M/S. APPOLLO TYRES LTD vs. THE ASSISTANT COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE VIJU ABRAHAM THURSDAY, THE 26TH DAY OF AUGUST 2021 / 4TH BHADRA, 1943 ITA NO. 249 OF 2015 AGAINST THE ORDER IN IT(TP)A No.02/COCH/2014 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/S: M/S. APOLLO TYRES LTD 6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD, ERNAKULAM, KOCHI-682031. (PAN: AAACA699Q). BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.ISAAC THOMAS SRI.NOBY THOMAS CYRIAC SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/S: THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1(1), ERNAKULAM, KOCHI-682018. BY ADV CHRISTOPHER ABRAHAM, INCOME TAX DEPARTMENT THIS INCOME TAX APPEAL HAVING COME UP FOR HEARING ON 26.08.2021, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

I.T.A. No. 249/2015 -2- J U D G M E N T S.V. Bhatti, J. Heard learned Senior Counsel Mr Joseph Markos and learned Standing Counsel Mr Christopher Abraham for parties. 2. M/s. Apollo Tyres Ltd Kochi/Assessee is the appellant. The Assistant Commissioner of Income Tax, Circle-1, Ernakulam/Revenue is the respondent. 3. The assessee assails the order dated 21.11.2014 of the Income Tax Appellate Tribunal (for short ‘Tribunal) Cochin Bench in IT(TP)A No.02/Coch/2014. The issues canvassed in the appeal relate to the return filed by the assessee for the Assessment Year 2009-10. Substantial question nos. (a) and (b) read as follows:

I.T.A. No. 249/2015 -3- “a) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal ("Tribunal") was right in treating the income of Rs.10,01,281/- as income from house property and not business income as claimed by the appellant? b) Whether on the facts and in the circumstances of the case and in the light of the fact that the expenses pertaining to said property had been allowed as business expenditure the Appellate Tribunal erred in treating the above income as income from house property? 4. The learned Counsel appearing for the assessee and the Revenue would state that the questions covered by (a) and (b) are similar to the questions raised by the assessee for the Assessment Year 2003-04 in ITA No.26/2013. This Court vide order dated 29.07.2021 has answered the said questions against the assessee and in favour of the Revenue. By following the

I.T.A. No. 249/2015 -4- reasons stated therein, question nos. (a) and (b) are answered in favour of the Revenue and against the assessee. 5. Substantial question no.(c) reads thus: “c) Whether on the facts and in the circumstances of the case the Tribunal was right in confirming the disallowance of the amount of Rs. 1,03,92,000/- being year-end provision for payment of commission as an unascertained liability? 5.1 The assessee for the Assessment Year 2009-10 booked an expenditure of Rs.5,00,36,912/- towards commission paid to the selling agents of the assessee. The said expenditure included an amount of Rs.1,03,92,000/- representing provision made as on 31.03.2009 towards commission payable by the assessee to commission agents, through whom the assessee claims to have made sales in favour of State Transport

I.T.A. No. 249/2015 -5- Undertakings (STUs). The Assessing Officer sought clarification on the claim of Rs.1,03,92,000/- towards expenditure which has been a provision created for payment of commission to the agents through whom the assessee claims to have effected sales in favour of STUs. The assessee replied that the subject deduction is an ad hoc provision made by the assessee, since the quantum of commission payable to each one of the commission agents for the sales made to STUs through them could not be quantified and that the commission payable to them is also negotiable. Since no payment as commission was made to the commission agents, tax at-source was not deducted. However, while making the payment, TDS could be effected. The provision made was also reversed in the subsequent year, actual commission payable to each party in respect of sales made through them to STUs was quantified, the tax was duly deducted at-source and deposited with the Department.

I.T.A. No. 249/2015 -6- 5.2 The Assessing Officer disallowed the provision made by the assessee towards commission payable to STU commission agents, amounting to Rs.1,03,92,000/-. The reason assigned by the Assessing Officer is that the assessee did not deduct TDS from the amount payable to the commission agents. The ex post facto reversing of the entry and payment of commission in the subsequent year together with deduction of TDS is not acceptable while treating the provision made for the Assessment Year 2009-10. The subject expenditure does not satisfy the provision of Section 40(a)(ia) of the Act. A mere provision of expenditure is not allowable as expenditure inasmuch as the assessee has not suffered actual expenditure on account of the said commission payable to the agents. The conclusion and reasoning of the Assessing Officer was affirmed by the Commissioner of Income Tax (Appeals). The Tribunal independently examined the tenability of the deduction,

I.T.A. No. 249/2015 -7- considered every facet of the explanation given by the assessee and whether it merits acceptance as an expenditure for the subject Assessment Year. Briefly stated, the conclusion recorded by the Tribunal is apt to be reproduced, and reads as follows: “27. It is evident from the orders of the lower authorities that the provisions for the expenditure claimed on account of payable has been disallowed as it is in the nature of provision only and is not an ascertained liability. Whereas it is the contention of the assessee that the provision has been made under the matching concept principle of accountancy and the same has been accrued during the relevant financial year though the exact quantification could not be made in the absence of details furnished by the assessee. Such claim of the assesee is not acceptable. It is not disputed that the expenditure debited to P&L account is only a provision made on estimate basis. Payments of commission are also fixed in terms of the agreement entered into with the selling agents. In such circumstances, it would have been a difficult task to

I.T.A. No. 249/2015 -8- ascertain the amount of expenses payable and to whom payable. Therefore, there was necessity to create the provision for expenditure on adhoc basis. It is also a fact on record that when the AO asked the assessee to furnish details of expenditure, the same was not furnished and it was stated that it was made only on adhoc basis. From this it is clear that when claiming the provision to be allowed as expenditure, the assessee treats it as a known and ascertained liability accrued during the financial year, however, when confronted with the obligation under the TDS provision, the assessee takes a contradictory stand that the deductees are not identifiable and in absence of details relating to correct amount to be paid and correct amount of TDS, adhoc deduction of tax on estimated provision was not possible. The assessee cannot be allowed to take such contradictory stand. It is also a fact that the assessee has not been able to substantiate as to how the said provision was only in respect of the service providers for which revenue was recognized for relevant year. So far as the decisions relied upon by the assessee are concerned, they are found to be distinguishable on facts and do not apply to the case of the

I.T.A. No. 249/2015 -9- assessee. Thus, the liabillity on account of expenses as well as the identity of the persons to whom it is payable is ascertained thought it was payable in future. However, in case of the assessee neither the exact amount payable nor to whom payable are ascertained. The ratio laid down in other cited cases are also on similar lines. In aforesaid view of matter, we fully agree with the findings of the DRP and hold that expenditure claimed is not allowable.” (emphasis supplied) 6. Mr Joseph Markos appearing for the assessee tried to convince this Court to take a different view by the very same argument put forward by the assessee before the Tribunal and the Assessing Officer. We have two difficulties in appreciating the argument of the assessee to accept the provision made towards commission payable to the agents through whom sales have been affected in favour of STUs. Firstly, the liability arising on account of the expenditure for which a provision is

I.T.A. No. 249/2015 -10- made could not be crystallized by the assessee as an expenditure. The provision for which deduction is claimed includes an unascertained amount of expenditure and the persons to whom the said commission was payable by the assessee. The deduction, if results in favourable consideration at our hands, then it would amount to allowing expenditure neither actually incurred nor ascertained with certainty as payable by the assessee. Such deduction is impermissible in law. The argument not accepted by the Revenue and the Tribunal, even if entertained by us, establishes the perversity or illegality in the findings of fact recorded by the orders under appeal. Such is not the case. Next, the Tribunal recorded a finding of fact upon reexamination of all circumstances, hence, we do not see a question of law, much less a substantial question of law, warranting our interference on any of the conclusions recorded either by the Assessing Officer,

I.T.A. No. 249/2015 -11- Commissioner of Income-Tax (Appeals) or the Tribunal. We are in full agreement with the reasons recorded both by the Assessing Officer and the Tribunal, and the question is answered against the assessee and in favour of the Revenue. 6.1 It is argued, for the assessee, that though the provision made towards commission payable to commission agents could not be established by the assessee for the previous year ending on 31.03.2009 (Assessment Year 2009-10), according to learned Senior Advocate Mr Joseph Markos, the assessee, in fact, has paid commission to its agents through whom sales have been affected in favour of STUs. The claim made in the subsequent year if not considered, then the assessee would be denied of claiming legitimate expenditure which the assessee has incurred for effecting the sales, and the expenditure is allowed in the subsequent Financial Year.

I.T.A. No. 249/2015 -12- 7. We appreciate the contention of the assessee and we are of the view that the finding now recorded, either by the Tribunal or by us while answering this question ought to be limited for the purpose of deduction claimed by the assessee for the Assessment Year 2009-10. Therefore, the assessee could be given liberty to prove actual payment made in favour of commission agents in any subsequent year before the Assessing Officer, place such proof of the expenditure incurred on account of commission paid to the agents and upon such details being furnished by the assessee, the Assessing Officer is required to pass revised assessment order in respect of such claims. With the above observation, question no.(c) is answered in favour of the Revenue and against the assessee. 8. Substantial question no.(d) reads as follows:

I.T.A. No. 249/2015 -13- “d) Whether on the facts and in the circumstances of the case and in the light of the decision of Special Bench in appellant's own case the Appellate Tribunal was right in holding that the interest component in the foreign exchange gain was a revenue receipt?” 9. Senior Advocate Mr Joseph Markos, to enable the Court to appreciate the intricacy involved in the substantial question raised by the assessee, has prefaced his submission by inviting our attention to paragraph 31 of the Tribunal’s order, which reads thus: “31. We have heard both the parties and perused the record. In our opinion, gain earned from cancellation of foreign exchange forward contracts which are connected with foreign loans raised for purchase of capital asset should be reduced from cost of plant and machinery to the extent of amount relating to the principal portion as held by the ITAT, Special Bench, Delhi in the assessee's own case (89 ITD 235). However, foreign exchange fluctuation

I.T.A. No. 249/2015 -14- related to the interest portion is to be treated as revenue receipt which shall be brought to tax. Being so, this ground of the assessee is partly allowed. (emphasis supplied) 9.1 The assessee claimed an amount of Rs.3,74,58,280/- as deduction from the total income. The said claim represents gain on cancellation of forward contracts relating to capital assets lying in CWIP. The Assessing Officer rejected the claim by recording that, firstly the reply of the assessee was not acceptable, secondly the case law mentioned by the assessee, though in its favour, since the Department has not accepted the decision in favour of the assessee and an appeal was pending in the Kerala High Court, the deduction claimed by the assessee was rejected. 9.2 The conclusions recorded by the Assessing Officer prima facie suffer from the following infirmities, namely, there is

I.T.A. No. 249/2015 -15- no consideration of any of the details furnished by the assessee. The decision between the parties, on which the assessee relied on was refused to be followed by observing that an appeal was pending in this Court. The said observation, it has been argued, is factually incorrect, for the Revenue did not file an appeal against an order where a finding in favour of the assessee was recorded. On the other hand, the assessee has filed ITA No.535/2009 in this Court. In the said Income Tax Appeal the assessee has raised the following substantial question of law and the findings recorded and considered by this Court have some relevance for the outcome of the present question. “Whether on the facts and circumstances of the case, the gains on the cancellation of forward contracts, held to be a capital receipt, were liable to be set-off against the cost of acquisition of imported plant and machinery.”

I.T.A. No. 249/2015 -16- 9.3 This Court observed that the finding of the Tribunal that it, namely gains on the cancellation of forward contracts, is a capital receipt and not a revenue receipt, has become final as there is no challenge at the instance of the Revenue. By referring to the said conclusion, the case of the assessee is that the Tribunal, though has accepted the claim of the assessee, however has observed erroneously that foreign exchange fluctuation related to the interest portion is to be treated as revenue receipt, it shall be brought to tax. Being so, this ground of the assessee is partly allowed. 10. The conclusion/finding in our view is erroneous: firstly that this Court in the decision reported in Apollo Tyres Ltd v. Assistant Commissioner of Income Tax1, has recorded a finding that the gains on the cancellation of forward contracts are a capital receipt and not a revenue receipt. Such a finding has 1 (2019) 416 ITR 539 (Ker)

I.T.A. No. 249/2015 -17- become final between the assessee and the Revenue. The underlined portion excerpted above is liable to be set aside for it treats the capital gain as revenue receipt. From the views taken by this Court, the receipt is treated as capital gain and this is accepted by the Tribunal. However, an unintended observation is resulting in contradictory findings. We affirm the substantial findings recorded in favour of the assessee in paragraph 31 of the order under appeal, and while affirming the said finding we set aside the following observation in the order of the Tribunal: “However, foreign exchange fluctuation related to the interest portion is to be treated as revenue receipt which shall be brought to tax. Being so, this ground of the assessee is partly allowed.” As indicated above, the question is answered in favour of the assessee and against the Revenue.

I.T.A. No. 249/2015 -18- 11. Substantial question no.(e) reads as follows: “e) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the amount of Rs.1,63,97,541/- on account of foreign exchange fluctuation has to be treated as revenue income?” 11.1 The substantial question of law relates to the claim of assessee amounting to Rs.1,63,79,541/-. The said amount is stated as unrealised foreign exchange gain on capital asset on foreign exchange forward contracts entered into for capital asset purposes. It means the capital asset is acquired through foreign exchange. The assessee claims to have derived foreign exchange gain in the Financial Year 2008-09. The nature of the gain is stated as unrealised capital gain on account of settlement of foreign exchange forward contract. In other words, a notional gain is derived by the assessee. The Assessing Officer, in the draft assessment order under Section 144C of the

I.T.A. No. 249/2015 -19- Act, disallowed the said claim and the disallowance was considered by the Dispute Resolution Panel (DRP) as objection no.11. The DRP and the Assessing Officer considered that the assessee rests its claim by referring to the decision of the Supreme Court in Commissioner of Income-Tax v. Woodward Governor India P. Ltd.2 It is understood that the assessee is not entitled to deduction in the computation of income as the amount was unrealised. It was further recorded by the DRP that the assessee incorrectly, to its own advantage, interpreted the principle laid down in Woodward Governor India P. Ltd. case. It is accepted by DRP that the unrealised capital gain on foreign exchange issued is on capital account and for the said reason, the principle in Woodward Governor India P. Ltd case is not on all fours acceptable. The decision allows notional loss/gain on revenue account but not on capital account. This entailed rejection of the claim of the assessee. The Assessing Officer 2 (2009) 312 ITR 254 (SC)

I.T.A. No. 249/2015 -20- recorded that the Woodward Governor India P. Ltd case deals with revenue loss and the situation in the case on hand deals with capital assets. The result of the brief discussion of the Assessing Officer is that: “unrealised foreign exchange gain of Rs.1,63,97,541/- is disallowed and added to the total income.” 11.2 The Tribunal has taken note of the fact that the assessee has reduced an amount of Rs.1,63,97,541/- at the computation stage and distinguished that there is difference between notional loss on capital account and the case relied on by the assessee deals with revenue loss. 12. Senior Advocate argues that the authorities under the Act and the Tribunal fell in patent error of fact and law in firstly understanding the difference of expression employed in Section 43A prior to amendment and after the amendment with effect from 01.04.2003. The judgments relied on by the assessee

I.T.A. No. 249/2015 -21- in Woodward Governor India P. Ltd. case and Oil and Natural Gas Corporation Ltd (ONGC) v. Commissioner of Income-Tax3 shall not be understood as dealing only with revenue loss; the decision in Woodward Governor India P. Ltd. case the Supreme Court made it clear that after amendment the adjustment in actual cost is to be made only on actual payment, with reference to gain with Foreign Exchange implication on capital account. He refers to the following paragraphs in ONGC case to argue that the reported decisions of the Supreme Court deal with both, capital loss and revenue loss, on account of foreign exchange fluctuation and that adjustment in actual cost is made on actual payment. The paragraphs relied on are: “14. On the question whether an assessee is entitled to adjust the actual cost 14 of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance-sheet date, pending actual payment of the varied liability with reference to unamended section 43A of the Act, in 3 (2010) 322 ITR 180 (SC)

I.T.A. No. 249/2015 -22- Woodward's case [2009] 312 ITR 254, the court observed thus (page 272): "... what triggers the adjustment in the actual cost of the assets, in terms of the unamended section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjust ment of the carrying cost of the fixed assets acquired in foreign currency. But for section 43A which corresponds to paragraph 10 of AS-II such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were 'for making payment' and not 'on pay ment which is now brought in by amendment to section 43A, vide the Finance Act, 2002." 15. Opining that the amendment of section 43A of the Act by the Finance Act, 2002 with effect from April 1, 2003 is amendatory and not clarificatory and would thus, apply prospectively, the court explained that under the unamended section 43A, adjustment to the actual cost takes place on the happening of change in the rate of exchange, whereas under

I.T.A. No. 249/2015 -23- the amended section 43A, the adjustment in the actual cost is made on cash basis. 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 but under the amended section 43A, with effect from April 1,2003, such payment of the decreased/enhanced liability on account of fluctuation in foreign exchange rate has been made a condition precedent for making adjustment in the carrying amount of the fixed asset. 16. We are of the opinion that the decision of this court in Woodward's case [2009] 312 ITR 254 settles the second issue as well. We respectfully concur with the same and hold that all the assessment years in question being prior to the amendment in section 43A of the Act with effect from April 1, 2003 the assessee would be entitled to adjust the actual cost of the imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance-sheet dates pending actual payment of the varied liability.” (emphasis supplied)

I.T.A. No. 249/2015 -24- 12.1 He contends that the assessee at the first instance reduced the notional foreign exchange fluctuation gain against the miscellaneous expenses shown in Schedule IX: Manufacturing and other expenses. The result thereby is that the expenses that could be claimed by the assessee have come down and corresponding deduction is claimed in the computation of net income of the assessee. The said procedure conforms to the accounting standard-11 by referring to which the accounts of the assessee are finalised. The conclusions recorded by the Tribunal and the authorities ignored that the assessee has reduced the actual expenses in Schedule IX of the audit report. In other words, it amounts to giving due credit to the foreign exchange fluctuation gain. The subject entry is a notional gain, no prudent trader cares to show the unrealised gain in the computation and pay income-tax on such unrealised/notional gain, deduction, hence, from computation

I.T.A. No. 249/2015 -25- of total income of Rs.1,63,97,541/- has been made. Therefore, he contends that the assessee is entitled for deduction of unrealised foreign exchange capital gain while taking the benefit under Section 43A of the Act in computation of net income of the assessee. 13. Per contra, learned Standing Counsel submits that it is one aspect of the matter, if deduction is made while computing the net income of the assessee and it is definitely a different circumstance if due credit is shown in the form of reduced expenditure booked by the assessee. The situation is a matter of record on a case-to-case basis. He further states that the documents now filed by the assessee are to be appreciated and decided by this Court. 14. We have carefully perused the explanation offered by the assessee to the draft assessment order and the case argued

I.T.A. No. 249/2015 -26- before the DRP. In our considered view, the first error committed in this behalf is that the authorities have gone backwards by appreciating the case of assessee on the legal principle laid down in Woodward Governor India P. Ltd. and ONGC cases. Even in this behalf the appreciation of the reported decisions is not in line with the facts or the dictum laid down by Woodward Governor India P. Ltd. & ONGC. It was not examined by the authorities on the actual details furnished in Schedule IX, the effect thereof, and Section 43A, as is applicable, enables the assessee to revise the value before actual payment of such amount. The assessee, it is brought to our notice that, in the subsequent Financial Year, has duly accounted for this item in the Financial Year 2008-09 and added it to the income in the Financial Year 2009-10. The authorities and the Tribunal have denied the claim more by inappropriately appreciating the accounting standard followed by the assessee and the effect to

I.T.A. No. 249/2015 -27- be given at the stage of preparation of P&L account and balance sheet for the year ending 31.03.2009 and the claim to which the assessee is entitled while filing the return. 14.1 As we understand from the record, the gist of the method followed by the assessee is that, the assessee in Schedule IX claimed less deduction than claimable by adjusting the notional capital gain on Forex and corresponding deductions of the same amount while computing the net income of assessee for purpose of tax. In effect, both credit and debit are given and the tax liability is not materially impacted. Anyway, when the actual event has taken place, tax is stated to have been paid. The converse is that if the deduction is disallowed, the assessee would be called upon to pay tax on unrealised/notional capital gain; the treatment is as per the accounting standard, and the claim for deduction conforms with Section 43A of the Act. For the above reasons, we answer

I.T.A. No. 249/2015 -28- question no.(e) in favour of the assessee and against the Revenue. ITA No.249/2015 is allowed in part as indicated above. The substantial question nos.(a) to (c) are answered in favour of the Revenue, against the assessee, and question nos.(d) and (e) are answered in favour of the assessee, against the Revenue. Sd/- S.V.BHATTI JUDGE Sd/- VIJU ABRAHAM JUDGE jjj

I.T.A. No. 249/2015 -29- APPENDIX OF ITA 249/2015 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF THE ORDER DATED 24/01/2013 ISSUED BY THE TRANSFER PRICING OFFICER. ANNEXURE B TRUE COPY OF THE DRAFT ASSESSMENT ORDER DATED 28/03/2013 PASSED BY THE RESPONDENT. ANNEXURE C TRUE COPY OF THE ORDER DATED 10/12/2013 PASSED BY THE DISPUTE RESOLUTION PANEL, BANGALORE. ANNEXURE D TRUE COPY OF THE FINAL ASSESSMENT ORDER DATED 31/12/2013 PASSED BY THE RESPONDENT. ANNEXURE E TRUE COPY OF THE APPEAL DATED 12/02/2014 FILED BY THE APPELLANT BEFORE THE ITAT, KOCHI. ANNEXURE F CERTIFIED COPY OF THE IMPUGNED ORDER DATED 21/11/2014 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH.