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DCIT, Circle-4, Kolkata Versus M/s. Asian Tea & Exports Ltd.

2016 (6) TMI 788 - ITAT KOLKATA

Subscription amount paid for club membership - whether an allowable business expenditure? - Held that:- In the instant case, the subscription paid towards membership for a period of five years and the same is being paid annually, thus is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise. Th .....

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ot allowed to be set off against the taxable income - CIT(A) deleted the addition - Held that:- the claimed loss under consideration occurred to the assessee on account of five unexpired forex forward contracts i.e is a loss incurred on account of revaluation of contract on last day of accounting period before date of maturity of forward contract. The Ld.CIT-A observed that the assessee has been following a consistent accounting policy for determining loss under AS-11 and AS-30 as required under .....

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ellate proceedings that the CIT-A noticed that the AO allowed the loss of ₹ 85,70,425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e the difference was arising for more than one accounting period. - Thus disallowance made by the AO treating the impugned amount for A.Y 2009-10 as contingent and notional loss is not justified and that the loss incurr .....

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Per Shri S. S. Viswanethra Ravi, JM This is an appeal preferred by the Revenue against the order dated 28.02.2013 passed by the CIT(Appeals)-IV, Kolkata for the assessment year 2009-10 framed under section 143(3) of the I.T.Act. 2. The appellant Revenue raised the following grounds: 1. Whether on the facts and circumstances of the case the Ld. CIT(A) has justified in law as well as on the facts in directing the A.O. to delete the addition of ₹ 2,12,617/- on account of subscriptions etc. pa .....

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of ₹ 54,23,955/- is without any basis and in contravention to the CBDT s instruction no.03/1010 dated 23.03.2010. 3. The brief facts of the case are that the assessee is a listed company with stock exchange and engaged in the business of trading and export of tea. The assessee declared its total income of ₹ 98,55,307/- through online return on 24.09.2009. The notices under section 143(2) and 142(1) of the Act issued for scrutiny. 4. During the course of assessment proceedings the AO .....

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ld. A.R. relied on CIT(A) s order. 7. Heard both and perused the material available on record. The question that arose for consideration before us as to whether the subscription paid to a club for membership of staff member is a business expenditure or not. 8. Ld. CIT(A), during appellate proceedings, opined that subscription amount paid for club membership is an allowable business expenditure as per the express provisions of section 37(1) of the Act. 9. We may refer to the provision of Section .....

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rofession". 10. The bare reading of the above suggests that in order to qualify or the true test for qualification of expenditure under s. 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account. 11. The Hon ble HIGH COURT OF DELHI in the case of COMMISSIONER OF INCOME TAX vs. SAMTEL COLOR LTD reported in 326 ITR 0425, the facts involved therein was that the assessee has paid corporate membersh .....

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lowed the employees to interact with its customers and the expenses were for business purposes. The Hon ble High Court held as follows: 5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The 'business purpose basis adopted for eligibility of expenditure under s. 37 of the Act was the correct approach. This is more so in view of the Tribunal .....

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ise and does not add to the profit earning apparatus of a business enterprise. Applying the principle laid down above, we hold that subscription amount paid towards membership in N.L.Planters club for a period of five years is an expenditure incurred wholly and exclusively for the purposes of business of the assessee. 13. The MUMBAI 'B BENCH of ITAT in the case of DEPUTY COMMISSIONER OF INCOME TAX vs. BANK OF AMERICA SECURITIES (INDIA) (P) LTD reported in (2011) 136 TTJ 0441, the facts invol .....

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. We find that the facts are not in dispute in as much as it has been rightly observed by the learned CIT(A) the AO has not disputed the fact that the expenditure of club membership fees ₹ 16 lacs has been incurred by the assessee wholly and exclusively for the purpose of business of the assessee. Further we find no merit in the plea of the learned Departmental Representative that the decision in Alembic Chemical Works Co. Ltd. (supra), is not applicable to the facts of the assessee s case .....

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16R.841 : "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determin .....

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capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise and accordingly we are inclined to uphold the finding of the learned CIT(A) in deleting the disallowance of ₹ 16 lacs made by the AO. The grounds taken by the Revenue are, therefore, rejected. 14. In the present case, the assessee contended that the subscription paid annually towards membership of the said club for a period .....

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respectably following the above, we dismiss the ground no-1 raised by the appellant Revenue. 16. Ground no.2 is against the deletion of addition of ₹ 54,23,955/- made by the AO. The AO was of the view that the marked to market loss is a notional loss, contingent in nature and it is not allowed to be set off against the taxable income. The CIT(A) deleted the addition basing on the order of Special Bench C of Mumbai bench of ITAT in the case of DCIT-vs- Bank of Bahrain & Kuwait reported .....

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on forex derivatives. Pursuance of the same, the assessee claimed a sum of ₹ 54,23,955/- as notional loss as market to market for assessment year 2009-2010. Since it is a notional loss as claimed and it is contingent in nature and it cannot be allowed as set off against the taxable as per the instruction issued by the CBDT. Further relied on AO s order and sought to allow the appeal. In reply, ld. A.R. reiterated the submissions made before the ld. CIT(A). 18. A perusal of order of CIT(A) .....

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pertinent to note that the assessment for 2010-2011 was completed, where the AO therein allowed the loss of ₹ 85,70,425/- as claimed by the assessee on account of five unexpired forex forward contracts. The ld. DR contends that the loss claimed by the assessee is a notional loss as no sale/conclusion/ settlement of contract has taken place and the asset continues to be owned by the company in accordance with para 2 of instruction no.03/2010. Thus, it is a contingent loss and there is no de .....

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derived support from the order of Special Bench C of Mumbai ITAT in the case of DCIT-vs- Bank of Bahrain & Kuwait wherein it held that loss incurred on account of revaluation of contract on last day of accounting period before date of maturity of forward contract is an allowable deduction. 20. A similar issue was dealt by the ITAT, MUMBAI 'C SPECIAL BENCH DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) vs. BANK OF BAHRAIN & KUWAIT reported in 41 SOT 0290 supra as relied by .....

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e unmatured on the date of balance sheet of an amount of ₹ 12,42,648. He noted that the assessee enters into forward contracts with clients to buy or sell foreign exchange at an agreed price on a future date. This future price was estimated according to certain norms such as forward premium rates for certain currencies and the AO disallowed the loss of ₹ 12,42,648 treating the same as notional loss. The AO, however, allowed the amount which was disallowed on this count in earlier yea .....

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y the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e., before the date of maturity of the forward contract." And applied ratio laid down by the Hon ble Supreme Court in the case of CIT vs. Woodward Governor India (P) Ltd reported (2009) 312 ITR 254 for the proposition that an anticipated loss .....

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n as much as the deviation from the same is to be reported in the audit report. AS-11 mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March 24. The Special Bench, in view of the decisions supra answered the reference in favour of assessee the relevant observation is at para-58 of which reproduced as under: 58. In view of the above discussion, we allow the assess .....

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1st March. (iv) A liability is said to have crystallised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing. (v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. (vi) The forward foreign exchange contracts have all the trappings of stock-in-trade .....

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