TaxTMI 
TaxTMI 
2018 (5) TMI 2207
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....1 as foreign exchange fluctuation loss of and donation of Rs. 60,984. Aggrieved, the assessee preferred an appeal before the CIT (A) stating that the disallowance u/s 40A(3) should be only of Rs. 39,96,583 and not Rs. 65,23,667. The CIT (A) considered the assessee's contentions and verified the assessment records and observed that the cash payments which are disallowable u/s 40A(3) of the Act are to the extent of Rs. 39,96,583 only. She accordingly granted partial relief with regard to this ground of appeal. 3. As regards the disallowance of loss on sale of fixed assets and loss on account of foreign exchange fluctuation is concerned, the CIT (A) confirmed the order of the AO. Thus, the appeal of the assessee was partly allowed against which the assessee is in second appeal before us by raising the following grounds of appeal: "1. The order of the learned CIT (A)-II, Hyderabad is erroneous both on facts and in law. 2. The learned CIT (A) erred in directing the AO to disallow the amount of Rs. 39,96,583/- u/s 40A(3) of the I.T. Act. 3. The learned CIT (A) erred in upholding the view of the AO regarding the disallowance of loss on sale of fixed asset amo....
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....efore us. Therefore, these contentions of the assessee need verification. We accordingly remit this issue to the file of the AO for verification and the AO is directed to take a decision in accordance with the law after giving the assessee a fair opportunity of hearing. 8. As regards ground No.4, we find that the facts in the relevant A.Y are similar to the facts in the A.Y 2009-10 and for the detailed reasons given by us in the assessee's appeal for the A.Y 2009-10, this ground of appeal is to be allowed. For the purpose of convenience and ready reference, the relevant paragraphs of the ITAT order in ITA No.1689/Hyd/2012, dated 22.05.2018 are reproduced hereunder: "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) 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 ....
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....A No. 1325/Hyd/2015. (e) Crane Software International Ltd., Vs. DCIT in ITA No. 741/Ban/2010. 6.2 The Ld. DR, on the other hand, supported the orders of the authorities 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 f ind 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 f ind 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 particu....
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....ctibility 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), submitte....
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....liability 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....
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....rliament 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 30to 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 commerci....
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....nce 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 fall....
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.... for 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 exp....
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....mstances 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 f inancial 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 prof it 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 a....
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.... 3. The Ld. 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 mil l ion 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 relevan....
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....of India Cements Ltd., reported in (1966) 60 ITR 52 within the scope of the expenditure to be amortized against prof its 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 f ind 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 ....
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....'ble High Court held the 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 wel l 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., (ci ted supra) has also considered the judgment of the Rajasthan High Court in the case of Secure Metres Ltd., (cited supra), to....