TaxTMI 
TaxTMI 
2023 (11) TMI 1145
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....ssessee against the Assessment Order, dated 07/05/2015, for the Assessment Year 2011-12 passed under Section 143(3) read with Section 144C(3) of the Act. 2.2. The Assessee has raised the following grounds of appeal in ITA No. 5260/Mum/2017: GROUND NO. I & II: TREATING CORPORATE GUARANTEE AS AN INTERNATIONAL TRANSACTION AND THEREBY MAKING AN ADDITION OF NOTIONAL CORPORATE GUARANTEE FEES OF Rs. 2, 73,48,125/ 1. On the facts and the circumstances of the case and in law, the Ld CIT(A) erred in regarding the guarantee given by Appellant to its AE as an international transaction' under section 92B of the Act and in making an addition on account of notional guarantee fees 2 The Ld Assessing Officer/TPO failed to appreciate and ought to have held that: (i) The ultimate beneficiary of the loan was the Appellant itself while the AF, a company registered in Canada, AV Transworks Limited ('AVTL) was merely a route for availing the funds and investing in Canada, in pursuit of the Appellant's own objective of business expansion, (ii) An "international transaction"" would arise only when the foreign subsidiary defaults in making the paym....
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....addition amounting to Rs 4,65,200/-. GROUND NO. V: DISALLOWANCE OF PREMIUM PAID ARISING ON ACCOUNT OF REPAYMENT OF OPTIONALLY CONVERTIBLE DEBENTURES ISSUED TO ADITYA BIRLA NUVO LIMITED AND THEREBY MAKING AN ADDITION OF INCOME OF Rs. 14,37,11,341/- 1. On the facts and the circumstances of the case and in law, the Ld. CIT (A) erred in upholding the addition of Rs. 14,37,11,341 on the ground that the accounting entry for premium has not been passed in the year under consideration 2. On the facts and the circumstances of the case and in law, the Ld CIT (A) erred in upholding the addition on the ground that the transaction details were not verified by the AO since the Appellant had not filed the details 3. The Appellant prays that the AO/TPO be directed to delete the aforesaid addition amounting to Rs. 14,37,11,341- GROUND NO. VI: GENERAL The Appellant craves leave to add, to amend, to alter and/ or to delete all or any of the above grounds of appeal." 2.3. The Revenue has raised the following grounds of appeal in ITA No. 5280/Mum/2017: "1) On the facts and in law, the Ld.CIT(A) erred in directing the TPO to adopt 0.5% as....
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....1/2011 declaring 'Nil income and claiming carry forward of current year losses of INR 27,00,41,977/-. 3.1. The case of the Assessee was selected for regular scrutiny assessment. During the assessment proceedings, the Assessing Officer noted that the Assessee had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price (ALP) under Section 92CA(1) of the Act. The TPO vide order dated, 01/01/2015, passed under Section 92CA(3) of the Act proposed upward transfer pricing adjustment of INR 13,25,46,700/- consisting of the following: SNo. Transfer Pricing Adjustment Amount (INR) 1 Adjustment for Interest charged on loan given to AEs 10,51,98,575/- 2 Adjustment on account corporate guarantee 2,73,48,125/- Total 13,25,46,700/- 3.2. The Assessing Officer incorporated the above transfer pricing adjustment in the Draft Assessment Order, dated 16/03/2015, passed under Section 143(3) read with Section 144C(1) of the Act. In the aforesaid Draft Assessment Order, the Assessing Officer computed the income of the Assessee at 'Ni....
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.... the disallowance of INR 4,65,200/- made under Section 35D of the Act and also confirmed the rejection of the additional claim for deduction of INR 14,37,11,341/- in respect of premium paid on repayment of optionally convertible debentures specified in paragraph 3.2 above. 3.4. Being aggrieved, the Assessee preferred appeal before the Tribunal on the grounds reproduced in paragraph 2.2 above. Ground No. I, II & III pertain to the transfer pricing adjustment. Ground No. IV pertains to disallowance of deduction under Section 35D of the Act. Ground No. V pertains to disallowance of premium paid on repayment of optionally convertible debentures raised as an additional claim during the assessment proceedings. The Revenue has also filed cross appeal on the grounds reproduced in paragraph 2.3 above. Ground No. 1 pertains to the transfer pricing adjustment on account of guarantee commission directed by the CIT(A) to be recomputed at the rate of 0.5%, Ground No. 2 pertains to claim of interest & other expenses allowed by the CIT(A) as per Section 36(1)(iii) of the Act of the Act, Ground No. 3(i), 3(ii) & 3(iii) pertains to allowance of claim of ESOP Expenses. Appeal by Assessee (ITA N....
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....the CIT(A) granted relief to the Assessee by giving directions to determining arm's length guarantee fee at the rate of 0.5% as against 2.5% determined by TPO/Assessing Officer. 4.7. Being aggrieved by the order passed by the CIT(A), the Assessee is in appeal before the Tribunal claiming that arm's length guarantee fee rate of 0.5% is on a higher side on the basis of report of independent chartered accountant wherein the aforesaid rate has been computed at 0.263%. The Revenue has also challenged the order of the CIT(A) reducing the arm's length guarantee fee rate of 2.5% determined by the Assessing Officer/TPO to 0.5%. 4.8. On perusal of the decision of the Mumbai Bench of the Tribunal in case of the Assessee for the Assessment Years 2008-09 & 2009-10 [ITA No. 610 & 520/Mum/2013 and ITA No. 4276 & 4790/Mum/2015, dated 25/08/2016], we find that the Tribunal has held as under: "14. Ground No. 1 of Assessee's appeal in ITA No. 620/M/13 For A.Y. 2008-09, Grounds Nos: 1, 2 and 3 of Assessee's Appeal No. 4276/M/2015 for A.Y. 2009-10, and Ground No. 1 of Revenue's Appeal No. 4790/M/2015: Issue involved is : Transfer Pricing Addition in respect of Corporate Guara....
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....s of the case. Nothing has been placed before us to persuade us to depart from the view taken by the Tribunal in the case of the Assessee for the preceding assessment years on this issue. 4.10. In view of the above, we do not find any infirmity in the order passed by the CIT(A). Therefore, respectfully following the above decisions of the Tribunal in the case of the Assessee for the Assessment Years 2007-08, 2008-09 and 2009-10, Ground No. I & II raised by the Assessee are dismissed. Ground No. III 5. Ground No. III raised by the Assessee is directed against the Transfer Pricing Adjustment of INR 10,51,98,575/- on account of interest on loan to Associated Enterprises. 5.1. The Assessee had given a loan in Canadian Dollar (CAD) to AVTL, Canada and a loan in US Dollar (USD) to Aditya Birla Minacs, Philippines. It was contended by the Assessee that the aforesaid loans were granted from own funds, and therefore, no interest was charged from the AEs. However, at the time of filing return of income, the Assessee voluntary made an adjustment in the computation of total income by computing interest at the rate of 1.53% (i.e. Average US LIBOR + 1%) in case of interest free USD l....
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....t's this ground of Appeal is Partly Allowed." 5.7. We have perused the orders passed by the Tribunal in the case of the Assessee for the Assessment Year 2007-08 [ITA No. 7033 & 7142/Mum/2012, dated 25/03/2015, and ITA No. 7033 (recalled matter), 16/03/2016] and common order, dated 25/08/2016, passed in ITA No. 610 & 620/Mum/2013 and ITA No. 4276 & 4790/Mum/2015 pertaining to Assessment Years 2008-09 and 2009-10 by following the decision dated 16/03/2016, passed by the Tribunal. Vide order dated 16/03/2016, Co-ordinate Bench of the Tribunal has, in identical facts and circumstances, has accepted LIBOR plus 1% as arm's length rate of interest while holding as under: "After considering the rival submissions and on perusal of the impugned finding and the facts as noted above, the only the issue how before us, is whether the loan advanced by the assessee to its 100% subsidiary AE in Canada on which the assessee had charged interest @ LIBOR +1% is at arm's length or not. The Ld. CIT(A) has applied six months LIBOR + 200 basis points based on RBI guidelines and after using external commercial borrowed rates. Whereas, the assessee's case is that the assessee has use....
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.... accuracy of ALP. Accordingly, we accept the Ld. Counsel's contention on this score and direct the AO to accept the interest rate charged at LIBOR 1% as on arm's length price. Accordingly, ground no. 2 is treated as allowed." 5.8. Given the admitted position that there is no change in the facts and circumstances of the case in the assessment year before us, and keeping in view the above decisions of the Tribunal in the case of the Assessee, which continue to hold the field, we do not find any merit in the contention advanced by the Assessee that no transfer pricing adjustment was warranted. The decision of CIT(A) to hold LIBOR + 1% as arm's length rate of interest in respect of loan for AEs is in line with the above decisions of the Tribunal in the case of the Assessee. Accordingly, Ground No. III raised by the Assessee is dismissed. Ground No. IV 6. Ground No. IV raised by the Assessee is directed against the disallowance of INR 4,65,200/- under Section 35D of the Act in respect of stamping charges paid on further issue of shares. 6.1. In view of the statement made by the Ld. Authorised Representative for the Appellant, under instructions, that the Assessee doe....
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....sessment Year 2011-12 which was rejected by the Assessing Officer vide Assessment Order, dated 07/05/2015, passed under Section 143(3) read with Section 144C(3) of the Act. The Assessing Officer rejected the aforesaid claim, inter alia, on the ground that the same was expenses claimed were capital in nature. 7.5. The CIT(A) also decline to grant any relief on this issue and did not allow the claim for deduction of INR 14,37,11,341/- pertaining to the proportionate premium paid on redemption of Debentures. 7.6. Being aggrieved, the Assessee has carried this issue in appeal before us. 7.7. We have heard the rival submissions and perused the material on record. 7.8. The contentions raised on behalf of the Assessee (including on the issue of nature of premium paid on redemption of debenture and the year of allowance of deduction) can be summarized as under: (a) The return for the relevant assessment year was filed on 28/11/2011, while the premium on OCD was paid on 24/03/2014. Accordingly, the claim became available to the Assessee only after return was filed and hence, an additional claim was made during the course of assessment proceedings. (b) CCDs are ....
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....or the use of funds. Commercially, when the terms of CCD were converted to OCDs and the OCDs were ultimately redeemed, such recompense was worked out commercially at the compounded rate of approx. 10% p.a. (approx.). This gave an overall premium of 52% on face value. If, however, the rate of return is calculated from the date of conversion to the date of redemption (i.e from 28/02/2014 to 24/03/2014), then the recompense works out to 624% p.a. If it is presumed that the premium runs from the date of conversion, then such presumption would be de-hors of commercial realities as a return of 624% p.a by the issuer company can, by no stretch of imagination, be regarded as a commercially acceptable recompense from the point of view of issuer. Based on the commercial realities, the premium paid should be considered as pertaining to the use of money for the entire period beginning from the date of issue of CCDs till the date of redemption and not just from the date of conversion. (f) In the present case, the premium on debentures was debited to securities premium account. This is as per the provisions of Section 78 of the Companies Act, 1956 (for Short 'the Companies Act'). The Co....
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....ssion. It is admitted position that the Assessee had issued CCDs of INR 250 Crores to Barclays. Since the CCDs were freely transferable the same were eventually purchased by ABNL, the parent company of the Assessee, on 07/02/2014 from the then holders of CCDs namely L&T Fincorp Ltd., L&T Infrastructure Finance Co. Ltd. and Tata Capital Financial Services Ltd. On 28/02/2014, as per mutual agreement between ABNL and the Assessee, CCDs were converted from OCDs. Since, ABNL did not opt for conversion, the OCDs were redeemed on 26/03/2014 at a premium of 130 Crore. The issue raised for consideration before us is whether the Assessee is entitled to claim deduction for the proportionate premium amount during the relevant assessment year since according to the Assessee the deduction for premium is to be allowed over the term of the debentures. 7.11. We note that when the CCDs were initially issued the Assessee had no obligation to pay premium, interest, or charges in relation to the CCDs as the same were convertible into equity on expiry of 60 months as per the conversion formula which was to be mutually agreed by the Assessee and the subscriber/holder of CCDs. 7.12. Therefore, for t....
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.... claimed by the Assessee cannot be allowed. 7.15. It was submitted on behalf of the Assessee that premium, which is recompense for the use of funds, was worked out commercially at the compounded rate of approx. 10% p.a. giving an overall premium of 52% on face value. If, however, the rate of return is calculated from the date of conversion to the date of redemption (i.e from 28/02/2014 to 24/03/2014), then the recompense works out to 624% p.a. which would be de-hors of commercial realities. In our view that the commercial effect of financial arrangement between the parties cannot form the basis of allowance of claim made by the Assessee. It is admitted position that at the time of modification of terms the CCDs were held by ABNL which was ultimate holding company of the Assessee. It is not the case of the Assessee that the modification of terms on which debentures were issued was occasioned by the circumstances beyond the control of the Assessee. On conversion of CCDs into OCDs, the subscriber/holder diluted their obligation to subscribe for equity shares of the Assessee and got an option to seek redemption of debentures in addition to the right to get shares on conversion. From....
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....ing Ground No. I & II raised by the Assessee in its appeal, we have noted that for the Assessment Year 2008-09 and 2009-10 the Tribunal had accepted the rate of 0.5% determined by the CIT(A) as the arm's length rate for corporate guarantee fee. The Revenue had, being aggrieved, preferred appeal before the Hon'ble Bombay High Court against the decisions of the Tribunal in the case of the Assessee for the Assessment Year 2008-09 and 2009-10. We note that the Hon'ble Bombay High Court has, while dismissing the appeals preferred by the Revenue in the case of the Assessee for the Assessment Year 2008-09 and 2009-10 [Income Tax Appeal No. 778 & 867 of 2017, dated 04/09/2019], has held as under: "4. The Revenue urges the following three identical questions of law in both appeals for our consideration:- 1. Whether on facts and in the circumstances of the case and in law, the Tribunal was justified in directing the AO/TPO to adopt 0.5% as the ALP of the guarantee commission charges provided by the Respondent Co.; without appreciating that the TPO had determined the ALP taking into consideration entity, country specific, currency risks and also considering the leveraged pos....
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....ubstantial question of law in appeal preferred by the Revenue. 9.3. The above judgment of the Hon'ble Bombay High Court for Assessment Year 2007-08 was followed by the Hon'ble Bombay High Court in appeal preferred by the Revenue for the Assessment Years 2008-09 and 2009-10 after taking note of the fact that there was no change in law or on facts. The position continues to be same for the assessment year before us. There is nothing on record to persuade us to take a view different from the view taken by the Tribunal in the preceding assessment years which has been confirmed by the Hon'ble Bombay High Court. Accordingly, Ground No. 1 raised by the Revenue is dismissed. Ground No. 2 10. Ground No. 2 raised by the Revenue is directed against the order of CIT(A) deleting the disallowance of INR 31,40,45,133/- made by the Assessing Officer under Section 36(1)(iii) of the Act in respect of the interest and other expenses incurred for acquisition of shares of a subsidiary company. 10.1. Being aggrieved, the Assessee carried the issue in appeal before CIT(A) who allowed the appeal of the Assessee on this issue and deleted the disallowance of INR 31,40,45,133/- made under Section....
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....da, which was claimed as allowable business expenses by the assessee company. The Ld. Assessing Officer, has held that assessee company is not earning any income under the head business or profession from the said investment and hence, the interest expenses cannot be treated as business expenditure. Therefore, the Assessing Officer has disallowed the interest expenses along with exchange fluctuation loss. Aggrieved from the order of the Assessing Officer, the assessee company has filed an appeal before the CIT (A)- 15, for A.Y. 2008-09, who has confirmed the action of the Assessing officer. Not being satisfied from the order of the Ld. CIT (A), the assessee company is in further appeal before us for A.Y. 2008-09 and for A.Y. 2009-10 the Revenue is in further appeal before us against the order of the CIT (A) who has deleted the addition made by AO. 29. We have carefully considered the rival submissions and gone through the facts and circumstances of the case. The Ld. Departmental Representative for the Revenue has primarily reiterated the stand of the Assessing Officer and CIT (A). On the other hand, the Ld. AR for the assessee company stated that assessee company wanted to....
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....R 52 (SC) 3. S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC) 31. Further the Ld. AR for the assessee company has also relied on the following judgments wherein it has been held that interest paid on borrowed funds for the purpose of acquiring controlling interest in the company is allowable expenditure:" 1. CIT. Shrishti Securities [2010] 321 ITR 498/2009] 183 Taxman 159 (Bom.) 2 CIT v Rajeev Lochan Kanoria [1994] 208 ITR 616/1995] 80 Taxman 572 (Cal) Therefore, based on the above cited facts and circumstances and position in case law, the interest expenditure incurred by the assessee is out of commercial exigency of the business and hence should be allowed as business expenditure under section 36 (1) (iii) of the Act, and we accordingly direct the Ld. CIT (A)/AO to delete the addition for A. Y 2008-09. For A. Y. 2009-10 we do not hesitate to confirm the order of the CIT(A). 32. In the result, the ground No. 5 of Assessee's appeal in ITA No. 620/M/13 for A. Y. 2008-09 is allowed and grounds Nos. 4(a) & 4(b) of Revenue's Appeal No.4790/M/2015 for A.Y 2009-10 is dismissed." 10.5. On perusal of above, we fi....
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....remium is not taxable and hence, any short receipt of such premium would only be a notional loss and not actual loss. SEBI guidelines requiring the assessee to account for short receipt of share premium as employees compensation expenses are relevant only for the purpose of accounting and are not conclusive for the purpose of allowing the same expenditure." 9.3 In view of the above, the notional expenses as per SEBI guidelines are not allowable under section 37(1) of the Act and hence the same is disallowed. Further, the ruling of Madras High Court in case of PVP Ventures Ltd. cannot be considered since the matter is presently subjudice. Hence the ESOP expenses of Rs. 4,50,38,317/- incurred by the assessee company are hereby disallowed. However, no addition on this account is being made to the total income of the assessee since no deduction was claimed in the computation of total income." 11.2. Being aggrieved, the Assessee carried the issue in appeal before CIT(A). Following the above decision of the Special Bench of the Tribunal relied upon by the Assessee during the assessment proceedings, the CIT(A) allowed the claim of deduction of INR 4,50,38,317/- in respect of E....
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....1) of the Act, it is sufficient if the expenditure has been incurred and therefore, issuance of shares at a discount were the assessee absorbs the difference between price at which it is issued and the market value of the shares would also be an expenditure incurred for the purpose of section 37 of the Act. Our attention has been invited to the findings recorded by the tribunal in paragraphs 9.2.7 to 9.2.8 of the tribunal and reliance has been placed on decisions in 'Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225 ITR 802 (SC), CIT v. Woodward Governor (India) (P.) Ltd., [2009] 179 Taxman 326/312 ITR 254 (SC). It is also urged that discount on issue of ESOPs is only a form of compensation paid to the employee and if not a short capital receipt. It is also urged that deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of account, which were prepared in Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. In support of aforesaid submission reliance has been placed on decision in CIT v. UP State Industrial Development Corpn. [1997] 92 T....
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....ng in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, "Profits and Gains of Business or Profession". 7. Thus, from perusal of section 37(1) of the Act, it is evident that the aforesaid provision permits deduction for the expenditure laid out or expended and does not contain a requirement that there has to be a pay out. If an expenditure has been incurred, provision of section 37(1) of the Act would be attracted. It is also pertinent to note that section 37 does not envisage incurrence of expenditure in cash. 8. Section 2(15A) of the Companies Act, 1956 defines 'employees stock option' to mean option given to the whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate the securities offered by a company at a free determined price. In an ESOP a company undertakes to issue shares to its employees at a future date at a price lower than the current market price....
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....OP over the vesting period is in accordance with the accounting in the books of account, which has been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. 12. So far as reliance place by the revenue in the case of Infosys Technologies Ltd.(supra) is concerned, it is noteworthy that in the aforesaid decision, the Supreme Court was dealing with a proceeding under section 201 of the Act for non-deduction of tax at source and it was held that there was no cash inflow to the employees. The aforesaid decision is of no assistance to decide the issue of allowability of expenses in the hands of the employer. It is also pertinent to mention here that in the decision rendered by the Supreme Court in the aforesaid case, the Assessment Years in question was 1997-98 to 1999-2000 and at that time, the Act did not contain any specific provisions to tax the benefits on ESOPs. Section 17(2)(iiia) was inserted by Finance Act, 1999 with effect from 1-4-2000. Therefore, it is evident that law recognizes a real benefit in the hands of the employees. For the aforementioned reasons, the decision re....
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....its AE as an international transaction' under section 92B of the Act and in making an addition on account of notional guarantee fees. 2 The Ld CIT(A) failed to appreciate and ought to have held that (i) The ultimate beneficiary of the loan was the Appellant itself while the AE, a company registered in Canada, AV Transworks Limited ('AVTL') was merely a route for availing the funds and investing in Canada, in pursuit of the Appellant's own objective of business expansion, (ii) An international transaction would arise only when the foreign subsidiary defaults in making the payment of loan to the bank. Therefore, section 92(1) of the Act would, primarily, not be applicable at all, till the guarantee is invoked. (iii) Without prejudice to above, the AO/TPO and the Hon'ble CIT(A) erred in not accepting the contention of the Appellant that in no case the amount of guarantee fee commission shall exceed 0.236% as per the Guarantee Benchmarking report of an Independent Chartered Accountant The Appellant prays that the AO/TPO be directed to delete the aforesaid addition amounting to Rs 2,73, 48,125/- or be directed to reduce th....
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.... that the transaction details were not verified by the AO since the Appellant had not filed the details. 3 The Appellant prays that the AO/TPO be directed to delete the aforesaid addition amounting to Rs 14,37,11,341/ GROUND 4: TDS Credit On the facts and circumstances of the case and in law, the AO, erred in granting the full credit of TDS. The AO may be directed to allow full credit as claimed by the Appellant in return of Income GROUND 5: Penalty Proceedings On the facts and circumstances of the case and in law, the AO erred in initiating the penalty proceedings. GROUND 6: General The Appellant craves leave to add, alter, amend, vary, omit substitute or withdraw the ground(s) of appeal at the time or before the hearing of this appeal. 12.3. The Revenue has raised the following grounds of appeal in ITA No. 5940/Mum/2017: "1 Whether in law and on the facts of the instant case, was the CIT(A) justified in directing the AO/TPO to adopt 0.5% as the ALP of the guarantee commission charges provided by the assessee company without appreciating that the TPO had determine this ALP taking into consideration entity, ....
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....ur findings and adjudication in respect of grounds of appeal raised by the Assessee/Revenue for the Assessment Year 2011-12 shall apply mutatis mutandis to the corresponding grounds raised in the cross-appeals for the Assessment Year 2012-13. Appeal by Assessee (ITA No. 5764/Mum/2017, AY 2012-13) 14. Keeping in view paragraph 13 above, we would first take grounds raised by the Assessee in the appeal. Ground No. 1 15. Ground No. 1 raised by the Assessee is directed against the order of the CIT(A) confirming the order passed by the Assessing Officer holding that the providing corporate guarantee to AE constitutes an international transaction under Section 92B of the Act. On a without prejudice basis, the Assessee has further contended that even if it is assumed that providing corporate guarantee to AE constitutes an international transaction, the CIT(A) erred in determining guarantee fee rate at 0.5% as the same could not have been more than 0.263% as determined by the independent chartered accountant in the report furnished during the assessment proceedings. 15.1. Ground No. 1 raised in appeal for the Assessment Year 2012-13 by the Assessee is identical to Ground No. ....
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....front the Assessee and seek explanation before denying credit of tax deducted at source. In terms of the aforesaid, Ground No. 4 raised by the Assessee is allowed for statistical purposes. Ground No. 5 19. Ground No. 5 raised by the Assessee is directed against the initiating the penalty proceedings. Penalty proceedings are separate and distinct from the assessment proceedings. In any case, the ground raised by the Assessee is premature, and is, therefore, dismissed. Ground No. 6 20. Ground No. 6, being general in nature, does not required adjudication and is, therefore, dismissed. Appeal by Revenue (ITA No. 5940/Mum/2017, AY 2012-13) 21. We would now take grounds raised by the Revenue in the appeal. Ground No. 1 22. Ground No. 1 raised by the Revenue is directed against the order of CIT(A) adopting he arm's length rate of guarantee fee at the rate of 05% as against 2.5% adopted by the TPO/Assessing Officer. 22.1. Ground No.1 raised by the Revenue in appeal for the Assessment Year 2012-13 is identical to Ground No. 1 raised in appeal by the Revenue for the Assessment Year 2011-12 which has been dismissed hereinabove. Accordingly, in view of our finding/ad....
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....n of Special Bench of the Tribunal in the case of DCIT Vs. Bank of Bahrain & Kuwait : 41 SOT 290 (Mumbai Tribunal) (SB) and the decision of Mumbai Bench of the Tribunal in the case of ACIT-16(3) Vs. M/s Venus Jewel [ITA Nos. 7328 & 7239/Mum/2013, dated 31/07/2015]. 25.3. Being aggrieved by the above relief granted by the CIT(A), the Revenue is now in appeal before us on this issue. 25.4. Both the sides reiterated the stands taken before the authorities below. The Ld. Departmental Representative placed reliance on paragraph 8.4 to 8.11 of the Assessment Order. Per contra, the Ld. Authorised Representative for the Assessee supported the order passed by the CIT(A) and, inter alia, submitted that the Assessing Officer has disallowed the loss claimed by the Assessee solely on the ground that it is 'notional' in nature by placing reliance upon CBDT Instruction No. 03/2010, dated 23/03/2010. The Assessing Officer has not disputed the fact that the foreign exchange difference is on account of hedging of exposure to forex losses on account of exports, and in the absence of the Assessing Officer even alleging that the loss is speculative in nature, the loss cannot be disallowed as a no....
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....lusion/settlement of contract has taken place and the asset continues to be owned by the company. A Marked to Market' loss may be given different accounting treatment by different assessees. Some may reflect such loss as a balance sheet item without making any corresponding adjustment in the Profit and Loss Account. Other may book the loss in the Profit and Loss Account which may result in the reduction of book profit. In cases where no sale or settlement has actually taken place and the loss on Marked to Market basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income. The same should therefore be added back for the purpose of computing the taxable income of an assessee." 25.6. On perusal of paragraph 8.6 of the Assessment Order reproduced hereinabove it becomes clear that the Assessing Officer was of the view that the issue under consideration was decided in favour of the Assessee by the judgment of the Hon'ble Bombay High Court in the case of Commissioner of Income-tax Vs. Badridas Gauridu Pvt. Ltd. : [2003] 261 ITR 256 (Bombay). However, in view of the Instru....
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....ract is settled or matured and if in a particular year, a contract does not mature, then the derivatives loss has to be treated as a contingent liability and has to be added back to the book profit. He further observed that such a loss cannot be allowed to be set off against the taxable income under the normal provisions of the Act also and accordingly disallowed the same under both the normal provisions of the Act as well as book profits returned under clause (c) of Explanation 1 of section 115JB of the Income-tax Act. 23. Aggrieved, the assessee preferred an appeal before the CIT(A) reiterating the submissions made before the AO. The CIT(A), taking - note of the decision of the Special Bench of the Tribunal in the case of DCIT V s. Bank of Bahrain and Kuwait in ITA No.4404 and 1883/Mum/2004 dated 19/8/2010 reported in [2010] 132 TTJ (Mum) (SB) 505,] [(2010) 41 SOT .290 (Mum) (SB)] held that the 'marked to market loss' debited by the assessee is not a contingent liability but is an 'accrued liability' and is, therefore, allowable as an expense. 24. Aggrieved by the relief given by the CIT (A), the Revenue is in appeal before us. 25. The l....
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....re date and in respect of contracts. Where the date of maturity fell beyond accounting period, the assessee valued the forward contracts on the last day of the accounting period on the basis of rate of foreign exchange prevailing on the date and accounted for the loss or profit as the case may be. The Special Bench has considered the question as to whether the loss was notional or contingent or whether it was accrued loss. After considering the commercial principles of policy of prudence, the Special Bench has held that the loss which is incurred on account of forward contract to sell currency at an agreed price at a future date falling beyond the last date of accounting period is a loss incurred by the assessee on account of the valuation of the contract on the last date of the accounting period and before the date of the maturity of the forward contract and hence is not a contingent liability but an accrued liability and is allowable as an expenditure. We find that the facts of the case before us are similar to the facts of the case before the Special Bench in the case of Bank of Bahrain and Kuwait (cited Supra) and the CIT(A) has only followed the decision of the Special Bench. ....
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....ognized as a revenue item over the life of the contact period, and any gains or losses on cancellation of such forward exchange contracts are also recognized on the same basis. It was then explained that as on the date of the closing of books, the assessee had some of these contacts, remaining to be settled in future by delivery of foreign exchange, and that the assessee had computed the loss, on the basis of foreign exchange rates as at the end of the year, on discharging these obligations. The amount so computed came to Rs 22,15,55,371. It was also explained that the assessee was maintaining its books on mercantile basis, and, therefore, even though the loss had not crystallized inasmuch as delivery was to take place in future and there may be variation in foreign exchange rates at that point of time, the loss was deductible under section 37(1). The assessee had also furnished the details of contracts and corresponding exports and imports obligations. It was also explained that the actual loss was Rs 119.65 crore, and not simply Rs 22.15 as was computed on the basis of foreign exchange rates as at the end of the year. Reliance was also placed on Hon'ble Supreme Court"s judgment i....
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....ndition No. 4 Whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains As per details on record, the Appellant has declared foreign exchange gain in the same year under appeal. The Appellant is consistent in making entries in the books in respect of losses as well as gains. Condition No. 5 Whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; The answer is affirmative as the Appellant is following Accounting Standard AS-II issued by the Institute of Chartered Accountants of India. Condition No. 6 Whether- the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. The system adopted by the Appellant is fair and reasonable and is not adopted with a view to reduce the incidence of taxation. In fact the Rule 115 of the Income Tax Rules provides that that all the assessee should; convert their foreign exchange assets into Indian Rupees on the last day of the previous year. In CIT vs. R. B. Construction 202 ITR 222 (AP)(....
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....is is what is the sound accounting policy and it has the sanction of law. As a matter of fact, it is this principle, as recognized by Hon'ble Supreme Court in the case of Chainrup Sampatram Vs CIT [(1953) 24 ITR 481 (SC)], which explains the valuation of closing stock on market price or cost price whichever is less. There is thus, in principle, no difficulty is seeking a deduction in respect of a reasonably anticipated loss, even though it may not have actually fructified, in computation of profits and gains of business. To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income. On the facts of the present case, however, not only anticipated losses have been claimed as deduction but anticipated profits have been offered to tax. The gains have been offered to tax on the basis of assessee's following mandatory accounting standards, and on the basis of same accounting standards losses on forward contracts have been recognized too. The claim of deduction of Rs 22.15 crores represents the difference between total foreign exchange loss of Rs 50.11 crores as at the year end date a....
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.... for the purposes of the business should be allowed in computing the income chargeable under the head "Profits and gains of business". In ss. 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 s. 32. Therefore, Parliament has used the expression "any expenditure" in s. 37 to cover both. Therefore, the expression "expenditure" as used in s. 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. xx xx 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act] 16...........it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant Accounting Standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well established, th....
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....examine the said Accounting Standard ("AS"). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of exchange differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under s. 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-11 de....
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....thing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee. 9. We have also noted that, as per the details filed by the assessee, the foreign exchange contracts have been entered into for genuinely restricting its bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transactions. These transactions are integral part of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. 10. In view of the above discussions, we uphold the action of the CIT(A) so far as this relief in respect of deleting the disallowance of Rs 22,15,55,371 on account of loss, at the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter. 11. Ground no.1 is thus dismissed." 18. Respectfully following the views so expressed by the co-ordinate bench, we uphold the relief granted by the learned CIT(A) and decline to interfere in the matt....
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....gainst the Assessee and in favour of the Revenue by the judgment of the Hon'ble Supreme Court in the case Checkmate Services Private Ltd. v. CIT-1:[2022] 448 ITR 518 (SC)[12-10-2022], wherein the Hon'ble Supreme Court has held that where an assessee failed to deposit Employees' Contribution towards Provident Fund and Employees' State Insurance within due date prescribed in respective statutes, deduction under Section 36(1)(va) of the Act was not allowable. The non-obstante clause contained in Section 43B of the Act would not apply in the case of employees' contribution held in trust by assessee-employer. Therefore, such assessee-employer would not be absolved from the liability to deposit employees' contribution on or before the due date specified in the respective statutes as a pre-condition for claiming deduction under Section 36(1)(va) of the Act. 26.2. In view of the above, order of CIT(A) is overturned and the disallowance of INR 23,30,594/- made by the Assessing Officer is restored. Ground No. 5 raised by the Revenue is allowed. Assessment Year 2013-14 27. We will now take up appeals preferred by the Revenue for the Assessment Year 2013-14 which arises from the c....
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....Assessment Year 2013-14 as well as the applicable facts are identical to the appeal preferred by the Revenue for the Assessment Year 2011-12. Therefore, our findings and adjudication in respect of grounds of appeal raised by the Revenue for the Assessment Year 2011-12 shall apply mutatis mutandis to the corresponding grounds raised in the Revenue in appeal for the Assessment Year 2013-14. 29. Keeping in view paragraph 25 above, the grounds raised by the Revenue in the appeal are taken up hereinafter in seriatim. Ground No. 1 29.1. Ground No. 1 raised by the Revenue is directed against the CIT(A) holding that 'Mark to Market' loss of INR 89,59,018/-. 29.2. Ground No. 1 raised in appeal for the Assessment Year 2013-14 by the Revenue is identical to Ground No. 4 raised in appeal by the Revenue for the Assessment Year 2012-13 which has been dismissed herein above. Accordingly, in view of our finding/adjudication in paragraph 25 to 25.9 above. Ground No. 1 raised by the Revenue is dismissed. Ground No. 2 30. Ground No. 2 raised by the Revenue pertains to 'Mark to Market' losses of INR 4,06,80,762/- pertaining to Assessment Year 2012-13 which was reversed during the Ass....
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....13-14 by the Revenue are identical to Ground No. 3(i), 3(ii) & 3(iii) raised in appeal by the Revenue for the Assessment Year 2011-12 which have been dismissed hereinabove. Accordingly, in view of our finding/adjudication in paragraph 11 to 11.6 above, Ground No. 3 & 4 raised by the Revenue are dismissed. Ground No. 5 & 6 33. Ground No. 5 & 6 raised by the Revenue in appeal for the Assessment Year 2013-14 is directed against the order of CIT(A) allowing. deduction for proportionate premium of INR 12,32,40,462/- on redemption of optionally convertible debentures. 33.1. Ground No. 5 raised by the Revenue is in appeal for the Assessment Year 2013-14 deals with identical issue raised by the Assessee in Ground No. V of the appeal for the Assessment Year 2011-12 and Ground No. 3 raised in appeal for the Assessment Year 2012-13. For Assessment Year 2011-12 and 2012-13, the CIT(A) had confirmed the order of the Assessing Officer whereby the Assessing Officer had disallowed deduction for proportionate premium on redemption of optionally convertible debentures, whereas for the Assessment Year 2013-14, the CIT(A) has allowed Assessee's claim for deduction for proportionate premium of....