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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI R.K.PANDA & SHRI SUDHANSHU SRIVASTAVA
PER SUDHANSHU SRIVASTAVA, J.M.: This appeal is preferred by the assessee against order dated 02.02.2015 passed by the Ld. CIT (Appeals)-7, New Delhi for assessment year 2010-11.
Brief facts of the case are that the assessee company is providing back office mortgage processing services to lenders, financial institutions and law firms. The return was filed for the year under consideration at nil income and subsequently the case
(Quatrro Mortgage Solutions (P) Ltd.) was selected for scrutiny. The assessment was completed at an income of Rs. 3,81,47,971/- u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The disallowances additions, inter alia, included a disallowance of Rs. 2,23,06,500/- on account of disallowance of foreign exchange fluctuation loss and a further disallowance of Rs. 3,35,712/- paid towards membership and subscription expenses. The assessee’s appeal against these two additions / disallowances was dismissed by the Ld. CIT (Appeals) and now the assessee is in appeal before the ITAT and has raised the following grounds of appeal :-
1. That the sustaining of disallowance of foreign exchange fluctuation loss of Rs.2,23,06,500/- on account of reinstatement of loan given to Quattro Mortgage Solutions Inc. under Section 37 of IT Act on the ground that it was not incurred in the course of carrying on business, was not on revenue account and had not occurred in the year, is unjust, unwarranted and not tenable on various factual and legal grounds and inconsistent with the treatment given by the revenue to similar such foreign exchange fluctuation gain of Rs. 2,39,68,500/- in the previous year.
2. That without prejudice to above ground, Id. CIT(Appeals) ought to have directed the foreign exchange fluctuation gain of Rs.74,93,798/- on account of reinstatement of loan taken from Axis Bank to be netted off with the foreign exchange fluctuation loss of Rs.2,23,06,500/- on account of reinstatement of loan given to Quattro Mortgage Solutions Inc and only the balance of Rs. 1,48,12,702/- could have been considered by her for the purpose of making the disallowance.
(Quatrro Mortgage Solutions (P) Ltd.)
That the expenditure of Rs.3,35,712/- towards membership and subscription for attending a seminar Organized by mortgage bankers association was incurred in the interest of the business of the assessee company and consequently the disallowance sustained is unjust, unwarranted and untenable on facts and law.
The above grounds are independent and without prejudice to one another. 5. Your appellant craves leave to add, alter, amend or withdraw any of the grounds of appeal at the time of hearing.”
3.0 At the outset, the Ld. Authorised Representative appearing on behalf of the assessee submitted that ground no. 3 pertaining to disallowance of Rs. 3,35,712/- on account of membership and subscription expenses was not being pressed due to the smallness of amount. It was pleaded that the assessee reserves the right to agitate a similar ground in other assessment years if the need so arises.
3.1 With respect to the foreign exchange fluctuation loss, it was submitted that this issue was covered in favour of the assessee by order of the Tribunal in assessee’s own case for assessment year 2009-10 in ITA No. 2351/Del/2014. A copy of the said order dated 13.06.2017 was placed on record.
(Quatrro Mortgage Solutions (P) Ltd.)
4.0 In response to the submissions of the Ld. Authorised Representative, the Ld. Sr. Departmental Representative placed reliance on the concurrent findings of the Assessing Officer and the Ld. CIT (Appeals) and submitted that the foreign currency was not part of the trading assets of the company and the fluctuation loss was not incurred in the course of carrying on the business activities of the company and was, thus, not incidental to it. It was submitted that the impugned amount of Rs. 2,23,06,500/- cannot be treated as revenue expenditure because the loss was on capital account. It was submitted that the assessee’s appeal deserved to be dismissed on this account.
5.1 We have heard the rival submissions and have also perused the material on record as well as the order of the Tribunal in assessee’s own case for assessment year 2009-10 on which reliance has been placed by the assessee.
5.2 The brief facts surrounding this issue are that the during the year under consideration the assessee had incurred a foreign exchange fluctuation loss of Rs. 2,23,06,500/- on account of reinstatement of loan given to M/s. Quatrro Mortgage Solutions Inc. and had also earned foreign exchange fluctuation gain on account of reinstatement of loan taken from Axis Bank amounting to Rs. 74,93,798/-. It is undisputed that the assessee company
(Quatrro Mortgage Solutions (P) Ltd.) had offered this gain as income and claimed the loss as expenditure in the profit and loss account. It is also undisputed that in the immediately preceding assessment year, the assessee had booked foreign exchange fluctuation gain of Rs. 2,39,68,500/- on account of reinstatement of the same advance given to M/s Quatrro Mortgage Inc. as a revenue receipt. It is also undisputed that the foreign exchange gain on account of reinstatement of loan was taxed as revenue receipt in assessment year 2008-09. Further, ITAT Delhi Bench in assessee’s own case for assessment year 2009-10 in has held that loss on account of foreign exchange fluctuation is liable to be allowed u/s 37(1) of the Act. The relevant observations and findings of the ITAT in assessee’s own case for assessment year 2009-10 in ITA no. 2351/Del/2014, vide order dated 13.06.2017, are contained in paragraphs 9 to 13 and are reproduced herein under for a ready reference :- “9. The ratio of the judgment in CIT vs. Woodward Governor India Pvt. Ltd. (supra) is that the loss suffered by the assessee on account of the exchange fluctuation as on the date of balance sheet is an item of expenditure u/s 37 (1) of the Act. More so, in the instant case, the Revenue itself treated the reinstatement of the loan in AY 2008-09 as a revenue item and it cannot be allowed to reprobate
(Quatrro Mortgage Solutions (P) Ltd.) and a probate during the year under assessment i.e. AY 2009-10.
Similarly, Hon’ble Apex Court in ONGC Ltd. vs. CIT (supra) case held that “when the assessee has maintained its account on mercantile system of accounting and the AO has not disputed the accounting standard complied with by the assessee, loss suffered by the assessee on account of foreign exchange as on date of balance sheet is allowable expenditure u/s 37 (J) of the Act notwithstanding the fact that liability has not been discharged in the year in which fluctuation in rate of foreign exchange had occurred. ”
11. Operative part of the judgment in ONGC Ltd. vs. CIT (supra) is reproduced as under :- “10. Having carefully perused the decision of this Court in Woodward's case (supra), we are of the Opinion that both the issues stand concluded by the said decision. Dealing with the said issues extensively, speaking for the Bench, S.H.Kapadia, J. summarised the following factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates, when the assessee is following mercantile system of accounting, is deductible: (i) whether the system of accounting followed by the assessee is the mercantile system, which brings in the debits of the amount of expenditure for which a legal liability has been incurred even before it is actually disbursed and credits, what is due, immediately it becomes due even before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change
(Quatrro Mortgage Solutions (P) Ltd.) was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv)Whether the assessee has been consistent and Definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; Whether the system adopted by the (vi) assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. Applying these factors on the facts of that case, it was held that the "loss" suffered by the Assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (1CA1), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred.
We are of the opinion that the ratio of the said decision, with which we are in respectful agreement, squarely applies to the facts at hand and, therefore, the loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1) of the Act. ”
Following the law laid down by the Hon’ble Apex Court in judgment cited as CIT vs. Woodward Governor India Pvt. Ltd. and ONGC Ltd. vs. CIT (supra) which is (Quatrro Mortgage Solutions (P) Ltd.)
applicable to the facts of this case, we are of the considered view that since the assessee has been maintaining its account on mercantile basis, loss on account of foreign exchange fluctuation is liable to be allowed u/'s 37 (1) of the Act. So far as question of utilizing the loan taken by the assessee for working capital requirement and not to acquire capital assets for which it was availed of, is concerned, again same is allowable expenditure u/s 37(1) of the Act because the Revenue has nowhere disputed that the loan was not utilized for business purpose. Rather it is for the businessman to see as to how and under what circumstances, the loan is to be utilized keeping in view the exigencies of the business.
Both AO as well as CIT (A) have erred by misconstruing the ratio of the judgment CIT vs. Woodward Governor India Pvt. Ltd. and ONGC Ltd. vs. CIT (supra) by disallowing the loss on account of foreign exchange fluctuation which is a revenue item and as such impugned order passed by Id. CIT (A) is not sustainable in the eyes of law. Hence, grounds no. l, 2, 3, 4 & 5 are determined in favour of the assessee.”
5.3 As the revenue could not point out any distinguishing fact in the year under consideration from the factual matrix of assessment year 2009-10, respectfully following the order of the co-ordinate bench of the Tribunal in assessee’s own case, on (Quatrro Mortgage Solutions (P) Ltd.) identical facts we hold that the foreign exchange loss is an item of revenue expenditure. Accordingly, the order of the Ld. CIT (Appeals) is set aside and the AO is directed to allow the foreign exchange loss as revenue expenditure to the assessee. Thus, ground nos. 1 and 2 stand allowed.
5.4 Ground no. 3 pertaining to disallowance of membership and subscription expenditure has not been pressed by the Ld. Authorised Representative due to smallness of amount.
Accordingly, we dismiss this ground as not pressed with liberty being granted to the assessee to raise identical ground in other assessment years if the need so arises.
5.5 Ground nos. 4 and 5 are general in nature and do not need any separate adjudication.
6.0 In the final result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 25.02.2019.