to the AO for verification, directing that if the assessee is not treated as an 'assessee in default' under Section 201(1), no disallowance should be made under Section 40(a)(ia).3. Disallowance under Section 43B of the IT Act:The issue involved the disallowance of Rs. 25,35,314 for unpaid statutory liabilities. The Tribunal referred to the assessee's own case for A.Y 2007-08, where it was held that if the amounts were not debited to the Profit & Loss Account, no disallowance should be made under Section 43B. The Tribunal remanded the issue to the AO for verification, directing that if the assessee had not debited the amounts to the Profit & Loss Account, no disallowance should be made under Section 43B.4. Disallowance of FCCB Expenditure:The assessee incurred a foreign exchange loss of Rs. 21,92,00,000 on Foreign Currency Convertible Bonds (FCCBs) due to currency fluctuation and claimed it as an expense. The AO disallowed Rs. 7,30,66,667, treating it as a notional capital loss. The Tribunal referred to the Supreme Court's decision in CIT vs. Woodward Governor India Pvt Ltd., which held that losses on account of foreign exchange fluctuation are allowable as expenditure under Section 37(1) if they are on revenue account. The Tribunal also referred to its own decision in the case of Crane Software International Ltd., which held that FCCB issue expenses are revenue in nature until the bonds are converted into share capital. The Tribunal allowed the assessee's claim, holding that the foreign exchange loss was a revenue expenditure and should be allowed as a deduction.Conclusion:The Tribunal remanded the issues under Sections 40A(3), 40(a)(ia), and 43B to the AO for verification and allowed the assessee's claim regarding FCCB expenditure, treating it as a revenue expenditure. Both the assessee's appeal and the revenue's appeal were partly allowed for statistical purposes.