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TMI Blog2023 (12) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... nder:- Assessee's Grounds of Appeal- AY 2013-14 "1. That the additions/disallowances made and sustained by the Commissioner of Income Tax (Appeals) are illegal and bad in law. 2. That in view of the facts and circumstances of the case, the CIT (Appeals) has erred on facts and in law in sustaining the disallowance of Rs 20,54,47,894/- (Rs. 18.82 Crore 2- being Loss on ECB Liability and Rs. 1.72 Crore being loss on Hedging contracts for ECB) claimed by the appellant as a deduction on account of exchange rate fluctuation. 3. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in not allowing deduction on account of foreign exchange fluctuations as allowable deduction, when it is an admitted fact that the loan received is used as circulating capital for the purpose of business. 4. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in treating the loss of Rs. 18.82 Crore (rounded off) as notional loss in respect of restatement of ECBs. 5. That the CIT(A), in view of the facts and circumstances of the case, has erred on facts and in law in treating the loss of Rs. 1.72 Crore (rounded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant craves to be allowed to add any fresh ground(s) of appeal and/or delete or amend any of the ground(s) of appeal Assessee's Grounds of Appeal- AY 2014-15 "1. That the additions/disallowances made and sustained by the Commissioner of Income Tax (Appeals) are illegal and bad in law. 2. That in view of the facts and circumstances of the case, the CIT (Appeals) has grossly erred on facts and in law in upholding the disallowance of Rs 18,64,61,000/- claimed by the appellant as a deduction on account of foreign exchange rate. This addition may kindly be deleted. 3. That the CIT(A) has grossly erred on facts and in law in upholding the addition/ disallowance of Rs 18,64,61,000 without appreciating the well settled position of law and the facts of the case. This addition may kindly be deleted. 4. That the CIT(A) has grossly erred on facts and in law in upholding the addition/ disallowance of Rs 7,92,643/- under Sec 14A and Rule 8D. The disallowance of Rs 7,92,643/- upheld is totally illegal and bad in law and may kindly be deleted. 5. That the CIT(A), in view of the facts and circumstances of the case, has grossly erred on facts and in law in upholding the addition/disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013-14 and 2014-15 it filed its return on 30.09.2013 and 30.09.2014 declaring income of Rs. 1,29,02,65,078/- and Rs. 207,96,59,220/- respectively. Both the returns were selected for scrutiny under CASS. Statutory notices were issued/served and complied with. Details filed were examined and considered by the Ld. Assessing Officer ("AO"). 4. The Ld. AO completed the assessment under section 143(3) of the Income Tax Act, 1961 (the "Act") on total income of Rs. 1,53,74,00,120/- on 19.01.2016 for AY 2013-14 including therein disallowance of depreciation of Rs. 57,05,766/- on investment made in windmills; disallowance of Rs. 20,54,47,894/- being notional loss booked under the head foreign exchange loss; disallowance of Rs. 56,97,665/- for non-deduction of TDS; disallowance of Rs. 1,16,97,590/- under section 14A; disallowance of Rs. 1,76,16,528/- under section 36(1)(viii) and disallowance of Rs. 9,69,602/- under section 37 aggregating in all to Rs. 24,71,35,045/-. 5. The Ld. AO completed the assessment for the AY 2014-15 on 23.12.2016 on total income of Rs. 2,31,35,75,580/- under section 143(3) of the Act including therein disallowance of depreciation of Rs. 11,41,153/-; disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 5.2 of his orders. In para 5.2 of the appellate order in AY 2013-14 his observation and findings are as follows:- "5.2 I have carefully considered the order passed by the AO and the submissions filed by the Ld. AR. The appellant is a financial institution. It had taken foreign currency loans by way of External Commercial Borrowings (ECB) and claims to have utilised the same for onward lending to its customers. This claim is not disputed by the AO. The value of the ECB was higher, due to exchange rate fluctuation, on the balance-sheet date, i.e 31.01.2013. The enhanced liability of Rs. 18.82 crores was treated as revenue expenditure and claimed as deduction u/s 37(1) of the Act by the appellant. The deduction was disallowed by the AO as the same, according to him, constituted contingent liability. Aggrieved against the disallowance, the appellant has preferred the appeal." 9.1 The Ld. CIT(A) followed his order (supra) in AY 2014-15. The assessee is dissatisfied and is before the Tribunal. 10. The Ld. AR drew our attention to the submission made before the Ld. CIT(A) during the course of appellate proceedings for AY 2014-15 wherein the assessee has rebutted the contentions bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO was affirmed for AY 2013-14 on the point. "3.4 It is humbly submitted that the additions made to Appellant's Computation of Income is unwarranted and is void ab-inito, our rebuttal against above allegations are as under: Foreign Exchange Loss incurred on re-instatement is an allowable expenditure 3.5. At the outset, it is submitted before your Honour that foreign exchange fluctuation loss recorded on re-instatement of a revenue account is an allowable expenditure under section 37 of the Act. In this regard, before asserting any contentions, it is imperative to highlight the provisions of section 37 of the Act. Legal Provisions The relevant extract of section 37 of the Act is reproduced below: *37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the Assessee), lad out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession, Therefore the following conditions should be satisfied for claiming an expense to be tax d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation." 3.8. Similar inference has been drawn by corresponding bench of Apex Court in below mentioned judicial precedents - Oil & Natural Gas Corp Ltd (SC) (2010) and - Bharat Earth Movers (SC)(2000) Applicability of judgements of Apex Court to the instant case 3.9. It is imperative to analyze the applicability of judgements of Apex Court to the facts of the present case especially in light of the tests laid down by Apex Court in case of Woodword Governor (Supra). In this regard, it is submitted that the Appellant is in compliance with all the conditions mentioned by the Hon'ble Supreme Court in the above case with respect to allowability of an expenditure. * Consistently following Mercantile System of Accounting Appellant has consistently followed mercantile system of accounting and prepared its books as per available guiding principles. It has never been disputed by the Learned AO that Appellant is not following mercantile system of accounting and has not consistently pursued the same. Further, Learned AO has not made any obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 43A but also with respect to the loss outside the purview of section 43A of the Act i.e. profit/ loss arising on account of appreciation/ depreciation in value of foreign currency held by tax payer on revenue account. Relevant findings of Hon ble Supreme Court is this regard have already been stated in para 3.5 above. Further relevant extract of the case law is reproduced as under - "After careful consideration it held that the assesees's claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year has been disallowed by the Assessing Officer, inter alia, on the ground that this liability was a contingent liability and the loss was a notional one. The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessed the 'event' le. the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessed is a fait accompli and not a notional one. .... "We, therefore, reject the submission of the Appellant in these appeals that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in section 10(2) of the Income Tax Act, 1922 [which was pari materia with the section 37(1) of Income tax Act, 1961....... .......... 5.9 Exchange rate is dynamic and fluctuates virtually on day-to-day basis. Hence, if there is gain today, there may be bigger gain by tomorrow or it may be wiped out or there may even be a loss. Hence, the loss on account of exchange rate fluctuation on a particular day, unless it happens to be the date of settlement of accounts, is transitory in nature. That being the case, it can be said that it does not pass the criteria of being called 'expenditure', as laid down by the Hon. Supreme Court in the case of Indian Molasses Co. P. Ltd. (supra). Incidentally, the same should also apply in the case of gain. But, the case at hand Involves loss and it is for that reason that loss is being discussed: ................ 5.15. According to the appellant, the decision in the case of Woodward Governor India. (P) Ltd. (supra) should be taken to be the authority for the general proposition that loss due to exchange rate fluctuation in respect of the value of ECBs is, as a rule, revenue expenditure to be allowed as deduction u/s 37(1) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The word "expenditure" is not defined in the 1961 Act. The word "expenditure is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "profits and gains of business. In Sections 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation has also been used. For example, depreciation and allowances are dealt with in Section 32. Therefore, Parliament has used the expression "any expenditure" in Section 37 to cover both. Therefore, the expression "expenditure" as used in Section 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. ...... 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its findings, it shall become binding precedent and any contrary instructions will not override the same. Your Honour's attention is invited to favourable judgments (mentioned below) where, on similar set of facts, various courts have held the issue in favor of the Appellant * Hon'ble Delhi High Court in case of Munjal Showa Limited v Deputy Commissioner of Income tax (W.P. (c) 1707/2014 & cm no. 3569/2014) dated February 22, 2016 Hon'ble Delhi Court decided the issue of loss arising on derivative contract on account of Mark to Market reinstatement in favour of assessee and held as under- "44. This has to be also appreciated in the context of the Assessee following the mercantile system of accounting and Section 145 of the Act. The income of the Assessee is to be computed consistent with the regular method of accounting followed by the Assessee. The Assessee has been following AS-11 and AS-30 issued by the ICAI, in terms of which the loss/gains on outstanding derivatives contracts are to be recognized on mark to market basis. The Assessee is right in contending that CBDT Instruction No. 3 of 2010 cannot possibly override the existing decisions of the Supreme Court/ H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gain of forex derivatives to tax but ignoring the loss of account of such forex derivatives. As the ultimate net figure on account of forex derivatives in the given facts and circumstances of the case is that of gain which was offered for taxation, it is manifest that the assessment order in accepting said figure of gain as chargeable to tax, cannot be described as prejudicial to the interests of the revenue. We are, therefore, unable to countenance the view canvassed in the Impugned order on this issue." "8. It is clear that the Tribunal while decided the issue for the A.Y. 2007-08 has also considered the CBDT instruction no. 3/2010 which has been heavily relied upon by the Commissioner as well as the Id. DR. The Tribunal on the identical facts has decided 10 ITA NO.671/Mum/2013 Reliance Communications Ltd, this issue by holding that the view of the Commissioner cannot be countenanced with. Accordingly, we do not find any reason to take a different view from that of already taken by the Tribunal for the A.Y. 2007-08." Instructions No. 3/2010 cannot be made applicable with respect to forex loss on ECB lability 3.19. Without prejudice to above, your Honour would appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,76,16,528/- and Rs. 2,89,99,437/- respectively claimed by the assessee under section 36 (i) (viii) of the Act. The Ld. AO discussed this issue in para 5 page 30-33 of his order for AY 2013- 14 and in para 22 page 13-14 of his order for AY 2014-15. The Ld. AO found that the assessee claimed deduction of Rs. 20 crores and Rs. 32.50 crores under section 36(i)(viii) in AY 2013-14 and 2014-15 respectively. When asked to justify, the assessee submitted that it satisfies all the conditions prescribed under section 36(1)(viii) to claim deduction for the amount transferred to special reserve and taking cognisance of timelines prescribed under section 80IA for making any disallowance is not called for. The explanation was not acceptable to the Ld. AO who made the impugned disallowance in both the years. 16. On appeal, the Ld. CIT(A) restored the matter to the Ld. AO with the following directions contained in para 8.5 of his appellate order for AY 2013- 14 which he followed in AY 2014-15 also:- "8.5. The assessee's contention that it provides long term finance with the understanding that the undertaking would be starting operations by the prescribed date/s but, in case the latter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. It is pointed out that regular amendments have been made in section 80IA extending the outer limit from March 31, 2003 to March 31, 2017 (at present) for applicability of the provisions. He submitted that the deduction contingent on fulfilment of a condition on a future date (i.e. one year from the end of the relevant previous year) could never have been the intention of the Government. The Ld. AR further submitted that during the assessment proceedings of AY 2017-18, the Ld. AO duly questioned the eligibility of assessee's claim of deduction under section 36(i)(viii) and being satisfied with the submissions made by the assessee allowed the claim. He placed on record documents in support. The Ld. AR also stated that no such disallowance has been made by the Ld. AO in his assessment order for AY 2018-19 and copy of that order was submitted before us. 19 The Ld. CIT-DR relied upon the order of Ld. AO/CIT(A). 20. We have carefully considered the rival submissions and perused the records. It is not in dispute that the assessee is eligible for deduction under section 36(1)(viii) of the Act. The dispute is in a very narrow compass i.e. whether taking cognizance of timeline prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by the Ld. CIT(A) we decline to interfere. 22. Ground No. 11 in AY 2013-14 relates to charging interest under section 234B and 234C of the Act. This is consequential. 23. Ground No. 4 in AY 2014-15 relates to disallowance of Rs. 7,92,643/- under section 14A and Rule 8D. The Ld. AO discussed this issue in para 17 page 10-12 of his order. On query the assessee submitted that it earned dividend income of Rs. 45.49 lacs exempt under section 10(34) of the Act. It was also stated that no direct or indirect expenditure was incurred by the assessee with respect to above. However, the assessee suo-moto disallowed an amount of Rs. 37,60,000/- under section 14A of the Act. The said amount was computed on the basis of a prudent and reasonable method adopted by the assessee. Hence reference to Rule 8D is not called for. Strategic investments be not considered while computing disallowance under section 14A vis a vis Rule 8D. Hence no further disallowance be made under section 14A r.w. Rule 8D. 24. The Ld. AO did not accept the explanation of the assessee and relying on several decisions held that investment decisions are very strategic decisions in which top management is involved and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 6 and 7 thereof refer (copy at page 165-167 of the Paper Book). The Revenue's appeal in AY 2011-12 against the CIT(A)'s order stands dismissed by the order of the Tribunal in ITA No. 1268/Del/2015 dated 14.3.2023. The appeal of the Revenue pertaining to AY 2012-13 against the deletion of similar disallowance by the Ld. CIT(A) has been dismissed by the Tribunal in its order in ITA No. 4985/Del/2017 dated 9.5.2023. 29.3 Following the precedent as above, we find no merit in the appeals of the Revenue which we hereby reject. These grounds are dismissed. 30. Ground No. (b) in AY 2013-14 and Ground No. 3 in AY 2014-15 relate to disallowance of Rs. 56,97,665/- and Rs. 59,58,893/- under section 40(a)(ia) respectively on account of short deduction/non deduction of TDS made by the Ld. AO which have been deleted by the Ld. CIT(A). Briefly stated, the facts are that according to Ld. AO payments made by the assessee to Suzlon Energy Ltd. was in the nature of technical and professional services and therefore liable for TDS under section 194J instead of 194C of the Act. Accordingly, due to the difference in TDS rate, the Ld. AO disallowed 80% of the expense under section 40(a)(ia) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke section 201 of the Act. 30.5 On consideration of the rival submissions, we are of the view that there is no infirmity in the order of the Ld. CIT(A) which is duly supported by the decisions (supra) of Hon'ble Calcutta and Delhi High Courts. We therefore uphold the order of the Ld. CIT(A) and reject the appeal of the Revenue in both the AYs involved. 31. Ground No. (c) in AY 2013-14 and Ground No. 2 in AY 2014-15 relate to disallowance of Rs. 1,05,63,232/- and Rs, 1,16,97,590/- under section 14A of the Act respectively. The Ld. AO discussed this issue in para 4 at page 27-30 of his order for AY 2013-14. On query the assessee submitted that it earned dividend income of Rs. 3,032,862/- which it claimed as exempt under section 10(34) of the Act. It was also stated that it suo moto estimated an amount of Rs. 36,50,000/- as expense incurred towards earning the above dividend income and disallowed the same in the computation of income under section 14A of the Act r.w. Rule 8D of the Income Tax Rules. The assessee further submitted that no direct and indirect expenditure were incurred for earning the said income. Thus no disallowance under Rule 8D(i) & Rule 8D(ii) is required. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the disallowance which is far in excess of the exempt income disclosed by the appellant. The Hon'ble Delhi High Court in the case of Joint Investment (P) Ltd. vs. CIT 2015/(3) TMI 155 has held that disallowance u/s 14A cannot exceed the exempt income. The Hon'ble Delhi Bench of the ITAT in the case of M/s Ganga Kaveri Credit & Holding (P) Ltd vs ACIT, Circle 12(1). New Delhi in ITA No 919/Del/2014 is also held that disallowance u/s 14A cannot exceed the amount of dividend income. Further, strategic investments of the appellant are to be excluded for computing disallowance under Rule 8D(2)(iii) as held by the Hon'ble High Court of Delhi in the case of CIT v. Oriental Structural Engineers Pvt. Ltd.: 216 Taxman 92 (Del.). The appellant company has suo moto computed disallowance u/s 14A at Rs. 36,50,862/- as against exempt income of Rs 30,32,862/- Respectfully following the decisions cited above, disallowance of Rs. 1,53,47,590/- u/s 14A computed by the AO is not in order. Consequently, additional disallowance of Rs. 1,16,97,590/- after allowing benefit of suo moto disallowance of Rs. 36,50,862/- u/s 14A made by the appellant is directed to be deleted. The ground of appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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