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2015 (5) TMI 727 - ITAT DELHI

2015 (5) TMI 727 - ITAT DELHI - TMI - Disallowance of diminution in value of fertilizer bonds - Held that:- The assessee company was compelled to receive fertilizerís bonds in lieu of cash fertilizers subsidy by the Government of India. The AO has not brought out any allegation that the assessee company bought fertilizers bonds for the purpose of making investment and thus, the bonds were to be given the same treatment which was to be given to cash in hand, foreign currency or cash in bank as cu .....

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ion of fertilizers bonds which were remained unsold at the end of the year.

Thus the fertilizer bonds received by the assessee in lieu of cash subsidy also deserves to be given the same treatment as foreign exchange because foreign exchange is also received in lieu of cash/Indian National Rupee (INR) and the same is also shown as current trading assets in the books of accounts as per well accepted accounting principles.CIT(A) was right in holding that the difference in the amounts of .....

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ontention of the assessee that the assessee has not diverted his interest bearing funds for the purpose of investments or any other manner for making investment which accrue tax free income for the assessee. In the same manner, we are further inclined to hold that the Revenue authority has not brought out any fact to establish this fact that the assessee diverted his interest bearing funds for making investments for earning tax free income. In this situation, we are fully agree with the approach .....

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should also be made for the year under consideration in this appeal i.e. for A.Y. 2008-09 and the AO is also directed to give set off of amount of suomoto disallowance already made by the assessee in the computation of returned income. - Decided in favour of assesse as directed - ITA No. 1447/Del/2012, ITA No. 1836/Del/2012 - Dated:- 20-5-2015 - SHRI S.V. MEHROTRA AND SHRI C.M. GARG, JJ. For the Appellant Sh. Pradeep Denodia, CA & Sh. V.P. Gupta, Adv. For the Respondent: Smt. Parwinder Kaur, .....

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y the AO. 3. Briefly stated the facts giving rise to this appeal are that the AO noted that the claim of the loss of ₹ 9.52 crores on account of diminution in value of bonds neither suffered by the assessee company during the year nor there was provision of any ascertain liability accrue during the year under consideration. By observing above facts, the ld. AO further holding that the claim of deduction of said loss of ₹ 9.52 crores was probably made with the intention to suppress th .....

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d that the amount of loss of ₹ 9.52 crores on valuation of bonds at the end of the year was being claimed in computation of taxable income as business loss for the reason that these bonds were in the nature of business assets notwithstanding the fact that in the accounts of assessee the said bonds have been categorized under the head of current investment assets . The ld. DR vehemently contended that the AO was right in making disallowance because the claimed loss neither suffered by the a .....

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he ld. AR further explained that the company had no intention to hold bonds as such and the same had been received by the company under compulsion for the reason that the Government of India was short of funds and was not making payments of the outstanding fertilizer subsidy amount. The ld. AR strenuously contended that the assessee was compelled to accept fertilizer s bonds in lieu of cash fertilizer subsidy and the assessee company had immediately sold a part of bonds during the year under con .....

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g reliance on the various decisions of the Hon ble Supreme Court, Hon ble High Court and ITAT Mumbai submitted that the assessee company was compelled to receive fertilizers bond in lieu of cash fertilizers subsidy and, therefore, these bonds were shown by the assessee as current assets and there was no intention of the assessee company to make investments in the said bonds and the same were received by the assessee from Government of India under commercial expediency and loss of diminution of t .....

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ee is allowable. The ld. AR submitted that while investment was made by the assessee under commercial expediency then the same did not bring an asset of a capital nature and the loss was, therefore, allowable as business loss. The ld. AR further pointed out that the assessee had no intention to hold these bonds till the date of their maturity and it was in need of funds to carry on its business and, therefore, bonds have been actually sold partly during the current year and the balance was sold .....

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gh Court in the case of Tripati Drinks P. Ltd. Vs. CIT, 112 ITR 721 (Orissa) and submitted that provision for diminution in the value of investment of assets will not reduce books profit and the claim of loss must be real loss and not the notional loss. Therefore, the assessee is not entitled to deduct the same from taxable income. 9. On careful consideration of above submissions, at the very outset, we note that undisputedly the assessee company was forced and compelled by the Government of Ind .....

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er the head current assets, loans and advances . In the case of Patnaik & Company (supra) the Apex Court explicitly held that where the investments were made under commercial expediency for the purpose of carrying on the assessee s business, then, the losses suffered by the assessee on the sale of such investments must be regarded as Revenue loss because the investment did not bringing an asset of capital nature and in these circumstances of the case, the losses suffered by the assessee shou .....

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ed order, we note that the CIT(A) granted relief for the assessee by observing as under: 5.2.2 As regards the fact that said bonds were shown in the Balance Sheet as on 31.03.2008 under the head current investments , it is submitted by the ld. AR vide written submission that the above was an inadvertent mistake and the same has been corrected in the Balance Sheet for the year ending 31.03.2009, wherein the above fertilizer bonds have been shown as other current assets (trade) under the head Curr .....

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ubmitted that the appellant has been crediting the amount of fertilizer subsidy in its profit and loss account as part of sale of products as per the consistent method of accounting being followed by the assessee from year to year. It was submitted that Note No. 1(v)(b) of Schedule 13 of the Printed Accounts on page 66 provides for accounting policy for revenue recognition, wherein it has been stated that fertilizer subsidy is accounted for by the company as income on accrual basis. Reference wa .....

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unt. The ld. AR has also relied upon the following decisions in support of its contention that wherever Govt. Bonds have been allotted or purchased in the interest of business, the loss suffered on sale thereof has to be considered as business loss . • Patnaik & Co. Ltd. vs. Commissioner of Income Tax-161 ITR 365 (SC); • Commissioner of Income-tax vs. D.S. Bist & Sons - 243 ITR 179 (Del); • Additional Commissioner of Income-tax vs. Upper Doab Sugar Mills Ltd. - 188 ITR 190 .....

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it had no option. Further, it had no intention to hold the bonds till their maturity as it was in need of funds to carry on its business and, therefore, bonds have been actually sold partly in current year and balance in the subsequent years. It was also submitted that difference in the amount of loss/profit on actual sale of bonds has been duly accounted for in the books of account of the relevant assessment year. 5.3 Under the facts and circumstances as mentioned above and following the pleth .....

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s/fertilizer s bonds suffered by the assessee during the year under consideration, but the main controversy revolves on the issue of loss recorded by the assessee on diminution of the fertilizer s bonds in the hand at the end of the year which was shown as other current assets (trade) under the head current assets, loans and advances . The ld. AR has also drawn our attention towards order of ITAT Mumbai, D Bench in the case of Reliance Industries Ltd. Vs. CIT (2014)-TIOL-160-ITATMUM and submitte .....

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of bonds at the end of year can be considered as ascertain losses and allowable as a business expenditure. In this order ITAT Mumbai held as under: 8. We have carefully considered the order of ld. Commissioner of Income Tax and the submissions of ld. Representatives of the parties. We have also carefully considered the cases cited before us (supra). It is relevant to state that in the case of Woodward Governor India (P.) Ltd. (supra), the Hon'ble Apex Court observed and held that the assesse .....

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ealized loss due to foreign exchange fluctuation as on the last date of the previous year was deductible. The said order of the Tribunal was upheld by the Hon'ble High Court. On further appeal by the department, the Hon'ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible u/s 37(1). It further observed than an enterprise has to report outstanding lia .....

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ible. 9. ITAT, in the case of Kotak Mahindra Investment Ltd. (supra) also considered a similar issue. In the said case the assesseecompany was engaged in the business of granting of loans and advances against shares and securities also traded in derivative segment by entering into future and option contract. Some of the future contracts could not be squared up at the end of the financial year. The assessee booked the expected loss in such contracts on MTM basis. The assessee thus claimed a loss .....

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reeing with the contention of the assessee that such loss on such valuation which is called "MTM" has to be allowed even though it may appear to be a notional loss. The Tribunal while confirming order of ld. CIT(A) and allowing the said loss placed reliance on the decision of Hon'ble Apex Court in the case of Woodward Governor India (P.) Ltd. (supra) and also the decision of Tribunal in the case of Edelweiss Capital Ltd V/s ITO in ITA No.5324/Mum/2007 (AY- 2004-05) dated 10.11.2010 .....

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epend on foreign loans to cover its expenses, both capital and revenue and for payment to non-resident contractors in foreign currency for various services rendered. The assessee made three types of foreign exchange borrowings i.e.(i) on revenue account; (ii) on capital account, and (iii) for general purposes. Some of the loans became repayable in the relevant accounting year and the date of payment of some loans fell after the end of the relevant accounting year. The assessee revalued its forei .....

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king into consideration the increased foreign exchange liability and repaid in the accounting year for the purpose of depreciation. He did not however, allow the claim for foreign exchange loss on loans both in relation to capital as well as revenue account which were outstanding on the last day of accounting year. On appeal, the CIT(A) affirmed the view of AO in relation to deduction u/s 37 of the interest on loans outstanding on the last day of the accounting year but allowed the benefit of in .....

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te of exchange in terms of section 43A. On appeal by the department, the Hon'ble High Court reversed the decision of the Tribunal on both the issues. On further appeal to the Apex Court, the decision of the High Court was reversed and it was held that (a) that the loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet was allowable as an expenditure u/s 37(1), and (b) that the assessee was entitled to adjust the actual cost .....

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g the said claim of the assessee by AO, the action of the AO is in consonance with the decisions of the Hon'ble Apex Court and also the view taken by the Tribunal in the cases cited hereinabove (supra). Hence, the view taken by AO to allow loss of ₹ 43.78 crores while making assessment u/s 143(3) on account of derivative contract outstanding is not an erroneous view taken by AO, nor the action of AO is prejudicial to the interest of revenue. Hence, the order of Commissioner of Income T .....

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that as we have already observed that the assessee company was compelled to receive fertilizer s bonds in lieu of cash fertilizers subsidy by the Government of India. The AO has not brought out any allegation that the assessee company bought fertilizers bonds for the purpose of making investment and thus, the bonds were to be given the same treatment which was to be given to cash in hand, foreign currency or cash in bank as current trading assets. In this situation, we respectfully take cogniza .....

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d at the end of the year. On careful consideration of the ratio laid down by Hon ble Supreme Court in the case of Patnaik Co. (supra) and by Hon ble Delhi High Court in the case of D.S. Bist (supra) we are inclined to hold that the fertilizer bonds received by the assessee in lieu of cash subsidy also deserves to be given the same treatment as foreign exchange because foreign exchange is also received in lieu of cash/Indian National Rupee (INR) and the same is also shown as current trading asset .....

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in the books of accounts of the relevant assessment year and the loss of ₹ 9.52 crores on account of diminution in the market value of the fertilizers bonds held at the end of the year as business assets cannot be disallowed and such disallowance cannot be sustained on facts or in law. We, therefore, are of the considered opinion that the conclusion arrived by the CIT(A) is just and proper and we are unable to see any valid reason to interfere with the same and hence, we decline to interf .....

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e reads as under: 1. That the CIT(A) erred in upholding disallowance made by the Assessing Officer in the order of assessment of ₹ 75 lacs u/s 14A of the Act on account of interest expenditure in the facts and circumstances of the case of the appellant. 15. Briefly stated the facts giving rise to this appeal of the assessee are that the AO made disallowance of ₹ 90 lacs held to be expenses incurred in relation to earn the tax free income during the year under consideration and the AO .....

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et off of the said amount which was suomoto disallowed by the assessee in the return of income. Now the aggrieved assessee is before this Tribunal with the sole ground as reproduced hereinabove. 16. The ld. AR contended that when the assessee itself has made suomoto disallowance then the conclusion of the authorities below should be demolished and dismissed. The ld. AR further contended that for making disallowance u/s 14A of the Act read with Rule 8D of the I.T. Rules, the Revenue authorities h .....

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on 28.02.2008 through HDFC Bank and copy of current account was also placed along with written synopsis/submissions of the assessee. The ld. AR further added that during the first appellate proceedings the CIT(A) examined details of investments including disallowance on account of interest after examining the factual position and after being satisfied that the investments has been made out of own funds of the assessee company. The ld. AR also placed a copy of the appellate order of the CIT(A) f .....

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ere was no disallowance on account of interest expenditure in F.Y. 2009-10 relevant to A.Y. 2010-11. 17. In view of above noted facts and circumstances, we note that the assessee company was granted relief by the CIT(A) for A.Y. 2010-11 with following conclusions: 3.1 I have carefully considered the facts of the case and the submissions of the appellant in this regard. In regard to the disallowance under section 14A read with Rule 8D of the Income Tax Rules for interest expenditure, the appellan .....

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of disallowance u/s 14A of the Act under cover of its letter dated 11.02.2012, a copy of which is in paper book on pages 14 to 17 and the statement is on page 17 of the Paper Book. The Assessing Officer inspite of details submitted by the company has adopted average investments at ₹ 57.24 crores, which is the amount of average investments including the amount of investments, income from which is taxable. No disallowance had been made in the earlier years upto A.Y. 2007-08 on account of int .....

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s upto A.Y. 2007-08. The AO had made ad-hoc disallowance on proportionate basis as per Clause (ii) of Rule 8D(2) of the Income Tax Rules. The CIT(A), in appeals of the company for those years had upheld the disallowance made by the AO on proportionate basis notwithstanding that the company had claimed in those years that no disallowance on account of interest is called for as the company was having sufficient funds in the form of share capital reserves and profits for the respective years which .....

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en filed in respect of these investments to substantiate the contention that all these investments have been made by the company out of its own funds as pinpointed in Annexure A7 to A9. It emerges from the details that during the current year, the appellant had made the investment of ₹ 4.16 crore out of its own funds as demonstrated with the bank statements and other documentary evidence. No specific disallowance of interest has been made by the AO in the earlier years regarding the tax fr .....

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