TaxTMI 
TaxTMI 
2026 (5) TMI 597
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....nd appellant's submissions. 3. The Ld. CIT(A) ought to have well appreciated the fact that the AO erred in reopening the assessment u/s 147 of the Act without new tangible material in his possession. 4. The Ld. CIT(A) failed to fairly appreciate the fact that the AO already had this information available during the course of original proceedings and thus the reopening of the assessment just based on same information, which is bad in law. 5. The Ld. CIT(A) ought to have appreciated the fact that the AO erred in issuing notice u/s 148 of the Act without there being any satisfactory reason to believe that the income chargeable to tax has escaped assessment. 6. The Ld. CIT(A) ought to have appreciated the fact that the period of four years from the end of the impugned assessment year as provided in the first proviso to section 149 of the Act, has expired on 31/03/2016 and that therefore, the notice issued u/s 148 of the Act is barred by limitation. 7. The Ld. CIT(A) ought to have considered the fact that there was no failure on the part of the assessee to make a return u/s 139 or in response to notice issued u/s 148 or to disclose fully ....
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....rofit and loss A/c over a period of three years shall be considered as revenue in nature 15. The Ld. CIT(A) erred in not considering the fact that the treatment of exchange loss is in accordance with AS-11 issued by the Institute of Chartered Accountants of India. 16. The Ld. CIT(A) ought to have appreciated the fact that, the Hon'ble ITAT in the assessee's own case in ITA 1689/Hyd/2012 for the AY 2009-10, deleted the addition made on account of amortization of exchange variation. 17. The Ld. CIT(A) failed to consider the fact that the AO had grossly erred in not accepting the Book profits admitted at Rs. 21,35,86,748/- and determined the book profit u/s 115JB of the Act at Rs. 28,66,53,413/- by making an addition of Rs. 7,30,66,667/- towards disallowance of foreign exchange amortization loss. 18. The Ld. CIT(A) ought to have appreciated the fact that the employee's contribution to PF and ESI were deposited by the appellant in their respective funds before filing its return of income for the AY 2011-12 and therefore, it cannot be taken as income of the assessee company as the amount was no longer in the hands of assessee allowable as ....
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....ad 'other general expenses' is on account of fluctuation in foreign currency and because of this, the assessee company has incurred foreign exchange loss of Rs. 21.92 crores on Foreign Currency Convertible Bonds (FCCBs) issued during the financial year 2006-07. Further, the said loss has been claimed over a period of three years starting from A.Y. 2009-10 up to A.Y. 2011-12 in view of Notification No. GSR 225 E dated 31.03.2009 issued by the Ministry of Corporate Affairs. The assessee also explained belated payment of PF and ESI and claimed that, the said payment has been made on or before the due date for furnishing of return of income under Section 139(1) of the Income-tax Act, 1961. The A.O., after considering the relevant submissions of the assessee and also taking note of certain judicial precedents, including the decision of the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Vs. CIT (1979) 116 ITR 1 (SC) disallowed forex loss on convertible bonds for Rs. 7,30,66,667/- on the ground that, the said loss is capital in nature, because the assessee has taken FCCB loans and used for capital expenditure and therefore, amortization of expenditure towards forex loss is c....
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....addition towards disallowance of amortization of forex loss on account of FCCB amounting to Rs. 7,30,66,667/-. 8. The learned counsel for the assessee, Shri P. Murali Mohan Rao, C.A. submitted that, this issue is squarely covered by the decision of the ITAT, Hyderabad Bench, in the assessee's own case for A.Ys. 2009-10 and 2010-11 in ITA No. 1714/Hyd/2014, wherein under identical set of facts and on identical disallowance of amortization of forex loss, the Tribunal deleted the additions. Therefore, he submitted that, the additions made by the A.O. should be deleted. 9. The learned CIT-DR for the Revenue, Dr. Narendra Kumar Naik, on the other hand, supporting the order of the Ld. CIT(A), submitted that, the assessee has borrowed foreign currency loans in the form of Foreign Currency Convertible Bonds on which it has incurred substantial foreign currency fluctuation loss and the same has been claimed over a period from 3 years starting from A.Y. 2009-10 to 2011-12. Since the assessee has incurred forex loss on FCCB loans and the same has been used for acquiring assets in India, the same should be capitalized to the assets. The A.O., after considering the relevant facts, has rig....
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.... that, this issue is also covered by the decision of the Hon'ble ITAT, Hyderabad Bench, in the assessee's own case for A.Y. 2009-10 in ITA No. 1735/Hyd/2012, wherein under identical set of facts and also on identical amortization of forex loss claimed by the assessee, the Tribunal has held as under : "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) 13 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad. 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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.... below and placed reliance upon the judgment of the Apex Court in the case of Sutlej Cotton Mills Ltd., reported 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 16 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad. an amount which is really a 'loss', even though said amount has not gone out fr....
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....bility under Section 37 is that the increase in liability due to foreign exchange fluctuations must fulfill the twin requirements of "expenditure" and the factum of such expenditure having been "laid out or expended". According to the learned counsel, the expression "expenditure" is "what is 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 t....
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....ility would stand reduced by Rs. 300 and there would be a gain of Rs. 300 which would become taxable. From this hypothetical example, learned counsel urged that the liability stood incurred on the date on which the assessee borrows 100 $ which in the above example is 1.4.1999, however, on account 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 tha....
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....ament has used the expression "any expenditure" in Section 37 to cover both. Therefore, the expression "expenditure" as used in Section 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. 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 30 to 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....
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....e with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account 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 fallin....
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....or which a legal liability has been incurred before it is actually disbursed. (see judgment of this Court in the case of United Commercial Bank v. CIT reported in 240 ITR 355). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed 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 expen....
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....es of the case, the issue is decided in favour of the assessee". 6.5 Thus, it is clear that till the bonds are converted into share capital, they remain as a loan fund and cannot be held as equity fund and thus capital in nature. From the financial statements for the F.Y 2008-09, and schedule 4 thereof, it 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 o....
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.... Counsel for the assessee, Mr. Y. Ratnakar, while reiterating the submissions made by the assessee before the authorities below, and submitted that the assessee company has issued unsecured Foreign Currency Convertible Bonds ("FCCB") on 05.12.2006 for $ 20,000 million US dollars and the bond holders were given an 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 ye....
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....., reported in (1966) 60 ITR 52 within the scope of the expenditure to be amortized against profits over ten year period under section 35D of the Act. Thus, according to him, the expenditure on the issue of FCCB is allowable as revenue expenditure. 4. The Ld. D.R., on the other hand, supported the orders of 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 inc....
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....he above facts of conversion of 20% of the debentures into shares by the end of 3 years to make the debentures more lucrative/attractive does not change the character of repayment of the loan within 11 years as it retains the character of a loan. 7. In the case of CIT vs. South India Corporation (Agencies) 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 deben....
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....quent assessment years, the revenue cannot take a contrary stand only for the A.Y 2009-10." 12. Further, this issue is also covered by the decision of the Hyderabad Bench in the assessee's own case for A.Y. 2010-11 in ITA No. 1714/Hyd/2014, wherein the Tribunal, while following its earlier decision for A.Y. 2009-10, deleted the additions made by the A.O. 13. In this view of the matter and considering the facts and circumstances of the case, and also by following the decision of the ITAT, Hyderabad Bench, in the assessee's own case, we direct the A.O. to delete the addition made towards disallowance of amortization of foreign exchange loss of Rs. 7,30,66,667/-. 14. The next issue that came up for our consideration from Ground No. 17 of the assessee's appeal is addition of Rs. 7,30,66,667/- towards disallowance of foreign exchange amortization loss to book profit under Section 115JB of the Income-tax Act, 1961. 15. We find that, the addition made by the A.O. towards disallowance of amortization of foreign exchange loss of Rs. 7,30,66,667/- to the normal income computed by the assessee has been deleted by us in the preceding paragraph nos.10 to 13. Since the addition made ....
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....com 503, held that, delayed payment of employees' contribution towards PF and ESI deposited after the due date specified under the respective Acts, cannot be allowable, even if such contribution is made before the due date under Section 139(1) of the Income-tax Act, 1961. Therefore, he submitted that, the addition made by the A.O. should be upheld. 19. We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, the assessee has deposited employees' contribution towards PF and ESI beyond the due date specified under the respective Acts. Further, it was the only contention of the assessee before the lower authorities that, the PF and ESI have been deposited on or before the due date provided under Section 139(1) of the Income-tax Act, 1961, for filing return of income. We find that, the above dispute has been settled by the Hon'ble Supreme Court in the case of Checkmate Services Pvt. Ltd. Vs. CIT (supra), wherein the Hon'ble Supreme Court, after considering the relevant provisions of the Act, and also various decisions on this issue, held that, belat....
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....smissed the appeal preferred by the assessee. Hence, this appeal. 8. Learned counsel for the assessee submitted that the issue involved in the appeal has not attained finality and is debatable. Therefore, the appeal should be admitted. 9. We have considered the submission made by learned counsel for the assessee and have perused the record. 10. The Supreme Court, in Checkmate Services (P) Ltd. (supra), in paragraph 52, has held as under: "When Parliament introduced Section 43B of the Income Tax Act, 1961, what was on the Statute Book, was only employer's contribution (Section 34(1)(iv)). At that point in time, there was no question of employee's contribution being considered as part of the employer's earning. On the application of the original principles of law, it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the desperate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated t....
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.... or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified." 12. Thus, from a perusal of the aforesaid relevant extracts of the decision of the Supreme Court in Checkmate Services (P) Ltd. (supra), it is evident that the assessee has to make payment of the contribution to PF and ESI before the statutory dates in order to claim the amount as deduction. Admittedly, the assessee has not paid the aforesaid amount on or before the statutory dates. The findings of fact has been recorded by the assessing officer, CIT(A) as well as by the Tribunal. The aforesaid finding of fact cannot, by any stretch of imagination, be said to be perverse. 13. It is not the case of the assessee that the aforesaid finding of fact is perverse. It is well settled in law that this Court, in exercise of powers under Section 260A of the Act, cannot interfere with the finding of fact until and unless the same is demonstrated to be perverse. (see Syeda Rahimunnisa v. Malan Bi by LRs (2016) 10 SCC 315 and Pr. CIT v. Softbrands India (P.) Ltd. [2018] 94 taxmann.com 426/406 ITR 513 (Karnataka)). 14. In vie....
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....t of Telangana in the case of Synergies Castings Ltd. Vs. ACIT (supra), we are of the considered view that, delayed payment of employees' contribution to PF and ESI cannot be allowed as deduction under Section 36(1)(va) r.w.s. 43B r.w.s. 2(24)(x) of the Income-tax Act, 1961. The Ld. CIT(A), after considering the relevant facts, has rightly sustained the addition made by the A.O. Thus, we are inclined to uphold the findings of the Ld. CIT(A) and reject the grounds taken by the assessee. 22. The next issue that came up for our consideration from Ground No. 21 of the assessee's appeal is addition of Rs. 51,28,500/- towards foreign exchange fluctuation loss. 23. The A.O. disallowed a sum of Rs. 51,28,500/- towards foreign exchange fluctuation loss on the ground that, the above disallowance has been made in the order passed under Section 143(3) of the Income-tax Act, 1961 dated 18.03.2014 and the assessee has not challenged the addition made by the A.O. 24. It was the argument of the learned counsel for the assessee that, the proceedings under Section 143(3) of the Act, and the proceedings under Section 143(3) r.w.s. 147 of the Act are different and the theory of merger doe....