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Income Tax Officer, Ward-12 (3) , Kolkata Versus M/s UMT Investment Ltd.

2016 (2) TMI 266 - ITAT KOLKATA

Foreign exchange gain taxability - restatement of foreign currency loan - foreign currency loan which has been recognized in the profit and loss account in accordance with Accounting Standard 11 (AS 11) issued by the Institute of Chartered Accountants of India (ICAI) - Held that:- The Loan agreement clearly mentions that the loan is meant for general corporate purposes only which means it is meant for revenue account. If it is meant for any capital investment, then the loan agreement would have .....

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iness of the assessee itself is making investments in other companies. We hold that just because no interest income is derived in this transaction, the character of the transaction for business purposes (i.e the loan utilization on revenue account) would not change. Hence the argument of the Learned AR that the utilization of borrowings is made on capital account is not appreciated. Once this is lost, then the decision of Woodward Governor case (2009 (4) TMI 4 - SUPREME COURT ) would automatical .....

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exchange losses due to restatement of the subject mentioned foreign currency loan at the end of the year in subsequent assessment years and had not claimed as deduction as it is notional in nature in line with the consistent stand taken by the assessee. In this regard, we deem it fit and appropriate in the interest of justice and fair play, to give directions to the Learned AO to grant deduction of notional exchange loss in the subsequent assessment years to be in consonance with our findings h .....

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he Learned CIT(A)-XII, Kolkata in Appeal No. 207/XII/12(3)/06-07 dated 19-01-2009 for the Asst Year 2004- 05 against the order of assessment framed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'). 2. The only issue to be decided in this appeal is as to whether the foreign exchange gain of ₹ 6,71,12,500/- in respect of foreign currency loan which has been recognized in the profit and loss account in accordance with Accounting Standard 11 (AS 11) issued .....

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Martin Telematics Ltd. This foreign currency loan was to be repaid on 13.6.2006 as per the terms of the loan agreement. The Loan agreement specifies the purpose of the loan as meant for general corporate purposes. The said foreign currency loan was restated at the exchange rate prevailing at the end of the year in order to comply with the requirements of Accounting Standard (AS 11) issued by the Institute of Chartered Accountants of India (ICAI) which is mandatorily to be followed by the assesse .....

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tion did not hold water in the mind of the Learned AO who added the same on the following grounds:- a) The assessee itself had credited the exchange gain in its profit and loss account as income. b) The assessee had borrowed monies from its foreign shareholder and utilized the same for advancing to its subsidiary company in the ordinary course of its business as the assessee itself is engaged in the business of investment and financing activity. Hence the loan was taken only on revenue account. .....

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the end of the year, be it gain or loss, needs to be recognized in the profit and loss account. e) As per AS 1 issued by ICAI under the heading 'Prudence', even the unrealized gains are to be recognized in the profit and loss account which has been rightly done by the assessee in its books. Hence the assessee trying to take a shift in the treatment of the said gain for tax purposes is not in accordance with law. 4. On first appeal, the Learned CITA deleted the addition by making the foll .....

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ference to accrual of income is not in agreement with the legislative intent. What is to be taxed is 'real income' and not the 'notional income' as held by judicial forums. d. With regard to case laws (viz. Indian Overseas Bank Ltd vs CIT 246 ITR 206 and CIT vs IOB 151 ITR 446) relied upon by the assessee, the AO wrongly distinguished loss on unsettled contracts. In fact the referred cases are in favour of the assessee. On the other hand, the case law relied by the AO (viz Coca C .....

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t of fixed capital and not circulating capital. h. The gain is only contingent and notional as held by Uttarakhand High Court in the case of CIT vs ONGC Ltd (301 ITR 415) and this view is further supported by Hon'ble Kolkata ITAT (EIH Hotels Ltd). i. Foreign exchange gain is only hypothetical in nature and not realized by the assesssee. 5. Aggrieved, the revenue is in appeal before us on the following ground:- On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deletin .....

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is meant for general corporate purposes. Hence the loan is utilized only on revenue account. Accordingly the resultant foreign exchange gain arising out of restatement of foreign currency loan at the end of the year is to be brought to tax in the light of decision rendered by the Hon'ble Apex Court in the case of Oil & Natural Gas Corporation Ltd vs CIT reported in 322 ITR 180 (SC) which had followed the previous decision of the apex court in the case of Woodward Governor of India Ltd re .....

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been borrowed and utilized on revenue account. c. He further argued that even under the concept of Prudence as per AS 1 issued by ICAI, the assessee is supposed to recognize the foreign exchange gains in its profit and loss account and offer the same to tax. d. He further argued that the assessee itself had credited the foreign exchange gain as its income in the profit and loss account but strangely chose to withdraw the same from the ambit of taxation while filing the return treating it as noti .....

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terest income on the advance made to subsidiary company out of borrowings from its shareholder. The Learned AR argued that hence even though the assessee is an investment company, this lending was not made with a view to earn interest income and accordingly cannot be construed as amounts lent in the ordinary course of business of the assessee. Hence he argued that the transaction cannot be treated as loan utilized on revenue account and has to be treated as loan utilized on capital account. b. T .....

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ther words, notional gain is not offered to tax and similarly notional loss is not claimed as deduction. He stated that even the decisions of ONGC Ltd (322 ITR 180 -SC) and Woodward Governor case (312 ITR 254-SC) relied on by the Learned DR , affirms the view of consistency and method of accounting system adopted by the assessee. c. He argued that Accounting standard 1 (AS 1) issued by ICAI is notified u/s 145(2) of the Act. In AS 1, the principle of Prudence states that unrealized gains should .....

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iated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. d. The Learned AR argued that the Learned AO proceeds to understand the recognition of foreign exchange gains on restatement at the end of the year on the mistaken premi .....

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due to restatement of loans at the end of the year if the loan is utilized on revenue account. The Hon'ble SC held that since the loan is utilized on revenue account, the resultant exchange gain / loss even though unrealized, should be recognized in the profit and loss account and considered for tax purposes. He further argued that with regard to the loan utilized on capital account, the Hon'ble SC only decided whether the provisions of section 43A of the Act introduced in the statute w .....

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unt or capital account by the assessee. This is the entire crux of the issue and various arguments of the counsels of both the sides. We find that the Learned AR is trying to assail the issue before us based on certain facts which were mistakenly understood by the Learned AO such as :- (a) interest income has been earned by the assessee out of advances made to subsidiary company (Usha Martin Telematics Ltd) in the ordinary course of business, which is factually incorrect. (b) Similarly the conce .....

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to future events , profits are not anticipated but recognized only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. (c) that the foreign exchange gain on restatement is out of a settled loan transaction and hence it is not notional. This finding is factually incorrect as the loan is outstanding at the end of the .....

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ld not shift the business purpose for which the assessee advanced monies to Usha Martin Telematics Ltd. We find in the instant case, that since the assessee does not have any cost for its borrowed funds and that is why the assessee has tried to take this stand that the lending is not meant for business purposes of the assessee as there is no question of disallowance of interest on borrowed capital u/s 36(1)(iii) of the Act. The following facts are indisputable in the present case :- a) The asses .....

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estatement of the loan balance outstanding at the end of the year based on exchange rate prevailing at the end of the year amounting to ₹ 6,71,12,500/-. f) The assessee had credited the said foreign exchange gain in its profit and loss account as income. But for tax purposes, the assessee had treated the same as unrealized gains and hence not chargeable to tax as it is only notional gain. g) The assessee had similarly restated the loan outstanding in the subsequent years at the end of the .....

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n 43A w.e.f 1.4.2003 and no decision was rendered by the Hon'ble Apex Court in this case with regard to the foreign exchange fluctuations arising out of loan borrowed on capital account. But the said decision duly considered the recognition of foreign exchange gains for tax purposes if the loan is utilized on revenue account. Admittedly, the loan in the instant case has been utilized only on revenue account. Hence the resultant foreign exchange gain arising due to restatement at the end of t .....

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rofit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. 8.2. We agree with the arguments of the Learned AR that merely because the assessee had recognized the exchange gain in its profit and loss account , it would not automatically take the character of income for tax purposes. Entries in the books of accounts are not determinative of the question whether the assessee has earned any profit .....

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. But in the instant case, it is mentioned as general corporate purposes meaning - that the loan is meant for general business purposes of the assessee. The amounts advanced to Usha Martin Telematics Ltd is meant for business purposes of the assessee and has to be construed as amounts lent in the ordinary course of business only . The business of the assessee itself is making investments in other companies. We hold that just because no interest income is derived in this transaction, the characte .....

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