AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 1271
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....eign exchange gain but reduced the same in the computation. Relying on the decision of Oil and Natural Gas Corporation Ltd., Vs. CIT [322 ITR 180] (SC), AO brought the same to tax. 2.2. Next item considered by the AO was provision on redemption of Foreign Currency Convertible Bonds [FCCB]. Assessee claimed an amount of Rs. 4,06,81,136/- on account of proportionate premium on redemption of FCCB. As assessee reduced the same from share premium account, AO disallowed the same and added back to the income. 2.3. The other addition of depreciation on UPS is not disputed by the parties before us. 3. Aggrieved on the order of AO, an appeal was preferred before the Ld.CIT(A). The additional evidence filed by assessee was sent to AO on remand and after considering the report and submissions of assessee, Ld.CIT(A) allowed the contentions of assessee on freight charges and notional gain on foreign exchange. Revenue is aggrieved on the issues. Since the provision on redemption was not allowed, assessee is aggrieved. The grounds are raised accordingly. 4. Both the parties reiterated the stand and referred to the paper book placed, written submissions and various case law. 5. After....
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.... "7.3. It is seen from the facts that loans were borrowed both on revenue account and also for the acquisition of assets. The questions for consideration before the Hon'ble Supreme Court in the case of ONGC Ltd vs CIT 322 ITR page 180 was whether exchange fluctuations on loans taken for revenue purposes could be allowed as deduction u/s.37(1), and fluctuations in the rate of exchange in respect of loans borrowed for purchasing capital assets could be adjusted to the actual cost of capital assets. These are two independent issues. The questions of law set out at page 187 of the judgement is as under: "(i)"Whether on the facts and circumstances of the case, the additional liability arising on account of fluctuations in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under section 37(1) of the Income-tax Act, 1961 (for short 'the Act') in the year of fluctuation in the rate of exchange or whether the same is allowable only in the year of repayment of such loans? ii) Whether the assessee is entitled to adjust the actual cost of imported capital assets acquired in foreign currency on account of fluctuation....
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.... the assessee has correctly excluded the said amount while computing its income for taxation purposes. Further in the next year this amount was also reversed in accordance with the accounting standards. 7.8. The jurisdictional High Court in CIT vs. Pact Securities & Financial Services Ltd. reported in 374 ITR page 681 at page 693 observed as under: "Thus, even if at the relevant time, it was not mandatory to adopt the methodology prescribed by the guidance note or for that matter the accounting standard as it was not notified by the Central Government in the Official Gazette, in our opinion, it is not relevant for the reason that, as long as there was a disclosure of the accounting policy in the accounts, which had a backing of a professional body, such as the institute of Chartered Accountants of India, it could not be discarded by the Assessing Officer." 7.9 It is to be noted that in the next A.Y. 2009-10 there was a loss of Rs. 4,47,00,000 due to fluctuations in foreign exchange on the loans borrowed for acquisition of assets. The AO has not allowed this loss as deduction. There cannot be one method if the fluctuations result in reduction of liability ....
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....2 6,85,85,295 6 2012-13 10,58,79,151 Total 37,65,07,731 26. In the previous year relevant to the assessment year 2007-08, the assessing officer has already allowed the deduction in the sum of Rs. 2,31,10,984/- being the proportionate amount of premium relating to that year, on pro-rata basis". 5.2.1. Ld.CIT(A), however, declined to allow by stating as under: "8.2. I have gone through the AO's observations and AR's contentions. It is seen that the AO has disallowed an amount of Rs. 4,06,81,136/towards prorata premium on redemption of Foreign Currency Convertible Bonds (FCCB). While doing so, the AO stated as under: "The assessee did not route this amount through the Profit & Loss Account and rather deducted it from the computation. Section 37 of the Act envisages that assessee can claim an amount only when it is accrued or ascertained liability. A contingent liability cannot constitute deductible expenditure of the purposes of Income Tax Act. Thus, putting aside of money which may become expenditure on the happening of an event would normally not constitute an allowable expenditure under the Income Tax Act....
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....ly on the remaining amount of 15 million USD. 7. The bonds matured on 06/12/2012 and entire amount with premium was repaid for the remaining 15 million bond holders. The pro-rata liability claimed every year is as under. Financial Year Asst. Year Amount claimed as expenditure 5/12/2006 to 31/3/2007 2007-08 2,31,10,984 1/4/2007 to 31/3/2008 2008-09 4,06,81,136 1/4/2008 to 31/3/2009 2009-10 8,95,69,998 1/4/2009 to 31/3/2010 2010-11 4,86,81,167 1/4/2010 to 31/3/2011 2011-12 6,85,85,295 1/4/2011 to 6/12/2012 2012-13 10,58,79,151 8. The department itself gave up the contention that the liability is contingent for the subsequent years. Having realized that as on 31st March of each year the pro-rata premium to the extent not converted into share capital is allowable as an expenditure gave up its objection that it is contingent in nature. Even assuming for the sake of argument the bond holder has the discretion to opt for conversion of the bonds to share capital, there is nothing on record to show that during the assessment year in question the bond holders have exercised such on option beyon....
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....t a future date. It is not necessary to go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure. In the light of the ratio laid down by the Court in the case of India Cements Ltd. v. CIT [1966] 160 ITR 52 (SC) liability incurred the purpose of obtaining the loan would be revenue expenditure. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3 lakhs in that accounting year. This conclusion was not justified looking to the nature....