TaxTMI 
TaxTMI 
2023 (12) TMI 402
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.... assessee and the Revenue year-wise are as under:- Assessee's Grounds of Appeal- AY 2013-14 "1. That the additions/disallowances made and sustained by the Commissioner of Income Tax (Appeals) are illegal and bad in law. 2. That in view of the facts and circumstances of the case, the CIT (Appeals) has erred on facts and in law in sustaining the disallowance of Rs 20,54,47,894/- (Rs. 18.82 Crore 2- being Loss on ECB Liability and Rs. 1.72 Crore being loss on Hedging contracts for ECB) claimed by the appellant as a deduction on account of exchange rate fluctuation. 3. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in not allowing deduction on account of foreign exchange fluctuations as allowable deduction, when it is an admitted fact that the loan received is used as circulating capital for the purpose of business. 4. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in treating the loss of Rs. 18.82 Crore (rounded off) as notional loss in respect of restatement of ECBs. 5. That the CIT(A), in view of the facts and circumstances of the ca....
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....acts and circumstances of the case, the Ld CIT(A) erred in deleting the addition made on account of disallowance u/s 14 A of Rs. 1,16,97,590/- d) The appellant craves to be allowed to add any fresh ground(s) of appeal and/or delete or amend any of the ground(s) of appeal Assessee's Grounds of Appeal- AY 2014-15 "1. That the additions/disallowances made and sustained by the Commissioner of Income Tax (Appeals) are illegal and bad in law. 2. That in view of the facts and circumstances of the case, the CIT (Appeals) has grossly erred on facts and in law in upholding the disallowance of Rs 18,64,61,000/- claimed by the appellant as a deduction on account of foreign exchange rate. This addition may kindly be deleted. 3. That the CIT(A) has grossly erred on facts and in law in upholding the addition/ disallowance of Rs 18,64,61,000 without appreciating the well settled position of law and the facts of the case. This addition may kindly be deleted. 4. That the CIT(A) has grossly erred on facts and in law in upholding the addition/ disallowance of Rs 7,92,643/- under Sec 14A and Rule 8D. The disallowance of Rs 7,92,643/- upheld is totally ill....
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....(s) of appeal." 3. Briefly stated the common facts are that the assessee company is a Non-Banking Financial Company ("NBFC") engaged in the business of providing finance to companies in energy sector in the form of equity investment and/or debt. For AY 2013-14 and 2014-15 it filed its return on 30.09.2013 and 30.09.2014 declaring income of Rs. 1,29,02,65,078/- and Rs. 207,96,59,220/- respectively. Both the returns were selected for scrutiny under CASS. Statutory notices were issued/served and complied with. Details filed were examined and considered by the Ld. Assessing Officer ("AO"). 4. The Ld. AO completed the assessment under section 143(3) of the Income Tax Act, 1961 (the "Act") on total income of Rs. 1,53,74,00,120/- on 19.01.2016 for AY 2013-14 including therein disallowance of depreciation of Rs. 57,05,766/- on investment made in windmills; disallowance of Rs. 20,54,47,894/- being notional loss booked under the head foreign exchange loss; disallowance of Rs. 56,97,665/- for non-deduction of TDS; disallowance of Rs. 1,16,97,590/- under section 14A; disallowance of Rs. 1,76,16,528/- under section 36(1)(viii) and disallowance of Rs. 9,69,602/- under section 37 aggregatin....
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.... discussed this issue in para 5 at pages 6-17 of his appellate order in AY 2013-14 and in para 5 at pages 9-23 of his order in AY 2014-15. The Ld. CIT(A) incorporated the submission of the assessee made before him in para 5.1 of his orders and recorded his findings in para 5.2 of his orders. In para 5.2 of the appellate order in AY 2013-14 his observation and findings are as follows:- "5.2 I have carefully considered the order passed by the AO and the submissions filed by the Ld. AR. The appellant is a financial institution. It had taken foreign currency loans by way of External Commercial Borrowings (ECB) and claims to have utilised the same for onward lending to its customers. This claim is not disputed by the AO. The value of the ECB was higher, due to exchange rate fluctuation, on the balance-sheet date, i.e 31.01.2013. The enhanced liability of Rs. 18.82 crores was treated as revenue expenditure and claimed as deduction u/s 37(1) of the Act by the appellant. The deduction was disallowed by the AO as the same, according to him, constituted contingent liability. Aggrieved against the disallowance, the appellant has preferred the appeal." 9.1 The Ld. CIT(A) followed h....
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....al for AY 2014-15 the Ld. CIT(A) simply followed his order for the AY 2013-14 without considering the submission of the assessee. In our opinion it is necessary to reproduce the assessee's submission which contains rebuttal of the Ld. CIT(A)'s contentions based on which the order of the Ld. AO was affirmed for AY 2013-14 on the point. "3.4 It is humbly submitted that the additions made to Appellant's Computation of Income is unwarranted and is void ab-inito, our rebuttal against above allegations are as under: Foreign Exchange Loss incurred on re-instatement is an allowable expenditure 3.5. At the outset, it is submitted before your Honour that foreign exchange fluctuation loss recorded on re-instatement of a revenue account is an allowable expenditure under section 37 of the Act. In this regard, before asserting any contentions, it is imperative to highlight the provisions of section 37 of the Act. Legal Provisions The relevant extract of section 37 of the Act is reproduced below: *37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or ....
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....see has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) 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; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation." 3.8. Similar inference has been drawn by corresponding bench of Apex Court in below mentioned judicial precedents - Oil & Natural Gas Corp Ltd (SC) (2010) and - Bharat Earth Movers (SC)(2000) Applicability of judgements of Apex Court to the instant case 3.9. It is imperative to analyze the applicability of judgements of Apex Court to the facts of the present case especially in light of the tests laid down by Apex Court in case of Woodword Governor (Supra). In this regard, it is submitted that the Appellant is in compliance with all the conditions mentioned by the Hon'ble Supreme Court in the above case....
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....d AO has misconceived the finding of the Apex Court in case of Woodward Governer (supra). As stated above, Learned AO alleged that the facts of the aforesaid mentioned case are not similar to that of the Appellant's as same deals with treatment of foreign exchange loss within the ambit of section 43A of the Act. 3.12. Your Honour would appreciate that Hon'ble Supreme Court not only dealt with treatment of foreign exchange loss with regard to provisions of section 43A but also with respect to the loss outside the purview of section 43A of the Act i.e. profit/ loss arising on account of appreciation/ depreciation in value of foreign currency held by tax payer on revenue account. Relevant findings of Hon ble Supreme Court is this regard have already been stated in para 3.5 above. Further relevant extract of the case law is reproduced as under - "After careful consideration it held that the assesees's claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year has been disallowed by the Assessing Officer, inter alia, on the ground that this liability was a contingent liability and the loss was a notional one. ....
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....on on year-to- year basis or at the time of final settlement of accounts. There is no specific section in the Income Tax Act dealing with Income/expenditure corresponding to the revenue gain/loss due to exchange rate fluctuation. While the gain is treated as income Incidental to business, a loss is treated as expenditure allowable u/s 37(1) the Act. The Hon Supreme Court, In the case of Indian Molasses Co. P. Ltd. vs. CIT (1959) 37 ITR 66 (SC), had occasion to consider the connotation of the term 'expenditure' occurring in section 10(2) of the Income Tax Act, 1922 [which was pari materia with the section 37(1) of Income tax Act, 1961....... .......... 5.9 Exchange rate is dynamic and fluctuates virtually on day-to-day basis. Hence, if there is gain today, there may be bigger gain by tomorrow or it may be wiped out or there may even be a loss. Hence, the loss on account of exchange rate fluctuation on a particular day, unless it happens to be the date of settlement of accounts, is transitory in nature. That being the case, it can be said that it does not pass the criteria of being called 'expenditure', as laid down by the Hon. Supreme Court....
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....or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred while dealing with the question as to whether there was a distinction 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 wi....
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....e of balance sheet is owable as expenditure under's 37(1) of the Act." 3.17. Accordingly, it is submitted that the facts in instant case are similar to those in case of Woodword Governor (Supra) and thus are distinguishable with the judgment of Indian Molasses Company (supra). Non-Applicability of Instructions No. 3/2010 3.18. Ld. AO placed reliance on the Instruction No. 3/2010 dated 23-03-2010 issued by CBDT while disallowing the above expense. In this regard, it is No. 3/2010 cannot override the decision humbly submitted that the Instructions of the Apex Court- Woodward (supra). Once the Apex Court has provided its findings, it shall become binding precedent and any contrary instructions will not override the same. Your Honour's attention is invited to favourable judgments (mentioned below) where, on similar set of facts, various courts have held the issue in favor of the Appellant * Hon'ble Delhi High Court in case of Munjal Showa Limited v Deputy Commissioner of Income tax (W.P. (c) 1707/2014 & cm no. 3569/2014) dated February 22, 2016 Hon'ble Delhi Court decided the issue of loss arising on derivative contract on accoun....
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....x. Both the loss/ gain assume the same character of either contingent or non-contingents If the forex loss on account of derivatives is considered as contingent and hence ineligible for deduction, the forex gain will also have to be considered as contingent and hence immune from taxation. 8.5. Be that as it may, it is observed from the impugned order as well as the details of the financial charges that the amount of Rs. 21.89 crores represents gain on account of forex derivatives. This fact has also been admitted by ld. CIT in para 6.3 of the impugned order. When there is a net gain of Rs. 21.89 crores, which the assessee included in its total income, we fail to appreciate the reason for charging the gain of forex derivatives to tax but ignoring the loss of account of such forex derivatives. As the ultimate net figure on account of forex derivatives in the given facts and circumstances of the case is that of gain which was offered for taxation, it is manifest that the assessment order in accepting said figure of gain as chargeable to tax, cannot be described as prejudicial to the interests of the revenue. We are, therefore, unable to countenance the view canvassed in the I....
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....of the assessee. These remain uncontroverted. In our view, reliance by Ld. CIT-DR on the decision of Mumbai Tribunal in Vaibhavi Trading P. Ltd. does not assist the Revenue. The issue has been decided in favour of the assessee by the decision (supra) of the Tribunal in its own case. Respectfully following the Tribunal's decision (supra) and agreeing with the submissions of the assessee, we delete the impugned disallowance of Rs. 20,54,47,894/- in AY 2013-14 and decide Ground No. 2 to 5 in assessee's favour. Similar disallowance of Rs. 18,64,61,000/- in AY 2014-15 is also deleted. Ground No. 2 and 3 in AY 2014-15 are thus decided in favour of the assessee. 15. Ground No. 6 and 7 of AY 2013-14 and Ground No. 5, 6 & 7 of AY 2014-15 relate to disallowance of Rs. 1,76,16,528/- and Rs. 2,89,99,437/- respectively claimed by the assessee under section 36 (i) (viii) of the Act. The Ld. AO discussed this issue in para 5 page 30-33 of his order for AY 2013- 14 and in para 22 page 13-14 of his order for AY 2014-15. The Ld. AO found that the assessee claimed deduction of Rs. 20 crores and Rs. 32.50 crores under section 36(i)(viii) in AY 2013-14 and 2014-15 respectively. When asked to justify....
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....dition will stand confirmed. This ground of appeal is disposed off accordingly." 17. Dissatisfied, the assessee is in appeal before the Tribunal. 18. The Ld. AR submitted that the Ld. AO made impugned disallowance holding that deduction under section 36(i)(viii) is available only to those entities which commenced operations after 01.04.1993 or 1.4.1999. The Ld. CIT(A) held that deduction related to undertaking who started its operations before the earliest prescribed date under section 80IA(4)(iv) should be denied and referred back the matter to the Ld. AO for re-examination from that angle. The Ld. AR contended that section 36(1)(viii) is a complete code in itself and taking cognizance to section 80IA for allowing deduction under section 36(1)(viii) is not warranted. It is pointed out that regular amendments have been made in section 80IA extending the outer limit from March 31, 2003 to March 31, 2017 (at present) for applicability of the provisions. He submitted that the deduction contingent on fulfilment of a condition on a future date (i.e. one year from the end of the relevant previous year) could never have been the intention of the Government. The Ld. AR further submit....
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....and 2018-19 has not been refuted by the Ld. CIT-DR. We therefore do not find any justification in making the impugned disallowance which we hereby delete in both the assessment years. 21. Ground No. 8, 9 and 10 in AY 2013-14 relate to disallowance of Rs. 9,69,602/- out of advertisement expenses claimed by the assessee at Rs. 32,38,894/-. The Ld. AO made the impugned disallowance for want of supporting documents. On appeal, the Ld. CIT(A) restored the matter to the Ld. AO with a direction to him to decide it afresh on production of ledger account containing the details of expenses with bills/vouchers by the assessee. The only grievance of the assessee has been lack of adequate opportunity given to it. Since opportunity to present its case again before the Ld. AO has been allowed by the Ld. CIT(A) we decline to interfere. 22. Ground No. 11 in AY 2013-14 relates to charging interest under section 234B and 234C of the Act. This is consequential. 23. Ground No. 4 in AY 2014-15 relates to disallowance of Rs. 7,92,643/- under section 14A and Rule 8D. The Ld. AO discussed this issue in para 17 page 10-12 of his order. On query the assessee submitted that it earned dividend income ....
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....f depreciation of Rs. 57,05,766/- and Rs. 11,41,153/- respectively . In making the impugned disallowances the Ld. AO followed the order of AY 2011-12 and 2012-13 wherein it is, interalia alleged that the assessee has made investment in windmill to earn income from investments and such investment activity cannot be equated with activities in the nature of trade or business or adventure. 29.1 On appeal, the Ld. CIT(A) deleted the impugned disallowances holding that the assessee can claim depreciation as it owns the assets and the same is put to use for business. The Revenue is dissatisfied and is in appeal in both the years. 29.2 The parties agree that this issue is covered against the Revenue by the decision of Hon'ble Delhi Court in ITA 349/2022 dated 22.09.2022 pertaining to AY 2010-11. Para 6 and 7 thereof refer (copy at page 165-167 of the Paper Book). The Revenue's appeal in AY 2011-12 against the CIT(A)'s order stands dismissed by the order of the Tribunal in ITA No. 1268/Del/2015 dated 14.3.2023. The appeal of the Revenue pertaining to AY 2012-13 against the deletion of similar disallowance by the Ld. CIT(A) has been dismissed by the Tribunal in its order in ITA No. 498....
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....previsions, the AD could have declared the appellant in default u/s 201 but no disallowance could be made u/s 40(a)(i) as the appellant has not defaulted on tax deduction at source." 30.2 The Revenue is dissatisfied and is in appeal before the Tribunal. 30.3 The Ld. CIT-DR relied on the order of the Ld. AO. 30.4 The Ld. AR submitted that section 40(a)(ia) is not applicable on short deduction of TDS. He further pointed out that the issue has been decided in favour of the assessee by the Tribunal in assessee's own case for AY 2012-13. The Ld. AR submitted that the Hon''ble Delhi High Court in PCIT vs. Future First Info Services (P) Ltd. (2022) 447 ITR 299(Del) has held that in cases of short deduction of TDS disallowance under section 40(a)(ia) could not be made. The correct course of action would be to invoke section 201 of the Act. 30.5 On consideration of the rival submissions, we are of the view that there is no infirmity in the order of the Ld. CIT(A) which is duly supported by the decisions (supra) of Hon'ble Calcutta and Delhi High Courts. We therefore uphold the order of the Ld. CIT(A) and reject the appeal of the Revenue in both the AYs involved. 31. Ground No....
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....trade quoted equity shares of Indian Energy Exchange Ltd. No direct or indirect expenditure was incurred by the appellant with respect to the above. However, a suo moto disallowance of Rs. 36,50,862/- u/s 14A of the Act by taking a percentage of salary of employees and administrative expenses to avoid litigation. The Ld. AR further submitted that no direct or indirect expenditure was actually incurred during the year for earning the dividend Income and the AO had included strategic Investment of the appellant while computing the disallowance u/s 14A it was further argued that disallowance could not exceed the amount of exempt income earned during the year. The Ld. AR relied on the ratio of the Hon'ble Delhi High Court in case of Joint Investment (P) Ltd. vs. CIT (2015) 372 ITR 694 (Del) 7.3. As is evident the AO has computed the disallowance which is far in excess of the exempt income disclosed by the appellant. The Hon'ble Delhi High Court in the case of Joint Investment (P) Ltd. vs. CIT 2015/(3) TMI 155 has held that disallowance u/s 14A cannot exceed the exempt income. The Hon'ble Delhi Bench of the ITAT in the case of M/s Ganga Kaveri Credit & Holding (P) L....