AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 88
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....y, poultry, milk and other sundry expenses from the small vendors who do not have any bank account and hence could not be paid in cheques / through banking channel. Hence, disallowance u/s. 40A(3) is not called for. 4. That the assessee company is running hotel business and the company is having 40 branches all over India the above amount of expenditure Rs. 1,42,84,760/- could not be paid in cheques / through banking channel as the parties to whom the payments were made has objected for the payment of cheques as there is no banking facility nearby. 5. The Appellant prays that the amount has been paid during the course of the business purpose only. Hence, disallowance u/s. 40A(3) is not correct. 6. That S. 40A(3) has been introduced to curb the black money and bogus transaction only and not to trouble the honest tax payers. In the instant case, the disallowance u/s. 40A(3) is not correct and hence may please be deleted. 7. That learned CIT(A) has given a direction to the AO to verify the payments made for TDS not deducted cases. As nothing is outstanding as payable at the end of year, the amount cannot be disallowed u/s. 40(a)(ia) of Rs. 5,03,20,8....
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....n view of the above notification FCCS are not capital nature, it is revenue nature because it has not been converted in to equity share capital. Hence, foreign exchange loss which has been written off to profit and loss A/c over a period of three years shall be considered as revenue nature. 18. That the learned CIT(A) ought to have considered that in previous Financial Year, (i.e. 2007-08) the Appellant Company has offered an income of Rs. 7,08,20,000/- which came from foreign exchange fluctuation and would have allowed the loss on foreign exchange which is debited to profit and loss A/c in the financial year 2008-09 of Rs. 7,30,66,667/-. 19. That the Appellant craves leave to add, to alter, or amend any of the aforementioned Grounds of appeal". 1.1 Further, vide letter dated 18.09.2017, the assessee has raised the following additional grounds of appeal: 20. As per the ratio laid down by the Hon'ble Supreme Court of India in the case of National Thermal Power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the ITAT has jurisdiction to examine the question of law though not arisen before the CIT (A) but h7isen before the IT AT for the first time. 2....
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....ave appreciated that the provisions of section 194C are not applicable to payments made of Rs. 13,81,000/- towards Generator maintenance. 35. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 87,99,923/- towards Club maintenance. 36. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 47,54,560/ - towards telephone charges. 37. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 52,50,500/- towards printing & stationery . 38. The Ld AO erred in provoking the provisions of section 40(a) (ia) without appreciating the fact that payments made are not covered by provisions of chapter XVII-B of the Act. 39. The Ld. AO ought to have appreciated the fact that the receiver of the interest i,e. payee, who is resident has offered the same as income in its return of income for the respective financial year and therefore, the assessee cannot be treated as assessee in default. 40. The AO ought to have appreciated the fact that second proviso to section 40....
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....f the Act. He arrived at the total sum of Rs. 1,33,68,613 as paid in violation of section 40A(3) of the Act and he accordingly disallowed the same. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the addition by holding that the assessee has not produced any evidence in support of its contention that the payment in question were below Rs. 20,000 on different dates and that there was no violation of section 40A(3) of the Act. The assessee is in second appeal before us. 5. The learned Counsel for the assessee has raised further an alternative argument before us that out of the total payments made in cash/bearer cheques, main payments are made to the employees of the assessee and therefore, they are not covered by the provisions of section 40A(3) of the Act. He also drew our attention to the details of the payments at Pages 8 to 12 of the paper book filed by him and submitted that all these details were filed before the authorities below, but they have not looked into and have not verified them. Thus, he requested that the AO may be directed to verify and allow the same. 6. The learned DR, on the other hand, supported the orders of the au....
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.... passing the consequential order, has verified the details and has allowed relief to the extent of Rs. 5,01,61,399/-. In the grounds of appeal, the assessee's argument is that the CIT (A) ought to have deleted the disallowance by himself, instead of directing the AO to verify the claim of the assessee. Further, in the additional ground of appeal No.10, the assessee is claiming that if the assessee has not been treated as an "assessee in default" u/s 201(1), no disallowance u/s 40a(ia) can be made. 9. We find that the Hon'ble Supreme Court in the case of Palam Gas Service vs. CIT reported in (2017) 81 Taxmann.com 43 (S.C) has held that irrespective of the amount being paid, the same is disallowable u/s 40a(ia) if no TDS has been made. Therefore, the decision of the CIT (A) on this point has to be set aside. In such circumstances, the alternate plea of the assessee assumes importance. 10. The learned Counsel for the assessee has placed reliance upon the decision of the Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd vs. CIT, reported in (163 Taxmann.355) wherein the Hon'ble Supreme Court was considering the case of the asses....
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....x has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, [thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :] [Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.]" In view of the above provision and since the assessee has not been treated as an "assessee in default" u/s 201(1) of the Act, we hold that no disallowance u/s 40a(ia) can be made. The assessee's additional ground of appeal No.10 is accordingly treated as allowed for statistical purposes". 4.1 Respectfully following the same, this ground of appeal of the assessee is also remitted to the fi....
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....tistical purposes. 5.1 Respectfully following the decision of the Coordinate Bench of the Tribunal, the issue is set aside to the file of the A.O for verification of the assessee's claim and if the assessee has not debited the same to profit and loss account, then the A.O shall not make any disallowance u/s 40(3)B of the Act. This ground of appeal is thus treated as allowed for statistical purposes. 6. As regards Grounds No. 11 to 18 are concerned, brief facts are that, during the F.Y 2006-07, the assessee company has raised term funds from international market by issuing Foreign Currency Convertible Bonds (FCCBs) worth USD 25 Millions, which is having the convertible option to equity shares or repayment of bonds after 5 years. During the financial year relevant to the assessment year before us, the assessee stated that due to fluctuation of exchange currency, the company has incurred foreign exchange loss of Rs. 21,92,00,000/- on foreign currency convertible bonds (FCCB) and therefore the company has restated the bonds at the exchange rates prevailing at the year end and the difference is transferred to 'Foreign Currency Monitory Item Translation Difference Account' to be wr....
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....eported in 116 ITR 1 (SC). Upon consideration of rival contentions and the material on record, we find that the A.O has disallowed the claim of the assessee on the ground that it is notional capital loss, while the Ld. CIT(A) confirmed the order of he A.O on the ground that it is to be allowed only at time of making payment and that the loss being capital in nature, cannot be allowed under any of the provisions of the Act. She also observed that the claim is not in accordance with the provisions of Sec. 43A of the Act. Thus, we find that both the A.O as well as the CIT(A) were of the opinion that it is a notional loss and therefore is not allowable in the first place. This issue was considered by the Hon'ble Apex Court in the case of Woodward Governor India Pvt Ltd., (supra) and it was held that the expression 'expenditure' used in section 37 of the IT Act may, in the circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from the pocket of the assessee. The facts of the case and the findings of the Hon'ble Court are reproduced hereunder for the sake of convenience and ready reference: "5. The assessee filed i....
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....s paid out" and "something which is gone irretrievably". In this connection, learned counsel placed reliance on the judgment of this Court in the case of Indian Molasses Co. (Private) Ltd. v. CIT reported in 37 ITR 66. According to the learned counsel, the increase in liability at any point of time prior to payment cannot fall within the meaning of the word "expenditure" in Section 37(1). Therefore, according to the learned counsel, the requirement of expenditure is not met in this case. According to the learned counsel, similarly the requirement of money being "expended or laid out" is also not satisfied and thus additional liability arising on account of fluctuation in foreign exchange rate is not deductible under Section 37(1). 7. Shri C.S. Aggarwal, learned senior counsel appearing for M/s Woodward Governor India P. Ltd. (Civil Appeal arising out of S.L.P.(C) No. 593/08), submitted that the assessee had debited a sum of Rs. 41,06,748.00 to its P&L account of which a sum of Rs. 29,49,088.00 stood for the unrealized loss due to foreign exchange fluctuation. According to the learned counsel, the assessee has been following mercantile system of accounting. According to the....
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....ccount of fluctuation in the dollar rate, the liability may enhance or may reduce by 31.3.2000. This has to be taken into account by the Department. The learned counsel submitted that whenever the dollar rate stood reduced, the Department has taxed in the past the business gains, therefore, as a corollary, the Department has to allow deduction in the year in which the assessee incurs business loss on account of the increase in the dollar rate. Therefore, according to the learned counsel, there is no warrant for interfering in the impugned judgment of the High Court. 10. As stated above, on facts in the case of M/s Woodward Governor India P. Ltd., the Department has disallowed the deduction/debit to the P&L account made by the assessee in the sum of Rs. 29,49,088.00 being unrealized loss due to foreign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the dedu....
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....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 may, in the circumstances of a particular case, cover an amount which is a "loss" even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT reported in 225 ITR 802. According to the Law and Practice of Income Tax by Kanga and Palkhivala, Section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by Sections 30to 36. This Section, according to the learned Author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of Section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under....
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....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 realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where Section 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under Section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by Legislative intervention. However, but for such intervention or in cases falling under Section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that ....
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....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 accounting standard followed by the assessee(s) in this batch of Civil Appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard ("AS"). 6.3 Thus, it is clear that the 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. 6.4 The other ground on which the loss has not been allowed is on the ground that it is capital loss. The co ordinate Bench of the Tribunal in the case of M/s Crane Software Ind Ltd., (supra) (to which, one of us, i.e JM is a signatory), has considered the issue....
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....t is seen that unsecured loans include FCCBs worth Rs. 101,72,00,000/-. Therefore, the above decision is clearly applicable to the facts of the case before us. In the case of Gati Ltd. (cited supra), this bench was considered the nature of the expenses incurred for issuance of FCCBs and it was held as under: "2. Brief facts of the case are that the assessee company, which is in the business of Cargo Transport and Trading, filed its return of income for the A.Y. 2007- 08 on 31.10.2007 declaring a total income of Rs. 15,54,67,315 and book profit of Rs. 2,62,85,309 under section 115JB of the Act. During the assessment proceedings under section 143(3) of the I.T. Act, the income of the assessee was determined at Rs. 16,36,43,200. Subsequently, the CIT assumed jurisdiction under section 263 of the I.T. Act and directed the A.O. (i) to bring to tax the gain on account of foreign exchange fluctuation of Rs. 15,46,428 as income from other sources; (ii) to disallow gratuity of Rs. 1,32,95,577; and (iii) to disallow expenditure amounting to Rs. 2,69,26,757 relatable to issue of foreign currency convertible bonds. Aggrieved by the order of the Ld. CIT under section 263 of the I.T. Ac....
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....option to convert FCCBs into original shares on or before 05.11.2011 and in the event the bond holder is not opting for such conversion, he is entitled to redemption on 06.12.2014 at 147.882% of the bond amount. He submitted that the bonds were issued for securing funds for business purposes including expansion of the business and the amount received is thus an unsecured loan in the hands of the company. He submitted that the expenditure of Rs. 2,64,26,757 incurred by the assessee company for issuing these bonds is therefore revenue expenditure. He also submitted that during the F.Y. 2006-07 relevant to the A.Y. 2007-08, the funds collected by the assessee company continued to remain with the assessee only as a liability in the form of unsecured loans as none of the bond holders exercised any option for conversion of their bonds into shares during the relevant financial year. He, further submitted that in the F.Y. 2007-08, the bonds to the extent of 5 million US dollars were converted into share capital as the bond holders exercised their option for conversion during the said F.Y. 2007-08 and this was also declared in the public accounts for the F.Y. 2007-08. He has submitted that ....
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....f the A.O. and has placed reliance upon the findings of the A.O. and the CIT(A). 5. Having regard to the rival contentions and the material on record, we find that the only dispute is to the nature of expenditure incurred by the assessee on issue of FCCBs. The Hon'ble Supreme Court in the case of "India Cements" (cited supra) was considering the allowability of claim of expenditure of the assessee therein, incurred by it, on stamps, registration fees etc., for securing a loan, as business expenditure under section 37(1) of the Act, and held that loan obtained cannot be treated as an asset or advantage of an enduring nature for the benefit of the business of the assessee, as, a loan is a liability and has to be repaid and it is therefore, erroneous to consider the liability as an asset or an advantage. It was further held that the nature of the expenditure incurred in raising a loan would not depend upon the nature or purpose of the loan as the loan may be intended to be used for the purchase of raw material when it is negotiated but the company may, after raising the loan, change its mind and spend it on secured capital assets. Therefore, the purpose for which the loan....
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....) Ltd., (cited supra), the Hon'ble High Court of Madras was seized of the issue as to whether the expenditure incurred on issue of debentures was capital or revenue and after considering the decision of the Hon'ble Supreme Court in the case of India Cements (cited supra) as well as the Delhi High Court decision in the case of CIT vs. Thirani Chemicals Ltd., reported in 290 ITR 196, held that the expenditure incurred on the issue of debentures is permissible deduction under section 37 of the I.T. Act. Similar view was expressed by the Hon'ble High Court of Madras in the case of First Leasing Company & India Limited (cited supra). 8. The Hon'ble Karnataka High Court in the case of ITC Hotels Ltd., (cited supra) has also considered the judgment of the Rajasthan High Court in the case of Secure Metres Ltd., (cited supra), to hold that even if the debentures were to be converted into the shares at a later date, the expenditure incurred on such convertible debentures has to be treated as revenue expenditure. We find that 'A' Bench of this Tribunal at Bangalore in the case of M/s. Crane Software International Ltd., Bangalore vs. DCIT, Circle-11(2) (cited s....