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Income Tax Appellate Tribunal, KOLKATA BENCH ‘B’, KOLKATA
Before: Shri P..M.Jagtap, AM & Shri S.S.Viswanethra Ravi, JM]
ORDER
Per Shri S.S.Viswanethra Ravi, JM
This is an appeal preferred by the Revenue against the order dated 28.02.2013 passed by the CIT(Appeals)-IV, Kolkata for the assessment year 2009-10 framed under section 143(3) of the I.T.Act.
The appellant Revenue raised the following grounds: “
1. Whether on the facts and circumstances of the case the Ld. CIT(A) has justified in law as well as on the facts in directing the A.O. to delete the addition of Rs.2,12,617/- on account of subscriptions etc. paid to club though these were not proved to be wholly and exclusively for the purpose of business.
2. Whether on the facts and circumstances of the case the Ld. CIT(A) has justified in law as well as on the facts in 2 Asian Tea & Exports Ltd. directing the A.O. to delete the addition of Rs.54,23,955/- on marked to market loss on unexplained forex contracts.
3. That whether on the facts and circumstances of the case the Ld. CIT(A) has justified in law as well as on the facts in directing the A.O. to delete the addition of Rs.54,23,955/- is without any basis and in contravention to the CBDT’s instruction no.03/1010 dated 23.03.2010.”
The brief facts of the case are that the assessee is a listed company with stock exchange and engaged in the business of trading and export of tea. The assessee declared its total income of Rs.98,55,307/- through online return on 24.09.2009. The notices under section 143(2) and 142(1) of the Act issued for scrutiny.
During the course of assessment proceedings the AO found that the assessee has paid Rs.2,12,617/- for membership subscriptions for its staff in N.C. Planters Club. The AO was of the view that the said expenditure is not incidental to the business expenditure and added to the total income of the assessee.
Ld. CIT(A) deleted the addition by relying on orders in CIT- vs- Samtel Colour Ltd. and DCIT –vs- Bank of America Securities (India) (P) Ltd. of Delhi and Bombay Tribunals.
The ld. DR relied on AO’s order regarding the ground no.1 and ld. A.R. relied on CIT(A)’s order.
3 Asian Tea & Exports Ltd. 7. Heard both and perused the material available on record. The question that arose for consideration before us as to whether the subscription paid to a club for membership of staff member is a business expenditure or not.
8. Ld. CIT(A), during appellate proceedings, opined that subscription amount paid for club membership is an allowable business expenditure as per the express provisions of section 37(1) of the Act.
We may refer to the provision of Section 37 which is reproduced herein below for the benefit of better understanding of the same in the context of case on hand.
(1) 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 purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
The bare reading of the above suggests that in order to qualify or the true test for qualification of expenditure under s. 37 of the Act is that it should be incurred wholly and exclusively for the purposes of business and the expenditure should not be towards capital account.
The Hon’ble HIGH COURT OF DELHI in the case of COMMISSIONER OF INCOME TAX vs. SAMTEL COLOR LTD reported in 326 ITR 0425, the 4 Asian Tea & Exports Ltd. facts involved therein was that the assessee has paid corporate membership fee to Indian Habitat Centre and Sports & Cultural Club, Noida amounting to Rs. 5 lakhs and Rs. 1 lakh respectively. The AO disallowed the expenditure as it does not bear any nexus with the business carried on by the assessee and the CIT(A), on appeal, directed the AO to disallow 20% of Rs. 6 lakhs and allow the balance amount as revenue expenditure on the ground that the entire expenditure was not incurred for business purposes. The Tribunal concluded that since membership allowed the employees to interact with its customers and the expenses were for business purposes. The Hon’ble High Court held as follows:
5.1 The expenditure incurred towards admission fee, admittedly, was towards corporate membership. As correctly held by the Tribunal, the nature of the expenditure was one for the benefit of the assessee. The 'business purpose’ basis adopted for eligibility of expenditure under s. 37 of the Act was the correct approach. This is more so in view of the Tribunal’s findings that it was the assessee which nominated the employee who would avail the benefit of the corporate membership given to the assessee.
In the instant case, the subscription paid towards membership for a period of five years and the same is being paid annually, thus, in the light of aforesaid decision, is an expenditure incurred wholly and exclusively for the purposes of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise. Applying the principle laid down above, we hold that subscription amount paid towards membership in N.L.Planters club for a period of five years is an expenditure incurred wholly and exclusively for the purposes of business of the assessee.
5 Asian Tea & Exports Ltd.
13. The MUMBAI 'B’ BENCH of ITAT in the case of DEPUTY COMMISSIONER OF INCOME TAX vs. BANK OF AMERICA SECURITIES (INDIA) (P) LTD reported in (2011) 136 TTJ 0441, the facts involved therein was that the assessee has made payment of entrance fee to a club namely Bombay Gymkhana amounting to Rs. 16 lacs. The AO disallowed Rs. 16 lacs as capital outlay and added to the income of the assessee. The CIT(A) deleted the addition of Rs. 16 lacs made by the AO being entrance fee to Bombay Gymkhana Club. The relevant portions of Tribunal’s order as follows:
We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute in as much as it has been rightly observed by the learned CIT(A) the AO has not disputed the fact that the expenditure of club membership fees Rs. 16 lacs has been incurred by the assessee wholly and exclusively for the purpose of business of the assessee. Further we find no merit in the plea of the learned Departmental Representative that the decision in Alembic Chemical Works Co. Ltd. (supra), is not applicable to the facts of the assessee’s case. In fact, their Lordships referred to various decisions particularly the decision in the case of City of London Contract Corporation vs. Styles (1987) 2 Tax Cases 239 wherein broad area of distinction is pointed out. It is held in that case that the outlay on the ‘acquisition of the concern’ would be capital while an outlay in ‘carrying on the concern’ is revenue. The Court further referred to the following observations in the case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R.841 : "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure."
6 Asian Tea & Exports Ltd.
Respectfully following the above decisions of the Hon’ble jurisdictional High Court and the Tribunal in the assessee’s own case and for the reasons as mentioned in para 5.3 in the case of Samtel Color Ltd. (supra), we are of the view that admission fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprise and accordingly we are inclined to uphold the finding of the learned CIT(A) in deleting the disallowance of Rs. 16 lacs made by the AO. The grounds taken by the Revenue are, therefore, rejected.
In the present case, the assessee contended that the subscription paid annually towards membership of the said club for a period of five years and it is not bringing into existence an asset or advantage for the enduring benefit of the business of assessee or to its staff to treat the same as capital expenditure. The club membership, it only facilitates smooth and efficient running of a business of the assessee. Therefore, we hold that the facts and circumstances of the aforesaid case law are applicable to the present case and the club subscription fee paid for staff is an allowable expenditure.
In the light of above, respectably following the above, we dismiss the ground no-1 raised by the appellant Revenue.
Ground no.2 is against the deletion of addition of Rs.54,23,955/- made by the AO. The AO was of the view that the marked to market loss is a notional loss, contingent in nature and it is not allowed to be set off against the taxable income. The CIT(A) deleted the addition basing on the order of Special Bench “C” of 7 Asian Tea & Exports Ltd. Mumbai bench of ITAT in the case of DCIT-vs- Bank of Bahrain & Kuwait reported in (2010) 41 SOT 0290.
Ld. DR submits before us, that the CBDT issued guidelines vide its instruction no.03/2010 dated 23.03.2010 to all assessing officers keeping in view of complexity in the foreign exchange market where assessees reporting losses on marked to market or in accounting standard issued by the Institute of chartered Accountants. The assessing officers were guided by the said instruction to make a specific query to submit to break up of any loss on “Marked to Market” methodology, on forex derivatives. Pursuance of the same, the assessee claimed a sum of Rs.54,23,955/- as notional loss as market to market for assessment year 2009-2010. Since it is a notional loss as claimed and it is contingent in nature and it cannot be allowed as set off against the taxable as per the instruction issued by the CBDT. Further relied on AO’s order and sought to allow the appeal. In reply, ld. A.R. reiterated the submissions made before the ld. CIT(A).
A perusal of order of CIT(A) shows that the assessee incurred a loss of Rs.54,23,955/- and claimed the same as loss on account of valuation as per Accounting Standard-11 and 30 for assessment year 2009-2010 under consideration and assessee claimed a loss of Rs.85,70,425/- for assessment year 2010-2011. The submission and material on record shows that the assessee incurred a total loss of Rs.1,39,94,380/- on account of cancellation of five forward contracts for assessment years 2009-2010 and 2010-2011. It is pertinent to 8 Asian Tea & Exports Ltd. note that the assessment for 2010-2011 was completed, where the AO therein allowed the loss of Rs.85,70,425/- as claimed by the assessee on account of five unexpired forex forward contracts. The ld. DR contends that the loss claimed by the assessee is a notional loss as no sale/conclusion/ settlement of contract has taken place and the asset continues to be owned by the company in accordance with para 2 of instruction no.03/2010. Thus, it is a contingent loss and there is no definition for contingency in the Act and it cannot be allowed.
The assessee’s case is that as per the recommendations accounting standard 30, all the companies are under mandate to account for marked to market losses in their books despite the fact that the contract has not yet matured as at the time of balance sheet. Further, the assessee being a company following the Accounting Standards issued by ICAI which are specified accounting standard as per Companies Act. In this regard, the CIT(A) derived support from the order of Special Bench “C” of Mumbai ITAT in the case of DCIT-vs- Bank of Bahrain & Kuwait wherein it held that “loss incurred on account of revaluation of contract on last day of accounting period before date of maturity of forward contract is an allowable deduction.
A similar issue was dealt by the ITAT, MUMBAI 'C’ SPECIAL BENCH DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) vs. BANK OF BAHRAIN & KUWAIT reported in 41 SOT 0290 supra as relied by the CIT-A where the facts are that the assessee is a non- 9 Asian Tea & Exports Ltd. resident company carrying on banking business in India. It enters into forward contracts with its clients to buy or sell foreign exchange at an agreed price on a future date. On the date of maturity, the contract is executed which may result in the profits or losses to the assessee.
During the assessment proceedings that the AO noticed that the assessee had booked a loss on revaluation of forward foreign exchange contracts, which were unmatured on the date of balance sheet of an amount of Rs. 12,42,648. He noted that the assessee enters into forward contracts with clients to buy or sell foreign exchange at an agreed price on a future date. This future price was estimated according to certain norms such as forward premium rates for certain currencies and the AO disallowed the loss of Rs. 12,42,648 treating the same as notional loss. The AO, however, allowed the amount which was disallowed on this count in earlier years. The CIT(A) allowed the assessee’s appeal, inter alia, observing that the assessee was offering profits resulting from such revaluation as and when they so arise and the AO had never objected to the profits which were shown on revaluation of outstanding foreign exchange forward contracts.
The Special Bench, while dealing with similar issue as it was referred to it to decide "Whether on facts and circumstances of the case, can it be said that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e., before the date of maturity of the forward contract." And applied ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India (P) Ltd reported (2009) 312 ITR 254 for the proposition that an anticipated losses on account of existing obligation as on 31st March, determinable with reasonable 10 Asian Tea & Exports Ltd. accuracy, being in the nature of expenditure/accrued liability, have to be taken into account while preparing financial statements
The Special Bench also applied the principle enunciated by the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT (1975) 98 ITR 167 (SC) that the Accounting Standards issued by ICAI which are mandatory for preparation of financial statements have to be followed in as much as the deviation from the same is to be reported in the audit report. AS-11 mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March
The Special Bench, in view of the decisions supra answered the reference in favour of assessee the relevant observation is at para-58 of which reproduced as under:
In view of the above discussion, we allow the assessee’s appeal for the following reasons : (i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts. (ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. (iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on 31st March. (iv) A liability is said to have crystallised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing.
11 Asian Tea & Exports Ltd. (v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. (vi) The forward foreign exchange contracts have all the trappings of stock-in-trade. (vii) In view of the decision of Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra), the assessee’s claim is allowable. (viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit.
Applying the above observations to the facts and circumstances of present case, We find that the claimed loss under consideration occurred to the assessee on account of five unexpired forex forward contracts i.e is a loss incurred on account of revaluation of contract on last day of accounting period before date of maturity of forward contract. The Ld.CIT-A observed that the assessee has been following a consistent accounting policy for determining loss under AS-11 and AS-30 as required under Companies Act and it is to be noted that the accounting standards were issued by the ICAI which has received judicial recognition. Accordingly the assessee, the gain or loss on revaluation of the outstanding contracts was booked in the P&L a/c as per the mandatory requirements of RBI guidelines. The Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed at p. 265 para 17 that the Central Government has made AS-11 mandatory. During the course of first appellate proceedings that the CIT-A noticed that the AO allowed the loss of Rs.85,70,425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e the difference was arising for more than one accounting period.
12 Asian Tea & Exports Ltd.
We, accordingly, hold that disallowance made by the AO treating the impugned amount of Rs. 54,23,955/- for A.Y 2009-10 as contingent and notional loss is not justified and that the loss incurred to the assessee on account of five unexpired forex forward contracts on the last date of the accounting period i.e. before the date of maturity of the forward contract is not contingent and it is a actual loss, is allowable. Thus, respectfully following the observations made by the Special Bench supra, the ground no -2 raised by the appellant Revenue fails and the order of CIT-A is justified, consequently ground no-2 is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order Pronounced in the Open Court on 29.04.2016