TaxTMI 
TaxTMI 
2026 (7) TMI 1705
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.... the learned CIT(A) was justified in deleting the addition made on account of foreign exchange fluctuation loss attributable to capital assets?" 3. Briefly stated, the facts are that the assessee (erstwhile M/s. Usha Martin Telekom Ltd), now known as Vodafone Idea Limited as successor to erstwhile M/s. Vodafone East Limited, is engaged in the business of providing telecommunication services. The assessee filed its return of income declaring loss, which was subsequently revised. The assessment was completed under section 143(3) of the Act. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of Rs.6,80,00,000/- being payment made to M/s. Usha Martin Ventures Ltd. (UMVL) pursuant to an Agreement dated 25.07.2000 executed for closure of the Paging Division. According to the Assessing Officer, the Paging Division was a separate and identifiable business undertaking and under the said agreement all its assets, liabilities, receipts and obligations stood transferred to UMVL. The Assessing Officer, therefore, held that the payment was not incurred for carrying on the business of the assessee but represented expenditure incur....
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....submitted that the expenditure incurred for closure of one division of a composite business was allowable under section 37(1). Reliance was placed upon the decisions of the Hon'ble Supreme Court in Veecumsees v. CIT (220 ITR 185), K. Ravindranathan Nair v. CIT (247 ITR 178), B.R. Ltd. v. V.P. Gupta (113 ITR 647), CIT v. Prithvi Insurance Co. Ltd. (63 ITR 632) and Produce Exchange Corporation Ltd. v. CIT (77 ITR 739). In respect of the foreign exchange fluctuation loss, the learned Authorised Representative submitted that the Assessing Officer had proceeded entirely on estimation. It was explained that the books of account clearly reflected the actual foreign exchange fluctuation relating to individual imports. A sum of Rs.3,24,40,221/- represented exchange fluctuation on import of spares and consumables, which was claimed as revenue expenditure, whereas exchange fluctuation of Rs.61,23,000/- relating to import of capital goods had already been capitalised by the assessee. It was, therefore, submitted that when actual figures were available from the books of account, there was no justification for estimating the amount attributable to capital assets. The learned Authorised Repre....
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....the approach adopted by the learned CIT(A) is legally unsustainable. Even if it is assumed that both divisions constituted one composite business, the expenditure must still satisfy the independent requirement of section 37(1). The existence of common management cannot convert a closure expenditure into an expenditure incurred for carrying on the business. 6.5 The principal reliance of the learned Authorised Representative is on the judgment of the Hon'ble Supreme Court in Veecumsees v. CIT (220 ITR 185). In our opinion, the said decision has no application to the facts of the present case. The controversy before the Hon'ble Supreme Court was whether interest paid on borrowings utilised for construction of a cinema theatre continued to be allowable under section 36(1)(iii) after the cinema business had been transferred. Thus, the issue related to the allowability of interest on borrowed capital under section 36(1)(iii). The Supreme Court held that since the borrowings had originally been made for business purposes, the subsequent transfer of one activity did not alter the character of the interest liability. The deduction was thus allowed because the liability represente....
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....activities for determining whether different activities constituted the "same business". Those judgments did not deal with deduction of expenditure under section 37(1), much less expenditure incurred under a contractual arrangement for closure of a business undertaking. In our view, the statutory context as well as the controversy before the Hon'ble Supreme Court in those cases is entirely different. 6.9 In view of the foregoing discussion, we hold that the payment of Rs.6,80,00,000/- made to Usha Martin Ventures Ltd. was incurred for closure of the Paging Business and not for carrying on the business of the assessee. Consequently, the conditions prescribed under section 37(1) are not fulfilled. The learned CIT(A) was, therefore, not justified in deleting the disallowance made by the Assessing Officer. We accordingly set aside the order of the learned CIT(A) on this issue and restore that of the Assessing Officer. Accordingly, the grounds raised by the Revenue are allowed. 7. Next grounds of appeals relate to deletion of the addition made on account of foreign exchange fluctuation loss. 7.1 The Assessing Officer observed that a part of the foreign exchange fluctuation ....