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TMI Blog2016 (3) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the disallowance u/s. 14A of the Act while computing the book profits u/s. 115JB of the Act to Rs. 13514428/- as against Rs. 11,24,17,511/- added by AO". 3. "On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 2,42,24,011/- u/s. 36(1)(iii) on account of proportionate interest expenditure pertaining to interest free loans & advances given by the assessee company to its subsidiaries out of interest bearing funds without appreciating that the assessee had not proved the commercial expediency for doing so". 4. on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of contingent liability of Rs. 279246564/- made by the AO- u/s 43(5) (d) of the Act inspect of Marked to Market (MTM) loss and instead holding that the said loss is allowable as covered u/s 43(5)(a) of the Act" 2.1 The facts of the case in brief are that the assessee filed its return of income on 30.9.2009 declaring a loss of Rs. 57,25,03,911/- under the normal provisions of the Act and book profit u/s 115JB of the Income Tax Act, 1961 at Rs. 49,25,53,548/-. The case of the assessee was selected for scrutiny a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between 51% to 100%. The Reserves and Surplus of the assessee increased from 54.66 lakhs in the financial 2000-01 to Rs. 41414.24 lakhs in the financial year 2007-08. Similarly, the investment in subsidiaries companies which were at Rs. 17.89 crores in financial year 2001-02 had gone up to Rs. 319.44 crores in financial years 2007-08. The ld. CIT(A) deleted the addition made by the AO on account of interest on the ground that the assessee's own funds were far more than the investment made in the subsidiaries companies and therefore relying on the decisions in the cases of CIT V/s Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom), Woolcombers of India Ltd V/s CIT 1981) 23 CTR (Cal) 204 and East India Pharmaceuticals Works Ltd V/s CIT (1987) 139 CTR (SC) 372 deleted the disallowance made on account of interest while sustaining the disallowance in respect of other in direct expenses at the rate of 0.5% of the average of value of investment which came to Rs. 1,35,14,428/-. 2.3 The ld. DR heavily relied on the orders of authorities below and submitted that the addition of Rs. 11,24,70,515/- were wrongly reduced to Rs. 1,35,14,428/- and prayed for that the order of the ld.CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the presumption under the law was that the investment were made out of interest free funds and not out of loans. 2.5 We have considered the rival submissions and perused the record and find that the assessee's own funds as stated above were far more than the investment made in the subsidiary companies and debentures. The facts are proved by the increase in reserve and surplus over the years which were at Rs. 414 crores as on 31.3.2008 against the investment in subsidiaries which stood Rs. 319.43 crores as on 31.3.2008. We also note that the assessee had taken loans from Financial Institutions amounting to Rs. 722.24 crores, out of which the working capital loan Rs. 258.79 crores and remaining pertains to term loans for the specific purposes. The AO took the entire interest debited to the profit and loss account amounting to Rs. 94.35 crores and worked out the disallowance accordingly. In our opinion, the ld CIT(A) had rightly deleted the disallowance on account of interest under rule 8D(2)(ii) of the Rules and rightly upheld the disallowance to the tune of Rs. 0.5% of the value of investment which comes to Rs. 1,35,14,428/- being 0.5 % of Rs. 270.28 crores by following the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g amount of Rs. 24.22 crores, the advances were advanced to various 11 subsidiary companies wherein the assessee holding were to tune of 51% to 100% share. It was also submitted that these subsidiaries were engaged in the business of installation of Windmills sold by the assessee company. The ld AR for the assessee further submitted that the interest free funds given to subsidiary companies were not utilized for any non-business purpose or further personal purposes of the directors of the companies but used for the purposes of business and were given purely for commercial exigency and therefore interest thereon could not be disallowed as held by the Hon'ble Supreme Court in the case of S A Builders Limited V/s CIT 288 ITR 1 (SC). 3.2 The ld. DR vehemently submitted before us that the interest disallowance of Rs. 2.42 crores was wrongly deleted by the ld. CIT(A) by ignoring the facts that the interest free loans to the subsidiary companies were given out of the interest bearing funds raised by the companies and therefore prayed for setting aside the order of ld. CIT(A) on this point. 3.3 On the other hand, the ld.AR pointed out that the assessee had advanced these funds out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered in the case of S A Builders (supra) wherein it has been held that interest on borrowed funds cannot be disallowed on the ground that the assessee has advanced interest free loans to sister concern as measure of commercial expediency and what has to be seen is the business purpose and what the sister concern utilization of borrowed the money for business purpose. The Hon'ble Apex court Court in the case of S A Builder (supra) has held as under:- "The High Court in the impugned judgment as well as the Tribunal and the income-tax authorities had approached the matter from an erroneous angle. In the instant case, the assessee borrowed the fund from the bank and lent part of it to its sister concern (a subsidiary) as interest-free loan. The test in such a case was really whether this was done as a measure of commercial expediency. The decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is 'for the purpose of business'. It has been consistently held in decisions relating to section 37 that the expression 'for the purpose of business' includes expenditure voluntarily incurred for commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to deduction of interest on its borrowed loans". In the case of Reliance Utilities and Power Ltd (supra), The Hon'ble Court has held that the assessee has its own funds and simultaneously has borrowed interest bearing funds the presumption is that the advance of money is out of own funds and not out of interest bearing funds. We, therefore, respectfully following the ratio laid down in the above decisions supra confirm the order of ld. CIT(A) on this issue. 4. The Ground No.4 is against the deletion of loss of Rs. 27,92,46,564/- by the ld. CIT(A) made by the AO u/s 43(5)(d) of the Act on account of M to M losses. 4.1 During the course of scrutiny proceedings, the AO found that the assessee had claimed a sum of Rs. 28,69,53,073/- in the profit and loss account under the head "Cash P/L on Options" which was on account of "Marked to market" loss on option of derivatives comprising of a sum of Rs. 77,06,509/- being actual loss on of option of derivatives on those contracts which materialized within the year and further sum of Rs. 27,92,46,564/- being provisions for MTM on options at the exchange rate on the reporting date or at the close of the year on those contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied heavily on the order of AO and prayed for upholding the same and setting aside the order of CIT(A) in view of instruction no 17/2008 dated 26.11.2008 which provided for disallowance of losses of notional and contingent nature. The ld DR submitted that the as on based on the rate of exchange on maturity of the contract but were accounted for at the year end as per accounting standard -11 which was not mandatory as not being notified u.s 145(3) of the Act. 6. The AR vehemently submitted before us that the case of the assessee was covered in its favor by decisions of the Hon'ble Supreme court, High court and Tribunals and CIT(A) had allowed the appeal of the assessee after following the ratio decided in the Special Bench of the Tribunal in the case of DCIT V/s Bank of Bahrain and Kuwait (2010) 132 TTJ (Mum) (SB) 505 and the decision of the Hon'ble Supreme Court in the case of Woodwords Governor India Pvt.Ltd. (2009) 312 ITR (SC) 254. The ld AR argued that the marked to market loss of Rs. 27,92,46,564/- which had accrued from the revaluation and re-statement of outstanding forward contract at the end of the year as per accounting standard -11 based foreign exchange on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting standard 11 which deals with the treatment of forex losses or gains not actually realized. The same practice was being followed in the earlier year and was also accepted by the Revenue. The need to hedge is a commercial expediency and necessity which is practically followed in all the business houses engaged in the business import/export these days specially when the exchange rate is highly volatile. The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait (2010)132 TTJ Mumbai (SB) 505 the special bench held that MTM losses in respect of forward foreign exchange contract debited to the profit and loss account are allowable and further held (i) a binding obligation is accrued against the assessee the moment it entered into forward foreign exchange contract(ii) consistent accounting method followed by the assessee to account for the forex gain and loss at the yearend based upon the current exchange rate cannot be disregarded(iii) the liability is said to have crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty(iv) as per AS-11 when the transaction is not settled in the same accounting year as that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um/2010 and M/s. Sutariya Gems Pvt. Ltd. in 3361/Mum/2013. Therefore, we have no hesitation in setting aside the order of Ld. CIT(A) and in directing the AO to delete the addition of Rs. 2,59,623/-. Ground No.2 is allowed." 8. In view of the facts of the assessee and various judicial decisions of the coordinate benches following the decision of apex court in the case of Woolward Governor India Pvt. Ltd(supra) and special bench decision in the case of Bank of Bahrain and Kuwait(supra), we are of the considered view that case of the assessee is fully covered by the decisions of the coordinate benches and we therefore respectfully following the same allow the appeal of the assessee on the issue of MTM losses by deleting the disallowance of Rs. 27,92,46,564/-. The AO is directed accordingly. 9. Now we will take up the appeal bearing ITA No.6751/Mum/2011. 10. Grounds raised in this appeal by the revenue are reproduced below: "1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the prior period expenses of Rs. 18,87,320/- without appreciating the fact that the assessee is following the mercantile system of accounting and the assessee has not pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the professional charges Rs. 6,61,200/- paid to L.E.Dchez against their professional fee for the period 1.1.06 to 31.3.2006. The ld. Counsel submitted that the bills for the professional charges were received late and as a result of which the payment of the said expenses could not be credited. As regards, the amount of Rs. 12,26,120, the bills were received late and could not be booked and therefore, in view of this facts, these could not be credited for the year to which these expenses were related and thus, in no way could be construed as part of expenses as the same were crystallized during the year. The ld. Counsel argued that the ld. CIT(A) after going into the details debts of the issue allowed the appeal of the assessee and therefore, the ld. Counsel submitted that the order of the ld. CIT(A) ber upheld. 10.3. We have considered the rival submissions and perused the record. We are in agreement with the finding of the ld.CIT(A) that liability for the bills for fees paid to M/s L.E.Dchez of Rs. 6,61,200/- was crystalised during the year as these bills were received late and payment could not be approved and booked during the year ended on 31.3.2006. The ld. CIT(A) also relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see vide bill dated 25.10.2005 received from M.P.Malviya towards repairs of furniture towards civil work, POP, painting work etc were pertaining to earlier year and wrongly brought in this year, therefore, the AO had rightly disallowed the same. The ld. DR prayed that the order of AO be upheld and the order of ld. CIT(A) be set aside. 11.2. Per contra, the ld. AR submitted before us that the assessee had carried out heavy repairs to furniture, POP and painting work etc which were damaged due to heavy rain in 2005 and the bills were received and settled during the year and thus, the same was booked in the current year and the ld. AR further submitted that the AO has no basis to disallow these essential expenses incurred, which were exclusively for the business purposes and smooth running of the business. He submitted that the AO disallowed these expenses on the ground that the bill was dated 25.10.2005 and without going into the further details has to be crystallised all these expenses. The ld. AR argued that mere following the mercantile system of accounting did not mandate that all the expenses which are not eve known to the assessee or which were not possible if estimated with s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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