TMI Blog2015 (9) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that it is only in the 1st year of allowance of a claim which is to be allowed over a period of time that jurisdiction u/s.263 can be exercised. We therefore reject this argument of the learned counsel for the Assessee. - Decided against assessee. Relief on the basis of "Cost of Project" u/s.35D(3)(a) - Held that:- It is only the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are acquired or developed in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the Assessee that should be considered. The Assessee issued GDRS and FCCBs and incurred expenditure in this regard. The proceeds of the issue were used to acquire shares of two foreign companies and thereby gain control of the two foreign companies. Therefore there were no fixed assets that were acquired or developed in connection with the extension of the industrial undertaking or setting up of the new industrial unit of the Assessee. The argument of the learned counsel for the Assessee cannot therefore be sustained and shares acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unrealised foreign exchange gain - Whether should be treated as "Income" or not? - Held that:- In our view the facts of the case in the decision of the Madras High Court in the case of PVP Ventures Ltd. (2012 (7) TMI 696 - MADRAS HIGH COURT ), is identical to the facts of the case of the Assessee in this appeal. FCCBs are instruments issued to investors for raising funds which is repayable after certain period. It is a debt instrument. The increase or decrease in liability on account of fluctuation in foreign exchange as on the date of the Balance sheet would increase or decrease the liability of the Assessee and such liability would be on capital account. Therefore the gain or loss would be on capital account and not taxable. - Decided in favour of the Assessee. - ITA No. 689/Bang/2014 - - - Dated:- 19-6-2015 - N. V. Vasudevan, JM And Jason P. Boaz, AM, JJ. For the Petitioner : Shri Arvind Sonde, Adv. For the Respondent : Shri S Radhakrishna, CIT-III (DR) ORDER Per N. V. Vasudevan, Judicial Member This is an appeal by the Assessee against the order dated 28.3.2014 of the Commissioner of Income-tax-III, Bangalore [CIT], passed u/s.263 of the Act, relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words an amount equal to one-tenth of such expenditure for each of the ten successive previous years , the words an amount equal to one-fifth of such expenditure for each of the five successive previous years had been substituted. (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely : .. (3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated at five per cent- (a) of the cost of the project, or (b) where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under sub-section (1) : Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the 31st day of March, 1998, the provisions of this sub-section shall have effect as if for the words two and one-half per cent , the words five per cent had been substituted. Explanation : In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred provide for the repayment thereof during a period of not less than seven years. (4) . (5) . (6) . 4. In the audit report u/s.44AB of the Act filed in Form No.3CD, the auditors has in column 15(b) highlighted amount claimed as deduction u/s.35D of the Act but not debited in the profit and loss account of ₹ 11,36,59,330. The narration further provides that the claim for deduction is 1/5th of the FCCB GDR issue expenses incurred during AY 07-08 and that the claim for deduction u/s.35D of the Act in AY 08-09 is the second year of claim. The computation of deduction u/s.35D of the Act given in AY 07-08 is at page-7 of Paper book No.1 filed by the Assessee. The same is given as ANNEXURE-1 to this order. There is a variation in the figure of deduction claimed u/s.35D of the Act in AY 07-08 and in AY 08-09. This may not be very material because the dispute not on the variation in the quantum. 5. It is not in dispute that the Assessee after commencement of his business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any as provided in Sec.35(3)(b) of the Act. The AO also did not enquire as to what is the Exchange gain on FCCB reinstatement of ₹ 60,75,80,000/-. We have already seen that the Assessee issued FCCBs for the purpose of acquisition of shares of Acquisition of M/s. Syndesis Ltd. (Later known as M/S. Subex Americas Inc.). Due to favourable fluctuation of foreign exchange, the liability of the Assessee to repay FCCBs became less and the consequent gain was not offered to tax as it was a gain on capital account. 9. The Assessee in reply to the show cause notice of the AO dated 11.11.2011 sent a reply dated 22.11.2011 in which on the question of on what expenses deduction u/s.35D of the Act is claimed, pointed out that it is on expenditure for issue of GDR's and FCCBs incurred by the company during the financial year ending 31.3.2007. The AO by another letter dated 30.11.2011 called upon the Assessee to clarify and furnish the following information:- The company has claimed a sum of ₹ 11,36,59,330/- as deduction u/s.35D. Please clarify whether your company is an industrial undertaking for the purpose of claiming deduction u/s.35D as it stood prior to 1.4.2009. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, the amount raised from Foreign Currency Convertible Bonds (FCCBs) aggregating to INR 7,807,500,000 has been ignored in totality. D) Thus, the amount eligible for deduction under section 35D is being computed as under: Actual expenditure of INR 577.890,354. restricted to higher of: - 5% of the Cost of Project being NIL or - 5% of Capital employed, in this case, the amount being 5% of the face value of GDRs (i.e., 5% x 117,287,280 = INR 5,864,364) Thus the excess deduction allowed under section 35D would amount to INR 112,486,457, as computed below: Particulars Amount (INR) Amount allowed in terms of the order under section 143(3) 113,659,330 Less: Amount eligible for deduction under section 35D being 1/5th of INR 5,864,364 (as computed above) 1,172,873 Excess deduction claimed under section 35D 112,486,457 14. The gist of the CIT's calculation as above is :- (1) that deduction u/s.35D(3)(b) is calculated on the basis of 5% of capital employed and Sec.35D(3)(a) will not apply beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and building in order to opt for 'cost of project'. It ought to he appreciated that the assessee had in fact expanded its business operations. Such acquisition could have been by direct acquisition of fixed assets outside India or through acquisition of subsidiaries, which offer benefits like ringfencing of liabilities qua the Indian company, undue exposure to foreign taxation, etc. The assessee submits that the term 'being' used in the definition of 'cost of project' should be understood in a manner which supports the purpose and intention of the said section. The meaning of the term thus not restricted only to land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings). 1.11 The assessee wishes to place reliance on the decision of Madhya Pradesh High court in the case of Commissioner of Income tax v. Shree Synthetics Ltd [1986] 162 ITR 819 (Copy of the decision enclosed as Annexure 2) which was rendered in the context of section 35D (2) of the Act wherein it has been held that: The word 'being' has been used in section 35D(2)(c)iv by way of illustrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange gain amounting to INR 607,500,000 should be treated as income for the year under consideration. 2.2 In this context, we submit that the Hon'ble Supreme Court in the instant case has analyzed the tax treatment of unrealized foreign exchange gain/loss arising out of restatement of liabilities, incurred for revenue purposes/purchase of capital assets, denominated in foreign currency. The implications have been analyzed in two baskets: - In the first category. the exchange differences arising on revenue items; and - In the second category, the exchange differences arising on liabilities incurred for the purpose of acquiring capital assets. 2.3 In this connection, the Apex court held that any revenue loss suffered by the assessee on account of exchange difference would be deductible in computing the total income of the assessee inasmuch as the assessee complies with acceptable accounting standards. 2.4 As regards, restatement of foreign exchange gain/loss arising on liabilities incurred for the purposes of acquiring capital assets, the same would have to be adjusted as per the provisions of Section 43A of the Act. 2.5 In the present case, the foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the definition - - 'Erroneous' means' involving error', 'deviating from the law'. - 'Erroneous assessment' refers to an assessment that deviates from law and therefore invalid. 2.14 In the present case, the assessee has provided detailed explanations before the AO regarding the deduction claimed under section 35D vide letters dated November 22, 2011 and December 9, 2011. Copies of relevant extracts of these submissions are enclosed herewith as Annexure 8. 2.15 In light of above, it can be said that the explanations/clarifications offered by the assessee has been accepted by the AO and hence, the AO has applied his mind and allowed deduction under section 35D after considering the same and therefore, the order cannot be said to be erroneous in any manner on the said issue. 2.16 As regards, gains on restatement of liabilities, the assessee had specifically provided the details in the computation of income submitted to the learned AO vide letter dated October 26,2010. 2.17 Thus, where the AO examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee can claim under art. 23(2) of the DTAA with Canada and art. 23(3) of the DTAA with Thailand. The assessee being aggrieved with the revisional orders passed by the CIT, preferred appeals to the Tribunal. Assessee urged, among other grounds, that the CIT could not have exercised jurisdiction under s. 263 of the Act for the reason that the order which was sought to be revised was neither shown to be erroneous nor prejudicial to the interest of the Revenue and in fact, it is virtually a case of the CIT opining differently from the assessing authority and therefore, was not amenable to the revisional jurisdiction. The Tribunal agreed with the submission of the Assessee and quashed the order u/s.263 of the Act. On further appeal by the Revenue, the Hon'ble Karnataka High Court held:- 20. Though it is either vaguely or loosely described by the authorities, even including the Tribunal that the CIT lacked jurisdiction to exercise revisional powers in a situation of the present nature, as it was virtually in the nature of change of opinion on the part of the CIT, taking a different view from the view taken by the assessee to the effect that the authority taking the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under these agreements and if the CIT can revise such an order without any hassle in the exercise of revisional jurisdiction under s. 263 of the Act and can correct the order which is erroneous and prejudicial to the interest of the Revenue, just because the assessing authority does not spell out the reasons and therefore can avoid scrutiny under s. 268 of the Act, is an argument which is not logical or rational and not acceptable and at any rate on the authority of the Supreme Court in the case of Malabar Industries Co. (supra) is not an acceptable submission. 23. Though learned counsel for the assessee have placed strong reliance on two judgments of the Bombay High Court and the Delhi High Court in the cases of Gabriel India Ltd. (supra) and Ashish Rajpal (supra) respectively and the Delhi High Court, in fact, has made reference to the decision of the Supreme Court in the case of Max India Ltd. (supra), with great respect, we are unable to apply the ratio of these two decisions to the present circumstance and we are quite satisfied that the law declared by the Supreme Court not only in the case of Electro House (supra) and also in the case at Malabar Industries Co. (supra) fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be equated with debentures but not produced any evidence to support its claim. In the absence of evidence, the Assessee's claim is rejected. Issue No.5 18.5 With regard to the question whether unrealised foreign exchange gain should be treated as Income or not, the CIT(A) was of the following view: 4.7. The Assessee on one hand states that any exchange gain/loss arising on account of restatement of liability with respect to the funds sourced for investments would have to be adjusted in accordance with the Sec.43A of the Act. On the other hand states that it has suo-motto added back an amount of ₹ 192,96,00,000 being foreign currency loss on restatement of such liability arising in connection with the investments made outside India in its return of income for AY 2009-10. The Assessee statement appears contradictory. In the absence of full evidences, the assessee claim could not be verified. The Assessing Officer is directed to examine the same and to bring the gain to tax accordingly. 19. Aggrieved by the order of the CIT, the Assessee has preferred the present appeal before the Tribunal. The submissions made by the learned counsel for the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to the conclusion that the issue relating to taxability of compensation received by the assessee was not examined by the AO and held that the order of the AO is erroneous and prejudicial to the interest of the Revenue. The Tribunal has arrived at a conclusive finding that though the assessment order does not patently indicate that issue of the taxability of the compensation has been considered by the AO, the record shows that the AO had applied his mind. The Hon'ble Delhi High Court held that it is not a case of lack of enquiry even if the enquiry was inadequate and the CIT was not justified in passing the order under s. 263. 22. We have considered his submissions and are of the view that admitted case before us is that the AO while completing the assessment did not go into the question of computation of capital employed for allowing deduction u/s.35D of the Act. The enquiry made by the AO was only with regard to the details of expenditure incurred on which deduction u/s.35D of the Act was claimed. The computation of deduction u/s.35D(3) of the Act did involve looking into the definition of capital employed and coming to a conclusion whether Share Premium or FCCBs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for AY 08-09 (impugned order), rectified the order of assessment for AY 07-08 in proceedings u/s.154 of the Act and had modified the deduction u/s.35D of the Act, in tune with the decision rendered by the CIT u/s.263 of the Act in AY 08-09 which order is impugned in this appeal. The learned counsel for the Assessee submitted that the said order u/s.154 of the Act is also under challenge by the Assessee before the 1st appellate authority. His submission was that as on the date when the order u/s.263 of the Act was passed, the position was that the 1st year in which the claim u/s.35D could have been varied or disallowed i.e., in AY 07-08 stood allowed. He relied on the following decisions for the proposition that once deduction u/s.35D is allowed in the first year of its claim, it cannot be disallowed in the subsequent years for which the deduction is to be allowed:- ACIT Vs. J.V. Strips Ltd., ITA No.364/Del/2012 order dated 5.7.2013. Gujarat Narmada Valley Fertilizers Co. Ltd. Vs. DCIT (2014) 45 Taxmann.com 38 (Gujarat) CIT Vs. Paul Brothers (1995) 79 Taxman 378 (Bom.) 25. We have considered the submissions of the learned counsel for the Assessee. We find that in the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the extension of the Industrial undertaking is completed or, as the case may be, the new Industrial unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the Industrial undertaking or the setting up of the new Industrial Unit of the assessee; 30. A reading of the above shows that it is only the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are acquired or developed in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the Assessee that should be considered. The Assessee issued GDRS and FCCBs and incurred expenditure in this regard. The proceeds of the issue were used to acquire shares of two foreign companies and thereby gain control of the two fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n point of time and on the date when jurisdiction u/s.263 of the Act was exercised cannot obliterate the existence of debate on the date when order of assessment was passed. The issue was debatable. In this regard he relied on the following decision: Kishanchand J. Bhavnani (HUF) Vs. WTO 29 ITD 383 (Bom.) wherein it was held that subsequent decision of jurisdiction High Court cannot give raise to a mistake apparent on the face of the record warranting rectification u/s.254(2) of the Act. He also relied on the decision of ITAT Ahmedabad Bench in the case of Kanel Oil Export Inds. Ltd. Vs. JCIT 121 ITD 596 (Ahd.) (TM) wherein it was held that decision of the non-jurisdiction High Court if it is shown to be rendered in ignorance of certain statutory provisions that are directly relevant is not binding. In this regard the argument was that Sec.78 of the Act was not considered by the Hon'ble Delhi High Court in the case of Berger Paints (supra) whereas the ITAT Ahmedabad Bench in the case of Sirhind Steel Ltd. (supra) had considered those provisions to arrive at a conclusion that Share premium has to be considered as part of Issued Share capital while allowing deduction u/s.35D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are unsustainable. In the light of the definition of Debentures as contained in the Companies Act, 1956 to include Bonds and in the light of the fact that the FCCBs in question are in the nature of bonds as defined in the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 wherein the meaning FCCBs is given as bonds issued in accordance with the said scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments, we are of the view that FCCBs are to be regarded as debentures and consequently be considered as part of capital Employed for allowing deduction u/s.35D of the Act. We hold and direct accordingly and decide the issue in favour of the Assessee. 37. The last issue that arises for consideration is as to whether unrealised foreign exchange gain should be treated as Income or not? 38. The stand of the Assessee in this regard was that the gain is on capital account and cannot be regarded as income. The Assessee also pointed out that in the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date pending actual payment of the varied liability. In this batch of civil appeals, we are concerned with increase in the existing liability on account of foreign exchange fluctuations on capital account . 40. After considering the provisions of Sec.43A of the Act, the Hon'ble Supreme Court held that Sec. 43A(1) applies where as a result of change in rate of exchange there is an increase or reduction in the liability of the assessee in terms of Indian rupees to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring the asset. 43A(1) has no application unless the asset is acquired and the liability existed, before the change in the rate of exchange takes effect. Increase or decrease in liability for repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange, irrespecti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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