M/S MANGALAM CEMENT LTD. vs. C.I.T. and ANOTHERS

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. D.B. Income Tax Appeal No.22/2001 M/s Mangalam Cement Ltd. Vs. The Commissioner of Income Tax & Anr. DATE OF JUDGMENT ::: 30.8.2016 HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE AJAY RASTOGI Mr. Sanjay Jhanwar, for the appellant. Mrs. Parinitoo Jain, for the respondent. ***** (1) By way of this appeal, the assessee has challenged the judgment & order of the Income Tax Appellate Tribunal dismissing the appeal preferred by the assessee, confirming the order of the CIT (Appeals). (2.1) The brief facts of the case are that the assessee- company has claimed expenses vis-a-vis travelling expenses, entertainment expenses, guest expenses and other expenses which are claimed on the basis of mercantile system of accounting actual payment of money is irrelevant consideration and incurring of liability is sufficient. The Assessing Officer while assessing income of the assessee for the assessment year 1991-92, has given expenses admissible under the Rules on the accrual basis on the note

2 of mercantile basis and the same view was confirmed by the Tribunal. (2.2) This court while admitting the appeal framed following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that the Commissioner of Income Tax had juri iction to initiate proceedings and assume juri iction under Section 263 of the Income Tax Act, 1961 and the revise the original assessment order?

3 in a case where the asset is acquired, or the liability to pay in foreign exchange arises, after the change in the rate of exchange, the said sub-section has no application and the general principles of law must be applied in deciding whether the actual cost is increased or reduced as a result of such change. In other words, Section 43A(1) applies only where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring the asset.Section 43A(1), therefore, has no application unless the asset is acquired and the liability existed, before the change in the rate of exchange takes effect. In such a case,Section 43Acontemplates recomputation of the cost of the assets for the purposes of depreciation [Sections 32and 43(1)], and also as regards capital assets for scientific research [Section 35(1)(iv)] and also regarding patent rights or copyrights [Section 35A].

"

"

5 basis. This is indicated by the words "at the time of making payment". In other words, under the unamended Section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended Section 43A w.e.f. 1.4.2003 such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural

change

brought

about

in Section 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature.” (3.2) In D.B. Income Tax Appeal No.38/2000 in the case of para 13 of the judgment, which reads as under:- “As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word "expenditure" in Section 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned Counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-`-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in presenti and a liability de futuro. 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 6 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. 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 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.” (4.0) Counsel for the appellant has further contended the Hon'ble Supreme Court in reference to the provisions under Section 43(2) has held certain principles on mercantile system and has extracted the accounting system which are prevailing with the assessee should be accepted. (4.1) Counsel for the respondent-department has contended that in view of the concurrent finding and in view of the fact that such expenses are not allowable unless being paid under the relevant assessment year, the view taken by the authority may not be disturbed. (5.0) Heard the learned counsel for the parties. (5.1) In view of the decision of the Supreme Court and judgement of this court having extracted the principles laid

7 down by the supreme court that merely on the basis that under the mercantile system which has been followed by the assessee actual expenses which are not incurred, if remained unpaid, it is to be allowed and in light thereof the issue no.4 is required to decided in favour of the assessee & against the department. The issues no. 1 to 3 are not required to be answered. In view of the above, the appeal is allowed. The expenses which were not allowed are allowed. (Ajay Rastogi), J. (K.S. Jhaveri), J. Brijesh9.