Notional foreign exchange gains or losses is to be taken into account in computation of income

 ITAT MUMBAI BENCH ‘I’

Mettler Toledo India (P.) Ltd.

versus

Income-tax Officer

IT Appeal Nos. 2152, 2153 & 2574 (Mum.) of 2007
[ASSESSMENT YEARS 2002-03 & 2003-04]

Date of Pronouncement- 28.09.2012

ORDER

Rajendra Singh, Accountant Member

These cross-appeals for the assessment year 2002-03 and appeal of the assessee for the assessment year 2003-04 are directed against different orders both dated January 15, 2007, of the Commissioner of Income-tax (Appeals) for the assessment years 2002-03 and 2003-04 respectively. These are being disposed of by a single consolidated order for the sake of convenience. The disputes raised in these appeals relate to dis allowance of expenditure incurred for trade mark, dis allowance of foreign exchange fluctuation loss and addition on account of capital gain in relation to sale of personal weighing scale business.

2. The appeals of the assessee in I. T. A. No. 2152/M/07 and I. T. A. No. 2153/M/07 for the assessment years 2002-03 and 2003-04.

3. These appeals are being taken up together as disputes raised in these appeals are identical. The assessee has raised disputes on two different grounds which relate to dis allowance of expenditure on trade mark and dis allowance of foreign exchange fluctuation loss.

4. The facts concerning the dis allowance of expenditure on acquisition of trade mark are that the Assessing Officer during the assessment proceedings noted that the assessee in terms of agreement dated June 1, 1998 with Hari Mohan Puri had acquired his rights, title and interest in the brand “Libra” and the right to manufacture and market sales, weighing device, equipment or instruments both mechanical or electronic for lump sum payment of Rs. 1 crore. The assessee had written off the said sum of Rs. 1 crore during the assessment years 1999-00 to 2004-05 as under :

5. The Assessing Officer asked the assessee to explain as to why the amount paid for acquisition for trade mark should not be disallowed as capital expenditure. The assessee explained that it had acquired the brand name for a period of five years and accordingly expenditure had been claimed over a period of five years as per details given above. It was also submitted that the claim of expenditure in respect of the same brand in the assessment year 1999-00 to 2001-02 had been allowed by the Assessing Officer and accordingly it was requested that the claim should be accepted in these years also. The Assessing Officer however did not accept the contentions raised. It was observed by him that capital asset meant property of any kind, having wide meaning. Though the agreement was valid for a period of five years and the assessee did not have any right to transfer or sell the brand, the assessee did enter into an agreement with “EDRYL” for personal weighing scale business at Goa for a sum of Rs. 30 lakhs which included the consideration for assigning trade mark “Libra”. It was thus clear that the assessee did enjoy the right of selling the brand though no such provision was made in the agreement. The Assessing Officer further observed that the Revenue authorities were entitled to look into surrounding circumstances for giving finding on a factual situation as held by the hon’ble Supreme Court in the case of CIT v. Durga Prasad More [1971] 82 ITR 540. The Assessing Officer therefore concluded that the assessee had acquired the brand on payment of Rs. 1 crore in the year 1998 itself. Thus, the expenditure had been incurred for acquisition of capital asset. The Assessing Officer also observed that doctrine of res judicata was not applicable to the income-tax proceedings and, therefore claim being allowed in the earlier years did not act as a bar to disallow the claim this year. The Assessing Officer therefore, disallowed the claim of Rs. 20 lakhs each in the assessment years 2002-03 and 2003-04.

6. The assessee disputed the decision of the Assessing Officer and submitted before the Commissioner of Income-tax (Appeals) that the assessee had not only been allowed to use the brand but also had been given the right to manufacture in terms of the agreement. It was also pointed out that there were various prohibitive provisions in the agreement which made the assessee- company the owner of the brand only for a limited period. It was accordingly urged that the claim of revenue expenditure should be allowed. Alternatively it was also submitted that, in case, expenditure was treated as capital expenditure, the assessee should be allowed depreciation under section 32 of the Act at 25 per cent. as brand was an intangible asset. The Commissioner of Income-tax (Appeals) however did not accept the contentions raised. It was observed by him that the assessee had acquired brand named “Libra” along with right to manufacture on lump sum payment of Rs. 1 crore. The acquisition of the brand became one of the foundation to carry out the business. The brand name which had necessary goodwill in the market had been exploited by the assessee to conduct business. It was therefore, an asset with which the business was being carried on. The Commissioner of Income-tax (Appeals) accordingly held that the expenditure incurred on acquisition of brand was capital expenditure. As regards alternate claim of the assessee to allow depreciation if the amount was treated as capital the Commissioner of Income-tax (Appeals) observed that dis-allowance of expenditure as capital in nature did not necessarily mean that asset had been created in such form and substance on which depreciation was allowable. He, therefore rejected the alternate claim also and did not allow depreciation. Aggrieved by the decision of the Commissioner of Income-tax (Appeals), the assessee is in appeal before the Tribunal in both years.

7. Before us, the learned authorized representative for the assessee submitted that as per the agreement the assessee had only the right to use the brand. He referred to clause B of the agreement placed at page 16 of the paper book in which it was mentioned that the assessee had been granted exclusive license to use brand name in respect of weighing machines and instruments. Further clause (1) on the same page also mentioned that the proprietor granted to the user the exclusive license and permission to use the brand name. It was thus clear that the assessee had been allowed only right to use brand and expenditure incurred for use of the brand for the purpose of business has to be allowed as revenue expenditure. The learned authorized representative also submitted that the Assessing Officer in the assessment years 1999-00 to 2001-02 had already allowed the claim of the assessee and assessment in the assessment year 2001-02 had been concluded after scrutiny under section 143(3) a copy of which was available at pages 101 to 103 of the paper book. It was also submitted that the assessee had acquired trade mark in terms of the agreement dated June 1, 1998 and therefore, the assessee had acquired trade mark after April 1, 1998. Thus the provisions of section 32(1)(ii) were applicable in the case of the assessee as per which trade mark was an intangible asset on which depreciation was allowable at 25 per cent. if acquired on or after April 1, 1998. It was pointed out that the assessee had made claim only at 20 per cent. which was lower than the depreciation allowable and therefore, the assessee had not derived any tax advantage. Further despite the dis allowance made by the Assessing Officer, the assessee was covered under section 115JB and had paid only minimum alternate tax (MAT). It was accordingly urged that the claim made by the assessee should be upheld.

8. The learned Departmental representative on the other hand strongly supported the orders of authorities below and argued that the assessee had sold the brand name along with certain personal scale business after five years which made it clear that the assessee was the owner of the brand and therefore expenditure had been incurred for acquisition of capital asset which was not allowable. It was also submitted that merely because the claim had been allowed in the earlier year, it did not give any right or confer any legal authority in favour of the assessee that in subsequent years also the mistake should be allowed to perpetuate as held by the Honorable High Court of Rajasthan in the case of CIT v. Foss Electronic (Denmark) [2003] 263 ITR 125.

9. We have perused the records and considered the rival contentions carefully. The dispute is regarding nature of expenditure incurred by the assessee on acquisition of brand name/trade mark “Libra”. The said brand had been acquired by the assessee vide agreement dated June 1, 1998. A perusal of the agreement placed at page 15 of the paper book shows that the assessee had been allowed only exclusive license to use the brand name. Thus, as per agreement the assessee had been allowed the use of brand name for a period of five years and was not the owner of the brand. However, subsequently on expiry of the five year period, the assessee sold the business along with brand name to a third party. Based on such action, it has been concluded by authorities below that the assessee was actually owner of the brand. In our view it is not necessary for us to go into the controversy as to whether the assessee was the owner of the brand or had been allowed use of the brand because in case the assessee had acquired the brand name after April 1, 1998 the assessee under the provisions of section 32(1)(ii) was entitled to depreciation in respect of trade mark at 25 per cent. treating the same as intangible asset. The assessee in this case had made claim at 20 per cent. over a period of five years. Thus claim made by the assessee was lower than the depreciation allowable and therefore, it has not caused any prejudice to the interests of the Revenue. Further, in the assessment years 1999-00 to 2001-02, the Assessing Officer has himself allowed the claim of the assessee at 20 per cent., which has become final. Therefore, in our view no useful purpose will be served in disturbing the claim made by the assessee, which is at a rate lower than the rate of depreciation allowable to the assessee even if the assessee is treated as owner of the asset. The orders of the Commissioner of Income-tax (Appeals) disallowing the claim cannot therefore be upheld. We therefore set aside the order of the Commissioner of Income-tax (Appeals) and allow the claim of the assessee.

10. The second dispute in appeal by the assessee is regarding allow ability of loss on account of foreign exchange fluctuation. The assessee had claimed foreign exchange fluctuation loss of Rs. 86,95,075 and Rs. 2,29,73,148 respectively for the assessment years 2002-03 and 2003-04 in respect of foreign currency loans. The Assessing Officer observed that the loss claimed by the assessee on restatement of foreign exchange liability on account of loan on the balance-sheet date was only notional loss as actual loss would arise only in the year of repayment of loan. It was held that in the income-tax assessment only actual expenses could be allowed and not notional expenses. Therefore, as per the Assessing Officer loss could be allowed only in the year when the loans were settled. The Assessing Officer accordingly disallowed the claim of loss.

11. In appeal the assessee submitted that the loss had arisen as liability to pay the loan had been incurred on the last day of the accounting period due to fluctuation in foreign currency. Thus loss was not notional or contingent as held by the Special Bench of the Tribunal in the case of Oil & Natural Gas Corpn. Ltd. v. Dy. CIT [2002] 83 ITD 151 (Delhi). It was accordingly urged that the claim should be allowed. The Commissioner of Income-tax (Appeals) however, did not accept the contentions raised. It was observed by him that the foreign currency loan was not only to enhance its working capital but also enhance its assets specially loan of Rs. 10 lakhs CHF. It was also observed by him that the loan was sanctioned and approved in 1998 and only in the financial year 2003-04 part payment of the loan had been made. The Commissioner of Income-tax (Appeals) also noted that the assessee changed the accounting policy of claiming loss only after March 31, 2001. In the year 2000-01, there was gain on account of restatement of foreign currency loss which had not been offered for tax. Further the claim made by the assessee was notional as liability remained undischarged. The Commissioner of Income-tax (Appeals) also observed that loss could not be allowed on the basis of entry in the books of account. There being no real loss, the Commissioner of Income-tax (Appeals) confirmed the dis allowance made by the Assessing Officer aggrieved by which the assessee is in appeal before the Tribunal.

12. Before us, the learned authorized representative for the assessee submitted that the Commissioner of Income-tax (Appeals) was not correct in stating that the foreign currency loan was for acquisition of capital asset. It was submitted that the loan was a working capital loan which was clear from the loan agreement at page 24 of the paper book in which purpose of the loan was clearly mentioned to use it as a working capital to finance the activities of the company. It was also submitted that foreign exchange fluctuation loss on restatement of the loan liability at the end of the accounting period was allowable as deduction in view of the judgment of the Honorable Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254. The learned authorized representative further submitted that the assessee had consistently followed the revaluation of foreign currency loan at the end of the balance-sheet date. It was pointed out that there was gain in the assessment year 2004-05 which had been offered to tax as per details given at page 79 of the paper book.

13. We have perused the records and considered the rival contentions carefully. The dispute is regarding allow ability of loss on account of foreign exchange fluctuation in respect of foreign currency loan taken by the assessee. The assessee had been restating foreign exchange loan liability on the balance-sheet date which resulted into loss which has been claimed as deduction. The loss/gain on account of foreign exchange fluctuation on restatement of the loan liability on the balance-sheet date is required to be taken into account in computation of income if the loan is on revenue account or is a working capital loan. Loss is allowable as deduction under section 37(1) as held by the Honorable Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). The loan in this case had been taken as working capital loan as is clear from the loan agreement wherein the purpose of the loan is clearly mentioned to use it as a working capital to finance the activities of the company. As held by the Honorable Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, foreign currency fluctuation loss is allowable as deduction if the foreign currency is held on revenue account or as trading asset or as part of circulating capital employed in the business. As regards the year of allow ability, the claim has to be allowed on the basis of restatement of the liability on the balance-sheet date as held by the Honorable Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). Thus the claim of the assessee is allowable. In case there is gain in a year and the assessee has not offered it to tax, the Revenue is free to take action under law. In these years, admittedly there is loss which is allowable as deduction. We, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and allow the claim of the assessee.

14. The appeal of the Revenue in I. T. A. No. 2574/M/2007 (assessment year 2002-03) : The only dispute raised by the Revenue in this appeal is regarding assess ability of capital gain on sale of personal weighing scale business. The Assessing Officer noted from the accounts that the assessee received a sum of Rs. 30 lakhs on sale of personal weighing scale business at Goa. The assessee treated the same as a capital receipt not taxable. The Assessing Officer, therefore, asked the assessee to explain as to why the amount should not be treated as capital gain and taxed under the Act. The assessee submitted that it had transferred the personal weighing scale business to EDRYL during the year. It was pointed out that the entire business including the right to use brand name had been transferred to EDRYL and with the sale of business, there was extinction of the profit earning source and therefore the amount had to be treated as capital receipt which was not taxable. The Assessing Officer however, did not accept the arguments advanced. It was held by him that the amount was taxable as capital gain. He accordingly taxed the amount as capital gain which was calculated by the treating cost of acquisition as nil.

15. The assessee disputed the decision of the Assessing Officer and reiterated the submission made earlier that the assessee had transferred the whole business of manufacturing and marketing of mechanical and personal scales and by transferring the said business, the assessee had parted with the source of income. Therefore, compensation received was capital receipt not chargeable to tax. It was also submitted that the cost of acquisition being nil, the amount could not be taxed in view of the judgment of the Honorable Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. The Commissioner of Income-tax (Appeals) agreed with the submission made by the assessee and observed that the amount received by the assessee was a capital receipt which could not be taxed as capital gains as the cost of acquisition could not be worked out. The Commissioner of Income-tax (Appeals) accordingly directed the Assessing Officer to delete the addition made aggrieved by which the Revenue is in appeal before the Tribunal.

16. We have heard both parties, perused the records and considered the matter carefully. The sale consideration of Rs. 30 lakhs had been received by the assessee on sale of personal weighing scale business at Goa. The learned authorized representative fairly conceded that the entire personal scale business had been sold as a going concern for a lump sum amount of Rs.30 lakhs and no part of the consideration was attributable to any particular asset or liability. Thus it was a case of a slump sale as defined in section 2(42C) and the profit arising from such slump sale is chargeable to tax as capital gain under the provisions of section 50B which is applicable from the assessment year 2000-01. Therefore, in our view, the capital gain has to be computed in accordance with the provisions of section 50B which is applicable in the case of the assessee. The order of the Commissioner of Income-tax (Appeals) is therefore, set aside and matter is restored to the Assessing Officer for fresh computation of capital gain under the provisions of section 50B after allowing opportunity of hearing to the assessee.

17. In the result, the appeal of the assessee is allowed and that of the Revenue is allowed for statistical purposes.