TaxTMI 
TaxTMI 
TaxTMI 
2026 (2) TMI 423
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....s paid to M/s.Sterling Matchem Trade (P) Ltd., (for short 'SMTPL') towards the loss suffered by the said SMTPL due to fluctuations in exchange rates for a sum of Rs. 45,67,071/-. Secondly, towards the compensation for premature termination of the agreement dated 15.06.2000 entered into between the assessee and the said SMTPL for a sum of Rs. 35,00,000/-. Aggrieved by the said order, the petitioner filed an appeal before the Commissioner of Income Tax (Appeals)-III, Chennai, vide ITA No.815/06-07A-III, and the said appeal was allowed by the Commissioner of Income Tax (Appeals)-III, Chennai by an order dated 19.08.2008. However, the Department filed an appeal against the said order vide ITA No.2221/Mds/2008 before the Income Tax Appellate Tribunal, 'C' Bench, Chennai, and the said Appeal was partly allowed by the Tribunal reversing the order of CIT(A) and upholding the order of Assessing Officer to the extent of the disallowance of a sum of Rs. 45,67,071/-, vide order dated 20.07.2012. Aggrieved by the said order, the assessee/ appellant is before us. 3. According to the learned counsel appearing for the appellant, the assessee entered into an agreement dated 15.06....
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....see to the SMTPL as a consequence of premature termination of the agreement and therefore, the same was rightly disallowed by the Assessing Officer and the same was confirmed by the Appellate Tribunal rightly. 5. The appeal was admitted on 02.01.2013 on the following substantial questions of law:-. "1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in interpreting the provisions of Section 37 of the 'Act' which permits all business loss as an allowable expenditure ? 2. In the absence of any specific prohibition relating to payment of compensation for exchange loss on termination of contract in advance, whether the Tribunal is right in law in upholding the disallowance of compensation for exchange loss? 3. Whether on the facts and in the circumstances of the case the Tribunal has erred in disallowing the expenditure which is fully supported by the agreement entered into by the parties while terminating the agreement in advance? 4. Whether on the facts and in the circumstances of the case the Tribunal should have appreciated the facts that liability arose on quasi contract and inference by law tha....
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....ity which reads as under:- "Firstly the AR submits that the assessing officer was not correct in assuming that the appellant is not required to pay any compensation for exchange loss since the agreement provides for credit for six months and therefore any loss on account of exchange fluctuation was agreed to be borne by SMTPL, because in the present case the losses on account of exchange fluctuation has arisen in cases where the payment were delayed beyond the period of six months envisaged in the agreement, which delay in some cases extend to more than one year. He further point out that in working out the loss on exchange fluctuation while claiming compensation, SMTPL set off the gains made on exchange fluctuation and claimed compensation only on the net loss amounting to Rs. 1,02,73,693/-. In this connection the AR furnished a statement giving details of invoices raised from 1997 to 2004, the bill amount and rate of exchange on date of bill, date of payment and rate of exchange on the date of payment and resultant loss or gain consequent to exchange fluctuation. For example on invoice No.170648 dated 28-10-1997 the exchange rate on the date of the bill was Rs. 5, wherea....
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....nsisted on being compensated by way of interest for the period of delay, the appellant would have been required to pay a substantially higher amount as interest as compared to the compensation of Rs. 45,67,071/-paid by it and which in fact resulted, in substantial savings, in the form of interest saved by the appellant" 10. Having taken note of the above contentions, the First Appellate Authority passed a reasoned order allowing the said expenditure. The same reads as under:- "I have carefully considered the submission of the AR and gone through the order of the assessing officer setting out the reasons for making the two disallowances as also various materials and information available in the records. Having perused the same and having given my careful consideration to the facts of the case, I find that in so far as the termination fee of Rs. 35,00,000 is concerned, the assessing officer has not correctly understood the legal implication of the letter of the appellant dated 18-3-2004 addressed to SMTPL agreed to pay them a consolidated compensation of Rs. 80,67,071 both for premature termination of the agreement as also for the loss on account of exchange fluctuation d....
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....The relevant portion from the said order is extracted hereunder for the sake of convenience:- 6. We have heard the submissions made by the respective parties and have gone through the documents on record as well as the orders of the lower authorities. A perusal of the relevant terms & conditions of the agreement between the assessee and M/s. SMTPL would show that there is no clause for compensation on account of loss suffered due to fluctuation in exchange rates. The clauses relating to the compensation are 'g' & 'j'. As per clause 'g', the compensation would be paid for the current period of six months from the date of despatch of material for remittance of payment and as per clause 'j', compensation was to be paid by either of the parties on account of premature termination of the agreement. Since both the parties were bound by the terms and conditions of the agreement, no covenant, which is not part of the agreement, could not be interpreted for the sake of convenience of either of the parties. The agreement is silent with regard to compensation suffered on account of loss of exchange rates. Since there is no written covenant with regard ....
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....ned Tribunal, the loss due to fluctuation in the exchange rates is not covered by the Clauses (g) or (j), but in our considered view, the same would fall within the scope of Clause (f) above, and the reasons for the same are as under. 14. It is the specific case of the assessee that in terms of the agreement, the assessee is entitled for a credit period of six months from the date of dispatch of the material, for remittance of the payment (as is evident from Clause (g)). But the assessee could not make the payment within the stipulated six-month period and on certain instances there is a delay beyond a period of one year and because of the same, SMTPL suffered loss due to fluctuation in the exchange rates and because of the same, it became necessary for the assessee to compensate the SMTPL and accordingly a sum of Rs. 45,67,071/- was agreed to be paid. The said Clause (f) provides for raising of an invoice by the SMTPL which shall include the rupee cost of the material as supplied by the Swedish Company, the Customs Duty, and the cost and the charges incurred by SMTPL including a fee mutually agreed upon as compensation for services rendered by the SMTPL. 15. As seen from the....
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....ng the subsequent financial year. The said amount of Rs. 45,67,071/- was crystallized on 18.03.2004 itself and therefore, the same cannot either be called as contingent amount or otherwise. 17. In the order of assessment, there is a finding that the expenditure has been incurred in the financial year ending 31.03.2006. This finding is arrived at on the basis of the fact that FMTPL had not accounted for the said expenditure either in years ending 31.03.2004 or 31.03.2005. It was only in year ending 31.03.2006, relevant to AY 2006-07, that a ledger of SMTPL was produced, accounting for compensation received from the assessee. This payment was pursuant to a Board Resolution, that was communicated to SMTPL by the assessee on 14.09.2005. 18. Based on the above, the Assessing Authority concludes that the expenditure would be relevant only to AY 2006-07 and disallows the same for AY 2004-05, being the subject assessment year. It is relevant to note that he has not questioned the genuinity of the expenditure incurred. 19. The Commissioner of Income Tax (Appeals) has accepted the assessee's challenge to the disallowance on the ground of commercial expediency, being of the view that....