TaxTMI 
TaxTMI 
TaxTMI 
2016 (5) TMI 1386
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....otice u/s 147/148 of the Act was given to the assessee. Our attention was invited to statement of facts filed before the Ld. Commissioner of Income Tax (Appeal). It was claimed that if there is recurring issue and, if allowed in first year, then in the later year, the relief cannot be denied. Reliance was placed upon the decision in CIT vs Paul Brothers (1995) 216 ITR 548 (Bom) and CIT vs Western Outdoor Interactive (P.) Ltd. (2012) 349 ITR 309 (Bom.) and also the decision of the Tribunal in ITA No.3285 & 5087/Mum/2007 for Assessment year 2001-02 & 2002-03 in the case of assessee itself, order dated 25/02/2009. This factual matrix was not controverted by the ld. DR and he merely relied upon the impugned order. 2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is engaged in the business of extraction of lime stone, which is used for manufacturing cement. During the relevant previous years to Assessment year 1994-95 to 1998-99, the assessee incurred expenditure for development of mine amounting to Rs. 5,64,12,225/-. The assessee commenced commercial exploitation in the previous year relevant to Asse....
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....ved as under:- "7.3 I have considered the facts of the issue and the submissions made by the AR but do not find any merit in them. First of all, the objection of the AO that no material had been substantiated to prove that the said expenditure had been incurred on the prospecting or development of mines has not been addressed even during the appellate proceedings by the appellant. The appellant has merely made a statement that the said expenditure had been incurred to remove the overburden. Even by the appellant's own admission, the development of mine would mean the work of digging openings as tunnels, raises and winzes to give access to new workings, to provide access to the ore. No evidence has been lead by the AR to support that the said expenditure had been incurred for any of these activities. The expenditure for removal of overburden, per-se would not qualify as an expenditure for either prospecting or development of mines. 7.3.1 Further, a perusal of the assessment records for the A.Y.2000-01 wherein, the AR has claimed that a similar claim was allowed by the AO earlier indicates that the said issue regarding allowability of claim u/s.35E has not been discussed anyw....
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....sessee is allowed. 5. Ground no.4 raised by the assessee is with respect to disallowance of community expenses at Rs. 1,53,815/-. Due to smallness of the amount involved, this ground was not pressed by the assessee, therefore, it is dismissed as not pressed. 6. The last ground pertains to claim in respect of sales tax and VAT subsidy received by the assessee. This ground was taken as additional ground. Since, this ground was not raised before the Revenue authorities, therefore, in all fairness, this ground is sent to the file of the Assessing Officer to examine the claim of the assessee and decide in accordance with law. The assessee be given opportunity of being heard. 7. The appeal of the assessee is partly allowed for statistical purposes. 8. Now, we shall take up appeal of the Revenue (ITA No.5751/Mum/2009), wherein, first ground pertains to holding that it is not open for the Assessing Officer to assume the allowance of depreciation for earlier years, when such depreciation was not actually allowed in those years. Without taking into consideration, explanation-5 below section 32(1)(ii) inserted by the Finance Act, 2001, which will apply retrospectively with effect from 01/....
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....in nature and the same is binding on the Revenue. In view of Circular No. 621, dt. 19th Dec., 1991 issued by the CBDT and the aforesaid judgment of this Court, the appeals were accepted and the orders passed by the Hon'ble High Court of Bombay were set aside leaving the parties to bear their own costs, thus, we affirm the stand of the Ld. Commissioner of Income Tax (Appeal) and dismiss the impugned ground, raised by the Revenue. 9. The next ground pertains to exchange rate fluctuation loss claimed by the assessee. The crux of argument on behalf of the Revenue is that the Ld. Commissioner of Income Tax (Appeal) erred in allowing the exchange rate fluctuation loss, suffered by the assessee as the assessee had borrowed from various banks to meet out its capital requirement. On the other hand, the counsel for the assessee defended the conclusion arrived at in the impugned order by claiming that the impugned issue is covered by the decision in CIT vs Woodword Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC). 9.1. We have considered the rival submissions and perused the material available on record. Briefly, the claim was in respect of exchange rate fluctuation loss in respect of loan ....
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....ion between the actual liability in presenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business". In Sections 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" has also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament has used the expression "any expenditure" in Section 37 to cover both. Therefore, the expression "expenditure" as used in Section 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M.P. Financial Corporation v. CIT reported in 165 ITR 765 the Madhya Pradesh High Court has held that the expression "expenditure" as used in Section 37 ma....
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....ing during the year needs to be computed. This is one more reason for reading Section 37(1) with Section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been reali....
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.... an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Section 145(1) enacts that for the purpose ofSection 28 and Section 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned withSection 28. Therefore, Section 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (see judgment of this Court in the case of United Commercial Bank v. CIT reported in 240 ITR 355). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the accoun....
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....derSection 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-`-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-`-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. 19. A company imports raw material worth US $ 250000 on 15.1.2002 when the exchange rate was Rs. 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15.4.2002 when the exchange rate is Rs. 49 per US $. However, on the balance sheet date, 31.3.2002, the rate of exchange is Rs. 50 per US $. In such a case, in terms of AS-....
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....o. 7632/08] - CAPITAL ACCOUNT CASE: 22. The main issue which arises for determination in this batch of civil appeals is: whether the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date pending actual payment of the varied liability. In this batch of civil appeals, we are concerned with increase in the existing liability on account of foreign exchange fluctuations on "capital account". 23. Before coming to the arguments, we quote hereinbelow Section 43A, as it stood prior to 1.4.2003: "43A. Special provisions consequential to changes in rate of exchange of currency--(1) Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole o....
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....lity and the same hinges on "making the payment towards the whole or a part of ...". According to the learned counsel, the expression "towards the whole or a part of" makes it clear that Section 43A as it stood referred to whole or a part of the payment and therefore to the point of payment. According to the learned counsel, under the preamended Section 43A, the effect of increase or decrease of liability arose only at the point of payment because the point of accrual shifted to the point of payment. In this connection, learned counsel urged that the difference between accrual and payment of a liability is that normally the point of accrual and the point of payment represent two different time milestones. However, according to the learned counsel, in the case of a contingent liability, like that of foreign exchange fluctuations, the point of accrual and the point of payment become the same. According to the learned counsel, under the pre-amended dispensation of Section 43A, the effect of increase or decrease of liability could only arise at the point of payment, as the point of accrual shifts to the point of payment. 27. Learned counsel next contended that on a proper and true ....
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....iability to pay in foreign exchange arises, after the change in the rate of exchange, the said sub-section has no application and the general principles of law must be applied in deciding whether the actual cost is increased or reduced as a result of such change. In other words, Section 43A(1) applies only where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring the asset. Section 43A(1), therefore, has no application unless the asset is acquired and the liability existed, before the change in the rate of exchange takes effect. In such a case, Section 43A contemplates recomputation of the cost of the assets for the purposes of depreciation [Sections 32 and 43(1)], and also as regards capital assets for scientific research [Section 35(1)(iv)] and also regarding patent rights or copyrights [Section 35A]. 31. As held in Arvind Mills case (supra) increase or decrease in liability in the repayment of foreign loan should be taken into account to modif....
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....ds as follows: "10. Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets." 33. As stated above, what triggers the adjustment in the actual cost of the assets, in terms of unamended Section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed ass....
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....Without going into much deliberation, we note that this has been decided in preceding para of this order (in ITA No.5957/Mum/2009) Assessment year 200506. Following the same reasoning, this ground is decided in favour of the assessee. 11. Next ground pertains to claim of depreciation in respect of badminton court amounting to Rs. 13,665/-. This ground was discussed in preceding para of this order(ITA No.5957/Mum/2009) for Assessment year 2005-06, therefore, decided in favour of the assessee. 12. Next ground pertains to disallowance in respect of reimbursement of school expenses amounting to Rs. 22,75,669/- at Satna. Without going into much deliberation, we note that this has been decided in preceding para of this order (in ITA No.5957/Mum/2009) for Assessment year 2005-06. Following the same reasoning, this ground is decided in favour of the assessee. 13. The next ground pertains to restricting the claim for depreciation on UPS at the rate of 15% as against 60% treating the same as plant and machinery amounting to Rs. 1,01,025/-. 13.1. Considering the totality of facts, we find that this issue is covered by the decision of the Tribunal in Macawber Engineering Systems (I)(P.)Ltd....
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....r 2008-09 only. 19.1. We find that the assessee received dividend income of Rs. 47,23,466/- and the Ld. Assessing Officer by applying Rule 8D of the rules made a disallowance of Rs. 71,87,621/-. The Ld. Commissioner of Income Tax (Appeal) sent back the matter to the file of the Ld. Assessing Officer to make a reasonable disallowance by following the decision from Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Ltd. We find no infirmity in the direction of the Ld. Commissioner of Income Tax (Appeal) and the same is affirmed. 20. The next ground is with respect to claim of foreign exchange fluctuation loss in respect of loan borrowed by the assessee to meet out its working capital requirements. This issue has been decided in preceding para of this order (ITA No.5751/Mum/2009) for Assessment year 2005-06. The same order will be applicable to the impugned ground also. 21. The last ground in the present appeal is with respect to allowance of depreciation, which was not actually allowed in earlier years. This ground has been decided in ITA No.5751/Mum/2009 for Assessment year 2005-06, therefore, the same reasoning/decision will be applicable to the impugned ground also. 22. ....