2021 (12) TMI 409 - HC - Income Tax

Partial Appeal Success: Revenue wins on income classification, commission disallowed; assessee prevails on interest, capital gain.

The court partially allowed the appeal, with substantial questions (a) to (c) decided in favor of the Revenue and questions (d) and (e) in favor of the ... Correct head of income - income from house property OR business income - expenses pertaining to said property had been allowed as business expenditure the Appellate Tribunal erred in treating the above income as income from house property - HELD THAT:- The questions covered by (a) and (b) are similar to the questions raised by the assessee for the AY 2003-04 [2021 (9) TMI 736 - KERALA HIGH COURT] Court vide order [2021 (9) TMI 736 - KERALA HIGH COURT] has answered the said questions against the assessee and in favour of the Revenue. By following the reasons stated therein, question nos. (a) and (b) are answered in favour of the Revenue and against the assessee. Disallowance of the amount being year-end provision for payment of commission as an unascertained liability - AO disallowed the provision made by the assessee towards commission payable to STU commission agents - HELD THAT:- The ex post facto reversing of the entry and payment of commission in the subsequent year together with deduction of TDS is not acceptable while treating the provision made for the Assessment Year 2009-10. The subject expenditure does not satisfy the provision of Section 40(a)(ia) - A mere provision of expenditure is not allowable as expenditure inasmuch as the assessee has not suffered actual expenditure on account of the said commission payable to the agents. The conclusion and reasoning of the Assessing Officer was affirmed by the CIT (Appeals). The Tribunal independently examined the tenability of the deduction, considered every facet of the explanation given by the assessee and whether it merits acceptance as an expenditure for the subject Assessment Year. Assessee could be given liberty to prove actual payment made in favour of commission agents in any subsequent year before the Assessing Officer, place such proof of the expenditure incurred on account of commission paid to the agents and upon such details being furnished by the assessee, the Assessing Officer is required to pass revised assessment order in respect of such claims. With the above observation, question no.(c) is answered in favour of the Revenue and against the assessee. Interest component in the foreign exchange gain was a revenue receipt - HELD THAT:- As this Court in the decision reported in Apollo Tyres Ltd v. Assistant Commissioner of Income Tax [2019 (5) TMI 33 - KERALA HIGH COURT] has recorded a finding that the gains on the cancellation of forward contracts are a capital receipt and not a revenue receipt. Such a finding has become final between the assessee and the Revenue. The underlined portion excerpted above is liable to be set aside for it treats the capital gain as revenue receipt. From the views taken by this Court, the receipt is treated as capital gain and this is accepted by the Tribunal. However, an unintended observation is resulting in contradictory findings. We affirm the substantial findings recorded in favour of the assessee in paragraph 31 of the order under appeal, and while affirming the said finding we set aside the following observation in the order of the Tribunal - “However, foreign exchange fluctuation related to the interest portion is to be treated as revenue receipt which shall be brought to tax. Being so, this ground of the assessee is partly allowed.” - the question is answered in favour of the assessee and against the Revenue. Foreign exchange fluctuation has to be treated as revenue income - HELD THAT:- As not examined by the authorities on the actual details furnished in Schedule IX, the effect thereof, and Section 43A, as is applicable, enables the assessee to revise the value before actual payment of such amount. The assessee, it is brought to our notice that, in the subsequent Financial Year, has duly accounted for this item in the Financial Year 2008-09 and added it to the income in the Financial Year 2009-10. The authorities and the Tribunal have denied the claim more by inappropriately appreciating the accounting standard followed by the assessee and the effect to be given at the stage of preparation of P&L account and balance sheet for the year ending 31.03.2009 and the claim to which the assessee is entitled while filing the return. As we understand from the record, the gist of the method followed by the assessee is that, the assessee in Schedule IX claimed less deduction than claimable by adjusting the notional capital gain on Forex and corresponding deductions of the same amount while computing the net income of assessee for purpose of tax. In effect, both credit and debit are given and the tax liability is not materially impacted. Anyway, when the actual event has taken place, tax is stated to have been paid. The converse is that if the deduction is disallowed, the assessee would be called upon to pay tax on unrealised/notional capital gain; the treatment is as per the accounting standard, and the claim for deduction conforms with Section 43A of the Act. For the above reasons, we answer question no.(e) in favour of the assessee and against the Revenue. Issues Involved:1. Classification of income from house property vs. business income.2. Disallowance of year-end provision for payment of commission as an unascertained liability.3. Treatment of interest component in foreign exchange gain as revenue receipt.4. Treatment of foreign exchange fluctuation as revenue income.Issue-wise Detailed Analysis:1. Classification of Income from House Property vs. Business Income:The primary issue was whether the income of Rs. 10,01,281/- should be treated as income from house property or business income. The Tribunal treated it as income from house property, which the assessee contested. However, the court noted that similar questions for the Assessment Year 2003-04 had already been decided against the assessee and in favor of the Revenue. Consequently, the court followed the earlier reasoning and answered this issue in favor of the Revenue.2. Disallowance of Year-end Provision for Payment of Commission:The assessee had booked an expenditure of Rs. 5,00,36,912/- for commission paid to selling agents, including a provision of Rs. 1,03,92,000/-. The Assessing Officer disallowed this provision, stating it was unascertained and no TDS was deducted. The Tribunal upheld this disallowance, emphasizing that the provision was made on an ad hoc basis without specific details. The court agreed with the Tribunal, noting that allowing such a deduction would mean permitting an unascertained liability, which is impermissible in law. The court, however, allowed the assessee to prove actual payment in subsequent years before the Assessing Officer, who must then pass a revised assessment order.3. Treatment of Interest Component in Foreign Exchange Gain as Revenue Receipt:The assessee contested the Tribunal's decision to treat the interest component in foreign exchange gain as a revenue receipt. The court found this conclusion erroneous, referencing a previous decision (Apollo Tyres Ltd v. Assistant Commissioner of Income Tax) where gains on the cancellation of forward contracts were treated as capital receipts. The court set aside the Tribunal's observation that foreign exchange fluctuation related to the interest portion should be treated as revenue receipt and affirmed the substantial findings in favor of the assessee.4. Treatment of Foreign Exchange Fluctuation as Revenue Income:The assessee claimed an amount of Rs. 1,63,97,541/- as unrealized foreign exchange gain on capital assets. The Assessing Officer and the Tribunal disallowed this claim, treating it as revenue income. The court, however, noted that the authorities had misinterpreted the principles laid down in the Supreme Court cases (Woodward Governor India P. Ltd. and ONGC). The court found that the assessee had appropriately adjusted the notional gain in line with accounting standards and Section 43A of the Act. Therefore, the court answered this question in favor of the assessee, allowing the deduction of unrealized foreign exchange capital gain.Conclusion:The court partially allowed the appeal. Substantial question nos. (a) to (c) were answered in favor of the Revenue, while question nos. (d) and (e) were answered in favor of the assessee.