TMI Blog2008 (1) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss incurred in asst. yr. 2004-05 due to reverse cross-currency trend. Consequently, following the decision of the jurisdictional High Court in the case of CIT vs. Method Trading Investment Ltd. 1998 (4) TMI 11 - CALCUTTA HIGH COURT] , we are of the view that the assessee need not pay tax merely because it is following the mercantile system of accounting ignoring the fact whether such book income is real income or not. Consequently, we are of the considered view that the gain arising in the books and not ultimately realized or actually received the benefit, is not a real income and hence is not taxable while computing the total income of the assessee for asst. yr. 2002-03. Expenses allowable under s. 37(1) - debited under the head Project office - HELD THAT:- The assessee has filed before us the details of expenses and evidences that the expenses were incurred in connection with the hotels, which are already in operation. Since the details were not filed before the lower authorities, we are of the opinion that the issue should be restored back to file of the AO. We direct the AO to consider the claim of the assessee as per law after giving due opportunity to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the source of funds, we disagree that the action of the AO who has made an ad hoc allocation and came to a conclusion that part of the total advances was funded out of borrowed capital and ignoring the decision of jurisdictional Calcutta High Court in the case of Britannia Industries Ltd.[ 2005 (6) TMI 19 - CALCUTTA HIGH COURT] . Thus, we are of the view that the disallowance made by the AO had no reasonable basis and should be deleted in full. In the result, the appeal of the assessee for the asst. yr. 2003-04, is also allowed in part. - N.L. Dash, JM And M.V. Nayar, AM ORDER PER M.V. NAYAR, A.M.: These two appeals filed by the assessee company came up for hearing before us and since the issues involved for both the assessment years are common, they are disposed of by this common and consolidated order for the sake of convenience. The appeals were heard by the Bench on several occasions and both the parties were allowed the opportunities more than once. The Authorised Representative of the assessee had filed a written submission, which was considered by this Bench. The Bench had raised certain queries, especially on the issue relating to book profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the notional liability on account of the principal loan was revalued in terms of Indian rupee at the prevailing exchange rate as on 31st March, 2002 i.e. the last day of the relevant previous year and the difference on realignment was accounted for in the books of accounts as again. Since, this realignment was done only to comply with the statutory provisions i.e. the provisions of the Companies Act read with the Accounting Standards issued by the ICAI and not an actual/realized gain, such gain, so computed on the last day of the relevant year, was a mere notional gain and hence according to the assessee was not a taxable income. The Authorised Representative of the assessee had submitted that the decision of Sutlej Cotton Mills Ltd. is not applicable in the case of the assessee company, since the gain is notional and not realized. In the case of Sutlej Cotton Mills Ltd., the foreign currency gain/loss was settled and had actually accrued in the hands of the assessee, while it is not so in the present case. The assessee had also relied on the following decisions: (i) CIT vs. Ferozepur Finance (P) Ltd. (1980) 18 CTR (P H) 227 : (1980) 124 ITR 619 (P H)-SLP filed against has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yearly gain/loss was purely notional because such gain/loss was neither realized nor actual but had to be computed based on the year ending exchange rate and as is evident from the chart filed before the Bench, certain years showed gain while certain years reflected loss on account of the same transaction based on the exchange rates as applicable on the last day of the relevant previous years. 6. In his reply, the Departmental Representative had accepted the fact that the assessee has rightly offered to tax the realized income on resetting of the swap transactions. However, he relied on an earlier decision of the Supreme Court reported in 31 ITR 1 (sic) and has submitted that following the principles of mercantile system of accounting, such gain as shown in the accounts should be considered as taxable. In his submissions, the Departmental Representative had contended that the gain as computed based on the relevant year under consideration was an actual income and not a notional income, since rupee liability of the assessee towards the term loan from ICICI Bank as on last date of the accounting year had decreased. On the other hand, the Authorised Representative has argued by fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. should not apply, since the gain in question does not represent the realized one. We also note that the assessee had accounted for the realized income arising from the swap transaction and the dispute lies only in respect of the notional gains reflected in the balance sheet. The Departmental Representative has cited plethora of decisions and has submitted that in case of mercantile system of accounting, earlier adjustments made in the books of accounts should be recognized and accordingly taxed. However, in our view, under the mercantile system of accounting, the Revenue can tax an income, which is only a 'real income and not otherwise'. In our view, the principles laid down by the jurisdictional High Court in the case of CIT vs. Method Trading Investment Ltd. (2001) 165 CTR (Cal) 541 : (2000) 246 ITR 588 (Cal) should be applied. In that case the Hon'ble Calcutta High Court has held, It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of reality of the situation . In coming to the conclusion of this case the Hon'ble Court has held, It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no evidence was placed on records in support of the contention of the assessee that the expenses in question are allowable under s. 37(1) of the IT Act. The assessee has filed before us the details of expenses and evidences that the expenses were incurred in connection with the hotels, which are already in operation. Since the details were not filed before the lower authorities, we are of the opinion that the issue should be restored back to file of the AO. We direct the AO to consider the claim of the assessee as per law after giving due opportunity to the assessee of being heard. However, while examining the claim of the assessee, he should bear in mind that the assessee had already commenced its hotel business and accordingly should dispose of its claim. Ground Nos. 5, 6 and 7 11. These grounds deal with the disallowance made by the AO under s. 14A of the Act and are dealt with together. 12. The Authorised Representative of the assessee company had submitted that the AO has earned tax-free dividend of Rs. 3,46,046 and in the process the AO had applied the provisions of s. 14A of the Act. According to the Authorised Representative, the ad hoc disallowances made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007) 16 SOT 251 (Mumbai) and Dhanlakshmi Bank Ltd. vs. Asstt. CIT (2007) 12 SOT 625 (Coch) and vehemently argued that no disallowance should be called for. The Authorised Representative had finally submitted that since no expenditure has been incurred to earn the tax-free dividend, the entire disallowance made under s. 14A should be deleted. 13. On the other hand, the Departmental Representative had strongly relied on the decisions of the lower authorities. In his submissions the Departmental Representative had tried to justify that the investments were made from the borrowed funds. However, there had been no clear findings that the investments, which were made in the earlier years were out of borrowed funds. 14. We note that on appeal the CIT(A) had reduced the total disallowance under s. 14A by Rs. 5,00,000, out of the total disallowance made by the AO. 15. We have considered the rival contentions put forward both by the Authorised Representative and the Departmental Representative. While considering the Revenue's contention that the disallowance has been made under s. 14A mainly on assumptions that the assessee had incurred huge management expenses and paid interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id fund was received out of the proceeds from redemption of IDBI Mutual Fund. The AO had assumed that the balance amount of Rs. 18,34,00,000 i.e. the opening balance was partly financed out of interest bearing loans. The AO had further assumed that 46 per cent of the said opening balance was out of borrowed fund and he had applied interest @ 5.95 per cent on such amount, which was considered as borrowed fund. In the process, the AO had disallowed Rs. 50,19,658 out of the total interest claim of the assessee. The learned CIT(A) had confirmed the disallowance made by the AO. 20. The Authorised Representative during the course of the hearing had argued that the assessee company had made investments in its subsidiary company in the earlier years only out of its own fund. He had submitted that the conclusion of the AO is not based on any cogent findings but on assumptions. The learned Authorised Representative had also relied on a recent decision of the jurisdictional Calcutta High Court in the case of CIT vs. Britannia Industries Ltd. At p. 533, the Hon'ble High Court has noted, if there is surplus and the advance is made out of the mixed funds, in that event, it cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary company allotting shares to the assessee company were also filed before the Hon'ble Bench. The Authorised Representative had contended that it was not a case of a normal loan but an introduction of share capital to its subsidiary company. Consequently, the assessee did not charge any interest from the subsidiary company, since it had contributed towards its share capital. 22. The Authorised Representative of the assessee company had also contended that the assessee company had introduced funds to its subsidiary company from time-to-time to protect its original investment. The subsidiary company was not doing well commercially during that period and needed financial support from the parent company, which is also evident from the annual accounts of the subsidiary company, which form part of the paper book filed by the assessee company. He further relied on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC), wherein the Hon'ble Supreme Court had held that in case an amount is advanced to a sister concern as a measure of commercial expediency, the claim for deduction on account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence if the holding company advances the borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would in our opinion, ordinarily be entitled to deduction of interest on its borrowed monies . The Authorised Representative further relied on the annual accounts of the sister concern i.e. Island Hotel Maharaj Ltd. which were placed on record and form part of the paper book. It was noted by Hon'ble Bench that the subsidiary company had an accumulated loss of Rs. 17,97,33,271 till 31st March, 2002 i.e. the last day of the relevant previous year. On a scrutiny of the loans and advances, appearing in its annual accounts, it was also apparent that advances were mainly given for running the business, security deposits and income-tax payments. It is noted from the audit report that no loan or advance was given to any of the directors or to any company I firm, in which the directors were interested, which is prejudicial to the interest of the company. On a query from the Bench, it was clarified that the assessee company was holding approx. 88 per cent shares in the sister concern to which the advances were made. 24. Hence, accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loans. 28. Considering the sizeable investments made, the assessee company had no other option but to make additional investment in order to protect its financial interest. There is no finding by the lower authorities that any fund was siphoned off by the sister concern. Moreover, from the annual accounts of the sister concern, it is evident that no loan was given to any of the directors or to any firm/company in which such director was interested. In fact, it was reported by the auditors of the recipient company, i.e. Island Hotel Maharaj Ltd., that it did not advance any sum to any of its directors or any other firm/company in which such director is interested. Having said this and relying on the decision of S.A. Builders Ltd., we agree with the Authorised Representative- that the advance in question was towards equity and given from time-to-time out of pure commercial expediency and to protect its own financial interest. 29. Even otherwise, we note that the advances given by the assessee company from time-to-time were against the issue of share capital. It has been placed on record that the assessee was actually allotted shares in a subsequent year out of the advances pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 4 35. This issue is relating to the disallowance of professional and legal expenses amounting to Rs. 2,55,947. While disposing of the ground Nos. 3 and 4 of the earlier appeal for asst. yr. 2002-03, we have already held that the matter should be remanded back to the file of the AO for fresh examination with an opportunity to the assessee for being heard. Following the said order we remand this issue back to the file of the AO for re-examination in the light of the direction as given in ITA No. 724/Kol/2007. Ground Nos. 5 and 6 36. In this case, the assessee had challenged the disallowance of Rs. 24,12,096 and is similar to the ground Nos. 5 and 6 of the assessee's appeal for asst. yr. 2002-03, i.e., ITA No. 724/Kol/2007. We note that the AO has made the disallowance following the same basis as applied in asst. yr. 2002-03 and has not agreed with the contention of the assessee that negligible expenses were incurred while earning the dividend income of Rs. 83,223. It was confirmed that no new investments were made during the year, whereas investments other than trade investments and Government securities were disposed of. We have already decided while dealing wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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