ITO 2(2)(3), MUMBAI vs. NISHIGANDHA POLYMERS P.LTD, MUMBAI

Now before us, the revenue has preferred the appeal by raising the grounds of appeal as under:-

On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:

(i) Whether on facts and circumstance of case and in law , the Ld. CIT (A) is justified in allowing the appeal of assessee relating to disallowance of bad debts other receivable written off amounting to Rs. Rs.4,49,363/- based on additional evidence produced during the appellate proceeding in contravention to Rule 46A(3) of I. T. Rules?

(ii) Whether on facts and circumstance of case and in law , the Ld. CIT (A) is justified in allowing the appeal of assessee relating to disallowance of Rs.2,06,83,311/- being net exchange loss on foreign currency transaction without appreciating the fact that the details filed by the assessee vide letter dt. 18/02/2016 do not substantiate or justify the claim of allowability of exchange loss either at the time of assessment proceeding or before Ld CIT(A)?

(iii) Whether on facts and circumstance of case, the Ld. CIT (A) is justified in allowing the appeal of assessee relating to disallowance of interest on sales tax of Rs. 1,24,810/- without appreciating the fact that the penal interest is not an allowable deduction within the meaning of explanation to sec 37(1) of the I.T. Act?

(iv) Whether on facts and circumstance of case and in law, the Ld. CIT (A) is justified in allowing the appeal of assessee relating disallowance of commission expenses of Rs 45,83,032/- without appreciating the fact that the assessee failed to establish either at the time of assessment proceeding or at the appellate stage that the expense have been incurred wholly or exclusively for the purpose of business and is incidental to it or show that the nature & qualities of services rendered for which commission was paid. And that genuinety of expenses cannot be proved merely by TDS deduction on the said expenses?

(v) Whether on facts and circumstance of case, the Ld. CIT (A) is justified in allowing the appeal of assessee relating to disallowance of interest expenses of Rs. 4,00,987/- u/s 40 (a)(ia) based on evidence produced during the appellate stage in contravention to Rules 46A(3) of I. T. Act?

(vi) Whether on facts and circumstance of case, the Ld. CIT (A) is justified in allowing the appeal of.assessee regarding disallowance of Rs 8,52,627/- u/s.40(a)(ia) of the Act, out of exhibition expenses based on evidence produced during the appellate proceeding in contravention to Rule 46A(3) of I. T. rules?

(vii) Whether on facts and circumstance of case, the Ld. CIT (A) is justified in allowing the appeal of assessee relating disallowance of Rs 14,74,773/- out of travelling expenses without appreciating that assessee could not justify with support of authenticate documentary evidences the purpose of foreign travel and to prove that the same was necessitated and incidental to business and the expense incurred is wholly & exclusively for the purpose of business?

(viii)Whether on facts and circumstance of case, the Ld. CIT (A) is justified in allowing the appeal of assessee regarding disallowance of Rs 7,20,452/- out of conveyance expenses without appreciating that assessee had made payment in cash and the expenses were supported by only self made voucher and not appreciating the fact that supporting evidence i.e. payment to taxis and employee furnished during assessment proceeding was vague and could not accepted patently as it was not properly filed?

Before us, Ld. DR brought to our notice the finding of 5. AO and Ld. CIT(A) in all the above disallowances and further she brought to our notice scrutiny report on the order of Ld. CIT(A) and for the sake of clarity, the grounds wise scrutiny report are reproduced below:-

Ground no. 1 of the assessee pertains to disallowance of Bad debts and other receivables written off During the course of assessment proceedings, the AO observed that the assessee company had debited to its profit and loss account an amount of Rs.4,49,363/- as "Bad trade and other receivable written off". The AO disallowed the claim of Bad trade and other receivable and advance written off of Rs.4,49,363/- on the ground that the assessee could not justify his claim.

Being aggrieved the assessee filed an appeal before the Ld. C1T(A). The Ld. CIT(A) relying on the Supreme Court decision in the case of TRF Ltd vs CIT(323ITR 397J has decided the issue in favor of the assessee and deleted the addition. The order of Ld. CIT(A) in deleting the addition of bad debts is not acceptable, the Ld CIT(A) has considered the fresh evidence filed by assessee without calling for remand report which is clearly in contravention to provisions of Rule 46-A of the Act. The Ld CIT(A) in additional evidences considered the details of 10 concerns whose debts were claimed to have been written off along with their invoices, addresses etc. These evidences; were not filed during the course of assessment proceedings and they were filed during appellate proceeding hence the said evidences should have been forwarded to this office for remand which is not the fact of the case. Hence the order of Ld. CIT(A) is not acceptable and further appeal is recommended on the issue.

Ground No. 2 pertains to disallowance of Rs.2,06,83,311/- being net exchange loss on foreign currency transaction:

During the course of assessment proceedings the AO observed that the assessee has debited to its Profit and Loss Account an amount of Rs.2,06.83,311/- being net loss on foreign currency fluctuation on transactions. The AO disallowed the same, since the assessee failed to submit the details with supporting evidence and the justification of write off was not established.

Being aggrieved the assessee filed an appeal before the Ld.CIT(A). Before Ld CIT(A), assessee heavily relied on submission dated 18.2.2016 made during the course of assessment proceeding to contend that details of foreign exchange loss were filed. The Ld. CIT(A) called for assessment records and thereafter relying on the judgment of Supreme Courts decision in the case of Sutlej Cotton Mills Ltd vs CIT 116 ITR 1, deleted the addition. The order of Ld CIT(A) is not acceptable. The submission dated 18.2.2016 filed was only working of foreign exchange loss and it nowhere proved the justification of loss charged. The said working was devoid of nature of transaction on which forex loss was worked. The said working only showed remittance amount, booking amount, exchange rate, debit and credit. Now the said working was not filed with complete supporting invoices evidencing sales/purchases, ledger accounts of import and export parties, remittance certificates evidencing date of remittances and further the name of party with whom foreign remittance were done was also not mentioned on the working. The working of forex loss submitted is also not reliable as the same is self generated document. From no stretch of imagination, it can be stated that the said working filed proves the genuinely of loss charged in Profit and Loss A/c. The Ld. CIT(A) in its order has also considered the fresh ground of Letter of Credit of 120 days being opened by assessee, without calling for remand report from the AO. The said ground was no where taken by assessee during the course of assessment proceeding as well as on submission dated 18.2.2016. The Ld. CIT(A) erred in treating the working of forex loss filed with justification of loss. Hence the order of Ld. CIT(A) is not acceptable and further appeal is recommended on the issue.

Ground No. 3 pertains to disallowance of interest on sales tax of Rs.1,24,810/- The AO observed that assesset- in Profit and Loss A/c has charged sales tax penal interest of Rs 124,810/-. The AO disallowed the same and added back in total income of the assessee.

Being aggrieved the assessee filed an appeal before the Ld.CIT(A). The Ld.CIT (A) relying on decisions of > Lachman Das Mathura Das v CIT. SC. 2002 122 Taxi mann 82S > Mahalaxmi Sugar Mills Co v CIT, 1980. 123 ITR 429 SC > Prakash Cotton Mills P Ltd v CIT, 1993 201 ITR 684 SC.

The order of Ld CIT(A) in deleting the addition is not acceptable. No where in the order of Ld CIT(A), there is complete analysis of relevant provision of MVAT Act, 2002 under which the penal interest has been charged. In MVAT Act, 2002 there are separate provisions of charging of interest for delay in payment of tax and penal interest. The provision of penal interest under MVAT Act 2002 is a concept introduced from year 2005 onwards whereas the case laws relied by assessee pertains to other years, hence factually the case' laws are different. Hence the order of Ld.CIT(A) is not acceptable and further appeal is recommended.

Ground No. 4 pertains to disallowance of commission expenses of Rs.45,83,032/- During the course of assessment proceedings, the AO observed that the assessee had debited in its Profit & Loss Account an amount of Rs.78,51,015/- as commission expense. Out of total commission expenses of Rs.78,51,015/- the commission expense of Rs 32,67,933/- were disallowed as satisfactory supporting evidence were not filed and further VAT/CST No on the credit note's filed were also not evident. Accordingly, AO disallowed commission expenses.

Being aggrieved, assessee filed an appeal before Ld. C1T(A). The Ld. CIT(A) deleted the addition on the ground that assessee has incurred all expenses only for the business purpose. The order of Ld CIT(A) is not acceptable, for the following reasons Ld CIT(A) in considering^ the TDS deduction from commission expense, which is fresh evidence, didn't called for remand report from AO. Assessee during the course of assessment proceeding, didn't submitted the proof of TDS deduction from commission. Further disallowance was made on the ground that since credit/debit notes of commission didn't contained any CST/VAT No their genuinety was questionable. The genuinety of expense cannot be proved mere by TDS deduction on the said expense. Atmost the TDS deduction only proves the identity of party to whom commission is claimed to have been paid. Hence the order of Ld.CIT(A) is not acceptable and further appeal is recommended, if approved.

Ground No 5 pertains to disallowance of interest expenses of Rs.4,00,987/-u/s40(a)(ia).

During the course of assessment proceedings to AO observed that the. assessee had debited interest expenses of Rs.79.88,156/- On verification of the details, the AO noticed that no TDS was deducted on the interest paid to the parties. The AO disallowed the amount of Rs.4,00,987/-u/s 40(a)(ia) of the Act as no Form 15G/15H were filed.

Being aggrieved, assessee filed an appeal before the Ld.CIT(A). The Ld. CIT(A) deleted the addition on the basis of Form 15G/15H filed by assessee during the course of appellate proceeding. The order of Ld CIT(A) is not acceptable, as Ld.CIT(A) considered fresh evidence, being Form 15G of Kishori Sarkar, Manharlal Doshi HUF and Malay Doshi without calling for remand report from the AO. During the course of assessment proceedings, vide submission dated 18.2.2016, assessee merely submitted Form 15G of Foram Doshi. Form 15G of other parties were not filed during assessment proceedings. Further Form 15G of Foram Doshi is also not reliable as same is not having any acknowledgment of TDS Circle on it. In such scenario, the AO rightly made addition.

Hence order of CIT(A) is not acceptable and further appeal is recommended as there is contravention of Rule 46A of the Act.

Ground No.6 pertains to disallowance of Rs. 8,52,627/- u/s 40(a)(ia) out of exhibition expenses.

During the course of assessment proceeding the AO noticed that the assessee had made payment to contractors/sub-contractors being exhibition expenses to India Rubber Industries Association. The assessee was asked to produce details of TDS and copy of payment challan, the assessee did not produce the required documents. Hence, AO disallowed the amount of Rs.8,52,627/- u/s 40(a)(ia) of the I.T. Act.

Being aggrieved, assessee filed an appeal before Ld.CIT(A). The Ld.CIT (A) deleted the addition on the ground that TDS has been deducted from the said expenses hence the same is allowable. Assessee didn't submitted the proof of TDS deduction during the course of assessment proceeding. Ld. CIT(A) in considering the fresh evidence of TDS deduction from exhibition expense didn't called for remand report which is clearly against Rule 46-A of the Act. Hence further appeal is recommended on the issue.

Ground No. 7 pertains to disallowance of Rs.14,74,773/- out of travelling expenses.

During the course of assessment proceedings, the AO noticed that the assessee had debited travelling expenses amounting to Rs.22,00,000/- which included travelling inside & outside India. The AO disallowed the expense on ground that bills were not related to assessee, no procurement of any business activity outside India and persons visited outside India were also not known. Accordingly, AO disallowed the expenses of Rs 14,74,773/-.

Being aggrieved, assessee filed an appeal before Ld.CIT(A). The Ld.CIT(A) held that evidences in supporting travelling were filed vide submission dated 8.3.2016 and 16.3.2016 and further since assessee is importing rubber from outside India hence foreign travel is explainable. The order of Ld CIT(A) in deleting the addition of travelling inside India of Rs 596.795/- out of Rs 14,74,773/- is not acceptable. Vide submission filed on 8.3.2016, assessee merely filed the details of travelling in India with ledger account of conveyance. Vide submission dated 23.3.2016, assessee filed self made vouchers of travelling expense which are not entirely reliable. Further the said submission was made at fag end of proceeding for reasons well known to assessee. Hence the order of Ld CIT(A) is not acceptable and further appeal is recommended.

Ground No. 8 pertains to disallowance of 7,20,452/- being conveyance expenses.

During the course of assessment proceedings, the AO noticed that the assessee had debited conveyance expenses amounting to Rs.7.20,452/- to P & L Account. On verification of the di-mils it was seen that the assessee had made the payments in cash, and the expenses were supported by self made vouchers. Since genuinely could not be established, the AO disallowed the conveyance expenses.

Being aggrieved the assessee filed an appeal before Ld.CIT(A). The_Ld CIT(A) deleted the addition on the ground that since payments were made to taxis and employees for travelling and the expenses incurred for business purpose, the same is allowable. The order of Ld CIT(A) is not acceptable. Ld CIT(A) Is relying on the name ledger account which was furnished during the assessment proceeding. Further the explanation in respect of taxis and payment to employees is also a vague explanation which cannot be accepted patently. Assessee's conveyance expense in fact is more than domestic travelling which seems to be unexplainable and further evidences supporting the said expenses are no where filed. The vouchers of conveyance are self made which are unreliable. Hence further appeal is recommended on the issue.

In this regard, Ld. DR relied upon the decision of Hon’ble Bombay High Court in the case of PCIT vrs. Sushil Gupta (2019) 102 taxman.com 409 (Bom).

During the course of the assessment proceedings the learned Assessing Officer had asked the respondent assessee company to submit details of foreign exchange loss of Rs.2,06,83,3117- debited to its profit and loss account, vide order sheet noting dated 15.02.2016. In response to the same, the respondent attended and submitted the details and working of the said foreign exchange loss (enclosed at Pg 91-93 of the paperbook filed) vide letter dated 18.02.2016 (page 48- 49 of the paperbook). However, the learned Assessing Officer disallowed the said foreign exchange loss by stating that the appellant had not submitted any details.

In the submissions dated 17.04.2017 made before the CIT(A), the respondent assessee submitted that the learned Assessing officer had wrongly mentioned in the assessment order that the assessee took two adjournments and did not submit any details even though it had attended and submitted the details of Foreign Exchange Loss on 18.02.2016 itself and without appreciating the said details, the learned Assessing Officer made additions on this account. The CIT(A) requisitioned the assessment records to verify the claim of the assessee and he observed that the assessee had submitted the said details of Foreign Exchange Loss vide letter dated 18.02.2016 and are available on record.

During the course of the subsequent appellate proceedings, the Ld. CIT(A), for justifying/ substantiating claim, had asked the appellant to give a note on Foreign Currency Exchange Gain/ Loss, its accounting treatment with example and reference to the transactions of import mentioned in the details of Foreign Currency Exchange Gain/ Loss already filed. Accordingly, the assessee, on the next date of hearing filed a note on Foreign Currency Exchange Gain/ Loss explaining the accounting treatment in the books of accounts, alongwith sample copies of invoices for import, the bank advice for currency conversion at the time of payment, the bank statement showing the debit for payment.

Note on Foreign Currency Exchange Gain /Loss; - The foreign currency exchange gain or loss is the difference between the price at which an import or export transactions were recorded in the books of account on the basis of exchange rate of foreign currencies prevailing at the time of entering into transactions and/or recording the purchase or sale transaction in the books of account and the amount actually paid or received at the rate of exchange of foreign currency prevailing at the time of actual payment or receipt.

Accounting Standard -11(As-11) deals with accounting treatment for the effects of changes in foreign exchange rates. Paragraph 9 of AS-11 deals with recognition of exchange differences, as per which 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. Further, para 11 of AS-11 provides that at each balance sheet date, foreign currency monetary items should be reported using the closing rate. The receivables and payable (i.e. Sundry Debtors and Creditors) are the monetary items. The appellant follows the accounting policy in accordance with AS- 11 and has been disclosed in notes to accounts at note 14 to the financial statements ( Paper Book Page 44). Therefore, an enterprise has to report the outstanding liability (creditors) 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.

The appellant imports material (rubber chemicals and components), which are mainly under the Letter of Credits. The credit period under the terms of LC is 120 days. Thus, payments are made to the supplier on 120 days from the date of purchases. The rate of exchange at the time of booking of purchases the books of accounts are different then the rate of exchange at the time of actual payments made to the supplier. Hence, the exchange difference gain/(Loss) arises to the appellant which they have debited to profit and loss account and claimed as a trading Gain/(Loss).

The above can be explained with an example as under: a) Refer the transaction of import at Sr. no. 31 of details of Foreign Exchange Fluctuation Loss, page no.55 of Paper book -I and for Invoice at page no. 371 of Paper book Index-II).

The appellant had imported Synthetic Rubber from Colorant Chromatics Aaland Finland on 16.07.2012 of EURO 2632.50. The rate of exchange on 16.07.2012 was 1EURO = Rs. 69.40 and rate of Exchange at the time of remittance i.e. on 13.09.2012 was 1 EURO = Rs.71.89. Thus, there was a loss of Rs. 2.49 per EURO to the appellant. The appellant had booked the loss of Rs. 6,554.937- (i.e. EURO 2632.50 x Rs. 2.49) from this transaction.

The following are the accounting entries passed by the appellant in the books of accounts:

I) At the time of Import of Material on 16.07.2012 :-

Direct Import A/c. Dr. Rs. 1,82,695.50 (EURO 2,632.50 x Rs. 69.40) To Colorant Chromatics A/c Rs. 1,82,695.50 II) At the time of payment on 13.09.2012:

To Colorant Chromatics A/c Dr. Rs. 1,82,695.50 (EURO 2,632.50 x Rs. 69.40) Exchange Fluctuation Import A/c. Dr. Rs. 6,554.93 (EURO 2,632.50 x Rs. 2.49) Dr. To Bank A/c. (EURO 2,632.50 x Rs. 71.89) Rs. 1,89,250.43 b) Refer the transaction of import at Sr. no. 23 of details of Foreign Exchange Fluctuation Loss, page no.55 of Paper book -I and for Invoice at page no. 359 of Paper book Index-II).

The appellant had imported Synthetic Rubber from JTC Corporation Japan on 23.05.2012 of USD 60,480.00. The rate of exchange on 23.05.2012 was 1 USD = Rs. 56.35 and rate of Exchange at the time of remittance i.e. on 28.08.2012 was 1 USD = Rs.55.80. Thus, there was a gain of Rs. 0.55 per USD to the appellant. The appellant had booked the gain of Rs. 33,264/- (i.e. USD 60,480.00 x Rs. 0.55) from this transaction.

The following are the accounting entries passed by the appellant in the books of accounts:

I) At the time of Import of Material on 23.05.2012 :- Direct Import A/c. Dr. Rs. 34,08,048.00 ( USD 60,480 x Rs. 56.35)

To JTC Corporation A/c Dr. Rs. 34,08,048.00 II) At the time of payment on 28.08.2012: JTC Corporation A/c Dr. Rs. 34,08,048.00 (USD 60,480 x Rs. 56.35) To Bank A/c. (USD 60,480 x Rs. 55.80) Rs. 33,74,784.00 To Exchange Fluctuation Import A/c. ( USD 60,480 x Rs. 0.55 [Rs. 56.35 - Rs. 55.80] Rs. 33,264.00 Further we have to submit that, the accounting policy followed by the Company( Refer note no. 14 of notes forming part of the financial statements): -

(a) Initial Recognition: - Foreign currency transactions are recorded in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency & the foreign currency at the date of the transaction.

(b) Conversion: - Foreign currency monetary items are reported using the closing rate, non- monetary items which are carried in terms of historical cost denominated >in a foreign currency are reported using the exchange rate at the date of transaction.

(c) Exchange Difference: -Exchange difference arising on the settlement of monetary items, or on reporting monetary items of company at rates different from those at which they are initially recorded during the year, are reported in previous financial statements are recognised as income or as expenses in the year in which they arise.

Accordingly, during the previous year relevant to captioned assessment year, the appellant has incurred net loss on account of difference between the rates at which an import or export transactions were recorded in the books of account and rate of foreign exchange prevailing at the time of actual payment or Receipt or at the end of the financial year. The appellant is rightly eligible to claim the said net loss in terms of section 28/37(1) of the Act. The section 37(1) of the Income Tax Act, 1961 reads as under:

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), laid out or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession. "

The expression 'expenditure' used in the above provision may includes loss also if it is incurred during the course of the business transactions. Hence, the appellant had incurred foreign exchange loss on import and export transactions. The said loss is allowable as business loss u/s. 37(1) of the Income Tax Act, 1961. Reliance in this regard is also placed on the judgement of supreme Court in the case of CIT vs. Woodward Governor India ( P.) Ltd. ( SC) [312 ITR 254] (2009):

Wherein the Apex court has observed that, "the word 'expenditure' is not defined in the Act. The word 'expenditure is, therefore, required to be understood in the context in which it is used. Therefore, the expression 'expenditure' used in section 37 may include 'loss' also even though the said amount has not gone out from pocket of the assessee. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in profit and loss account for the reporting period. "

Therefore, the said loss on foreign exchange fluctuation on trading transaction is allowable in terms of section 37(1) of the Act.