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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
Per N.V.Vasudevan, JM ORDER This is an appeal by the Assessee against the order dated 28.03.2013 of CIT, Circle-I, Kolkata passed u/s 263 of the Income Tax Act, 1961 (Act). 2. The Assessee is a company. It is engaged in the business of manufacturing and executing turn key projects. For A.Y.2008-09 the assessee filed return of income on 29.09.2008. While computing its income under the head ‘profits and gains of Business’, the assessee had claimed as deduction a sum of Rs.2,97,31,341/- . The break-up of the aforesaid loss on account of foreign exchange fluctuation was as follows :- Statement showing Details of Loss on Exchange Fluctuation (Net) Sl.No. Division Amount (in Rs.) Reference 1. Bangalore (2,15,329) Annexure-4.1. 2. Corporate 3,51,82,178 Annexure-4.2 3. Highway 6,50,763 Annexure-4.3 4. Projects (58,86,271) Annexure-4.4 2,97,31,341 Schedule of Loss on Foreign Exchange Fluctuation (Annexure 4.2)
Details Amount (Rs.)
Loss on FCL of Union Bank 3,28,696
2 McNally Bharat Engineering Company Limited A.Yr.2008-09 Loss on FCL of Karur Vysya Bank 8,83,209 Loss on FCL of BOI 29,40,000 Loss on Ereiz Transaction 3,02,532 Loss on FCL of Karur Vysya Bank 11,00,165 Gain on FCL of Karur Vysya Bank (5,12,687) Los on FCL of AXIX Bank 4,27,673 Loss on FCL of BOI 15,75,000 Exchange Loss on FCL 9,70,586 Provision for Loss on FCL of Union Bank upto March,08 4,39,429 Provision for Loss on FCL of Union Bank upto March,08 3,33,308 Provision for Loss on FCL of Karur Vysya Bank upto March,08 5,158 Provision for Loss on FCL of Bank of India upto March,08 12,95,000 Loss on FCCB Issue 2,50,94,109 TOTAL 3,51,94,109
It can be seen from the aforesaid break up of loss on foreign exchange fluctuation that a sum of Rs.2,50,94,109/- had been claimed as a loss on foreign exchange fluctuation on FCCB Issue by the assessee. During the previous year the assessee had issued Foreign Currency Convertible Bonds (FCCB). As on the last date of the previous year, due to foreign exchange fluctuation, the amount payable by the assessee towards the Bonds was higher by a sum of Rs.2,50,94,110/- and this was claimed as revenue expenditure while computing the income from business.
The AO issued a notice u/s 142(1) of the Act dated 31.08.2010. He raised a specific query with regard to the allowability of the aforesaid sum as deduction. The relevant query of the AO in this regard were as follows :- “9. A detailed explanation as to why the expenditure incurred of Rs.2,58,987/- on issue of FCCB Bonds not debited to the P&L A/C but claimed revenue expenditure shall not be disallowed as capital expenditure. How the loss of Rs.2,50,94,110/- relating to this issue was accounted for ?” “12. Details of the loss on sale of fixed assets and loss from exchange fluctuation (net) debited to the P&L A/C for the year ended 31.03.07 and their treatment for computation of the total income of the assessee for the assessment year 2008-09.” 5. The assessee in reply to the aforesaid query of the AO vide letter dated 24.12.2010 gave a detail reply which is as follows :- 2
3 McNally Bharat Engineering Company Limited A.Yr.2008-09 “A detailed explanation as to why the expenditure incurred of Rs. 2,58,987/- on issue of FCCB Bonds not debited to the P&L A/c but claimed as revenue expenditure shall not be disallowed as capital expenditure. How the loss of Rs. 2,50,94,110/- relating to this issue was accounted for? During the year under consideration, the company incurred an expenditure of Rs. 2,58,987/- on issue of Foreign Currency Convertible Bonds worth $10 million. The above expenditure has not been debited to the Profit & Loss account but has been adjusted with the security premium account.
While computing the Total Income for year under consideration, the said expenses have been claimed as revenue in nature. As the expenditure has been incurred for raising debts to be utilized for the business of the assessee, the expenditure has to be considered as revenue in nature, allowable as deductible expenditure in computing total income chargeable to tax. The said principles has been upheld by the Hon'ble Calcutta High Court in the case of CIT-vs.- East India Hotels Ltd. (2001) 252 ITR 860 (Cal) and by Hon'ble Mumbai Tribunal in the case of J.M.Shares & Stock Brokers Ltd-vs.-DCIT (2004) 83 TTJ 1052 (Mum). In the above decision, Hon'ble Mumbai Tribunal has specifically held that issue expenses on convertible portion of partly convertible debentures were allowable as revenue expenditure irrespective of the fact that the date of conversion after six months fell within the same year. Further, it has been held by Hon'ble Rajasthan High Court in the case of CIT -vs.- Secure Meters Ltd (2010) 321 ITR 611 (Raj) that debentures when issued are a loan, and whether it is convertible or non convertible does not militate against the nature of the debenture and therefore, the expenditure incurred would be admissible as revenue expenditure. The SLP filed by the Department against the aforesaid case was rejected by the Hon'ble Supreme Court vide SLP No. CC 10548/2009. Following the decision of Rajasthan High Court in Secure Meters(supra) Hon'ble Mumbai ITAT in the case of Mahindra & Mahindra -vs.- ClT (2010) 36 SOT 348 (Mum) has held that expenditure incurred on account of foreign currency convertible bonds (FCCB) would be admissible as revenue expenditure.
In view of the above judicial pronouncements, the assessee has claimed the said expenses as allowable revenue expenditure in computing total income chargeable to tax. Further, at the time of remittance of money in India, received from issue of FCCB, the dollar value fell from Rs. 45.55 to Rs.39.37. Due to fall in the rupee value, the amount in the bank account has to be reinstated at the rate of Rs. 39.37. Since the transaction is settled during the year under consideration, as per Accounting Standard -11 "The effects of changes in Foreign Exchange Rates", the exchange difference is recognised in the profit and loss account. Hence, the above loss being a realised loss is allowable as deduction while computing Total Income.”
4 McNally Bharat Engineering Company Limited A.Yr.2008-09 6. The A.O. passed an order of assessment u/s 143(3) of the Act dated 30.12.2010 wherein he had not disallowed the claim of the assessee for deduction of a sum of Rs.2,50,94,110/-. There is however no discussion in the order of assessment with regard to the claim of the Assessee for deduction of Rs.2,50,94,110/-.
The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO allowing the claim of the assessee for deduction on account of foreign exchange fluctuation was erroneous and prejudicial to the interest of the revenue. According to the CIT the bonds are issued for the purpose of raising the capital and any gain, expenses or loss incurred which is capital in nature cannot be allowed as deduction and as revenue expenditure. The CIT was of the view that by allowing the aforesaid deduction, the income of the assessee was under assessed which caused prejudice to the interest of the revenue. Accordingly the CIT issued a show-cause notice u/s.263 of the Act dated 21.03.2013.
The assessee in reply to the show cause notice brought to the notice of the CIT the inquiries made by the AO while concluding the assessment u/s 143(3) of the Act. The assessee has specifically brought to the notice of the CIT that u/s 263 of the Act the CIT cannot exercise powers unless the CIT is able to show that the order of AO was (i) erroneous and (ii) prejudicial to the interest of the revenue. It was further submitted that where the AO formed a particular view on a matter on which two views are possible and just because the CIT does not agree with such view, he cannot exercise powers u/s 263 of the Act. The assessee pointed out that the view taken by the AO was a possible view supported by the judicial pronouncements referred to by the assessee in response to the query raised by the AO in the course of assessment proceedings. The assessee placed reliance on the following judicial pronouncements in support of his contentions referred to above :- i)Malabar Industrial Co.Ltd vs CIT243 ITR 83(SC) ii)CIT vs G.M.Mittal Stainless Steel Pvt. Ltd. 263 ITR 255(SC) iii)CIT vs Gabriel India Ltd. 203 ITR 108(Bom) 4 5 McNally Bharat Engineering Company Limited A.Yr.2008-09 9. Apart from the above the assessee also submitted that even on merits the action of the AO in allowing deduction on account of loss on account of foreign exchange fluctuation was correct.
The CIT however, was not convinced with the reply given by the assessee. He was of the view that as per the decision of the Hon’ble Supreme Court in the case of CIT vs Woodward Governor India Pvt. Ltd. 312 ITR 254 (SC) it has been laid down that loss due to foreign exchange fluctuation is allowable as revenue expenditure provided the foreign currency transaction is on account of revenue item. According to CIT in the case of the assessee the loss due to foreign exchange fluctuation in foreign currency relate to transactions on capital item and therefore expenditure was capital in nature and not allowable as deduction to the assessee. He therefore held that the order of AO was erroneous. Thereafter the CIT discussed the powers u/s 263 of the Act as well as judicial pronouncements wherein the scope of power of 263 has been explained. Finally the CIT concluded as follows :- “10. In the light of the observations made above and the submissions of the assessee I consider the assessment order to be erroneous in so far as it is prejudicial to the interest of the revenue. Hence, the assessment order for A.Y. 2008-09 passed u/s 143(3) is set aside to the A.O. The Assessing Officer is directed to make proper examination and verification of the loss of RS.15,14,32,477/- on account of issue of Foreign Currency Convertible Bonds claimed as deductions by the assessee in its Profit & Loss A/c and consider the allowance or disallowance of the same as per the provisions of the Income.”
Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal. The ld. Counsel for the assessee submitted that the issue with regard to the question whether the loss on account of fluctuation in foreign currency of sums payable by the Assessee on FCCB was considered by the AO and allowed in the order u/s 143(3) after detailed inquiry, verification of facts and considering the submissions made by assessee. Hence when the said view has been taken by A.O. with proper application of mind, then simply because the same was not mentioned in assessment order it would not be correct to hold that the order of A.O. is erroneous. He relied on the decision of the Hon’'ble Bombay High court in CIT -vs.- Gabrial India Limited (1993) 114 CTR
6 McNally Bharat Engineering Company Limited A.Yr.2008-09 0081 (Bom) wherein it was held that since the claim was allowed by the ITO on being satisfied with the explanation of the assessee, such decision of the ITO cannot be held to be "erroneous" simply because in his order he did not make an elaborate discussion in that regard. It was pointed out that similar view has been expressed by the Hon'ble Jurisdictional ITAT in Chroma Business Ltd. -vs.- DCIT (2004) 82 TIT 540 (Kol-Tri). It was submitted that the AO has taken a possible view and hence the order is not erroneous in so far as it is prejudicial to the interest of the revenue. Reference was made to the decision of the Hon'ble Apex court in CIT -vs.- Max India Ltd. (2007) 295 ITR 282 (SC) wherein it was held that where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the ITO is unsustainable in law. It was pointed out that similar view was taken by Hon'ble Jurisdictional High court in CIT -vs.- J.L.Morrision (India) Ltd. (2014) 366 ITR 0593 (Cal). It was submitted that FCCB is in the nature of debt and has been duly accounted as 'Unsecured Loan' in the Balance Sheet following accounting principles. It was submitted that the Hon'ble Mumbai Tribunal in Mahindra & Mahindra Limited -vs.- ACIT (2014) 29 ITR (Trib) 95 (Mum) has held that since issue of premium payable on FCCBs has been held to be revenue in nature, similarly the difference in the exchange which has resulted in loss on re-valuation of loan liability in the form of FCCB, has also to be given similar treatment thereby allowing such loss as revenue expenditure. Hence, debenture or FCCBs issued, whether convertible into shares at a future date is in the nature of loan and cannot be treated as capital raised by the assessee. Accordingly, the expenditure or loss incurred on issuance of any debt is allowable while computing Total income. Attention was drawn to the decision of the Hon'ble Rajasthan High Court in CIT -vs.- Secure Meters Ltd (2010) 321 ITR 611 (Raj) wherein it has held that debentures when issued are loan, and whether it is convertible or non convertible does not militate against the nature of the debenture and therefore, the expenditure incurred would be admissible as revenue expenditure. It was submitted that the SLP filed by the 6 7 McNally Bharat Engineering Company Limited A.Yr.2008-09 Department against the aforesaid case was rejected by the Hon'ble Supreme Court vide SLP No. CC 10548/2009 dtd. 11-08-2009. The learned DR relied on the order of the CIT. It was submitted by him that the loss on account of exchange fluctuation was capital expenditure in nature. It was submitted that the decision rendered in the case of Mahindra & Mahindra (supra) was a case of expenditure incurred on issue of FCCB and not a case of loss due to exchange fluctuation.
11. We have given a careful consideration to the rival submissions. It is clear from the order of the AO that the AO made due inquiries with regard to the claim of the assessee for deduction as a revenue expenditure while computing the income from business. A sum of Rs.2,50,94,110/- was claimed under the head ‘ loss on account of foreign exchange fluctuation’. The assessee gave a detail explanation as to how loss on account of fluctuation of foreign exchange on repatriation of proceeds on issue of FCCB was in the nature of loss and how the claim for deduction made by the assessee was admissible. It is clear from the submissions made by the Assessee that at the time of remittance of money in India, received from issue of FCCB, the dollar value fell from Rs. 45.55 to Rs.39.37. Due to fall in the rupee value, the amount in the bank account had to be reinstated at the rate of Rs. 39.37. It is also not disputed that the transaction was settled during the year under consideration. As per Accounting Standard -11 "The effects of changes in Foreign Exchange Rates", the exchange difference has to be recognized in the profit and loss account. Hence, the above loss being a realized loss was claimed to be allowable as deduction while computing Total Income. It is clear from the decisions referred to by the learned counsel for the Assessee in the case of Secured Meters Ltd. (supra) by the Hon’ble Rajasthan High Court as well as in the case of Mahindra & Mahindra (supra) by the Hon’ble ITAT Mumbai, though FCCB were convertible into shares at a later point of time, they were in the nature of loan at the time of their issue till conversion and any expenditure incurred in connection with issuing FCCB would be admissible as a revenue expenditure. This principle has been extended to be applicable on account of fluctuation of foreign currency in respect of foreign currency convertible bond FCCB by the Hon’ble ITAT Mumbai in the case of Mahindra and Mahindra Limited. The AO even though has not mentioned the submissions of the 7 8 McNally Bharat Engineering Company Limited A.Yr.2008-09 assessee in this regard, has nevertheless not made any disallowance of loss on account of foreign exchange fluctuation claimed by the assessee. The conclusion in such circumstances is that AO was satisfied with the claim of the assessee for deduction of the aforesaid sum. It may be that contrary view may also exist on the issue. The view taken by the AO is a possible view and the CIT in exercising of powers cannot seek to substitute his view with that of the AO. The decision rendered by the Hon’ble Bombay High Court in the case of CIT Vs. Gabriel India Limited (supra) clearly supports the plea of the assessee. The conclusion of the CIT in the impugned order that the loss in question is on account capital item cannot be sustained in the light of the decisions referred to by the learned counsel for the Assessee in the reply to the show-cause notice u/s.263 of the Act. Therefore it cannot be said that the order of the AO was erroneous and prejudicial to the interest of the revenue. Consequently the order passed u/s 263 of the Act cannot be sustained and the same is hereby quashed.
In the result the appeal of the assessee is allowed. Order pronounced in the Court on 15.07.2016.