TMI Blog2005 (5) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... he following. The assessee has converted its foreign currency borrowings into Indian rupees and deployed the same to earn income by way of interest, return on investments, etc. The impugned cost is incurred to enable the assessee to obtain such funds and to enable it to ascertain the actual cost of such funds the cost required to reconvert it and repay the foreign currency is essential as it has a direct nexus. If the income in relation to such activity is offered for taxation, on which there is no dispute, the matching cost should also be accordingly allowed. Therefore, the ratio of the decision of the Hon'ble apex Court cannot be said to be applicable to the instant case inasmuch as not allowing the impugned expenditure in the year of incurring would result in a distorted picture of profits. As a result of the discussions, in our view the circumstances and the nature of the expenditure in the instant case do not justify the invocation of the ratio of the decision of the Hon'ble apex Court in the case of Madras Industrial Investment Corpn. Ltd[ 1997 (4) TMI 5 - SUPREME COURT] . Thus, the claim of the assessee for allowance of expenditure incurred in connection with swappin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue is treated as partly allowed. In the result, the appeal of the assessee is partly allowed and the appeals of the Revenue are dismissed. - Member(s) : K. C. SINGHAL., G. S. PANNU. ORDER-G.S. PANNU, A.M.: As all these appeals relate to the same assessee, they are clubbed together and are being disposed of by way of a common order for the sake of convenience and brevity. ITA No. 1563/Del/1999 2. This is an appeal by the assessee against the order of the CIT(A) dt.25th Jan., 1999pertaining to asst. yr. 1995-96. The main grounds preferred by the assessee ate as under: "1. That on the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of Rs. 6,96,449 incurred on the maintenance of visiting officer's flats meant for the stay of officers of the assessee-company while on official tour, which is more economical for the assessee-company rather than incurring huge cost in hotels. 2. That on the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of the revenue expenditure of Rs. 67,06,33,245 incurred in connection with the swapping of foreign currency funds for augmenting the rupee funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuations. The assessee recognized the difference between the forward contract rate and the exchange rate on the date of the transaction. The assessee thus determined the exchange difference of Rs. 8,172.85 lakhs arising out of re-alignment of foreign currency borrowings covered against forward contracts and treated the same as cost of borrowings. In its books of account, a sum of Rs. 1,466.55 lakhs was charged to the P L a/c during the year itself and the balance of Rs. 67,06,33,245 was treated as deferred revenue expenditure which was to be charged over the balance period of forward cover which spilled over into next assessment year. However, in the computation of income, the assessee claimed the sum of Rs. 67,06,33,245 as deductible from the total income. The AO has disallowed this claim of the assessee on the ground that the expenditure claimed pertained to future period and not to the period relevant to assessment year under consideration inasmuch as the impugned transaction was to safeguard against future currency fluctuations. The AO held that the expenditure did not cover the obligation of the previous year relevant to assessment year under consideration. The AO also held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but sustained the disallowance on the ground that such expenditure did not relate to the current assessment year. Accordingly, the disallowance of Rs. 67,06,33,245 made by the AO was upheld. Not being satisfied with the order of the first appellate authority, the assessee is presently in appeal before us. 9. The learned counsel for the assessee, Shri N. Avtar has reitemted the submissions made on behalf of the appellant before the lower authorities. The earned counsel for the assessee argued that having regard to business mechanics of the assessee in the course of which the impugned costs have been incurred, the expenditure has been per se accepted by the CIT(A) to be of revenue in nature. Thus, an expenditure which has been incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It was argued that the expenditure was definite and therefore, it was to be allowed as deduction in the impugned year itself although the currency transacted under the forward contract was to be received in the subsequent period. The rate at which the assessee was to get the currency was fixed and the same was done with the objective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessee's business of financing which is termed as swapping by the assessee. In order to safeguard against fluctuation in the rate of foreign exchange at the time of repayment in relation to the foreign currency so swapped assessee enters into forward contracts with banks to purchase foreign currencies on future date at predetermined rates. The assessee claimed as deduction the difference between the forward rate and the exchange rate on the date of transaction as revenue expenditure. In relation to the contract which were entered into and were concluded during the year itself, i.e., contracts whereby the assessee repurchased the foreign exchange at the predetermined rates during the year itself the claim of the assessee pertaining to the aforesaid difference was allowed by the AO itself. The amount of such claim was Rs. 1,466.65 lakhs. The balance of the claim of Rs. 67,06,33,245 was relating to contracts which were not concluded within the year under consideration. The same has been negated by AO on twin grounds. Firstly that the assessee had itself not debited in its P L a/c but treated it as deferred revenue expenditure and secondly, that it was capital in nature. Inso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into Indian currency on the same date, say at the rate of Rs. 35 per us Dollar. The assessee is required to repay to the foreign lender US $ 1,000 on say31st July, 1995. Since the assessee was required to return the US dollar to its lender on 31st July, 1995 and it did not want to risk the fluctuation in the rate of dollar on the future date, it entered into a forward contract with a bank on 1st May, 1994 itself to buy the required foreign exchange on 31st July, 1995 at a negotiated rate, say Rs. 37 to a dollar, meaning thereby that on 31st July, 1995 it will be able to take delivery of the foreign currency equivalent to 1000 US $ @ Rs. 37 which would enable it to repay the same to its foreign lender. The assessee thus entered into a contract on1st May, 1994, as a result of which, liability of Rs. 2,000 was crystallized on that date itself. It is clearly discernible from the aforesaid illustration that such liability is definite and ascertainable having regard to the contractual obligation. In terms of the contract, assessee becomes aware of the rate at which. the foreign currency shall be purchased on the future date. The effect or the finality of the contract does not get postpon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upports the aforesaid proposition. 16. Now we would consider the stand of the learned Departmental Representative that benefits accrue to the assessee over the entire period of contract and thus it is only at the end of the contract that the expenditure is allowable. The reliance by the learned Departmental Representative on the decision in the case of Madras Industrial Investment Corpn. Ltd. does not help the case of the Revenue. The assessee in that case had issued debentures at a discount and, therefore, it incurred a liability to pay an amount larger than what it had borrowed. The debentures raised were to be redeemed or arising for repayment after a period of 12 years. The liability to pay an amount larger than the amount borrowed was held to be spread over the entire period of debenture, as there was a continuous benefit to the business of the company over the entire period of debenture. In coming to this conclusion, the Hon'ble apex Court noted that the liability to pay the discount incurred in the year of issue of debenture was with a view to secure a benefit over a number of years or in other words it was found that there was a continuing benefit as the assessee was utiliz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of Rs. 67,06,33,245 incurred in connection with swapping of foreign currency funds for augmenting the rupee funds required by it for its business is to be allowed in the year of incurrence of the same i.e. during the current assessment year itself. The assessee succeeds on this ground. 18. The brief facts leading to the third ground are that the assessee had claimed a sum of Rs. 52,799 on account of amortization of lease rent in respect of the properties atCalcutta, Jaipur andChandigarh. The AO and the CIT(A) have disallowed the claim treating the assessee as the owner of these properties on the ground that the same have been leased for a very long period establishing the assessee as an owner thereof. The claim for amortization of lease premium paid by the assessee was thus not allowed. 19. After having heard both the parties and perusing the orders of the lower authorities, we find that the full facts concerning the matter have not been culled out and brought on record inasmuch as the terms of the agreement for taking the properties on lease, etc., are not available. Thus, it is not possible to test the efficacy of the claim of the assessee, although the learned counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased assets on the basis of the decision of the Supreme Court in CIT vs. Shaan Finance (P) Ltd. (1998) 146 CTR (SC) 110 : (1998) 231 ITR 308 (SC); (a) despite the fact that the AO had clearly established that the transaction in question was in the nature of finance/hire purchase transaction and not in the nature of lease; (b) despite the fact that the issue at dispute in the present case is whether the assessee was carrying on any business of leasing or not which was not therein in the case relied on by the CIT(A). 24. The facts leading to the said ground that the assessee had claimed depreciation of Rs. 18,74,22.388 on leased out assets on which the assessee was showing income from lease rent. The denial of depreciation by the AO was on the ground that the business of the assessee was some kind of hire-cum-purchase and finance business and the assets/plants and machinery leased out were the stock-in-trade. In coming to such conclusion, the relevant discussions made by the AO in the assessment order are as follows: "The transactions of leasing out of assets carried out by the assessee-corporation is broadly summarized as under: (i) First a lessee approaches the assessee-Corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's business in this regard, therefore, consists of some kind of hire purchase-cum-finance business which the assessee calls lease for the purpose of claiming depreciation. I, therefore, hold that this business of so-called leasing is in the nature of hire-purchase-cum-finance business and the assets/plants and machinery involved are its stock-in-trade. Under these circumstances no depreciation can be allowed to the assessee on the so-called leased out assets as they do not form part of a normal lease transaction. They are rather stock-in-trade for a business of finance-cum-hire purchase. Assessee has preferred to call these as lease transactions due to obvious reasons." 25. Aggrieved by the order of the AO denying the claim of depreciation, the assessee carried the matter in appeal before the CIT(A). It was submitted before the CIT(A) that the AO had failed to appreciate the nature of assessee's business inasmuch as terms of the lease agreement were ignored by him. It was canvassed that the assessee fulfilled the conditions of s. 32 which requires that an asset should be owned by the assessee and the same should have been used for the purposes of business of the assessee dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the asset and the asset leased out for all intents and purposes becomes the property of the lessee then in such a situation the benefit of depreciation would not be available in the hands of the lessor. Viewed in the above background, in the instant case, we find that the CIT(A) concludes that during the currency 0f lease, the assessee alone remains the owner and at the end of the lease period, the assessee-lessor is within its right to receive back the leased asset. For this purpose we have perused the specimen of lease agreement placed at pp. 35 to 70 of the paper book, the relevant cl. 2.4 of the art. II of the agreement reads as under: "2.4 Upon termination this agreement by afflux of time or otherwise, the lessee shall, at its own cost and expenses, forthwith deliver or cause to be delivered to the lessor the equipment, at such time and place as may be directed by the lessor, in good repair, order and conditions (subject to normal wear and tear)." A perusal of the aforesaid does lead to conclusion that during the currency of lease deed, the assessee alone remains the owner and at the end of the lease period, the assessee-lessor is within its right to receive back the leased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for interest on borrowings spent for construction of a building which was not put to use during the year. According to the AO s. 36(1)(iii) covers a case of loan which has been utilized in the course of a running business alone. The AO also held that since the assessee itself debited the interest in its books of account as capital expenditure, the same was not allowable as revenue expenditure in spite of the fact that the deduction was claimed in the computation of income. The CIT(A) has since allowed the claim of the assessee. The CIT(A) also held that the treatment by the assessee in the books of account cannot deviate from the true character of the expenditure. Accordingly, the Revenue is in appeal before us. 32. After having heard the rival parties, we do not find any substance in the present ground of the Revenue for the reason discussed hereinafter. The trite law is that under s. 36(1)(iii), an assessee is entitled to deduction of interest paid on moneys borrowed for the purpose of business irrespective of the utilization of the borrowings. The expression "purposes of business" found in s. 36(1)(iii), as relevant for the assessment year under consideration, is comprehens ..... X X X X Extracts X X X X X X X X Extracts X X X X
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