pri Section 10B: Losses of Eligible Units cannot Be Set off against Income of other Units Section 10B: Losses of Eligible Units cannot Be Set off against Income of other Units

Case Law Details

Case Name : ACIT  Vs K.E.I. Industries Limited (ITAT  Delhi)
Appeal Number : ITA. No. 1433/Del/2014
Date of Judgement/Order : 03/12/2020
Related Assessment Year : 2009-2010

ACIT  Vs K.E.I. Industries Limited (ITAT  Delhi)

Section 10B: Losses of Eligible Units cannot Be Set off against Income of other Units

The assessee is aggrieved before the Ld. CIT(A) for denial of carry forward loss in its 100% Export Oriented Unit [EOU] at Chopanki, Bhiwandi (Rajasthan). The A.O. relying upon the Order for the preceding assessment year i.e., 2008-2009 did not allow carry forward of business losses. The assessee in the written submissions has submitted that the assessee is a 100% EOU at Chopanki, Bhiwandi (Rajasthan) which is registered as EOU [Noida Special Economic Zone] and is eligible for deduction under section 10B of the I.T. Act, 1961. The unit become operational in A.Y. 2008-2009. For the previous year relevant to A.Y. 2009-2010, the unit suffered loss of Rs.2,45,32,014/- which was carried forward as “business loss”. It was also submitted that in A.Y. 2008-2009 the Tribunal vide Order Dated 18.05.2012 has allowed similar claim of assessee following the decision of Hon’ble Bombay High Court. The Ld. CIT(A) following the same allowed the claim of assessee and the operative portion of the Order of the Ld. CIT(A) in paras 20 and 21 of the Order are reproduced as under :

“20. It was submitted that for the preceding assessment year i.e. 2008-09 A.Y., ITAT by the order dated 18.5.2012, in ITA No. 3901 /Del/2011 has held that the Appellant was right in carrying forward the loss of Chopanki unit. In allowing the appeal for assessment year 2008-09, the ITAT followed the decision of Bombay High Court in CIT v. Galaxy Surfactants Ltd. [2012] 343 ITR 108.

21. Respectfully following the decision of ITAT in appellant’s own case for the assessment year 2008-09, the AO is directed to allow carry forward of loss of Rs.2,45,32,014/- of Chopanki unit as business loss. It is not a case, where losses of non eligible unit or units are being set off against the profit of eligible unit. The issue whether section 10A is exemption provision deduction provision is of no relevance. Insofar as, carry forward of loss of unit eligible to deduction under section 10B is concerned the amendment made by the Finance Act, 2003 to subsection (6) with retrospective effect from 01.04.2001 specifically provide for carry forward of losses of 100% EOU. There is no merit in the reason that since section 10B is in the nature of exemption, therefore, benefit of carry forward is not available. The specific mandate of the law, as amended by Finance Act, 2003 which specifically provide for carry forward of losses of unit eligible for deduction u/s 10B cannot be overlooked. The reason of the AO would nullify the amendment of sub-section (6) of section 10B of the Act, which is not permissible. Assessing Officer had only reduced returned loss by Rs.56,28,605/-being the loss of Chopanki Unit eligible for deduction u/s 10B after excluding depreciation on capitalization of exchange fluctuation. Hence, addition of Rs. 56,28.605/- in returned loss is deleted and loss of Chopanki Unit is not to be separately carried forward but as part of loss from other units only. This ground of appeal is hence allowed.”

The Ld. D.R. fairly stated that the issue is covered by the Order of the Tribunal for the A.Y. 2008-2009.

On the other hand, Learned Counsel for the Assessee submitted that ultimately the matter in issue have been decided by the Hon’ble Supreme Court in the case of CIT vs., Yokogawa India Ltd., [2017] 391 ITR 274 [SC] in Reference to Assessee’s SLP(C) No.18157/2015 as referred in para-14 of the Order which is reproduced as under :

“14. The difference between the two expressions ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e., immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal Nos.8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units.”

Learned Counsel for the Assessee submitted that in the aforesaid decision of the Hon’ble Supreme Court it is made clear that findings under section 10A would be applicable to the cases governed by provisions of Section 10B of the I.T. Act and it was a group appeals which have been decided by the Hon’ble Supreme Court by holding that deduction under section 10A/10B is to be allowed while computing the gross total income and not at the stage of computation of total income in Chapter-VI of the I.T. Act dealing in the aggregation of the income set-off or carried forward of the loss. Learned Counsel for the Assessee, therefore, submitted that issue is covered by Order of ITAT for the A.Y. 2008-2009 in the case of same assessee and ultimately decided by the Hon’ble Supreme Court in the case of CIT vs., Yokogawa India Ltd., (supra), in which in para-18 held as under :

“18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly.”

In view of the above facts and that when the Tribunal has allowed similar claim of assessee in preceding A.Y. 2008-2009 and ultimately in group appeals, the Hon’ble Supreme Court has allowed the claim of assessee, the issue is covered by the aforesaid decisions in favour of the assessee which fact is also accepted by the Ld. D.R. Therefore, there is no infirmity in the Order of the Ld. CIT(A) in allowing the claim of assessee. Ground No.3 of the appeal of the Revenue stand dismissed.

Depreciation allowable on cost Enhanced due to exchange rate fluctuation

It is noted in the impugned order that A.O. was of the view that though Section 43A applies to the assets acquired from Abroad, however, analogy of Section 43A, which bars enhancement of actual cost, on account of exchange fluctuations except in the case of actual payment can be applied to depreciable assets acquired/bought in India by utilising foreign funds raised through FCCBs etc., Therefore, the A.O. disallowed the depreciation on enhanced cost of Rs.27,37,25,941/- attributable to assets bought in India.

We have considered the rival submissions. The assessee explained before the authorities below that in assessment year under appeal, the assessee had capitalized a sum of Rs.27,37,25,941/- on account of exchange rate fluctuation in respect of machineries bought in India from the foreign funds raised through FCCBs. No repayment of loan by way of FCCBs was made during the year under appeal. However, increase in any liability on account of prevailing exchange rate was shown in the balance-sheet under the Head “Unsecured Loans” the fluctuations to the extent of acquisition of fixed assets in India by utilising FCCBs was added to the actual cost and depreciation charged thereon. Thus, the assessee purchased the machinery in India from the foreign funds through FCCBs which fact is not disputed by the authorities below. It is, therefore, clear that though Section 43A apply to the assets acquired from Abroad, still the A.O. without justification applied Section 43A for making the disallowance of depreciation against the assessee. Section 43A thus could not apply in the case of the assessee which is also held by various Benches of the Tribunal in the decisions quoted above. Accounting Standard-11 would also apply in the case of the assessee. The assessee has also explained that Companies Amendment Rules also apply to the facts of the case because option is given to assessee and it provided “Where long term foreign currency monetary items relates to acquisition of depreciable capital asset, the same shall be added/deducted from the cost of the asset and shall be depreciated accordingly over the balance life of the asset.”. It is not in dispute that assessee followed AS-11 regularly. In A.Y. 2010-2011 the Ld. CIT(A) allowed similar claim of the assessee, but, the Department did not file any appeal against the same Order. In A.Y. 2011-2012 though the Department filed appeal before the Tribunal on this issue on allowing depreciation, but, the same has been dismissed vide Order Dated 21.10.2019 (supra). Thus, the Ld. CIT(A) was bound to follow rule of consistency and should not have taken a contrary view in A.Y. 2012­2013. We rely upon the Judgments of the Hon’ble Supreme Court in the case of Radhasoami Satsung 193 ITR 321 (SC) and Excel Industries Ltd., 358 ITR 295 (SC). The assessee has also followed Companies Rules, 2009 because it has given option to the assessee to do so. The decision of Mumbai Bench in the case of DDIT v. Staubil A.G. India Branch Office (supra), relied upon by the Ld. CIT(A) is on identical facts. Therefore, there is no infirmity in the Order of the Ld. CIT(A) in following the same. It may also be noted here that wherever there was an exchange gain to the assessee, the same was reduced from the WDV and claim was made accordingly, therefore, assessee is following the AS-11 consistently and as such the same should not have been disputed by the authorities below. The Ld. D.R. has not pointed-out any infirmity in the Order of the Ld. CIT(A) in allowing the depreciation to the assessee as per Law. We, therefore, do not find any merit in this Ground No.2 of the appeal of the Revenue and the same is accordingly dismissed.

FULL TEXT OF THE ITAT JUDGEMENT

This Order shall dispose of all the above appeals as well as cross objections since issues are related.

2. We have heard the Learned Representative of both the parties through video conferencing and perused the material available on record. The appeals are decided as under.

3. This appeal by Revenue has been directed against the Order of the Ld. CIT(A)-VIII, New Delhi, Dated 09.12.2013, for the A.Y. 2009-2010.

4. In this case the AO has completed the assessment at Loss of Rs. 35,17,01,680/- as against the returned Loss of Rs.63,91,64,737/-, after making certain additions/disallowances. The Assessee-Company is engaged in the business of manufacture of cables, wires and stainless steel wires. The Ld. CIT(A) allowed the appeal of the assessee partly, therefore, Revenue is in Departmental Appeal and Assessee is in the Cross Objection.

5. Ground No.1 of the appeal of the Revenue reads as under :

“Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of Rs.26,35,58,122/- on account of by back/prepayment of foreign currency convertible bonds (FCCBs)?”

5.1. The assessee has disputed the addition of Rs.26,35,58,122/- before the Ld. CIT(A) on account of buy back of foreign currency convertible bonds (FCCBs) at discount. The assessee had availed Foreign Currency Convertible Bonds (FCCBs) from Europeon Union aggregating US $36 millions. This was available to Assessee-Company; it used the loan to purchase Capital Assets for the Company. The assessee, therefore, argued that as the loan receipt in A.Y. 2007-2008 was capital receipt, the buy back of FCCBs by European Union in A.Y. 2009-2010 is a capital receipt again. This has been done as per guidelines of Reserve Bank of India. In the written submissions filed on record, the facts leading to the addition of Rs.26,35,58,122/- were explained as under :

“3. During the financial year 2006-07, the Appellant had issued at par 1% FCCBs aggregating to US$ 36 millions. FCCBs were issued on 29.11.2006 at US$ 5000 per bond and the same were to be redeemed on 30.11.2011  at a price of US$ 7277per bond i.e. @145.54% of the principal amount. As per the terms and conditions of FCCBs, during the period 15.12.2006 to 30.10.2011, the bondholders were given right to exercise the option of converting the bonds into equity shares.

4. That the FCCBs proceeds were to be utilized as under :

“The aggregate net proceeds from this Offering are expected to be approximately US$34,560,000, which we intend to use for setting up of new project for manufacturing of existing range of products, that is, HT&LT power cable, rubber cable, house wire, etc.; expansion/backward integration of existing facilities and the use permitted as per the ECB Guidelines, as amended from time to time.”

Reference in this regard is made to the summary of terms and conditions of FCCB, which are at vases 1 to 29 of the paper book.

5. As at the expiry of first previous year after issuance of bonds in November 2006 i.e. year ended on 31.3.2007, the aggregate amount of FCCBs was Rs. 1,56,34,80,000/- (156.34 Cr.).

6. In the financial year 2008-09, on account of global financial crisis, globally the investors were keen to safeguard their investments. Some of bondholders of FCCBs issued by the Appellant were also eager to encash their bonds.

7. RBI with a view to allow Indian companies to buy hack FCCBs. allowed buyback of FCCB both under “automatic route” and “approval route” [Circular No. 39 (DIR Series) dated 8.12.2008, refer vases 30 to 33 of the paper bookl. Under the automatic route, buyback of FCCB was subject to following conditions:

(i) the buyback value of the FCCB shall be at a minimum discount of 15 % on the book value;

(ii) the funds used for the buyback shall be out of existing foreign currency funds held either in India (including funds held in EEFC account) or abroad and / or out of fresh ECB raised in conformity with the current ECB norms; and

(iii) where the fresh ECB is co-terminus with the outstanding maturity of the original FCCB and is for less than three years, the all-in-cost ceiling should not exceed 6 months Libor plus 200 bps, as applicable to short term borrowings. In other cases, the all-in-cost for the relevant maturity of the ECB, as laid down in A.P. (DIR Series) No. 26 dated October 22, 2008 shall apply.

8. The Appellant in terms of automatic route, complying the regulatory procedures repurchased 2110 FCCBs of the value of US $ 10.55 millions (Rs.54,06,87,500/- at exchange rate of Rs.51.25). Repurchase was made at discount of US $ 5.40 million (Rs.27,71,29,378/-). As such, the Appellant reduced its obligation to repay FCCBs by Rs.26,35,58,122/-(54,06,87,500 minus Rs.27,71,29,378). Amount of Rs.26,35,58,122/- was shown under the head “other income-Schedule-P ” to the balance sheet as at 31.3.2009. In the computation, the amount of Rs.26,35,58,122/- was claimed as capital receipt. Computation of income for the assessment year 2009-10 is at pages 34 to 36 of the paper book.

9. Here it is important to note the utilization of FCCB proceeds. Year-wise details of utilization of FCCB proceeds are as under :

Particulars of utilization Financial year 2008-09 Financial year 2007-08 Financial year 2006-07
FCCB Issue Expenses 5,02,67,360
Capital Expenditure / Advance 15,04,13,932 92,87,49,977 35,45,38,104
Exchange Fluctuation (Net) (2,70,084) 7,52,32,790 4,44,15,862
Interest Income (Net) (83,05,795) (2,80,47,167) (1,90,79,780)
Pending utilization in Bank (Net) 5,94,84,801* 20,13,22,854 1,17,72,58,454
Total 20,13,22,854 1,17,72,58,454 1,60,74,00,000

*Unitized balance of Rs. 5,94,84,801/- was utilized towards capital expenditure in the assessment year 2010-11.

Balance sheet of the Appellant for the financial years 2006-07, 2008-09 & 2009-10 (printed) are at vases 54. 55 & 56 of the paper book.

10. It is submitted that there is no dispute as to the facts leading to repurchase of FCCBs or as to the quantum of discount on buyback. The facts have been set out for proper appreciation of issue.”

5.2. On going through the assessment order, it is discernable that the addition of Rs.26,35,58,122/- was made for the following two reasons :

(i) Buyback of FCCBs was a business transaction having all the elements of business, inasmuch as, the assessee was not duty bound to buy-back FCCBs. The same were bought back on account of profit inherent in buyback of FCCBs at discount. Sensing the profit the assessee made conscious effort to realize the profit.

(ii) FCCBs proceeds were utilized to acquire depreciable-assete. As such, the assessee has availed the depreciation on the assets so acquired. Therefore, it is fair to bring the profit to tax on buyback of FCCBs at discount.

5.3. The assessee challenged the impugned addition before the Ld. CIT(A) by making the following submissions.

“12. At the outset, it is submitted that the ground is covered by judgment of Delhi High Court in Logitronics P. Ltd v. CIT (2011) 333 ITR 386. However, for the sake of completeness of submissions, following four propositions bring home the point that addition of Rs.26,35,58,122/- was not warranted:•

(i) Section 41(1) did not apply to buyback of FCCBs.

(ii) Provisions of section 28(iv) did not apply to buyback of FCCBs.

(iii) Applicability of Logitronics P. Ltd v. C1T (2011) 333 ITR 386 (Del)

(iv) There is no provision to charge to tax the amount of Rs.26,35,58,122/-. Proposition (i) — Section 41(1) did not apply to buyback of FCCBs.

13. Undisputedly, FCCBs being spices of debentures were nothing but a debt/loan. General law is that a remission of debt is not income. The principle of general law was superseded by sections 41(1) and 59(1) of the Act, which provides that remission of a debt / liability, shall be treated as income of the year of remission. The fact that Legislature had to insert sections 41(1) and 59(1), to bring to tax remission of a debt / liability as income of the year of remission show that the same is not income in the general sense. It was for this reason that by the clause (v) Section 2(24) of the Act, any sum chargeable under sections 41 and 59 has been specifically included in the definition of “income”.

14. Waiver of loan is not covered by Section 41(1) — The requisite condition to attract section 41(1) is that the assessee should have been allowed deduction or benefit of allowance in respect of loss, expenditure or trading liability incurred and subsequently during any previous year, the assessee should have received any amount in respect of such loss, expenditure or trading liability by way of remission or cessation thireof. It is not the case here that principal amount of FCCBs was claimed as expenditure or trading liability in any of the earlier previous year. Therefore, fundamental condition for attracting section 41(1) was not met. Reliance is placed on:

(i) Mahindra & Mahindra Ltd v. CIT (2003) 261 ITR 501 (Born);

(ii) CIT v. Chetan Chemicals Pvt. Ltd. (2004) 267 ITR 770 (Gig);

(iii) CIT v. Tosha International Ltd (2011) 331 ITR 440 (Del);

(iv) CIT v. Jindal Equipments Leasing & Consultancy Services Ltd (2004) 325 ITR 57(Del);

(v) Iskraemeo Regent Ltd v. CIT (2011) 331 ITR 317(Mad).

15. Moreover, liability to repay FCCBs was not a trading liability, therefore, in any case, section 41(1) was not attracted. Since the legal position on this aspect was clear beyond doubt, therefore, the Assessing Officer while making the addition did not refer to section 41(1) of the Act.

Proposition (ii) — Section 28(iv) did not apply to buyback of FCCBs.

16. Section 28(iv) of the Act provides that value of any benefit or perquisite arising from business shall be chargeable to tax under the head profit & gains of business or profession. Bombay High Court in Mahindra & Mahindra Ltd (Supra) has held that:

“The value of any benefit or prerequisite arising from business, as contemplated by section 28(iv), could accrue in numerous ways. The income which can be taxed under section 28(iv) must not only be referable to a benefit or perquisite, but it must be arising from business. Secondly section 28(iv) does not apply to benefits in cash or money [see CIT v. Alchemic P. Ltd (1981) 130 17’R 168 (Guj)j “

17. Coming back to the question, whether FCCBs can be said to arise from business, it will be appropriate to refer to lskraemeo Regent Ltd (supra), wherein, at page 334, it was observed by the Hon ible Court that where the assessee was not trading in money transaction, a grant of loan cannot be termed as a trading transaction and it cannot be construed in the course of business.

18. It is also no more res-integra that section 28(iv) can be invoked only where the benefit or perquisite is other than cash. If what was received either by way of benefit or perquisite was money, there could be no question of considering the value of such monetary benefit or perquisite under clause (iv) of section 28. Reference in this regard may be made to Ravinder Singh and another v. CIT (1994) 205 ITR 353 (Del) @ 359­360. Therefore, waiver of part of principal amount of FCCBs is not covered by section 28(iv) of the Act. Similar view has been taken in following judgments:

(i) CIT v. Chelan Chemicals Pvt. Ltd. (2004) 267 ITR 770 (Guj);

(ii) Iskraemeo Regent Ltd v. CIT (2011) 331 ITR 317 (Mad)

(iii) Rollatainers Ltd v. CIT (2011) 339 ITR 54 (Del)

Proposition (iii) — Applicability of Logitronics P. Ltd (supra)

19. It is submitted that in Logitronics P. Ltd (supra), assessee had taken loan from State Bank of India, which could not be paid and the loan was categorized as non performing asset (NPA). By way of one time settlement, the assessee paid Rs.I.85 Cr. against the principle amount of Rs.4.76 Cr. and the difference of Rs.2.91 Cr. was waived by the bank The issue was whether the amount was waived was income chargeable to tax under the head ‘profit & gains of business’.

20. It is submitted that the genesis of reasons recorded by the Assessing Officer in the present appeal are same as were recorded in the case of Logitronics P. Ltd (supra).

21. Considering the issue whether loan waived was chargeable to tax under the head “business income”, the Hon ‘ble High Court held that:

“if the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if the loan was for trading purpose and was treated as such from the very beginning in the books of account the waiver thereof may result in income more so when it was transferred to the profit and loss account” (page 402)

22. Applying the ratio of the judgment, the addition was uncalled for because the Appellant not only raised the FCCBs for acquiring capital assets but actually utilized the FCCB proceeds for acquiring capital assets. This factual position has been admitted by the Assessing Officer in paragraph 3.3 (page-5) q( assessment order, wherein, it was observed that “FCCBs were utilized in increasing assets of the company, most of them being depreciable assets”. Utilization of FCCBs certified by the auditors in the balance sheet of the Appellant has not been doubted by The Assessing Officer. Therefore, decision in Logitronics P. Ltd. (supra) is on all fours of the present case.

23. It is submitted that by judgment dated 18.2.2011 in Logitronics P. Ltd. (supra), the case of CIT v. Jubilant Securities P. Ltd. was also disposed off The Assessing Officer has read the facts of CIT v. Jubilant Securities P. Ltd. as that of Logitronics P. Ltd. Facts of Jubilant Securities P. Ltd were mixed up with Logitronics P. Ltd. Dealing with the case of Logitronics P. Ltd (supra), the Assessing Officer has observed that:

    • assessee in Logitronics P. Ltd case was in the business of financing, whereas, actually the assessee was in the business of manufacturing of electronic products (page 389);
    • addition of Rs.25 lacs on account of unsecured loan written back was deleted by the Tribunal and the order was upheld by the High Court, whereas, actually, the Tribunal had remitted the matter back to the Assessing Officer to find out whether the loan was utilized for the purpose of acquiring capital asset or for the purpose of business / trading activity (page 389 r/w 402-403);
    • the Tribunal found that loans borrowed to augment the funds to be advanced on interest were not used in financing business, whereas, loan from State Bank of India was for carrying on business of manufacturing of electronic products.

24. Since the Assessing Officer mixed up the facts of Jubilant Securities P. Ltd., with that of Logitronics P. Ltd, therefore, the ratio of the judgment was wrongly not applied. The Appellant submits that the ground is squarely covered by the Logitronics P. Ltd, (supra).

Proposition (iv) — No provision to levy tax on the amount of Rs.26,35,58,122/-

25. Both the charging provisions and the computational provisions together constitute complete code to bring a particular receipt to income tax. Department is seeking to tax partial waiver of FCCBs under the head “profit & gains of business or profession”. Section 28 is a charging section for profits and gains of business or profession. It takes into account the receipts of specified categories as income. All the receipts mentioned in section 28 are inherently of income nature. Waiver of loan is not envisaged as income. Since neither section 28 nor section 41(1) is applicable, therefore, accretion by way of discount on repurchase of FCCBs cannot be brought to tax. In the absence of any provision bringing to charge the alleged profit on buyback of shares at discount cannot be brought to tax merely on the principle offairness and / or equity.”

5.4. The Ld. CIT(A) considering the explanation of assessee, material on record in the light of Judgments of jurisdictional Delhi High Court in the case of Logitronics P. Ltd., vs., CIT [2011] 333 ITR 386 (Del.), deleted the addition. His findings in paras 8 to 10 of the Order are reproduced as under :

8. I have carefully considered the facts of the case, the submissions made and the case laws relied upon. At the outset, it may be noted that the stand of the Appellant that FCCBs proceeds were for setting up new project to manufacture wires has not been controverted by the AO. In fact, one of the reasons to make the addition is that FCCBs were utilized in increasing the depreciable assets of the assessee company. I have also verified the balance sheets of the Appellant. Submissions as to the utilization of FCCBs proceeds towards capital account were found to be correct. I also find substance in the submission that the conditions prescribed by RBI to buyback FCCBs were met. The fact that the Appellant was allowed to buyback FCCBs itself shows that conditions were complied with.

9. On going through the submissions, I agree with the Appellant that addition of Rs.26,35,58,122/- cannot be sustained under section 41(1) of the IT Act because the amount of FCCBs was not allowed as expenditure or trading liability in the earlier years, therefore, the precondition of section 41(1) was not met. Similarly, the addition cannot be sustained under section 28(iv) of the IT Act. Only in case of an assessee engaged in money lending business, the transaction of raising loan / debenture can be held to be a trading transaction. The Appellant is in manufacturing business, therefore, its submission based on the decision of Madras High Court in Iskraemeo Regent Ltd v. CIT (2011) 331 ITR 317 that a grant of loan cannot be termed as a trading transaction in the course of business needs to be accepted. As the Appellant is not the business of dealing in FCCBs, therefore, the Appellant is right in submitting that transaction of buyback of FCCBs was not a business transaction. Moreover, section 28(iv) applies to benefit or perquisite other than cash. It being the settled position, I need not discuss the case laws referred on this aspect.

10. The stand of the Appellant is that the ground is covered by the judgment of jurisdictional High Court in Logitronics P. Ltd. v. CIT (2011) 333 ITR 386 (Del.) My attention was specifically drawn to the following passage, wherein, the Hon’ble Court made a distinction between waiver of loan taken for acquiring capital asset and waiver of loan for trading purposes :

“In the context of waiver of loan amount, what follows from the reading of the aforesaid judgment is that the answer would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax. On the other hand, if the loan was for trading purpose and was treated as such from the very beginning in the books of account the waiver thereof may result in income more so when it was transferred to the profit and loss account ”

Since the FCCBs were raised to use the proceeds for setting up of new project and the AO in paragraph 3.3 has himself observed that FCCBs were utilized in increasing assets of the company, most of them being depreciable asset, therefore, applying the ratio of aforesaid judgment, it is held that the addition of Rs.26.35.58.122/- cannot be sustained.

Purchase of FCCBs, a debenture at discount is not different from waiver of loan by the bank or financial institution. It is not worthy that the AO while discussing the case of Logitronics P. Ltd. went by the facts of CIT v. Jubilant Securities P. Ltd., which was disposed of along with Logitronics P. Ltd. For the above reasons, the addition of Rs.26,35,58,122/- made by the AO is directed to be deleted and ground of appeal is allowed.”

6. The Ld. D.R. relied upon the Order of the A.O. and submitted that assessee company has profit motive to earn income which were not offered for taxation, therefore, A.O. was justified in making the addition.

7. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that FCCBs profits were utilised for setting-up new project which has not been controverted by the A.O. The buy-back of FCCBs was made in terms of RBI Circular. The amount of FCCBs were neither claimed as allowed deduction in computing the income of any year. Therefore, neither Section 28(iv) nor Section 41(1) of the Act are applicable. He has relied upon Judgment of Hon’ble Supreme Court in the case of CIT vs., Mahindra & Mahindra Ltd., 404 ITR 1 (SC) and Order of Mumbai Bench in the case of DCIT vs., Pidilite Industries Ltd., 177 ITD 472, Judgment of Delhi High Court in the case of Logitronics P. Ltd., vs., CIT [2011] 333 ITR 386 (Del.) and Order of ITAT, Delhi E-Bench, Delhi in the case of M/s. OK Play India Ltd., Roz-Ka-Meo Industrial Estate, Tehsil Nuh, District Mewat, Haryana vs., JCIT, Range-II, Gurgaon in ITA.No.3402/Del./ 2016, Dated 13.01.2020 in which on identical facts the appeal of assessee has been allowed by following the above decisions of Hon’ble Delhi High Court and Hon’ble Supreme Court.

8. We have considered the rival submissions and perused the material on record. The stand of the assessee since the beginning had been that FCCBs proceeds were for setting-up new project for manufacture of wire has not been disputed by the A.O. In fact one of the reason to make the addition is that FCCBs were utilised in increasing the depreciable asset of the assessee company. The Ld. CIT(A) has verified this fact from the balance-sheet of the assessee company and found the utilization of FCCBs proceeds towards capital account were found to be correct. This fact is also not disputed by the A.O. The assessee has also satisfied the conditions of RBI to buy-back FCCBs. The assessee also proved on record that all the conditions of RBI in this regard have been made by assessee company. Section 41(1) of the I.T. Act would not apply because the amount of FCCBs was not allowed as expenditure or trading liability in earlier year. Further, no addition could be made under section 28(iv) of the I.T. Act. The assessee is in manufacturing business and has admittedly utilised the FCCBs by increasing the asset of the assessee company and most of them being depreciable asset which fact is also mentioned by the A.O. in the assessment order. Since the FCCBs were raised to use the proceeds for setting-up of new project and this fact is admitted by the A.O. in the assessment order, therefore, assessee used the loan to purchase the capital asset for the company. The ITAT, Delhi E-Bench, Delhi in the case of M/s. OK Play India Ltd., Roz-Ka-Meo Industrial Estate, Tehsil Nuh, District Mewat, Haryana vs., JCIT, Range-II, Gurgaon (supra), considering the Judgment of the jurisdictional Delhi High Court in the case of Logitronics P. Ltd., vs., CIT (supra) and Judgment of Hon’ble Supreme Court in the case of CIT vs., Mahindra & Mahindra Ltd., (supra), decided the identical issue in favour of the assessee and appeal of assessee has been allowed. The findings of the Tribunal in paras 3.7 to 3.12 are reproduced as under :

“3.7. We have heard rival submissions and perused the relevant material on record. The assessee raised FCCB in the earlier year and during the year repaid with discount of Rs.9,46,73,015/- received. According to the assessee, the discount received is in the nature of capital receipt but according to the Revenue the discount is in the nature of trading receipt. The Assessing Officer has alleged the activity of raising FCCB as an adventure in the nature of trade. This finding of the Assessing officer is without any basis. The assessee is not engaged in raising the FCCB with motive of any trading and discounting and thereby earning profit on the same. The allegation by the Assessing Officer of motive and intent of earning profit by the assessee are unsubstantiated with any evidences. On the contrary, the assessee has substantiated that it raised the FCCB for funding its acquisition of assets. Further, the Ld. CIT(A) has relied on the decision of the Hon’ble Delhi High Court in the case of Logitrinics (P) Ltd (supra), wherein it is held as under:

“27  We, therefore, restore this issue back to the file of the Assessing Officer for his fresh adjudication with a direction to the assessee to furnish all the details and particulars of loan, and the purpose for which the loan taken from Bank was utilised. All these information are within the control and specific knowledge of the assessee and, therefore, it would be the duty of the assessee to prove and establish that the amount of loan taken from the Bank was utilized for the purpose of acquiring capital assets in case the assessee wants to have the benefit of decision of Hon’ble Delhi High Court in the case of Tosha International Ltd. (supra) as well as the decision of Hon’ble Bombay High Court in the case of Mahindra & Mahindra Ltd. (supra) If on an enquiry and verification, it transpires that the assessee has utilized the loan for the purpose of its business activity or trading activity, the amount of loan to the extent it has been waived by the bank shall be deemed to be the assessee’s income chargeable to tax as per the decision of Hon’ble Bombay High Court in the case of Solid Containers Ltd. (supra), where the principle laid down by the Hon’ble Supreme Court in the case of TV.

Under section 4, the charging section, the charge of income-tax is upon the ‘total income of the previous year’. The term ‘income’ is defined under section 2(24). In general, all receipts of revenue nature, unless specifically exempted, are chargeable to tax. Loan taken is not normally a kind of receipt which will be treated as income. However, when a part of that loan is waived off by the creditor, some benefit accrues to the assessee. Question is what would be the character of waiver of part of the loan at the hands of the assessee ? Waiver definitely gives some benefit to the assessee. Whether it is to be treated as capital receipt ? If it is so, then only capital gains tax would be chargeable under section 45 or else, whether remission of loan is no income at all ? The answer to these questions would depend upon the purpose for which the said loan was taken. If the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax, but on the other hand, if the loan was taken for trading purpose and was treated as such from the very beginning in the books of account, the waiver thereof may result in the income, more so when it was transferred to the profit and loss account. [Para 23]”

3.8 The Hon’ble High Court has laid down test for holding the amount of waiver of loan as capital or trading receipt. If the amount of the loan has been utilized for capital expenditure, then the waiver amount is in the nature of the capital receipt and if the amount of the loan has been utilized for trading purposes then the waiver amount received would be in the nature of trading receipt.

3.9 Before us, the assessee has demonstrated how the FCCB amount has been utilized towards capital expenditure. The assessee submitted entire list of capital asset acquired through the funds of FCCB, which is available on page 235 to 241 of the paper book. The assesse has shown capital expenditure of more than Rs.21 Crores upto March, 2008. The Ld. DR could not controvert this factual aspect of utilization of the FCCB toward capital expend ture. In instant case, once it is undisputed that FCCB amount has been utilized toward capital expenditure, in view of the decision of the Hon’ble Delhi High Court in the case of Logotronics (P) Ltd (supra), the discount on FCCB falls in the nature of capital receipt not exigible to tax. The Ld. CIT(A) has given his finding on wrong assumption of the fact that FCCB funds were utilized for trading or revenue expenditure, without verifying the books of account of the assessee.

3.10. The Hon’ble Apex Court in the case of CIT Vs. Mahindra and Mahindra Ltd. (supra) on the issue of benefit taxable under section 28(iv) has held as under:

“10. The term “loan” generally refers to borrowing something, especially a sum of cash that is to be paid back along with the interest decided mutually by the parties. In other terms, the debtor is under a liability to pay back the principal amount along with the agreed rate of interest within a stipulated time.

11. It is a well-settled principle that creditor or his successor may exercise their “Right of Waiver” unilaterally to absolve the debtor from his liability to repay. After such exercise, the debtor is deemed to be absolved from the liability of repayment of loan subject to the conditions of waiver. The waiver may be a partly waiver i.e , waiver of part of the principal or interest repayable, or a complete waiver of both the loan as well as interest amounts. Hence waiver of loan by the creditor results in the debtor having ext a cash in his hand. It is receipt in the hands of the debtor/assessee. The short but cogent issue in the instant case arises whether waiver of loan by the creditor is taxable as a perquisite under Section 28 (iv) of the IT Act or taxable as a remission of liability under Section 41 (I) of the IT Act.

12. The first issue is the applicability of Section 28 (iv) of the IT Act in the present case. Before moving further, we deem it apposite to reproduce the relevant provision herein below:—

‘28. Profits and gains of business or profession.— The following income shall be chargeable to income-tax under the head “Profits and gains of business profession”,—

(iv) the value of any benefit or perquisite, whether convertible into money or no , arising from business or the exercise of a profession;

13. On a plain reading of Section 28 (iv) of the IT Act, prima facie, i appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs.57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act. [Emphasis supplied]”

3.11. In the instant case, the benefit has been received in the shape of the money and thus, the said benefit cannot be held as taxable even under section 28(iv) of the Act.

3.12. In view of the discussion above, we set aside the finding of the Ld. CIT(A) on the issue in dispute and hold that the discount received on FCCB is not taxable in the hands of the assessee. The Ground No. 1 of the appeal of the assessee is accordingly allowed.”

8.1. Thus the issue is covered by the aforesaid decision of the Tribunal as well as by Judgment of Hon’ble Delhi High Court in the case of Logitronics P. Ltd., vs., CIT (supra). No material is produced before us to contradict the findings of fact recorded by the Ld. CIT(A) in favour of the assessee. Therefore, we are of the view that no interference is required in the matter. We confirm the finding of fact recorded by the Ld. CIT(A) and dismiss Ground No.1 of the appeal of the Revenue.

8.2. In the result, Ground No.1 of the appeal of the Revenue dismissed.

9. Ground No.2 reads as under :

“2. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) was justified in deleting disallowance of depreciation of Rs.1,82,76,330/- ?”

9.1. The assessee has disputed the disallowance of depreciation of Rs.1,82,76,330/- before the Ld. CIT(A) being the enhanced cost on account of exchange fluctuation in respect of assets acquired in India. The assessee in the written submissions, facts leading to disallowance of depreciation were explained which reads as under :

“26.  During the previous year relevant to the assessment year in question, the Appellant had capitalized a sum of Rs.27,37,25,941/- on account of exchange rate fluctuation in respect of the machineries brought in India from the Foreign Funds raised through FCCBs. No repayment of loan by way of FCCBs was made during the year, however, increase in liability on account of prevailing exchange rate was shown in the balance sheet under the head “unsecured loans”, Fluctuations the extent of acquisition of fixed assets in India by utilizing FCCBs was added to the actual cost and depreciation charged thereon.

27. The stand of the Appellant was that enhance liability on account of foreign exchange fluctuation was accounted for in accordance with Accounting Standard-11 and that section 43A was not applicable.”

9.2. It is noted in the impugned order that A.O. was of the view that though Section 43A applies to the assets acquired from Abroad, however, analogy of Section 43A, which bars enhancement of actual cost, on account of exchange fluctuations except in the case of actual payment can be applied to depreciable assets acquired/bought in India by utilising foreign funds raised through FCCBs etc., Therefore, the A.O. disallowed the depreciation on enhanced cost of Rs.27,37,25,941/- attributable to assets bought in India.

9.3. The assessee disputed the disallowance of depreciation having referred to Section 43(1) which defines the term “actual cost” and has made the following submissions :

“30. In CIT v. Arvind Mills Ltd (1992) 193 ITR 255, Hon ‘ble Supreme Court considered the issue of additional liability on account of exchange currency fluctuations on the actual cost of fixed assets. Considering the issue, the Hon’ble Apex Court made following observations:

“on strict accountancy principles, the increase or decrease in liability towards the actual cost of an asset arising from exchange fluctuation can be adjusted in the accounts of the earlier year in which the asset was acquired necessary, by reopening the said accounts)-. In that event, the accounts of that earlier year as well as subsequent years will have to be modified to give effect to variations in depreciation allowances consequent on the re-determination of the actual cost.

…… However, though this is a course which is theoretically advisable or precise, its adoption may create a lot of practical difficulties. That is why the Institute of Chartered Accountants gave an option to business people to make a mention of the effect of devaluation by way of a note on the accounts for the earlier year in case the balance-sheet in respect thereof has not yet been finalised but actually to give effect to the necessary adjustments in the subsequent years instead of re-opening the closed accounts of the earlier year…”

31. Considering the allowance of depreciation, the Hon ‘ble Apex Court observed at page 262 that:

“So far as depreciation allowance is concerned; the position is perhaps a little simpler because it is a recurrent claim. Under the definitions contained in section 32, read with section 43(i) and (6) of the Act, the depreciation is to be allowed on the actual cost of the asset less all depreciation actually allowed in respect thereof in earlier years. Thus, where the cost of the asset subsequently goes up because of devaluation, whatever might have been the position in the earlier year, it is always open to the assessee to insist, and for the 17’0 to agree, that the written down value in the year in which the increased liability has arisen should be taken on the basis of the increased cost minus depreciation earlier allowed on the basis of the old cost. . In other words, though the depreciation granted earlier will not be disturbed, the assessee will be able to get a higher amount of depreciation in subsequent years on the basis of the revised cost and there will be no problem.”

32. Before moving further, it will be appropriate to refer to judgment of Hon ‘ble Supreme Court in CIT v. Woodward Governor India P. Ltd. (2009) 312 ITR 254, wherein, the issue of impact of exchange differences arising in foreign currency transactions was considered threadbare. From the judgment, following principles emerge:

(1) loss suffered by an assessee on account of fluctuation in the rate of foreign exchange as on the date of balance sheet is an item of expenditure under section 37 of the Act.

(ii) profits & gains of the previous year are required to be computed in accordance with relevant Accounting Standard. In terms of AS-11, foreign currency loan denominated in a foreign currency is a monetary item, to be valued at the closing rate.

Accounting, Standard-11

33. From Woodward Governor India P. Ltd. (supra), it is evident that the Hon’ble Supreme Court laid down that in respect offoreign currency transactions profits & gains of the previous year is required to be computed in accordance with Accounting Standard-11.

34. Accounting Standard-11, deals with ‘effect of change in foreign exchange rates’. Its object of AS-11 is to express / report the transactions involving foreign exchange in enterprise’s reporting currency i.e. in rupee. It may be noted that AS-11 was revised w.el 1.4.2004 and revised AS-11 required that exchange differences be recognized in the profit & loss account

35. In reporting the effect of loss/profit due to exchange fluctuation as on 31s` March, the AS-11 makes no distinction, whether the acquired asset was imported or indigenous i.e. produced or manufactured in India. The Appellant in maintaining its books has been regularly following AS-11. The salient features of AS-11 are regarding foreign currency transaction, which clearly states as under:

Forei,en Currency Transactions – Initial Recognition

36. A foreign currency transaction is a transaction which is denominated or requires settlement in a foreign currency, including transactions arising when an enterprise either:

(a) ……..

(b) Borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency;

(c) Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.

(d) A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

Subsequent Reporting – at each balance sheet date

38. For reporting foreign currency transaction in subsequent year, AS-11 mandates that foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from, or required to disburse, such item at the balance sheet date;

Recognition of Exchange Differences

39. Exchange differences arising on the settlement of monetary items on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise.

40. An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each intervening period up to the period of settlement is determined by the change in exchange rates during that period.

Tax Effects of Exchange Differences

41. Gains and losses on foreign currency transactions and exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes on Income.

42. The Companies (Accounting Standards) Amendment Rules, 2009, with retrospective effect from 7.12.2006, gave the following option to an enterprise:

“Exchange differences relatable to acquisition of depreciable capital asset was allowed to be added or deducted from the cost of the asset

and

Exchange difference in other cases was allowed to be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” and amortized over the balance period of such long term asset / liability but not beyond 3r March 2011.”

Copy of the Notification dated 31.3.2009 notifying the Rules is enclosed at pages 10 & 11 of the submissions.

43. Due to exceptional and sudden depreciation of Indian Rupee against US Dollar, the Central Government amended Companies (Accounting Standards) Rules.

44. The amended Rules called Companies (Accounting Standards) Amendment Rules, 2009, provided that on or after 7.12.2006, an enterprise at its option, which option shall be irrevocable and exercised retrospectively shall account for the foreign exchange fluctuations on long term foreign currency monetary items (FCCB) as under:

(i) where the long term foreign currency monetary items relates to acquisition of depreciable capital asset, the same shall be added / deducted from the cost of the asset and shall be depreciated accordingly over the balance life of the asset

45. The Appellant exercised the option allowed by Companies (Accounting Standards) Amendment Rules, 2009 and accordingly, gave the following note in the annual report for the year 2008-09 – assessment year 2009-10 (internal page 52 of printed balance sheet for F.Y. 2008-09):

“Upto 31m March, 2008, the company was charging foreign exchange difference arising on long term foreign currency monetary items viz FCCBs, Foreign Currency Term Loan to profit and loss account. Pursuant to changes made in AS 11 vide Companies (Accounting Standards) Amendment Rules 2009, during current year the Company has exercised option of deferring the said charge to the profit and loss account, in respect of accounting periods commencing on or after December 7, 2006. As a result, such foreign exchange difference relating to the acquisition of depreciable capital assets have been adjusted with cost of such assets and would be depreciated over the balance life of the assets and in other cases has been accumulated in ‘FCMITDA’.

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9.4 The Ld. CIT(A) considering the submissions of the assessee and material on record directed to allow depreciation of the impugned amount on the enhanced cost. This ground was allowed. The findings of the Ld. CIT(A) in paras 15 and 16 of the Order are reproduced as under :

“15.     I have examined the ground which is legal in nature. On going through the submissions made and the case laws relied upon, it is held that the issue is fairly settled by the judgments of Hon’ble Supreme Court in CIT v. Arvind Mills Ltd. 193 ITR 255 and Maruti Udyog Ltd. 320 ITR 729. The decision of ITAT, Mumbai Bench in DDIT v. Staubil A.G. India Branch Office (ITA No. 3703/Mum/2005), a copy of which was filed squarely covers the ground in favour of the Appellant. In that case also out of foreign currency loans, assessee had acquired premises in India. Since the fixed asset was acquired by utilizing foreign currency loan and on account of currency fluctuation, the loan liability had increased; therefore, enhanced liability was added to the fixed assets. Depreciation on enhanced liability was not allowed by the AO but in first appeal, the same was allowed by the CIT (A) and the appeal before the ITAT was filed by the Department, raising the following ground :

“2. On the facts and the circumstances of the case and in law, the Id. CIT (A) erred in holding that the Assessing Officer was not justified in disallowing depreciation of Rs.18,626/- on capitalization of exchange control fluctuation arising on foreign currency borrowing from its head office relatable to fixed assets acquired in India without appreciating that section 43A is not applicable in the present case. ”

16. ITAT following the judgments in Woodward Governor India (P.) Ltd. and CIT vs. Maruti Udyog Ltd. upheld the order of CIT(A). Therefore, the AO was not justified in disallowing depreciation on enhanced cost in respect of indigenously acquired assets. It is not in dispute that section 43A is not applicable in the facts of the case. In the absence of specific provisions on the lines of section 43A, it was improper for AO to do what the Legislature did not do. For the reasons stated above, the AO is directed to allow depreciation of Rs, 1,82,76,330/- on enhanced cost of Rs.27,37,25,941/-. Hence the ground is allowed.”

9.5. The Ld. D.R. relied upon the Order of the A.O. and submitted that assessee wrongly claimed the depreciation on enhanced cost. The Ld. D.R. submitted that decision of ITAT, Mumbai Bench in the case of DDIT vs., Staubil A.G. India Branch Office [ITA.No.3703/Mum./2005] would not apply to the facts of the case.

9.6. On the other hand, Learned Counsel for the Assessee reiterated the submissions made before the authorities below. Learned Counsel for the Assessee submitted that in assessment year under appeal exchange loss of Rs.27,37,25,941/- was added to WDV and depreciation of the impugned amount was claimed. In A.Ys. 2010-2011 and 2011-2012, gain was reduced from WDV and depreciation was claimed on reduced WDV. In A.Y. 2012-2013 exchange loss of Rs.12,34,93,464/- was added to WDV and depreciation was claimed on enhanced cost. The A.O. referring to Section 43A disallowed the depreciation. In A.Ys. 2010­2011 and 2011-2012 though WDV was reduced by the exchange gain, however, incremental depreciation attributable to exchange loss of Rs.27,37,21,941/- for A.Y. 2009-2010 under appeal was allowed. In A.Y. 2012­2013 following the earlier Orders, depreciation of enhanced cost was not allowed. The Ld. CIT(A) has correctly followed the decision of ITAT, Mumbai Bench in the case of DDIT vs., Staubil A.G. India Branch Office (supra) to allow the depreciation of exchange loss observing that Section 43A was not applicable. In A.Ys. 2010-2011 and 2011-2012 following the Order for the A.Y. 2009-2010, disallowance of depreciation was deleted. In A.Y. 2012-2013, the Ld. CIT(A) did not follow the appellate orders for earlier years and upheld the disallowance of depreciation on the reasons (1) The A.O. rightly applied Section 43A and (2) In the absence of recognition of amended AS-11, assessee was not entitled to change the actual cost. He has submitted that Revenue is in appeal in A.Y. 2009-2010 on this issue, whereas assessee is in appeal for the A.Y. 2012-2013. For the A.Y. 2010-2011 the Revenue did not file any appeal for allowing depreciation. For the A.Y. 2011-2012 though the Revenue filed appeal in ITA.No.3564/2015, but, the Revenue appeal was dismissed on 21.10.2019 on account of low tax effect. Copy of the Order is placed on record. Learned Counsel for the Assessee submitted that the Ld. CIT(A) correctly followed the decision of ITAT, Mumbai Bench in the case of DDIT vs., Staubil A.G. India Branch Office (supra). Accounting Standard-11 is also applicable in the present case. The amended Rules called Companies [Accounting Standards] Amended Rules as referred to before the authorities below also applied to the facts of the case. Section 43A would not apply to the facts of the case because it applies to the fact when the assets are acquired from a Country outside India and that it does not apply to acquisition of indigenous assets. Learned Counsel for the Assessee relied upon the following decisions :

9.6.1.   Cooper Corporation (P) Ltd., vs., DCIT [2016] 159 ITD 165 (Pune) in which it was held as under :

“A bare reading of the aforesaid provision of Section 43A, which opens with a non obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that S.43A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/losses arising at the time of making payment. It therefore deals with realised exchange gain/loss. The treatment of unrealised exchange gain/loss is not covered under the scope of S. 43A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines etc.,”

9.6.2.   Order of ITAT, Cochin Bench in the case of MFAR Hotels & Resorts Ltd., vs., ACIT ITA.No.63/Coch/2015, Dated 16.03.2018 in which it was held as under :

“6.9.    In the present case, though the assessee took the plea before the lower authorities that AS-11 is applicable, the lower authorities has not at all examined it and straightaway applied the provisions of sec. 43A. In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out of foreign currency loans. Hence, the Assessing Officer has to bifurcate the foreign exchange fluctuation in respect of foreign currency loan used for assets acquired outside India and the indigenous assets and apply provisions of sec. 43A or AS-11(2003) accordingly.”

9.6.3.   Order of ITAT, Visakhapatnam Bench in the case of DCIT vs., Maddi Lakshmaiah & CO. Ltd., [2017] 166 ITD 69 (Vizag) in which it was held as under :

14. The provisions of section 43A of the Act, deals with treatment of changes in rate of exchange of currency, where an assessee has acquired any asset, in any previous year from a country outside India for the purpose of business or profession, and in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or decrease in the liability of the assessee as expressed in Indian currency at the time of making payment towards the whole or a part of the cost of the asset or towards repayment of the whole or a part of the monies borrowed by him from any person, directly or indirectly in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any shall be adjusted to the cost of the asset. A plain reading of section 43A of the Act, makes it clear that the said provisions is applicable only when the assessee has acquired an asset from a country outside India for the purpose of its business or profession. The said section does not apply when the asset is acquired in India. Therefore, to apply the provisions of section 43A of the Act, to deal with changes in the rate of exchange of currency, one has to understand whether the said asset has been acquired within India or outside India and the assessee has borrowed any money from any person for the purpose of acquisition of any asset from a country outside India.”

9.6.4.   The Learned Counsel for the Assessee, therefore, submitted that the Ld. CIT(A) has correctly allowed depreciation in favour of the assessee.

10. We have considered the rival submissions. The assessee explained before the authorities below that in assessment year under appeal, the assessee had capitalized a sum of Rs.27,37,25,941/- on account of exchange rate fluctuation in respect of machineries bought in India from the foreign funds raised through FCCBs. No repayment of loan by way of FCCBs was made during the year under appeal. However, increase in any liability on account of prevailing exchange rate was shown in the balance-sheet under the Head “Unsecured Loans” the fluctuations to the extent of acquisition of fixed assets in India by utilising FCCBs was added to the actual cost and depreciation charged thereon. Thus, the assessee purchased the machinery in India from the foreign funds through FCCBs which fact is not disputed by the authorities below. It is, therefore, clear that though Section 43A apply to the assets acquired from Abroad, still the A.O. without justification applied Section 43A for making the disallowance of depreciation against the assessee. Section 43A thus could not apply in the case of the assessee which is also held by various Benches of the Tribunal in the decisions quoted above. Accounting Standard-11 would also apply in the case of the assessee. The assessee has also explained that Companies Amendment Rules also apply to the facts of the case because option is given to assessee and it provided “Where long term foreign currency monetary items relates to acquisition of depreciable capital asset, the same shall be added/deducted from the cost of the asset and shall be depreciated accordingly over the balance life of the asset.”. It is not in dispute that assessee followed AS-11 regularly. In A.Y. 2010-2011 the Ld. CIT(A) allowed similar claim of the assessee, but, the Department did not file any appeal against the same Order. In A.Y. 2011-2012 though the Department filed appeal before the Tribunal on this issue on allowing depreciation, but, the same has been dismissed vide Order Dated 21.10.2019 (supra). Thus, the Ld. CIT(A) was bound to follow rule of consistency and should not have taken a contrary view in A.Y. 2012-­2013. We rely upon the Judgments of the Hon’ble Supreme Court in the case of Radhasoami Satsung 193 ITR 321 (SC) and Excel Industries Ltd., 358 ITR 295 (SC). The assessee has also followed Companies Rules, 2009 because it has given option to the assessee to do so. The decision of Mumbai Bench in the case of DDIT v. Staubil A.G. India Branch Office (supra), relied upon by the Ld. CIT(A) is on identical facts. Therefore, there is no infirmity in the Order of the Ld. CIT(A) in following the same. It may also be noted here that wherever there was an exchange gain to the assessee, the same was reduced from the WDV and claim was made accordingly, therefore, assessee is following the AS-11 consistently and as such the same should not have been disputed by the authorities below. The Ld. D.R. has not pointed-out any infirmity in the Order of the Ld. CIT(A) in allowing the depreciation to the assessee as per Law. We, therefore, do not find any merit in this Ground No.2 of the appeal of the Revenue and the same is accordingly dismissed.

11. In the result, Ground No.2 of the appeal of the Revenue is dismissed.

12. Ground No.3 of the appeal of the Revenue reads as under :

“3. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of Rs. 56,28,605/-in returned loss of the exempted unit u/s 10B ?”

12.1. The assessee is aggrieved before the Ld. CIT(A) for denial of carry forward loss in its 100% Export Oriented Unit [EOU] at Chopanki, Bhiwandi (Rajasthan). The A.O. relying upon the Order for the preceding assessment year i.e., 2008-2009 did not allow carry forward of business losses. The assessee in the written submissions has submitted that the assessee is a 100% EOU at Chopanki, Bhiwandi (Rajasthan) which is registered as EOU [Noida Special Economic Zone] and is eligible for deduction under section 10B of the I.T. Act, 1961. The unit become operational in A.Y. 2008-2009. For the previous year relevant to A.Y. 2009-2010, the unit suffered loss of Rs.2,45,32,014/- which was carried forward as “business loss”. It was also submitted that in A.Y. 2008-2009 the Tribunal vide Order Dated 18.05.2012 has allowed similar claim of assessee following the decision of Hon’ble Bombay High Court. The Ld. CIT(A) following the same allowed the claim of assessee and the operative portion of the Order of the Ld. CIT(A) in paras 20 and 21 of the Order are reproduced as under :

“20. It was submitted that for the preceding assessment year i.e. 2008-09 A.Y., ITAT by the order dated 18.5.2012, in ITA No. 3901 /Del/2011 has held that the Appellant was right in carrying forward the loss of Chopanki unit. In allowing the appeal for assessment year 2008-09, the ITAT followed the decision of Bombay High Court in CIT v. Galaxy Surfactants Ltd. [2012] 343 ITR 108.

21. Respectfully following the decision of ITAT in appellant’s own case for the assessment year 2008-09, the AO is directed to allow carry forward of loss of Rs.2,45,32,014/- of Chopanki unit as business loss. It is not a case, where losses of non eligible unit or units are being set off against the profit of eligible unit. The issue whether section 10A is exemption provision deduction provision is of no relevance. Insofar as, carry forward of loss of unit eligible to deduction under section 10B is concerned the amendment made by the Finance Act, 2003 to subsection (6) with retrospective effect from 01.04.2001 specifically provide for carry forward of losses of 100% EOU. There is no merit in the reason that since section 10B is in the nature of exemption, therefore, benefit of carry forward is not available. The specific mandate of the law, as amended by Finance Act, 2003 which specifically provide for carry forward of losses of unit eligible for deduction u/s 10B cannot be overlooked. The reason of the AO would nullify the amendment of sub-section (6) of section 10B of the Act, which is not permissible. Assessing Officer had only reduced returned loss by Rs.56,28,605/-being the loss of Chopanki Unit eligible for deduction u/s 10B after excluding depreciation on capitalization of exchange fluctuation. Hence, addition of Rs. 56,28.605/- in returned loss is deleted and loss of Chopanki Unit is not to be separately carried forward but as part of loss from other units only. This ground of appeal is hence allowed.”

12.2. The Ld. D.R. fairly stated that the issue is covered by the Order of the Tribunal for the A.Y. 2008-2009.

12.3.    On the other hand, Learned Counsel for the Assessee submitted that ultimately the matter in issue have been decided by the Hon’ble Supreme Court in the case of CIT vs., Yokogawa India Ltd., [2017] 391 ITR 274 [SC] in Reference to Assessee’s SLP(C) No.18157/2015 as referred in para-14 of the Order which is reproduced as under :

“14. The difference between the two expressions ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e., immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal Nos.8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units.”

12.3.1. Learned Counsel for the Assessee submitted that in the aforesaid decision of the Hon’ble Supreme Court it is made clear that findings under section 10A would be applicable to the cases governed by provisions of Section 10B of the I.T. Act and it was a group appeals which have been decided by the Hon’ble Supreme Court by holding that deduction under section 10A/10B is to be allowed while computing the gross total income and not at the stage of computation of total income in Chapter-VI of the I.T. Act dealing in the aggregation of the income set-off or carried forward of the loss. Learned Counsel for the Assessee, therefore, submitted that issue is covered by Order of ITAT for the A.Y. 2008-2009 in the case of same assessee and ultimately decided by the Hon’ble Supreme Court in the case of CIT vs., Yokogawa India Ltd., (supra), in which in para-18 held as under :

“18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross^ total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly.”

12.3.2. In view of the above facts and that when the Tribunal has allowed similar claim of assessee in preceding A.Y. 2008-2009 and ultimately in group appeals, the Hon’ble Supreme Court has allowed the claim of assessee, the issue is covered by the aforesaid decisions in favour of the assessee which fact is also accepted by the Ld. D.R. Therefore, there is no infirmity in the Order of the Ld. CIT(A) in allowing the claim of assessee. Ground No.3 of the appeal of the Revenue stand dismissed.

12.4. There is no other issue involved in the Departmental Appeal. The Departmental Appeal stands dismissed.

13. In the result, ITA.No.1433/Del./2014 for the A.Y. 2009-2010 of the Department dismissed.

C.O.No.200/Del./2017 in ITA.No.1433/Del./2014
A.Y. 2009-2010 [M/s. K.E.I. Industries Ltd., New Delhi].

14. The assessee in the cross objection has raised the following ground :

“That on the facts and circumstances of the case and in law, foreign exchange fluctuation loss of Rs.27,37,25,941/- was allowable deduction under section 37 of the Act. Hence the Appellant is entitled to relief of Rs.27,37,25,941/-.”

14.1. The cross objection is time barred. Learned Counsel for the Assessee submitted that this cross objection is connected with Ground No.2 of the Departmental Appeal and alternative claim is made by assessee for claiming deduction under section 37 in case Ground No.2 in Departmental Appeal is decided against the assessee. He has submitted that in case findings of Ld. CIT(A) are maintained, the cross objection of the assessee would stand infructuous and may be disposed of accordingly. Learned Counsel for the Assessee, therefore, submitted that since alternative claim was raised in the cross objection because of the different views taken and issue was not examined deeply, therefore, assessee preferred to file cross objection for final settlement of the issue and as such delay in filing the cross objection may be condoned.

14.2. Considering the facts of the case as explained above and the legal issue raised in the cross objection which is connected with Ground No.2 of the Departmental Appeal, we condone the delay in filing the cross objection which is an alternative claim made by assessee.

14.3. Since we have dismissed Ground No.2 of the Departmental Appeal, therefore, the cross objection becomes infructuous and is accordingly dismissed.

15. In the result, C.O.No. 200/Del./2017 of the Assessee dismissed.

C.O.No.34/Del./2019 in ITA.No.3564/Del./2015
A.Y. 2011-2012 [M/s. K.E.I. Industries Ltd., New Delhi].

16. In this cross objection the assessee has raised the following ground :

“That on facts and circumstances of the case and in law, Commissioner of Income tax (Appeals)-5, New Delhi did not appreciate that exchange difference relatable to acquisition of indigenous depreciable assets was on revenue account. Accordingly, fluctuation gain of Rs.1,12,30,905/- relatable to acquisition of such assets was liable to be taxed as income.”

16.1. The cross objection is time barred. In the present case, the appeal of Revenue has been dismissed in ITA.No.3564/Del./2015 vide Order Dated 21.10.2019. Learned Counsel for the Assessee submitted that Cross Objection was filed subsequently to make an alternative claim and is depending upon the issue raised in the Departmental appeal for A.Y. 2009-2010 on Ground No.2.

16.2.    Since we have dismissed the Departmental Appeal for the A.Y. 2009-2010, therefore, cross objection of the assessee becomes infructuous. The delay in filing the cross objection is however condoned.

17. In the result, C.O.No.34/Del./2019 of the Assessee dismissed.

ITA.No.528/Del./2016 – A.Y. 2012-2013

[M/s. K.E.I. Industries Ltd., New Delhi].

18. This appeal by Assessee has been directed against the Order of the Ld. CIT(A)-5, Delhi, Dated 23.12.2015 for the A.Y. 2012-2013.

19. Learned Counsel for the Assessee did not press Ground No.1 which is general. The same is stand dismissed as not pressed.

20. Ground Nos.2 to 2.5 reads as under :

“2. That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the disallowance of depreciation of Rs.3,90,96,306/- on account of exchange fluctuations on the assets acquired in India from the funds raised through foreign currency convertible bonds [FCCBs].

2.1. That on the facts and circumstances of the case and in law, the CIT(A) in upholding the disallowance of depreciation of Rs.3,90,96,306/-has erred in not following the orders of her predecessor in office.

2.2. That on the facts and circumstances of the case and in law, the CIT(A) has erred in holding that in view of section 43(1) read with Explanation 8 thereto and section 43A of the Act, the Appellant was not entitled to depreciation on exchange fluctuations even on the assets acquired in India. 2.3. That on the facts and circumstances of the case and in law, the CIT(A) has erred in not appreciating that the provisions of section 43A were not applicable to the indigenous assets acquired out of FCCB’s brought in to India.

2.4. Without prejudice, on the facts and circumstances of the case and in law, in case exchange fluctuations on FCCB’s brought in to India is held to be covered by section 43(1) read with Explanation 8 thereto, the Appellant be allowed deduction under section 36(l)(iii) of the Act.

2.5. That on the facts and circumstances of the case and in law, the CIT(A) has erred in holding that amended AS-11 was not applicable for the same has not been recognized by the Act.”

21. Learned Counsel for the Assessee submitted that this issue is same as have been decided in A.Y. 2009-2010 in Departmental Appeal on Ground No.2, which fact is not disputed by the Ld. D.R. Since in A.Y. 2009-2010 we have dismissed Departmental Appeal on Ground No.2, therefore, there were no reason for the Ld. CIT(A) to take a contrary view in A.Y. 2012-2013 on identical facts. In view of the above, following the reasoning given in A.Y. 2009-2010 (supra), we set aside the Orders of the authorities below and allow the claim of assessee for depreciation.

21.1. In the result, Ground Nos. 2 to 2.5 of the Assessee are allowed.

22. Ground No.3 reads as under :

“3. That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the addition of Rs.24,48,822/- under section 14A of the Act and to the book profits under section 115JB of the Act.”

22.1. On Ground No.3, assessee has contested the addition to the book profit under section 115JB of an amount of Rs.24,48,822/- under section 14A of the I.T. Act. The addition was made by virtue of clause (f) of Explanation-1 to Section 115JB of the Act. According to assessee this issue is no longer resintegra. In the past also, no adjustment on this amount has been made by the A.O. although the assessee has been receiving dividend regularly. The Ld. CIT(A) noted that assessee has received dividend income of Rs.2,37,896/- during assessment year under appeal. As in the past years, the assessee offered to tax a sum of Rs.24,48,822/- as expenditure incurred in relation to exempt income under section 14A read with Rule 8D which comprise of interest disallowance of Rs.22,94,735/-as per Rule 8D(2)(ii) and a sum of Rs.1,54,087/- as indirect expenditure @ 0.5% of the average disallowance as per Rule 8D(2)(iii). The disallowance offered was in accordance with the tax audit report. The return of income was filed taking this computation into account to disclose the gross business loss of Rs.15,29,06,907/- for the impugned year. Thus the addition made by the A.O. under section 115JB of the Act was found to be correct and this ground was dismissed. The additional ground raised by the assessee with regard to addition under section 14A was also rejected.

22.2. Learned Counsel for the Assessee as regards the impugned addition made to the book profit under section 115JB of the Act submitted that the issue is covered by the Order of ITAT, Delhi Special Bench in the case of ACIT vs., Vireet Investment Pvt. Ltd., [2017 ]82 taxmann.com 415 (SB) (Del.-Tribu.)in which the issue was “Whether the expenditure incurred to earn exempt income computed under section 14A could not be added while computing the book profit under section 115JB of the Act.” He has submitted that the Special Bench in its para 6.22 decided the issue in favour of the assessee by holding as under :

“6.22.  In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause( f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated u/s 14A read with Rule SD of the Income-tax Rules, 1962.”

22.3. Learned Counsel for the Assessee, therefore, submitted that the issue is covered in favour of the assessee by the above decision of the Tribunal.

22.4. The Ld. D.R. has not disputed the above contention of the assessee.

23. Considering the above, it is clear that an identical issue have been decided by the Tribunal Delhi Special Bench in favour of the assessee that no addition could be made of such nature while computing the book profit under section 115JB of the I.T. Act. Therefore, the issue is covered in favour of the assessee by the above decision of the Special Bench. Following the same, we set aside the Orders of the authorities below and delete the addition of Rs.24,48,822/- under section under section 124A of the I.T. Act.

23.1. In the result, Ground No.3 of the appeal of the Assessee allowed.

24. Ground No.3.1 reads as under :

3.1. That on the facts and circumstances of the case and in law, the CIT(A) has erred in not appreciating the disallowance under section 14A cannot exceed the exempt income.”

24.1.  On Ground No.3.1, assessee contended that the Ld. CIT(A) has erred in not appreciating that disallowance under section 14A cannot exceed the exempt income. Learned Counsel for the Assessee in support of the above ground relied upon Judgments of the Hon’ble Delhi High Court in the case of ACB India Ltd., vs., ACIT [2015] 374 ITR 108 (Del.) and Pr. CIT vs., M/s. Caraf Builders & Constructions (P.) Ltd., [2019] 414 ITR 122 (Del.).

24.2. The Ld. D.R. also submitted that the issue is covered in favour of the assessee by the above decisions.

25. We have considered the rival submissions of both the parties. It is an admitted fact that in assessment year under appeal assessee has received dividend income of Rs.2,37,896/-. In the case of Joint Investments Pvt. Ltd., vs., CIT 372 ITR 694 (Del.) (HC) the Hon’ble Delhi High Court held that “by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by assessee in relation to the tax exempt income.” This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” It is, therefore, well settled Law that disallowance cannot exceed the exempt income. We, therefore, set aside the Orders of the authorities below and direct the A.O. to restrict the disallowance to Rs.2,37,896/- only.

25.1. In the result, Ground No.3.1 of the appeal of the Assessee is allowed.

26. In the result, ITA.No.528/Del./2016 of the Assessee partly allowed.

27. To sum-up, Departmental Appeal and both the cross objections of the Assessee are dismissed and appeal of the Assessee partly allowed.

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