DCIT, CIRCLE -5 KOLKATA, KOLKATA vs. M/S KESORAM INDUSTRIES LTD., KOLKATA

SHRI M.BALAGANESH, AM

These appeals of the assessee as well as the revenue arise out of the orders of the Learned CIT(A),VI Kolkata in Appeal No. 1254 /CIT(A)-VI/Cir-5/2009-10/Kol dated 15.2.2012 against the order passed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) and appeal of the revenue against the order of the Learned CIT(A), VI Kolkata in Appeal No. 249 /CIT(A)-VI/Cir- 5/2009-10/Kol dated 21.2.2012 against the order passed by the Learned AO u/s 147 read with section 143(3) of the Act.

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ITA No. 782/Kol/2012 A.Y 2005-06– Assessee’s Appeal

3.1. The brief facts of this issue is that the assessee availed foreign currency loan (FCNR Term Loan) of 105,00,000 USD in the fag end of the financial year ended 31.3.2003 in order to prepay 14% Debentures for Rs. 50 crores and a sum of Rs. 49,87,76,250/- was shown as loan outstanding as on 31.3.2003. The said loan was subjected to restatement at the end of the year on 31.3.2004 which resulted in an exchange gain of Rs. 4,20,26,250/-. Pursuant to this restatement, the balance of loan outstanding as on 31.3.2004 was arrived at Rs. 45,67,50,000/-. The assessee did not offer the notional gain of Rs. 4,20,26,250/- as income in Asst Year 2004-05 which was however, added to income by the Learned AO while completing the assessment for the Asst Year 2004-05 u/s 143(3)of the Act. The same was subjected to first appeal by the assessee who deleted the addition. On further appeal by the revenue before this tribunal, the tribunal had deleted the addition. However, this tribunal decision was rendered prior to the judgement rendered by the Hon’ble Supreme Court on the impugned issue in the case of Woodward Governor of India (P) Ltd reported in 312 ITR 254 (SC). At present, the tribunal order has been agitated by the revenue before the Hon’ble Calcutta High Court and the same is pending.

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Taking into account the restated loan outstanding value as on 31.3.2004 amounting to Rs. 45,67,50,000/- , the assessee made certain repayments of foreign currency loan as per the terms of the loan agreement during the financial year 2004-05 relevant to the assessment year under appeal amounting to Rs. 22,83,75,000/- and incurred actually exchange fluctuation loss of Rs. 75,07,500/- . The loan balance outstanding after taking into account such repayment was subjected to restatement as on 31.3.2005 based on the exchange rate prevailing at the end of the year , which resulted in foreign exchange fluctuation loss of Rs. 21,25,864/-. The assessee claimed both the realized exchange fluctuation loss of Rs. 75,07,500/- and notional exchange loss of Rs. 21,25,864/- as deduction for the Asst Year 2005-06 which was disallowed by the Learned AO. On first appeal, the Learned CITA held that since the foreign exchange gain that arose in Asst Year 2004-05 was not subjected to tax , the assessee is not entitled to claim the foreign exchange loss in Asst Year 2005-06 which had admittedly arose pursuant to comparison of the loan balances after restatement made in the earlier year. However, the decision in Woodward Governor case (312 ITR 254 –SC) was not considered in this decision. Aggrieved, the assessee is in appeal before us on the following grounds:- 1 That the Ld.CIT(A) erred in facts as well as in law by confirming the disallowance of Rs.21,25,864/ - being the loss suffered by the Appellant due to fluctuation in foreign exchange rate, without appreciating that the said loss was ascertained with reference to the foreign exchange rate prevailing as on 31st March, 2005 and was allowable as per the principles laid down by the Apex Court.

2 That the Ld.CIT (A) erred in facts as well as in law by confirming the disallowance of Rs. 75,07,500/- as capital in nature on pure assumption, without appreciating that the same was a realized loss arising out of foreign exchange fluctuation in respect of term loan taken from State Bank of India for its working capital fund requirements and was allowable u/ s.37(1) of the Act.

3 Without prejudice to ground 2 (above), even assuming but not admitting, that such realized foreign exchange loss is termed as capital in nature and could not be allowed as revenue loss u/s.37(1)

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of the Act, the Ld.CIT(A) erred in not directing the Assessing Officer to allow depreciation on the capital asset, as presumably linked by the Assessing Officer to such realised foreign exchange loss.

4 That the appellant craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the hearing of the appeal.

3.2. The Learned AR fairly argued that the issue requires to be remanded back to the file of the Learned AO for redetermination as the lower authorities had not considered the decision of the Hon’ble Apex Court in the case of Woodward Governor (supra) which squarely covers the issue under appeal. In response to this, the Learned DR fairly conceded to the same.

3.3. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove remain undisputed and hence are not reiterated for the sake of brevity. We find that the foreign currency loan agreement has been filed by the assessee in the paper book before us and this has been filed before us for the first time. Accordingly the same is construed as Additional Evidence and is admitted herein. We find that this issue requires to be set aside to the file of the Learned AO who will have to give clear cut finding on the following matters :-

(a) Whether the foreign currency loan was utilized for working capital purposes by the assessee. If so, the resultant foreign exchange gain or loss would be revenue in nature and would become taxable or allowable as deduction as the case may be in the light of decision of the Hon’ble Supreme Court in the case of Woodward Governor India Ltd reported in 312 ITR 254 (SC). Admittedly, the foreign currency loan was utilized for pre-payment of high cost debt of 14% debentures for Rs. 50 crores. The Learned AO has to give a categorical finding that whether the debentures at the first instance were utilized for the purpose of working capital

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purposes of the company in order to decide whether the loan was utilized on revenue account.

(b) Alternatively, if the foreign currency loan was utilized for acquiring fixed assets, then the resultant foreign exchange gain or loss would go to reduce the value of fixed assets and treatment to be given in terms of section 43A of the Act. Similarly if the monies raised through issue of debentures were utilized by the assessee for capital purposes, then the resultant foreign exchange gain / loss should also be considered in the light of provisions of section 43A of the Act.

(c ) In respect of foreign exchange loss which is actually incurred amounting to Rs. 75,07,500/- (pursuant to repayment of loans in part during the financial year 2004-05) , the same is allowable as deduction if the said loan was utilized on revenue account as stated in para (a) above. However, if the facts of the case fall in category of para (b) above, then the said actual exchange loss of Rs. 75,07,500/- would have to be treated in accordance with provisions of section 43A of the Act.

Since the revenue’s appeal for the Asst Year 2004-05 is pending before the Hon’ble Calcutta High Court wherein the notional exchange gain has not been subjected to tax, we deem it fit and appropriate, in the interest of justice and fair play, to direct the Learned AO , to decide the issue under appeal, in the light of the decision to be rendered by the Hon’ble Calcutta High Court and the directions contained in para (a) to (c ) above. The assessee is at liberty to file fresh evidences and documents to substantiate its contentions before the Learned AO. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.

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ITA No. 930/Kol/2012 A.Y 2005-06 – Departmental appeal against section 143(3) order

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115JB of the Act. On first appeal, the Learned CIT(A) deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:- “That on the facts and circumstances of the case, ld CIT(A) erred in law as well as facts by deleting the disallowance the retain back provision for contingence amounting to Rs.18,86,02,604/- in the computation of the book profit for the A.Y 2005-06 u/s. 115JB without examining accounts and documents. “

6.1. The Learned DR relied on the order of the Learned AO. In response to this, the Learned AR relied on the order of the Learned CIT(A).

6.2. We have heard the rival submissions and perused the materials available on record. We find that the Learned CIT(A) had deleted this addition by observing the following :-

“ The appellant has been assessed as per its submissions u/s 115JB in the assessment year 2002-03 , 2003-04 and 2004-05. Therefore, since the said amounts have been taxed in the year of creation of provisions, therefore, the same cannot be added back in the assessment year 2005-06 when the addition has been written back. Therefore, the addition of Rs. 18,86,02,604/- is hereby deleted. This ground of appeal is allowed.”

We find that the factual findings given by the Learned CIT(A) were not controverted by the revenue before us. Moreover, we are also convinced from the details filed in the paper book about the treatment of the provision for contingencies given by the assessee in various asst years and hence we do not find any infirmity in the order of the Learned CITA in this regard and hold that the assessee is entitled for reduction of provision for contingencies amounting to Rs. 18,86,02,604/- while computing book profits u/s 115JB in terms of clause (i) of Explanation 1 to section 115JB of the Act. Accordingly, the grounds raised by the revenue are dismissed.

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6.3 In the result, the appeal of the revenue in ITA No. 930/Kol/2012 is dismissed.

ITA No. 931/Kol/2012 – Department appeal against section 147 rws 143(3) order

8.1. The brief facts of this issue are that the assessee had made certain deposits with certain parties including government bodies in the earlier years and the same were lying outstanding for a very long time and had chosen to write off the same as irrecoverable in Asst Year 2005-06 as below:-

Security Agent Deposit 5,000 Deposit with Jiwanmal Chandmal 45 Deposit with Bombay Electric Supply & Transport 20,460 Deposit with Bombay Co-op Society 11,577 Non-receipt of TDS certificate 5 --------------- 37,087

The Learned AO observed that the loss arising on account of aforesaid deposits is a capital loss and conditions of section 36(1)(vii) read with section 36(2) of the Act have not been fulfilled by the assessee and accordingly made the disallowance. On first appeal, the assessee tried to explain that these amounts could not be realized and the obsolete material could not be used and further the cost of such recoveries would

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have been higher , the assessee as a prudent person and out of business exigency wrote off these amounts in its books and claimed as deduction. On going through the submissions of the assessee, the Learned CIT(A) held that the aforesaid advances / deposits were made in the ordinary course of business and thereafter written off as irrecoverable and such write off has been claimed as deduction u/s 37(1) read with section 28 of the Act. He followed the decision of his predecessor on the same issue in assessee’s own case and deleted the addition. Aggrieved, the revenue is in appeal before us on the following ground:- 1. That on the facts and circumstances of the case, Ld. CIT(A) erred in law as well as facts by deleting the disallowance of Rs.37,087/- being the various advances in deposits written off.

8.2. The Learned DR vehemently supported the order of the Learned AO. The Learned AR vehemently supported the order of the Learned CIT(A) and further stated that this issue has already been decided in favour of the assessee by this tribunal in assessee’s own case in ITA No. 308/Kol/2007 dated 23.11.2007 for Asst Year 2003- 04. The Learned AR further stated that similar disallowance was deleted by the Learned CIT(A) for Asst Years 2006-07 and 2007-08 against which no further appeals were preferred by the revenue.

8.3. We have heard the rival submissions and perused the materials available on record. We find from the facts of the case that the deposits and advances were given in the ordinary course of business and were lying in the books of the assessee company for quite a long time. The same were considered irrecoverable by the assessee and had written off the same in Asst Year 2005-06 and hence the same is to be considered as a trading loss u/s 28 of the Act. We hold that the Learned CIT(A) had rightly deleted the addition made in this regard. Accordingly, the ground no.1 raised by the revenue is dismissed.

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9.1. The brief facts of this issue are that the assessee while filing its original return of income for the Asst Year 1999-2000 had not claimed any income tax depreciation . This return was processed and accepted u/s 143(1) of the Act. Later the provisions of section 32 of the Act was amended and Explanation 5 was inserted with effect from 1.4.2002 empowering the Assessing officer to allow such claim even if the assessee has not claimed such deduction. In view of the said amendment to section 32, the assessee claimed the income tax depreciation through a petition u/s 154 dated 24.5.2001 requesting the Assessing Officer to allow the claim available to the assessee which was rejected by the Learned AO. Since the petition for rectification was filed before the AO on 24.5.2001 requesting him to allow the claim of tax depreciation in Asst year 1999-2000, the assessee presumed that such depreciation would be allowed and had thereafter computed its tax depreciation on the reduced written down value in the following years including Asst Year 2003-04. Since the assessee had not been allowed the depreciation for Asst Year 1999-2000, which stands confirmed by the order of the AO dated 5.5.2006, the assessee is entitled to avail depreciation on the enhanced WDV of 1999-200 (without granting tax depreciation). The assessee filed rectification petitions before the AO for the Asst Years 2000-01 to 2002-03 and had claimed the same before the Learned CIT(A) for the Asst Year 2003-04. The Learned CIT(A), however, for the Asst Years 2000-01 to 2003-04 held that since the assessment has reached a finality and also that the appellant had not preferred any appeal before the higher forum, it was obvious that the WDV of assets was confirmed. The said WDV was to be given effect to in subsequent years and accordingly the AO was directed to give effect to the rectification petitions. The AO again rejected the petitions on the ground that no claim was made by the assessee by way of revised

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return and by the principle of Supreme Court in Goetze India Ltd vs CIT reported in 284 ITR 323 (SC), the said petition cannot be entertained. On subsequent appeal before Learned CIT(A) in Appeal No. 04/V/CIR-5/07-08, the additional depreciation was allowed by the Learned CIT(A). It is also seen from the records that the appeal effect has been given by the AO in restating the depreciation in Asst Year 2004-05 and subsequent appeals before this tribunal by the revenue have been dismissed. Further no appeal was filed by the revenue before this tribunal against the direction of the Learned CIT(A) in Asst Year 2004-05 and therefore the contention of the revenue that the matter is being filed before High Court in all the years is incorrect. Accordingly, the assessee pleaded before the Learned CIT(A) to direct the AO to restate the depreciation based on the WDV of the preceding years.

9.2. The Learned CIT(A) observed that this issue is squarely covered by the decisions of this tribunal in favour of the assessee for earlier years in ITA No. 2302, 2303 and 2356/Kol/2007 dated 29.2.2008 for the Asst years 2000-01 , 2001-02 and 2002-03 respectively and held that the assessee is entitled for additional depreciation. The Learned CITA directed the Learned AO to verify the arithmetical correctness of the claim in the depreciation chart and directed to allow the claim of additional depreciation. Aggrieved, the revenue is in appeal before us on the following ground:- 2. That on the facts and circumstances of the case, Ld. CIT(A) erred in law as well as facts by deleting the disallowance of excess depreciation claim by way of revised return being relied upon the judgement of Hon'ble ITAT, Kolkata and Ld. CIT(A)-VI, Kolkata in assessee's own case of earlier year without going through the merit of the case.

9.3. We have heard the rival submissions and perused the materials available on record. We find that this issue is squarely covered by the orders of this tribunal in the earlier years as stated above and also by the decision of this tribunal in ITA No. 443/Kol/2011 dated 12.12.2011 and ITA No. 190/Kol/2011 dated 2.11.2011 for Asst Years 2006-07 and 2007-08 respectively . Respectfully following the same , we do

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not find any infirmity in the order of the Learned CIT(A) in this regard. Accordingly, the ground no.2 raised by the revenue is dismissed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 29-02- 2016

Sd/- Sd/- ( N.V. Vasudevan, Judicial Member ) (M. Balaganesh, Accountant Member) Date:

Date 29 -02-2016

Copy of the order forwarded to:-

1.. The Appellant: The Deputy Commissioner of Income Tax, Cir-5/ Addl. CIT, Range-5, P-7 Chowringhee Square, Kol-69. 4th Fl., Aaykar Bhawan Poorva, 110 Shanti Pally, E.M Bye Pass, Kol-107. The Respondent- M/s. Kesoram Industries Limited ‘Birla Building’, 8th Floor, 9/1 R.N 2 Mukherjee Road, Kolkata-700 001. 3 /The CIT, 4.The CIT(A)

**PRADIP SPS

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