TaxTMI 
TaxTMI 
2008 (1) TMI 426
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....ity to file his replies in writing. Thereafter, the Authorised Representative had filed a written rejoinder. The written submissions filed by both the parties were also carefully considered by us while disposing this common order. ITA No. 724/Kol/2007; Asst. yr. 2002-03 Ground Nos. 1 and 2 2. In the computation of income-tax, the assessee company has excluded Rs. 1,26,46,298 tinder the head "Notional gain on foreign currency swap". During the course of the assessment proceedings, the AO called for the explanation for such exclusion. The assessee submitted that it had taken a loan of Rs. 85 crores, which, along with interest payable was swapped with the Japanese yen, based on the prevailing rupee-yen spot rates as on the days of such swap transaction. The liability on account of the said loan was revalued on 31st March, 2002 and based on such revaluation, it was found that the liability on account of rupee loan was decreased by Rs. 1.26 crores. It was clarified that the gain was merely notional since the actual liability of the assessee shall depend on the cross-currency rate as on the maturity of the transaction and should not be recognized as income for tax purposes. Howe....
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....(Guj). The Authorised Representative further submitted that similar revaluation of the foreign currency loan was made in the subsequent financial years, i.e., financial years ending on 31st March, 2003 and 31st March, 2004. A chart, indicating the gain/loss on such revaluation and its treatment in the computation was furnished before us. On perusal, we note that while the assessee disclosed a gain of Rs. 1,32,17,395 in the asst. yr. 2003-04, it incurred a loss of Rs. 4,33,16,405 in asst. yr. 2004-05, which was offered to tax in the computation. The AO in his assessment order for asst. yr. 2004-05 had also considered the same as taxable. A copy of the said order was filed before us. Consequently, we note that the Revenue while considering the book income from currency swap as taxable, is not allowing the book loss incurred in the subsequent year as tax deductible and thus is blowing hot and cold. 5. The assessee had confirmed that it has offered to tax the realized gain of currency swap and only the notional gain has been considered as non-taxable. In its written submissions, the assessee has filed that out of the term loan principal amount of Rs. 850 million, the principal am....
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....same liability. However, as per the arrangement with the Deutsche Bank, its INR liability was converted into JPY liability based on the currency conversion rate of the date on which the swap was effected. The swap transaction actually extended for a number of years and the final profit or loss arising because of the swap can only be established as and when the payments are made towards the rupee loan liability of ICICI Bank, which will reflect the realized gain or loss and accordingly be treated for tax purposes. The assessee submitted that the rates considered as on 31st March of the relevant previous years are not the actual rates at which the JPY were converted into INR to liquidate the assessee's liability towards ICICI Bank. In response to Departmental Representative's submissions, the assessee company had stated that it was not proper to comment that the entire liability of Rs. 85 crores was swapped into JPY. The original loan liability in any case remains and is reflected in the balance sheet, which cannot be denied. The swap has been effected by the assessee company with foreign currency with an intention to gain from currency fluctuations also. Ultimately, it may s....
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....assessed only because an assessee is following mercantile system of accounting and theoretically or nationally income accrue". 8. In the case before us, it is not true that the assessee had actually realized any income because of the fluctuation of foreign exchange rates as is apparent from the chart before us. We also note that while there is a book gain of Rs. 1.26 crores in asst. yr. 2002-03 and Rs. 1.32 crores in asst. yr. 2003-04, the assessee company incurred a book loss of Rs. 4.33 crores in asst. yr. 2004-05. This clearly proves that what the Revenue wanted to tax in the case of the assessee company, was a contingent income and not a real income. Moreover, we note that the AO while completing the assessment for asst. yr. 2004-05 did not deduct the notional loss arising from currency swap. It is also true that the gain shown in the books in asst. yrs. 2002-03 and 2003-04 is not an actual gain but was reflecting a trend as is evident from the loss incurred in asst. yr. 2004-05 due to reverse cross-currency trend. Consequently, following the decision of the jurisdictional High Court, we are of the view that the assessee need not pay tax merely because it is following the me....
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.... and claimed tax-free amounted to Rs. 3,46,630. He alleged that the AO had applied a thumb rule method in computing the alleged disallowance. It was further submitted that no new investment was made during the relevant previous year. On the other hand, a part of the investments were liquidated during the year. He had argued that the relevant investments were made in the earlier years and that too out of its own fund. There was no finding in those years that the investments were made by utilizing the borrowed funds. The funds utilized were from mixed accounts where the sale receipts were accounted for. During the hearing he also relied on the decision of the Calcutta High Court in CIT vs. Britannia Industries Ltd. (2005) 198 CTR (Cal) 426 : (2006) 280 ITR 525 (Cal) and had argued that the AO cannot merely assume that that borrowed funds were utilized even if the mixed bank account showed a credit balance on the date of investment. Moreover, the Authorised Representative had further contended that the investments were mainly trade investments and invested in its subsidiary company for various commercial considerations and not merely to earn annual tax-free dividends. He had relied on....
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....ng of the dividend. Considering the relevant facts of the case we feel that in the interest of justice the addition under s. 14A should be restricted to 1 per cent of the dividend received, which has been claimed as tax-free. Ground No. 8 16. The AO has disallowed Rs. 6,46,970 on repairs, renewals, replacements and advertisement on an ad hoc basis. The AO had alleged that the assessee company had not filed the details and hence made an ad hoc 2 per cent disallowance. On the other hand, the assessee company had contended that necessary details were filed during the assessment proceedings, though not in the desired format. The learned CIT(A) had confirmed the disallowance. While confirming the disallowance, he has stated that the assessee company did not file further details as called for by the AO. 17. We have considered the rival contentions and also perused the details filed before the lower authorities. While it is true that the assessee company had filed certain primary details, it is true that the same was not strictly according to the statutory format as provided by the AO. 18. Under the circumstances, we tend to agree with the AO that non-business expenses cannot ....
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....d that the payment was made out of assessee's own fund and that the borrowed capital was not siphoned out". In fact, the jurisdictional High Court has held that even if the overdraft account had a debit balance, the earlier conclusion should not have been different. In coming to this conclusion, the Hon'ble High Court had relied on a plethora of decisions held by the same Court earlier, such as, in 132ITR 219 (sic), Reckitt & Colman of India Ltd. vs. CIT (1982) 26 CTR (Cal) 24 : (l982) 135 ITR 698 (Cal). Indian Explosives Ltd. vs. CIT (1983) 35 CTR (Cal) 244 : (1984) 147 ITR 392 (Cal) and Alkali & Chemical Corporation of India Ltd. vs. CIT (l986) 50 CTR (Cal) 139 : (l986) 161 ITR 820 (Cal). It was argued by the Authorised Representative that the advances were made out of mixed bank accounts where the receipts out of current sales were credited. The Authorised Representative had also submitted that apart from showing the years in which the advances were made, which were earlier to the previous year relevant to the assessment year under appeal it was submitted that such advances were made out of own funds. In fact, the Revenue never raised this issue in the past while holding....
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....the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of board of directors and assume the role to decide however which is reasonable expenditure having regard to the circumstance of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own point of view but that of a prudent businessman. According to the Hon'ble Court, one should see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. According to the Authorised Representative, the assessee company had (sic-not) advanced the money out of borrowed funds but from its own sources for which no interest was claimed as a deduction. Even assuming but not admitting that a part of the advance against the share capital was made out of borrowed funds, it is beyond doubt that such introduction of funds was made out of commercial expediency an....
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....ay operations and servicing of its interest liability. 25. On the other hand, the learned representative for the Revenue had contended that the judgments relied upon by the Authorised Representative of the assessee cannot be applied, since the facts of the assessee's case appear to be different. 26. Having carefully considered the arguments of both sides and going through the written submissions filed from time-to-time, it is noted that the assessee company had, in fact, introduced the funds to its subsidiary company from time-to-time according to its requirements. Moreover, the assessee company held approx. 88 per cent shares of the said subsidiary company. The amount invested by the assessee company till 31st March, 2002 was Rs. 11.35 crores. It is also noted that from the annual accounts of the subsidiary company that till 31st March, 2002 the financial figures were as under: Position of mobilization and deployment of funds (amount in Rs. '000) Total liabilities 687,062 Total assets 687,062 Sources of funds Paid up capital 128,500 Advance against issue of shares 198,150 Reserve and surplus 15,273 Secured loans 314,944 Appli....
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.... Industries Ltd. 31. Having considered all these factors, we are of the view that the disallowance made by the AO had no reasonable basis and should be deleted in full. Ground No. 12 32. The AO has made an ad hoc disallowance of Rs. 5 lacs, out of the total claim made by the assessee under the head "Staff welfare expenses". The assessee had contended that since the details required to be filed were voluminous, it had filed certain details though not according to the statutory form given by the AO. The learned CIT(A) had confirmed such disallowance since no further details were filed before him. After hearing the contentions of the rival parties, we feel that in the interest of natural justice, the issue should be restored back to the file of the AO. The AO is directed to allow the assessee company an opportunity of being heard and dispose of all the claims according to law. 33. In the event, the assessee's appeal is partly allowed. ITA No. 725/Kol/2007; Asst. yr. 2003-04 Ground Nos. 1 and 2 34. The issue involved is common to ground Nos. 1 and 2 of the earlier appeal. In this case the assessee has again challenged the addition of Rs. 1,32,17,395 made by the....