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Income Tax Appellate Tribunal, ‘’D’’BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’D’’BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And MS MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No.3454/AHD/2016 �नधा�रण वष�/Asstt. Year: 2012-2013 D.C.I.T, Ahmedabad Strips Pvt. Ltd., Circle-1(1)(1), 604, Sarap Complex, 6th Floor, Vs. Ahmedabad Navjivan Press Road, B/h. Gujarat Vidhyapith, Off Ashram Road, Ahmedabad-380014.
PAN: AABCA8222A
(Applicant) (Respondent) : Revenue by Shri Vinod Tanwani, Sr. D.R Assessee by : Shri Bhavesh Shah, A.R सुनवाई क� तार�ख/Date of Hearing : 08/02/2019 घोषणा क� तार�ख /Date of Pronouncement: 28/02/2019 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)- I, Ahmedabad [Ld.CIT(A) in short] vide appeal no.CIT(A)-1/DCIT.Cir- 1(1)(1)/04/2015-16 dated 28/10/2016 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 02/03/2015 relevant to Assessment Year (AY) 2012-13.
The Revenue has raised the following grounds of appeal:
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(1) The CIT(A) has erred in law and on facts in deleting the addition of Rs.91,73,496/- made u/s.40A(2)(b) of the I.T. Act on account of disallowance of interest. (2) That the LdCIT(A) has erred in law and on facts in deleting the addition of Rs. 65,583/- made on account of disallowance of car depreciation. (3) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.11,14,386/- made on account of disallowance of additional depreciation claimed on Rolling Mills Rolls. (4) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.1.06,568/- made u/s.36(1)(iii) of the I.T. Act, on account of disallowance of interest expenses in respect of capital work in progress. (5) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.34,60,766/- made on account of disallowance of foreign exchange loss.
The 1st issue raised by the Revenue is that the Ld.CIT (A) erred in 3. deleting the addition made by the AO for Rs. 91,73,496/- on account of excess interest paid to the related parties.
The facts of the case are that the assessee in the present case is a private Ltd company and engaged in the business of manufacturing of cold rolled/hot rolled strips/sheets. The AO during the assessment proceedings found that the assessee has borrowed money on interest at the rate of 18% per annum from the related parties. As per the AO prevailing market rate of interest on the money borrowed is at the rate of 12% per annum. Accordingly, the AO disallowed the excess amount of interest paid over and above 12% rate of interest per annum amounting to Rs. 91,73,496.00 and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the Ld.CIT (A) who deleted the addition made by the AO by observing that the Hon’ble ITAT in the own
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case of the assessee pertaining to the assessment year 2008-09 and 2009-10 in ITA No. 239 and 1836/AHD/2012 has decided the issue in favor of the assessee.
Being aggrieved by the order of the Ld.CIT (A) Revenue is in appeal before us.
The Ld. DR and AR before us relied on the order of authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the payment of interest on the borrowed fund by the assessee at the rate of 18% per annum from related parties. As per the AO prevailing market rate of interest is at the rate of 12% per annum on the borrowed fund. Since the assessee has made payment of interest to the related parties at the rate of 18% per annum, therefore the AO was of the view that the assessee has paid excessive interest to the parties over and above the prevailing market rate as per the provisions of section 40A(2)(b) of the Act. Accordingly the amount of excess interest amounting to Rs. 91,73,496/-was disallowed by the AO.
8.1 The AO in the case on hand has assumed the prevailing market rate of interest at the rate of 12% per annum on the borrowed fund without bringing any tangible material on record. Therefore in the absence of any material by which the AO treated the interest paid by the assessee is unreasonable/excessive, we are not impressed with the finding of the AO.
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8.2 There is no dispute about the use of fund borrowed by the assessee at the rate of 18% per annum. Thus it is transpired that the assessee has used the borrowed fund for its business. Accordingly, we are of the view that it is the assessee who knows its business affairs the best than any other person. Accordingly, the assessee can only decide the need for the borrowing from the related parties including the rate of interest. As such the AO is not expected to direct/advice to the assessee to borrow the money for the business at a particular rate of interest. In this regard, we find support and guidance from the judgment of Hon’ble High Court of Delhi in case of Oracle India (P.) Ltd. reported in 11 taxmann.com 139.
8.3 We also note that the ITAT in the own case of the assessee as discussed above has deleted the addition made by the AO vide order dated 12 July 2016. The relevant extract of the order is reproduced as under: 10. We have given a thoughtful consideration to the rival contentions and have carefully perused the order of the authorities below. The only basis of the Assessing Officer for making the disallowance was that the assessee has paid interest to unrelated parties at varying rates of 6%, 12% and 16%. In our considered opinion, solely because assessee had paid interest at different rates to different parties, that itself could not be a ground to come to the conclusion that payment of interest to related parties at rate other than that paid to other party was excessive and unreasonable. Our view is fortified by the decision of the Hon'ble Jurisdictional High Court of Gujarat given in the case of Sarjan Realities Ltd. in Tax Appeal No. 657 of 2014 50 taxmann.com 52. The relevant part of the decision of the Hon'ble Jurisdictional High Court reads as under:- "It is required to be noted that it is the contention on behalf of the revenue that as such the company paid the interest at different rates to different persons/companies and therefore, the same was rightly disallowed under section 40A(2)(b). However, it is required to be noted that except aforesaid there was no basis for the Assessing Officer to come to the conclusion that amount of interest paid at the rate of 12 per cent would relate to the concerned parties was otherwise excessive and/or unreasonable. It is not the case on behalf of the revenue that considering the market rate the: aforesaid interest paid at the rate of 12 percent can be said to be excessive and/or unreasonable. Under the circumstances, solely because the assesses for whatever reasons/consideration paid the, interest at different rates by that itself cannot be a ground to come to the conclusion that paying of
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interest at higher rate than paid to other party was excessive and/or unreasonable. Under the circumstance both/the commissioner (Appeals) as well as the tribunal have rightly deleted the: disallowance sof Rs. 1.22 crores made by the Assessing Officer under isection 40A(2)(b). Under the circumstances, question is answered against the revenue. [Para 4.0]" 11. In so far as the rate of interest at 18% considered to be} excessive, the Co- ordinate Bench in the case of Vipul Y. Mehta (supra) has held that the payment of interest @: 18% per annum to. the relatives, on unsecured loans cannot be said to be, excessive or unreasonable. 12. Considering the facts in totality, in the light of the judicial decisions discussed hereinabove, we set aside the findings of the Ld.CIT(A) and direct the A.O. to delete the impugned disallowances. 13. In the result, both the appeals of the Assessee are allowed.
In view of the above, we do not find any reason to interfere in the finding of the Ld.CIT (A). Hence the ground of appeal of the Revenue is dismissed.
The 2nd issue raised by the Revenue is that the Ld.CIT (A) erred in 9. deleting the addition made by the AO for Rs. 65,583/- on account of depreciation.
9.1 The AO during the assessment proceedings found that the assessee has claimed depreciation in respect of the vehicles which was not registered in its name. As such these cars were registered in the name of the employees of the company.
9.2 On a question by the AO, the assessee submitted that the payment for the purchase of these cars has been made from the fund of the company. The cars were registered in the individual name of the employees in order to save the registration charges levied by the state government.
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9.3 However, the AO was dissatisfied with the contention of the assessee and therefore disallowed the depreciation amounting to Rs. 65,583/- only. Accordingly the same was added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT (A) who deleted the addition made by the AO after having a reliance on the order of his predecessor in the own case of the assessee pertaining to the assessment year 2010-11 and 2011-12.
Being aggrieved by the order of the Ld.CIT (A) Revenue is in appeal before us.
Both the Ld. DR and AR before us relied on the order of authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. At the outset, we find that the Hon’ble ITAT in the own case of the assessee pertaining to the assessment year 2010-11 and 2011-12 vide ITA No. 1717 and 1971/AHD/2015 vide order dated 1st February 2018 has deleted the addition made by the AO. The relevant extract of the order is reproduced as under: “9. Brief facts of the case are that the assessee has purchased a motor car in the name of Manager. It has incurred expenditure on interest which was paid on the loan used for purchasing the car. The assessee has also claimed depreciation. The ld.AO was of the view that since car was purchased in the name of Manager, it was not owned by the assessee, IT No. 1717 and 1971/Ahd/2015 With CO therefore, expenditure incurred for acquiring car as well as depreciation is not admissible to the assessee. On the appeal, the ld.CIT(A) has observed that car was used practically for the business purpose of the assessee. It has provided finance for purchasing the car. The
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only name of the Manager is being reflected in the registration certificate. Otherwise, for all other practical purposes car was used by the assessee. The ld.CIT(A) has looked into supporting evidence, and thereafter allowed incidental expenses as well as depreciation. After going through order of the ld.CIT(A), we do not find any reasons to interfere in it. Car was practically owned and possessed by the assessee. It was used for the purpose of assessee's business. Therefore, this ground of appeal is rejected in both the years”.
13.1 As the facts of the case on hand are identical to the facts of the case as discussed above, therefore Respectfully following the same, we do not find any reason to interfere in the finding of the Ld.CIT (A). Hence the ground of appeal of the Revenue is dismissed.
The 3rd issue raised by the Revenue is that the Ld.CIT (A) erred in 14. deleting the addition made by the AO for Rs. 11,14,386/- on account of depreciation claimed on rolling mills Rolls.
The assessee in the year under consideration has claimed accelerated depreciation under section 32(1)(iia) of the Act on the purchase of rolling mills role amounting to Rs. 11,14,386/-. The assessee also claimed that it had claimed additional depreciation on the rolling mills rolls in the earlier year which was allowed by the Revenue.
However, the AO found that the impugned fixed assets namely rolling mills rolls does not represent the machinery, but it is a part of the main machinery. Therefore the AO was of the view that the rolling mills rolls being part of machinery cannot be considered as machinery eligible for additional depreciation under the provisions of section 32(1)(iia) of the Act. Thus the AO disallowed the accelerated depreciation of Rs. 11,14,386/- and added to the total income of the assessee
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Aggrieved assessee preferred an appeal to the Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that it has been claiming additional depreciation consistently in the earlier years which was allowed by the AO. Therefore the same needs to be considered for the additional depreciation for the year under consideration.
17.1 The assessee also claimed that it had claimed depreciation and additional depreciation as per Appendix I under rule 5 of Income Tax Rule at Part-A serial No. III, 8(vii), which contains a separate entry for the depreciation of rolling mills Rolls.
17.2 The Ld.CIT (A) after considering the submission of the assessee observed that rolling mills rolls are not office equipment. There is separate entry appearing in appendix I for claiming depreciation in respect of rolling mills rolls. The rolling mills rolls is an integral part of the machinery without which the machine cannot function. Thus the Ld.CIT (A) held that when the plant and machinery is eligible for additional depreciation, then the part of the plant and machinery should also be eligible for additional depreciation. Accordingly the Ld.CIT (A) deleted the addition made by the AO and allowed the ground of appeal of the assessee.
Being aggrieved by the order of the Ld.CIT (A) the Revenue is in appeal before us.
Both the parties before us relied on the order of authorities below as favorable to them.
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We have heard the rival contentions and perused the materials available on record. In the instant case, the dispute relates to the additional depreciation claimed by the assessee on the rolling mills rolls. The AO was of the view that the rolling mills rolls are not machinery but represent the part of the main machineries. Therefore the same is not eligible for additional depreciation under section 32 of the Act.
20.1 However, we note that there was the addition of fixed assets under the head rolling mills Rolls amounting to Rs. 28,05,395 only in the assessment year 2011-12. The assessee in respect of such assets claimed additional depreciation in the income tax return. But no disallowance was made by the AO during the assessment framed under section 143(3) of the Act vide order dated 30th January 2014. We further note that a similar position was there in the assessment framed under section 143(3) of the Act pertaining to the assessment 2013-14.
The Ld. DR has also not brought anything on record to demonstrate whether any proceedings under section 263 of the Act or 147 of the Act have been initiated against the assessee on account of such additional depreciation.
21.2 Therefore we are of the view that the principle of consistency needs to have adhered in view of the judgment of Hon'ble Supreme Court in the case of Radhasoami Satsang reported in 193 ITR 321 wherein it was held as under: “13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
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On these reasonings in the absence of any material change justifying the revenue to take a different view of the matter—and if there was no change it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12.”
21.3 We also note that there is no dispute about the use of rolling mills rolls in the activity of manufacturing. Accordingly, we are of the view that where the machinery is allowed for additional depreciation used in the activity of manufacturing, then the parts of the machinery should also be eligible for additional depreciation under section 32(1)(iia) of the Act. Thus we do not find any infirmity in the order of the Ld.CIT (A). Hence we decline to interfere in the same. Thus the ground of appeal of the Revenue is dismissed.
The issue raised by the Revenue in ground No. 4 is that the Ld.CIT (A) erred in deleting the addition made by the AO for Rs. 1,06,568/- under section 36(1)(iii) of the Act on account of interest expenses in respect of capital work in progress.
The AO during the assessment proceedings found that the assessee has shown capital work in progress in its balance sheet as on 31st March 2012 amounting to Rs. 65,71,735/-only. But the assessee has not allocated any interest expenses in respect of such capital working progress. Accordingly, the AO worked out the proportionate amount of interest at the rate of 12% of Rs. 65,71,635/- being capital work in progress amounting to Rs. 1,06.568/- and disallowed the same by adding to the total income of the assessee.
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Aggrieved assessee preferred an appeal to the Ld.CIT (A). The assessee inter-alia before the Ld.CIT (A) submitted that its funds exceed the amount of capital involved in capital work-in-progress. Therefore it can be presumed that no borrowed fund has been used in such capital work in progress. Accordingly, there is no question of making any disallowance under section 36(1)(iii) of the Act.
The learned CIT (A) after considering the submission of the assessee deleted the addition made by the AO.
Being aggrieved by the order of the Ld.CIT (A) Revenue is in appeal before us.
The Ld. DR and the Ld. AR before us relied on the order of authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. On perusal of the balance sheet of the assessee as on 31 March 2012 it was noticed that owned fund of the assessee stands 29,69,49,883/- whereas the capital work in progress stands at Rs. 65,71,635/-only. Thus a presumption can be drawn that the assessee has not used any borrowed fund in such capital work-in-progress. In this regard, we find support and guidance from the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- “The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet
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the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal”.
28.1 Similarly, we also rely on the judgment of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:- “Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A.”
28.2 Similarly, we also find support from the judgment of Hon’ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the headnote reads as under : “If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A”.
In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of fund involved in the capital work-in-progress as discussed above. Hence, we do not find any reason to disturb the finding of ld. CIT-A. Accordingly, the AO is directed to delete the addition made by him. Thus the ground of appeal of the Revenue is dismissed.
The last issue raised by the Revenue is that the Ld.CIT (A) erred in deleting the addition made by the AO for Rs. 34,60,766/-on account of disallowance of foreign exchange loss.
The assessee in the year under consideration has claimed foreign exchange fluctuation loss amounting to Rs. 34,60,766/-only. As per the
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assessee, the loss was arising in the books of accounts on account of the reinstatement of current liabilities relating to the import of goods and commission to parties. The assessee further submitted that the impugned loss was shown in the books of accounts as per the Accounting Standard 11 “The effects of change in foreign exchange rates” issued by the Institute of chartered accountants of India. The assessee also claimed that such loss is an allowable deduction because of the judgment of Hon’ble Supreme Court in the case of CIT Vs. woodward governor India (P.) Ltd reported in 179 taxman 326.
However, the AO disagreed with the contention of the assessee on the ground that the impugned loss is representing a notional loss. As such the assessee has not suffered any loss.
31.1 The AO also noted that the accounting standard issued by the Institute of chartered accountants of India could not override the provisions of the income tax Act. Thus the AO disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to Ld.CIT (A). The assessee before the Ld.CIT (A) submitted that it had recorded the foreign currency transaction regarding the purchases and commission to the foreign parties at the rate prevailing on the date of the transaction. As such these transactions were outstanding on the balance sheet date. Therefore these were converted again on the balance sheet date at the rate prevailing at the time of balance sheet date. As a result, there was a loss which is allowable under section 37(1) of the Act.
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32.1 The Ld.CIT (A) after considering the submission of the assessee deleted the addition made by the AO after having a reliance on the judgment of Hon’ble Supreme Court in the case of CIT Vs. woodward governor India (P.) Ltd reported in 23 CTR 1.
Being aggrieved by the order of the Ld.CIT (A) Revenue is in appeal before us.
Both the Ld. DR and AR before us relied on the order of the authorities below as favorable to them.
We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has claimed a loss on account of foreign currency fluctuation amounting to Rs. 34,60,766/- which was disallowed by the AO on the ground that it is a notional loss. As such the assessee has not suffered any loss on account of reinstatement of current liabilities as on 31-3-2012. Accordingly, the addition was made by the AO.
35.1 From the preceding discussion, we note that the fact that such loss is arising to the assessee on account of reinstatement of current liabilities has not been doubted. Thus it is transpired that the assessee has claimed the loss concerning the import of goods and overseas commissions which were not paid till the balance sheet date i.e. 31st March 2012.
35.2 The assessee has carried out certain transactions in foreign currencies which were outstanding as on the balance sheet date as on 31 March 2012. As per accounting standard, the assessee has to record such transaction on the balance sheet date after converting the value of such transaction in Indian
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currency. It is obvious that the rate prevailing as on 31st March 2012 will be taken for translating the foreign currency into Indian currency. Thus any loss or gain on account of such conversion of the foreign transaction will be offered to tax accordingly. In this regard, we find support and guidance from the judgment of Hon'ble Supreme Court in the case of wood word governors India private Ltd supra wherein it was held as under: “AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on Initial Recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under section 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a- vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss
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or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period.”
In view of the above, we are of the considered opinion that the assessee is entitled to claim the loss on account of foreign currency transaction as discussed above. Hence we do not find any reason to disturb the finding of the Ld.CIT (A). Hence the ground of appeal of the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Court on 28/02/2019 at Ahmedabad.
-Sd- -Sd- (MS MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 28/02/2019 manish