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Essel Mining & Industries Ltd. Versus Addl. C.I.T., Range-5, Kolkata And Vice-Versa

2016 (5) TMI 978 - ITAT KOLKATA

Treatment of Foreign Exchange Fluctuation Gain - revenue or capital gain - Held that:- The foreign exchange fluctuation gain to the extent it relates to foreign currency loans utilised for purchase of indigenous plant and machinery in the assessee’s wind power units did not attract the provision of section 43A of the Act. Section 43A of the Act only makes a reference to acquisition of asset from a country outside India and in consequence of the change in the rate of exchange after the acquisitio .....

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earlier part of the order such gain or loss has been consistently neither offered to tax nor claimed as deduction by the assessee while computing the total income. In the light of the facts and circumstances stated above, we are of the view that the claim made by the Assessee deserves to be accepted.

AO is directed to exclude the foreign exchange fluctuation gain to the extent of ₹ 5,79,10,209/- from the total income of the assessee as it is a capital receipt not chargeable to .....

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ri M. Balaganesh, AM For the Assessee: Shri D. S. Damle, FCA For the Department : Shri Rajat Subhra Biswas, CIT(DR) ORDER Per N. V. Vasudevan, JM ITA No.352/Kol/2011 is an appeal by the Assessee while ITA No.589/Kol/2011 is an appeal by the Revenue. Both these appeals are directed against the order dated 10.01.2011 of CIT(A)-VI, Kolkata, relating to AY 2007-08. ITA No.352/Kol/2011 (Assessee s appeal) 2. Ground No.1 was not pressed and the same is dismissed as not pressed. 3. Ground Nos. 2 and 3 .....

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n in the case of Goetz (India) Ltd. was relevant only in relation to the Assessing Officer's power and not in respect of the power of an Appellate authority and thus he erred in applying the said decision in relation to the claim made by the appellant at the Appeal stage. 4. The Assessee is a company. It is engaged in the business of raising of ore and manufacture of ferro alloys. The assessee is also engaged in trading of iron ore and mining ore. For A.Y.2006-07 the assessee filed return of .....

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luded a sum of ₹ 5,79,10,208/- which pertain to foreign currency loan availed by the assessee for purchase of indigenous machinery in the assessee s wind power unit. It was the plea of the assessee before CIT(A) that similar gain or loss on foreign exchange fluctuation against foreign currency loan utilised for purchase of indigenous machinery had not been included in the total income and offered to tax when there was a gain on the ground that it was a capital receipt not chargeable to tax .....

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n the Computation of Total Income. The claim allowed in the order u/s 143(3) as well as in the Order u/s 1471143(3) 2009-10 (41,33,87,127) Added back in the Computation of Total Income being capital loss. Assessed as such i.e. loss disallowed in the order u/s 143(3) 2010-11 13,84,44,458 Claimed as capital receipt in the Computation of Total Income. The claim allowed in the order u/s 143(3) 2011-12 (50,94,002) Added back in the Computation of Total Income being capital loss. Assessed as such i.e. .....

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7; 10,89,43,668/- being the gain on Foreign Exchange Fluctuation, as Capital Receipt in the appellant s hands and so the said sum of ₹ 5,79,10,208/- should have been reduced from the appellant s taxable income. 6. The assessee submitted before CIT(A) that since the foreign currency loan in question had been availed and utilised for purchase of indigenous fixed assets, the gain there from should be considered as being on capital account and consequently the said sum was required to be reduc .....

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s would ordinarily be trading profit 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. But, if on the other hand, the foreign currency is held as capital asset or as fixed capital, such profit or loss would be of capital nature. 7. CIT(A) however did not agree with the aforesaid submissions of the assessee for the reasons that the assessee did not make any claim for exclusion of the aforesa .....

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turn of income, an assessee can make further new claim only by filing a revised return of income in time. The CIT(A) therefore held that the claim made by the assessee in this regard cannot be entertained. 8. Aggrieved by the order of CIT(A) the assessee has raised ground Nos 2 and 3 before the Tribunal. 9. We have heard the submissions of the ld. Counsel for the assessee and the learned DR. The ld. Counsel for the assessee brought to our notice that the Hon ble Supreme Court in the case of Goet .....

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hat the Hon ble Supreme Court in the case of Goetze India Ltd further observed that in para - 4 of its decision that its decision will not have any impact on the power of the Tribunal u/s 254 to entertain for the first time a point of law, provided the fact on the basis of which the issue of law can be adjudicated are already available on record. The Hon ble Supreme Court made it clear that its decision was limited in the power of the AO. The ld.counsel submitted that in the decision rendered by .....

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ed was bona fide and the same cwas not raised earlier for good reasons. The ld. Counsel submitted that the ratio laid down in the case of Goetze India Ltd., regarding the power of the Tribunal to entertain a new plea should be construed as applicable to the first appellate authority also in view of the decision in the case of Jute Corporation of India (supra). The ld. DR relied on the order of the AO. 10. We have given a very careful consideration to the rival submissions and are of the view tha .....

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nces of the case we are of the view that the first appellate authority ought to could have entertained the claim of the assessee and examined the same on merits rather than refusing to entertain the claim by relying on the decision of the Hon ble Supreme Court in the case of Goetze India Ltd . we hold accordingly. 11. The next argument raised by the ld. Counsel for the assessee was that the issue can be adjudicated by the Tribunal rather than remand the issue to the CIT(A) for fresh consideratio .....

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remand the issue to the AO. The ld. Counsel further drew our attention to the decision of the Hon ble ITAT Ahmedebad A Bench in the case of ACIT vs GHCL Limited vide ITA Nos.830 & 2508/Ahd/2008 order dated 30.09.2015 wherein identical question whether foreign exchange fluctuation gain on foreign currency loan availed for purchase of indigenous machinery had to be excluded from the total income as capital receipt not chargeable to tax, had come up for consideration The question before the Ho .....

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as this ground of appeal is concerned, some material facts will have to be taken note of. During the course of assessment proceedings, the Assessing Officer noted that the assessee has earned foreign exchange fluctuation gain of ₹ 1,79,20,653/- on foreign exchange loan borrowed to acquire indigenous plant and machinery but has not reduced the same from written down value of the plant and machinery, as,according to the Assessing Officer, was the requirement of section 43A of the Income Tax .....

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urrency loan from IDBI and Export Import Bank of India for acquisition of indigenous plant and machinery. The appellant has received exchange fluctuation gain of ₹ 1,79,20,653/- during the relevant year. Relying on the decision of S.C. in Sutlej Cotton Mills Ltd. Cited supra, as the gain was in respect of a capital asset it is considered as a capital receipt. As the loan was used for acquisition of capital asset, the said transaction was clearly on capital account. It being a capital recei .....

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to how the adjustments will have to be done when asset is brought from India, as there is no provision similar to provision of Sec. 43A. Once the asset is purchased and actual cost is determined, any subsequent change in value of loan cannot alter the cost of asset as held by Hon ble Supreme Court in case of CIT V. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285, wherein it was held that at the time of repayment of loan, when there was a fluctuation in the rate of foreign exchange as a result o .....

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sion of SC in TISCO 231 ITR 285 (SC) is subject to provisions of Sec. 43A. But when the asset is purchased from India and not from abroad, the provisions of section 43A cannot be applied. It cannot be also said that part of cost is met by somebody else, so cost shall be reduced as per section 43(1) as at the time of purchase of asset the cost was the loan amount. Though the appellant has reduced the cost of capital asset in books of accounts, courts have held that accounting treatment by assesse .....

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A.R. as no deduction has been allowed to the appellant in earlier years. The foreign exchange fluctuation gain in the case of the appellant is definitely a capital receipt as it was utilised for purchase of asset and further it cannot be reduced from the cost of fixed assets for computation of depreciation as the provisions of section 43A are not applicable as the assets have been purchased from India and not abroad. Accordingly the A.O. is directed not to reduce the cost of fixed assets for dep .....

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l finding to that effect by the Assessing Officer himself. As such, the provisions of section 43A of the Act do not come into play at all. Learned Departmental Representative could not point out any other statutory provision under which impugned adjustment could have been made. In view of these discussions, we see no reasons to disturb the relief granted by the ld. CIT(A). We approve the same and decline to interfere in the matter. 12. In the light of the aforesaid decision the ld. Counsel praye .....

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tion of asset from a country outside India and in consequence of the change in the rate of exchange after the acquisition there is an increase of reduction in the liability of the assessee as expressed in Indian currency at the time of making payment and compared to the liability existing at the time of acquisition of the asset. The section is not attracted where the asset is not acquired from a country outside India. This aspect has been considered and accepted by the Hon ble Ahmedabad Bench in .....

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lude the foreign exchange fluctuation gain to the extent of ₹ 5,79,10,209/- from the total income of the assessee as it is a capital receipt not chargeable to tax. 14. Ground Nos. 4 and 5 raised by the assessee read as follows :- 4. That the Commissioner of Income-tax (Appeals) was wrong in not admitting the appellant's Additional Ground of Appeal relating to the deduction of the demand of ₹ 1 00, 14,22,200/- raised by the Railway authorities towards Wharfage/Stacking Charges. 5. .....

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by him in the form of additional grounds of appeal before CIT(A). The same was not admitted by the CIT(A) for adjudication for the reason that the aforesaid claim was not the subject matter of the assessment order against which the assessee has filed its appeal. 16. The ld. Counsel for the assessee submitted that the facts which were necessary for adjudicating the issue raised in ground No.4 are not available on record either before AO or CIT(A) and in these circumstances the principle laid down .....

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1. That on the facts and circumstances of the case, Ld. CIT(A)-VI, Kolkata has erred in law as well as on facts of the case by deleting the disallowance of 'Net Present Value' (NPV) of 7,11,50,400/-, although it is capital in nature and hence cannot be allowed u/s.37(1) of the LT. Act, 1961, more so as the Hon'ble Supreme Court has held that the compensation paid by the mine owners to the forest department for use of forest land for mining are the fees / compensation for earlier year .....

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Value of Broken Area(NPV). The said payment had been made to the Divisional Forest Officer in pursuance of the Forest (Conservation) Act, 1980 and as per Demand Notice dated 24.11.05 from the Divisional Forest Officer and as per Order dated 14-16.02.2005 issued by Ministry of Environment & Forests (F. C. Division), Government of India. For the purposes of obtaining Temporary Working Permission for mining the above-mentioned payment was a pre-condition. As per .the Supreme Court Order in Wri .....

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s including the stoppage of day to day mining operations and thus for the purpose of carrying on its mining business the Assessee was compulsorily required to incur the expenditure towards payment of NPV. 20. The NPV represented a levy towards compensation for diversion of the forest land into mining activities and the land in respect of which the payment was made, was owned by the Forest Department. By making the payment of NVP, no tangible asset came into existence. The Assessee also submitted .....

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accordingly, the Assessee had to follow the same. The Assessee further clarified that the payment of NPV being a statutory requirement which had to be complied with by the Assessee wholly and exclusively for the purpose of carrying on of its business, the incurring of such expenditure should be considered as having direct nexus with the business activities of the Assessee. The Assessee thus submitted that before the AO that the payment of NPV should be considered as an allowable revenue expendit .....

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eriodic payment. According to the AO the expenditure in question satisfied all the conditions for being treated as a capital expenditure. He therefore disallowed the claim of assessee for deduction for the aforesaid sum as revenue expenditure. 22. On appeal by the assessee CIT(A) held that the expenditure was revenue expenditure and had to be allowed as deduction. 23. Aggrieved by the order of CIT(A) the Revenue has preferred the present ground of appeal before the Tribunal. 24. At the time of h .....

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stion that was considered by the Tribunal in the aforesaid decision was as follows :- ITA No.122/Kol/09 1) That under the facts and circumstances of the case, ld. CIT(A) had erred in law as well on facts by not considering that Net Present Value is a compensation, paid by the assessee to the Forest Deptt., for utilization of forest land for non-forest purpose. Hon ble Supreme Court has categorized such payments as fees to be paid by the mine owners to the Forest Deptt., quantified on the basis o .....

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000/-. 2. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in not considering the order of the Ministry of Environment & Forests (F.C. Division), dated 10.12.2005, circulated vide F.No.8-41/2003-FC, by virtue of which the assessee got right of mining over an additional 25 hector of broken up forest area., 3. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in not considering the fact that the asse .....

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ce, not allowable. 5. That on the facts and circumstances of the case, ld. CIT(A) has erred in law as well as on facts in applying the ratio of the case of Bikaner Gypsums Ltd.[(1991) 187 ITR 39, 49 (SC)] in the case of the assessee, which is not at all applicable. In that case the expense of shifting of Railway Track was incurred by the assessee for the smooth operation of their business. 24.1. The Tribunal on the above issue held as follows :- 4. Ld. counsel for the assessee further stated tha .....

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on ble Apex Court in the case of T.N. Godavaram Thirumalpad (supra) has observed that forests are vital components to sustain life support system on the earth. Therefore, thee is an absolute need to take all precautionary measures when forest lands are sought to be directed for non-forest use. Hon ble Apex Court stated that when forest land is used / diverted for non-forest purposes and there is consequential loss of benefits accruing from the forests, the User Agency of such land be required to .....

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forest purposes, and one of the conditions of the permission should be that there should be compensatory afforestation, then the responsibility of the same should be that of user agency. Hon ble Apex Court observed that the money so received towards NPV should be used for natural assisted re-generation, forest management, protection, infrastructure development, wildlife protection and management, supply of wood and other forest produce saving devices and other allied activities. In the context, .....

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. In that context, it was held by Their Lordships that levy of NPV is a fee that means every mining agency using and converting forest land to non-forest purpose has to pay a fee for continuing carrying on of the business. We agree with ld. AR that nonpayment of this NPV could lead to consequences, inter alia, to the stoppage of the business. The Hon ble Apex Court ha held in the case of Bikaner Gypsums Ltd.-vs.- CIT (supra) at page 49 as under:- Where the assessee has an existing right to carry .....

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ther the said payment is a pre-condition to enable the assessee to carry on its mining activities and as such it is not a voluntary one That payment was made on the basis of direction given by the Divisional Forest Officer working in the Ministry of Environment and Forests, Government of India. Since the said payment of NPV being a statutory requirement and has to be paid by the assessee to continue to carry on its mining activities, we are of the considered view that the said payment is wholly .....

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red as capital in nature. Hon ble Apex Court has held in Empire Ju9te Company Ltd. -vs-CIT [124 ITR 1] that there may be cases where expenditure, even if incurred for obtaining an advantage of any enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. Hon ble Apex Court observed that if the advantage consisted of merely in facilitating the concerned assessee s trading operations or enabling the management and conduct of the assessee s business .....

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ue its mining business. Therefore, the above decision of Hon ble Apex Court in the case of Bikaner Gypsums Limited (supra) squarely applies to the case of assessee and it could not be capital in nature. 14.1 A similar issue also came before Hon ble Karnataka Bench of ITAT in the case of National Aluminium Co. Ltd.-vs.-DCIT [101 TTJ (CTK) 949]. In the said case, assessee-company debited an amount of ₹ 6.20 crores towards contribution to Minerals Exploration Fund set up by Government of Indi .....

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India, it cannot but be in the business interest of the assessee-company to abide by such directions of the Government of India. Accordingly, this payment is a statutory requirement and the expenditure has been considered wholly and exclusively for the purpose of business and has got a direct connection with the business activity of the Company. It was held that since the assessee-company was following mercantile system of accounting and the provisions had been made on the basis of Office order .....

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e profitability while leaving the fixed capital untouched, expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Ahmedabad Bench, ITAT in Joint Commissioner of Income Tax -vs.- Dewerson Industries Limited [2005 TIOL 236 (AHD.)] held that payments of similar nature to Ministry of Forest and Environment, Government of Gujarat were allowable as business expenditure. ITAT, Mumbai Bench in Industrial development Bank of India -vs.- Deputy Commissioner .....

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e because no asset arises to the trader by reason of such expenditure. It was further held that where law imposes on the assessee, an obligation to incur expenses for being permitted to pursue its trading activity, the expenditure would be an outgoing from the profits of the trade. 15. In view of the above decision and the facts of the case before us, we hold that ld. CIT(Appeals) has rightly held that the above expenditure of ₹ 3,95,56,500/- paid by the assessee as NPV to enable the asses .....

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o-ordinate Bench decision is not applicable to the present facts of the case but he relied on the decision of Hon ble Supreme Court in the case of T.N. Godavarman Thirumulpad v. Union of India and Others (2006) 1 SCC dated 26-09-2005.According to Ld. SR-DR the NPV is considered as fee. We find that this issue has been considered by this Co-ordinate Bench decision of NPV paid by assessee is held to be revenue expenditure, this liable u/s 37(1) of the Act. Once, this the position issue is squarely .....

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hat on the facts and circumstances of the case, Ld. CIT(A)-VJ, Kolkata has erred in law as well as ·on facts of the case by deleting the disallowance u/s.14A of Rs.,94,14,773/- and computing disallowance u/s.14A at ₹ 3,99,203/-, @1% of exempt income i.e., ₹ 3,99,20,387/- without any basis and logic, which is more so as in the case of CIT vs. Hero Cycles, November 4, 2009 (P&H) it was held that even if the funds are merged in common kitty, the disallowance u/s.l4A is justif .....

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A.Y.2008-09 as held by the Hon ble Bombay High Court in the case of Godrej & Boyce and Manufacturing Co. Ltd. Vs DCIT (2010)328 ITR 81 (Bom) and further held that in respect of A.Y. prior to A.Y.2008-09, disallowance u/s 14A of the Act should estimated on a reasonable basis. The CIT(A) thereafter held that no interest expenses can be disallowed as the assessee had sufficient own funds. With reference to the disallowance of other expenses the CIT(A) held that disallowance of 1% of the exempt .....

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nvestment are about ₹ 295.9 crore but as against this the share capital and reserves and surplus are about ₹ 1734 crore. Therefore, it can be assumed that the surplus funds of the assessee on which it is not required to pay interest are deployed in the investments from which exempt income is earned. Since borrowed funds prima-facie do not appear to be invested in the investments therefore no disallowance can be made u/s.14A out of the interest expenses. As regards the administrative .....

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