Income Tax Appellate Tribunal – Hyderabad
Dy.Cit, Cir-1(2), Hyderabad vs M/S Cuntry Club (I) Limited,, … on 22 May, 2018 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A”, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No. 1689/Hyd/2012 Assessment Year: 2009-10 M/s Country Club vs. Asst. CIT, Circle-1(2),
Hospitality & Holidays Ltd., Hyderabad.
(Formerly Known as
Country Club India Ltd.,)
Hyderabad. PAN – AAACC8276B (Applicant) (Respondent) ITA No. 1735/Hyd/2012 Assessment Year: 2009-10 Asst. CIT, Circle-1(2), M/s Country Club
Hyderabad Hospitality & Holidays Ltd., (Formerly Known as Country Club India Ltd.,) Hyderabad. PAN-AAACC8276B
(Applicant) (Respondent) Assessee by : Shri P. Murali Mohan Rao Revenue by : Dr. K. Srinivas Reddy Date of hearing : 21-02-2018 Date of pronouncement : 22-05-2018 ORDER
PER P. MADHAVI DEVI, J.M.:

Both are cross appeals of the assessee as well as the revenue against the order of the Ld. CIT(A)-2, Hyderabad
2 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
dated 18.09.2012. In the assessee appeal, the assessee has raised the following grounds of appeal.

“1. That the Order of the learned m (A) is not only erroneous both on f acts and in law but is perverse.

2. That the learned m (A) erred in upholding the addition of Rs. 1,42,84,760/disallowed under the Provisions of S. 40A(3) of the IT Act, 1961 which is not correct and not justif ied.

3. That the expenditure of Rs. 1,42,84,760/- has been incurred in cash for purchase of items such as vegetables, fruits, dairy, poultry, milk and other sundry expenses from the small vendors who do not have any bank account and hence could not be paid in cheques / through banking channel. Hence, disallowance u/s. 40A(3) is not called f or.

4. That the assessee company is running hotel business and the company is having 40 branches all over India the above amount of expenditure Rs. 1,42,84,760/- could not be paid in cheques / through banking channel as the parties to whom the payments were made has objected f or the payment of cheques as there is no banking f acility nearby.

5. The Appellant prays that the amount has been paid during the course of the business purpose only. Hence, disallowance u/s. 40A(3) is not correct.
6. That S. 40A(3) has been introduced to curb the black money and bogus transaction only and not to trouble the honest tax payers. In the instant case, the disallowance u/s. 40A(3) is not correct and hence may please be deleted.

7. That learned CIT(A) has given a direction to the AO to verif y the payments made f or TDS not deducted cases. As nothing is outstanding as payable at the end of year, the amount cannot be disallowed u/s. 40(a)(ia) of Rs. 5,03,20,862/- in the light of the decision of the Special Bench of Hon’ble ITAT, Vizag in the case of M/s Merilyn Shipping & Transports Vs ACIT, ITA No 477/Viz/2008.

8. That the provisions of section 40(a)(ia) of the Act is applicable only to expenditure which is payable on 31” March of every year and cannot be invoked to disallow the amounts which are already been paid during the previous year.
3
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
9. That the learned CIT(A) has not given a speaking order and
specif ic allowances not conf irmed.

10. That the learned CIT(A) erred in upholding the disallowance
u/s. 43B of Rs. 25,35,314/- which is not correct and not
justif ied.

11. That the learned CIT(A) erred in upholding the disallowance
towards FCCB expenditure of Rs. 7,30,66,667/- which is not
correct and not justif ied.

12. That during the f inancial year 2006-07, the Appellant
Company (Country Club (India) limited) has raised long term
funds f rom international Market by issuing Foreign Currency
Convertible Bonds worth USD 25 million, which is having the
convertible option to equity shares or repayment of bonds af ter
Five Years.

13. That during the f inancial year 2008-09 the company has
incurred f oreign exchange loss of as, 21,92,00,000/- on Foreign
Currency Convertible Bonds due to fluctuation of exchange
currency.

14. That the Appellant Company has restated the Bonds at the
exchange rates prevailing at the year end and the difference out
of such restatement is transf erred to “Foreign Currency
Monetary Item Translation Difference Account, to be written off
over a period of 3 years.”

15. That the learned C!T(A) f ailed to appreciate that the
Appellant Company has transf erred 1/3 of the difference
amount to prof it and Loss Account under the head Gain/Loss
account during the Financial Year 2008-09 by f ollowing the
notif ication issued by Ministry of Corporate affairs on 31″ march
2009 Vide notif ication No. G.S.R. 225(E) regarding f oreign
exchange loss which is not correct and not justif ied.

16. That the notif ication No. G.S.R. 225(E) clarif ies that
companies can debit to prof it and losses account, all f oreign
exchange losses which were incurred during the f inancial year
2008-2009 due to f luctuation of foreign currency and,
companies can avail this benef it till 31 s t March 2011. Hence,
disallowance In this regard is not correct.

17. In view of the above notif ication FCCS are not capital
nature, it is revenue nature because it has not been converted in
to equity share capital. Hence, f oreign exchange loss which has
been written off to prof it and loss A/c over a period of three
years shall be considered as revenue nature.
4
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
18. That the learned CIT(A) ought to have considered that in previous Financial Year, (i.e. 2007-08) the Appellant Company has offered an income of Rs. 7,08,20,000/- which came from foreign exchange f luctuation and would have allowed the loss on f oreign exchange which is debited to prof it and loss A/c in the f inancial year 2008-09 of Rs. 7,30,66,667/-.

19. That the Appellant craves leave to add, to alter, or amend any of the af orementioned Grounds of appeal”.

1.1 Further, vide letter dated 18.09.2017, the assessee has raised the following additional grounds of appeal:

20. As per the ratio laid down by the Hon’ble Supreme Court of India in the case of National Thermal Power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the ITAT has jurisdiction to examine the question of law though not arisen before the CIT (A) but h7isen before the IT AT for the f irst time.
21. The Ld. CIT (A) ought to have allowed the grounds of appeal in respect of addition made u/ s 40(a)(ia) of the Act without direction to the AO to verif y, since the assessee has not been treated as an assessee in def ault u/ s 201(1) of the Act and no proceedings have been initiated in this regard.

22. The Ld AO ought to have appreciated that the provisions of section 1941 are not applicable to payments made of Rs. 10,34,375/- towards Rent a/ c.

23. The Ld AO ought to have appreciated that the provisions of section 1941 are not applicable to payments made of Rs. 25,45,575/- towards Furniture Hire charges.

24. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 31,92,307/- towards Advertisement-Hoardings.

25. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 75,48,367/- towards Advertisement-Newspaper & Periodicals.

26. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 12,55,745/- towards Advertisement-Sign Boards.

27. The Ld AO ought to have appreciated that the provisions of section 194C are not applicable to payments made of Rs. 42,00,984/- towards Advertisement-TV.
5
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
28. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
13,45,954/- towards Advertisement-0thers.

29. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
18,74,353/- towards Business promotion expenses.

30. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
6,30,770/- towards Dry Cleaning Expenses.

31. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of
Rs.8,56,234/- towards Postage & courier charges.

32. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
4,55,600/- towards Recruitment expenses.

33. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
53,84,615/- towards House keeping maintenance.

34. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
13,81,000/- towards Generator maintenance.

35. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
87,99,923/- towards Club maintenance.

36. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
47,54,560/ – towards telephone charges.

37. The Ld AO ought to have appreciated that the provisions of
section 194C are not applicable to payments made of Rs.
52,50,500/- towards printing & stationery .

38. The Ld AO erred in provoking the provisions of section 40(a)
(ia) without appreciating the f act that payments made are not
covered by provisions of chapter XVII-B of the Act.

39. The Ld. AO ought to have appreciated the f act that the
receiver of the interest i,e. payee, who is resident has offered
the same as income in its return of income f or the respective
financial year and therefore, the assessee cannot be treated as
assessee in def ault.
6
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
40. The AO ought to have appreciated the f act that second proviso to section 40(a)(ia) is curative in nature and has retrospective effect from 01.04.2005 from the date in which sub- clause i.e.. 40(a) was inserted by Finance Act.

41. The appellant may add or alter or amend or modify or substitute or delete or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal.

2. Brief facts of the case are that the assessee was known as Country club India Ltd., and both the assessment order, as well as CIT(A) order were passed in the said name only. Subsequent to the order of the CIT(A), the assessee changed its name to Country Club Hospitality and Holidays Ltd., and the same was incorporated in ROC w.e.f 02.11.2014. The assessee has, thus filed revised Form No. 36 in the changed name and has raised the grounds of appeal. At the time of hearing, Ld. Counsel for the assessee submitted that the assessee does not wish to press the additional grounds of appeal Nos. 22 to 37 and therefore they are rejected as not pressed. Additional ground of appeal No. 20 is an argument in favour of admission of additional grounds while ground of appeal No. 21 is a legal ground and all the facts relating to this ground are on record. Therefore, this ground is admitted and we proceed to dispose the appeal of the assessee as under.
7
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
3. As regards grounds No. 2 to 6 relating to disallowance u/s 40A(3) of the IT Act, we find that similar issue had arisen in the assessee’s own case for the A.Y 2008-09 and ‘A’ Bench of this Tribunal (to which both of us are signatories) has considered the issue at length at para 4 to 7 of its order has held as under, which is reproduced hereunder, for the sake of ready reference.
“4. Brief f acts of the case relating to Ground No.2 are that the assessee company, which is in the business of running clubs and hospitality, f iled its return of income for the A.Y 2008-09 on 26.09.2008 declaring income of Rs.89,61,93,030. The return was processed on 9.2.2010 raising a demand of Rs.7,24,50,170/-. Subsequently, the assessment was picked up for scrutiny u/s 143(3) of the Act and various details were called for from the assessee. The details were f iled on 30.12.2010. AO u/s 133(6) of the Act, obtained the copies of bank A/c statements of the assessee, which revealed that the assessee has made payments through bearer cheques in excess of Rs.20,000/- in violation of section 40A(3) of the Act. He arrived at the total sum of Rs.1,33,68,613 as paid in violation of section 40A(3) of the Act and he accordingly disallowed the same. Aggrieved, the assessee pref erred an appeal bef ore the CIT (A) who conf irmed the addition by holding that the assessee has not produced any evidence in support of its contention that the payment in question were below Rs.20,000 on different dates and that there was no violation of section 40A(3) of the Act. The assessee is in second appeal bef ore us.

5. The learned Counsel for the assessee has raised f urther an alternative argument before us that out of the total payments made in cash/bearer cheques, main payments are made to the employees of the assessee and therefore, they are not covered by the provisions of section 40A(3) of the Act. He also drew our attention to the details of the payments at Pages 8 to 12 of the paper book f iled by him and submitted that all these details were f iled bef ore the authorities below, but they have not looked into and have not verif ied them. Thus, he requested that the AO may be directed to verify and allow the same.
8
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
6. The learned DR, on the other hand, supported the orders of the authorities below.

7. Having regard to the details of the payments made in cash, we f ind that some of the payments are to the employees of the assessee company. We f ind that any payment made by a company to its employees f or incurring expenditure on its behalf for business of the company, cannot be disallowed u/s 40A(3) of the Act. Therefore, we deem it f it and proper to remit the issue to the f ile of the AO for verif ication of the above contention of the assessee and on verif ication if it is found that the payments are to the employees for meeting the expenditure of the assessee company, the AO shall not make any disallo wance u/s 40A(3) to such an extent. Thus, Ground of appeal No.2 is treated as partly allowed for statistical purposes.

3.1 Respectfully following the same, we remand this issue also to the file of the A.O for verification and if it is found that payments are to the employees of the assessee company for meeting the expenditure of the assessee company, then the A.O shall not make any disallowance u/s 40A(3) of the IT Act to such an extent. The grounds of appeal No. 2 to 6 are accordingly treated as partly allowed for statistical purposes.
4. As regards grounds No. 7 to 9, we find that similar issue had arisen in the assessee’s own case for the A.Y 2008-09 and that the ground of appeal raised by the revenue in its appeal for the A.Y 2009-10 is also similar to the grounds raised by the revenue for the A.Y 2008-09 which has been considered by the Tribunal and the
9 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
Tribunal dealt with the issue at paras 8 to 12 which are reproduced hereunder for ready reference:
“8. As regards Grounds of appeal Nos.3 to 6, brief f acts are that on verif ication of the details f iled by the assessee, the AO observed that the assessee has not made TDS from various payments totaling to Rs.5,21,75,632. He therefore, disallowed the same u/s 40(a)(ia) of the Act. On appeal, the CIT (A) has deleted the disallowance with a direction to the AO to verif y whether the payment towards the expenditure, was actually paid or payable and to allow the same if it is f ound to have been actually paid, before 31st of March i.e. the end of the relevant accounting year. For giving such a direction, the CIT (A) followed the decision of the Special Bench of the ITAT, Visakhapatnam in the case of Merilyn Shipping & Tran sport vs. ACIT in ITA No.477/Viz/2008. The AO, while passing the consequential order, has verif ied the details and has allowed relief to the extent of Rs.5,01,61,399/-. In the grounds of appeal, the assessee’s argument is that the CIT (A) ought to have deleted the disallowance by himself , instead of directing the AO to verif y the claim of the assessee. Further, in the additional ground of appeal No.10, the assessee is claiming that if the assessee has not been treated as an “assessee in default” u/s 201(1), no disallowance u/s 40a(ia) can be made.

9. We f ind that the Hon’ble Supreme Court in the case of Palam Gas Service vs. CIT reported in (2017) 81 Taxmann.com 43 (S.C) has held that irrespective of the amount being paid, the same is disallowable u/s 40a(ia) if no TDS has been made. Theref ore, the decision of the CIT (A) on this point has to be set aside. In such circumstances, the alternate plea of the assessee assumes importance.

10. The learned Counsel for the assessee has placed reliance upon the decision of the Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd vs. CIT, reported in (163 Taxmann.355) wherein the Hon’ble Supreme Court was considering the case of the assessee who was considered as an assessee in def ault u/s 201(1) and interest u/s 201(1A) was also made. The Hon’ble Supreme Court has held that the assessee therein, cannot be treated as “as assessee in default” u/s 201(1), if the recipient has offered the income and has paid the taxes thereon. However, with regard to the interest u/s 201(1A), the Hon’ble Supreme Court has held that the same is payable till the date of payment of taxes by the deductee
10 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
assessee. He submitted that in the case of the assessee bef ore
us, the recipients of the payment, have already offered the
income in their hands and theref ore, the assessee cannot be
treated as “as assessee in def ault”. Further, the learned
Counsel f or the assessee also argued that by virtue of the
second proviso to section 40(a)(ia), where the assessee is not
deemed to be “an assessee in def ault” under the provisions of
sub-section 201 (1), then for the purpose of this sub-clause i.e.
40a(ia), it shall be deemed that the assessee has deducted and
paid the tax on such sum on the date of furnishing returned
income by the recipient. By referring to the said proviso, he
submitted that though this proviso has been inserted by
the Finance Act of 2013, various Benches of the Tribunal have
held this proviso to be clarif icatory in nature and applicable
retrospectively. He placed reliance upon the decision of the
Hon’ble Delhi High Court in the case of CIT vs. Ansal Land
Mark Township reported in 61 Taxman.com 45 (Del.) in support
of this contention. He theref ore, submitted that since the
assessee has not been treated as an “Assessee in Def ault” u/s
201(1) of the Act, it is to be presumed that the recipients have
offered the said income to tax and in such circumstances, no
disallowance u/s 40a(ia) is to be made.

11. The learned DR however, supported the order of the
authorities below.

12. Having regard to the rival contentions and the material on
record, we f ind that the Hon’ble Delhi High Court in the case
of CIT vs. Ansal Land Mark Township (Supra) has considered
the applicability of the second proviso to section 40a(ia) and
has held to be declaratory and curative and to have
retrospective effect from 1.4.2005. The assessment order bef ore
us is the A.Y 2008-09. The relevant provision is reproduced
hereunder for ready ref erence:

“[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid af ter the due date specif ied in sub-section (1) of section 139, [thirty per cent of ] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :] [Provided further that where an assessee f ails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in def ault under the f irst proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be
11 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad. deemed that the assessee has deducted and paid the tax on such sum on the date of f urnishing of return of income by the resident payee referred to in the said proviso.]”

In view of the above provision and since the assessee has not been treated as an “assessee in def ault” u/s 201(1) of the Act, we hold that no disallowance u/s 40a(ia) can be made. The assessee’s additional ground of appeal No.10 is accordingly treated as allowed for statistical purposes”.
4.1 Respectfully following the same, this ground of appeal of the assessee is also remitted to the file of the A.O with similar directions and the grounds are treated as allowed for statistical purposes and revenue’s appeal is also treated as allowed for statistical purposes.
5. As regards Ground No. 10, we find that similar issue had arisen in the assessee’s own case for the A.Y 2007-08 and the coordinate Bench of the Tribunal has considered the issue at paras 13 to 15 of its order. For the sake of ready of reference, the same is reproduced hereunder:
“13. As regards the grounds of appeal No.7 against the disallowance u/s 43B of the Act of the payments made towards APGST, VAT, ESI, Professional Tax Payable amounting to Rs.25,35,314 is concerned, brief facts are that the assessee had shown these amounts as outstanding at the end of the previous year and therefore, the AO made the disallowance. The CIT (A) also conf irmed the said disallowance holding that the assessee has not substantiated the claim and has not brought out any evidence to prove that the payment, in question, were made within the time specif ied as per the provisions of section 43Bof the Act. The learned Counsel for the assessee submitted that the assessee has not debited these amounts to the P&L A/c and
12 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad. has not claimed the same as expenditure and hence they cannot be disallowed u/s 43B of the Act. He has drawn our attention to the details of the outstanding liabilities at pages 6 to 7 of the Paper Book wherein these amounts are shown as payable and submitted that these details were also filed bef ore the AO, who has not verif ied the same. He submitted that the opening balances from the earlier years are being added as income of the relevant A.Y and prayed f or deletion of the addition.

14. The learned DR was also heard.

15. We f ind that at pages 6 & 7 of the paper book f iled by the assessee are the copies of the trial balance as on 31.03.2008 showing the outstanding expenses and provisions. The amounts disallowed by the AO are the statutory provisions made by the assessee. The assessee’s contention that these amounts have not been debited to the P&L A/c needs verif ication. Theref ore, we deem it f it and proper to remit this issue to the f ile of the AO for verif ication of the assessee’s claim and if the assessee has not debited the same to the P&L A/c, then no disallowance should be made u/s 43B of the Act. This ground of appeal is treated as allowed for statistical purposes.

5.1 Respectfully following the decision of the Coordinate Bench of the Tribunal, the issue is set aside to the file of the A.O for verification of the assessee’s claim and if the assessee has not debited the same to profit and loss account, then the A.O shall not make any disallowance u/s 40(3)B of the Act. This ground of appeal is thus treated as allowed for statistical purposes.
6. As regards Grounds No. 11 to 18 are concerned, brief facts are that, during the F.Y 2006-07, the assessee company has raised term funds from international market by issuing Foreign Currency Convertible Bonds (FCCBs)
13 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
worth USD 25 Millions, which is having the convertible option to equity shares or repayment of bonds after 5 years. During the financial year relevant to the assessment year before us, the assessee stated that due to fluctuation of exchange currency, the company has incurred foreign exchange loss of Rs. 21,92,00,000/- on foreign currency convertible bonds (FCCB) and therefore the company has restated the bonds at the exchange rates prevailing at the year end and the difference is transferred to ‘Foreign Currency Monitory Item Translation Difference Account’ to be written off over a period of 3 years. The assessee also relied upon the notification dated 31.03.2009 of the Min of Corporate Affairs issued vide notification No. GSR 225(E) regarding foreign exchange loss, wherein it is provided that the company can debit to the profit and loss account, all foreign exchange losses which are incurred during the F.Y 2008-09 due to fluctuation of foreign currency and companies can avail this benefit till 31.03.2011 and therefore, in accordance with the said notification, the assessee company had transferred 1/3 of the difference amount to profit and loss account under the head gain/ loss account during the F.Y 2008-09. The A.O, however held that the CBDT instructions No. 3 of 2010,
14 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
dated 23.03.2010 had dealt the issue of “marked to market” i.e where the financial instruments are valued at market price so as to report the actual value on the reporting date which is required from the point of view of transparent accounting practices for the benefits to the shareholders of the company, but is notional loss as the asset continues to be owned by the company. She observed that the “marked to market” loss is given different accounting treatment by different assessees and a notional loss which should be contingent in nature cannot be allowed to be set off against the taxable income. Thus, she disallowed the claim of expenditure of Rs. 7,30,66,667/-

claimed by the assessee as notional capital loss and brought it to tax. Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the order of the A.O and the assessee is in second appeal before us.
6.1 The Ld. Counsel for the assessee while reiterating the submissions made before the authorities below has placed reliance upon the following decisions in support of his contentions:

(a) CIT Vs PACT Securities & Financial Services Ltd., reported in 61 taxmann. com 192 (AP & TS).

(b) Cooper Corporation Pvt Ltd., Vs DCIT, reported in ITA No. 866/PN/2014.
15
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
(c) CIT Vs Woodward Governor India Pvt Ltd., reported 179 taxman.com 326 (SC) (d) Gati Limited Vs ITO, in ITA No. 1325/Hyd/2015.

(e) Crane Sof tware International Ltd., Vs. DCIT in ITA No. 741/Ban/2010 .

6.2 The Ld. DR, on the other hand, supported the orders of the authorities below and placed reliance upon the judgment of the Apex Court in the case of Sutlej Cotton Mills Ltd., reported in 116 ITR 1 (SC). Upon consideration of rival contentions and the material on record, we find that the A.O has disallowed the claim of the assessee on the ground that it is notional capital loss, while the Ld.

CIT(A) confirmed the order of he A.O on the ground that it is to be allowed only at time of making payment and that the loss being capital in nature, cannot be allowed under any of the provisions of the Act. She also observed that the claim is not in accordance with the provisions of Sec. 43A of the Act. Thus, we find that both the A.O as well as the CIT(A) were of the opinion that it is a notional loss and therefore is not allowable in the first place. This issue was considered by the Hon’ble Apex Court in the case of Woodward Governor India Pvt Ltd., (supra) and it was held that the expression ‘expenditure’ used in section 37 of the IT Act may, in the circumstances of a particular case, cover
16 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
an amount which is really a ‘loss’, even though said amount has not gone out from the pocket of the assessee.

The facts of the case and the findings of the Hon’ble Court are reproduced hereunder for the sake of convenience and ready reference:

“5. The assessee f iled its Return of Income on 28.1.1998 for the assessment year 1998-99 on a total income of Rs. 1,10,28,190.00. That return was processed under Section 143(1)(a) on 23.3.1999. On 16.8.1999 a notice under Section 143(2) was issued to the assessee stating that in the course of assessment proceedings under Section 143 it was noticed by the Department that the assessee had debited to its Profit & Loss Account a sum of Rs. 41,06,746.00 out of which a sum of Rs.29,49,088.00 was the unrealized loss due to foreign exchange f luctuation on the last date of the accounting year. The AO held that the liability as on the last date of the previous year under consideration was a contingent liability, it was not an ascertained liability and consequently it had to be added back to the total income of the assessee. Accordingly, he added back Rs. 29,49,088.00 being the unrealized loss due to foreign exchange f luctuation. In other words, the debit to the P&L account was disallowed. This order of the AO was upheld by the CIT(A) vide decision dated 29.11.2001. Being aggrieved, the assessee went in appeal to the Tribunal. By judgment and order dated 1.4.2005 the Tribunal relying on its earlier decision in the case of M/s Woodward Governor India P. Ltd. for the assessment years 1995-96, 1996-97 and 1997-98 held that the claim of the assessee for deduction of unrealized loss due to foreign exchange f luctuation as on the last date of the previous year had to be allowed. This decision of the Tribunal has been upheld by the Delhi High Court vide the impugned judgment dated 30.4.2007, hence, this Civil Appeal is f iled by the Department.

6. Shri Parag Tripathi, learned Additional Solicitor General, appearing on behalf of the Department submitted that, in this case, the assessee(s) claims deduction under Section 37, which is a residuary provision, as there is no specif ic provision dealing with adjustment based on foreign exchange fluctuations on the Revenue account (akin to Section 43A, which deals with such adjustments in the Capital account). According to the
17 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
learned counsel, the essence of deductibility under Section
37 is that the increase in liability due to foreign exchange
fluctuations must fulf ill the twin requirements of “expenditure”
and the f actum of such expenditure having been “laid out or
expended”. According to the learned counsel, the expression “expenditure” is “what is paid out” and “something which is
gone irretrievably”. In this connection, learned counsel placed
reliance on the judgment of this Court in the case of Indian
Molasses Co. (Private) Ltd. v. CIT reported in 37 ITR 66.
According to the learned counsel, the increase in liability at any
point of time prior to payment cannot f all within the meaning of
the word “expenditure” in Section 37(1). Therefore, according to
the learned counsel, the requirement of expenditure is not met in
this case. According to the learned counsel, similarly the
requirement of money being “expended or laid out” is also not
satisf ied and thus additional liability arising on account of
fluctuation in f oreign exchange rate is not deductible
under Section 37(1).

7. Shri C.S. Aggarwal, learned senior counsel appearing f or M/s
Woodward Governor India P. Ltd. (Civil Appeal arising out of
S.L.P.(C) No. 593/08), submitted that the assessee had debited
a sum of Rs. 41,06,748.00 to its P&L account of which a sum of
Rs. 29,49,088.00 stood for the unrealized loss due to f oreign
exchange f luctuation. According to the learned counsel, the
assessee has been following mercantile system of accounting.
According to the learned counsel, under mercantile system of
accounting, which is also known as accrual system of
accounting, whenever the amount is credited to the account of
the payee (creditor) liability stands incurred by the assessee
even though the amount is actually not paid. In this connection,
learned counsel placed reliance on the def inition of the word “paid” in Section 43(2). According to the learned counsel, in the
past in some years when the value of the rupee becomes
stronger vis-`-vis US$, the Department had taxed the gains as
income. Theref ore, according to the learned counsel, when it
comes to “income”, the Department says that accrual is enough
for taxability and “payment” is irrelevant but when it comes to “loss”, the Department says that “payment” alone is relevant f or
taxability. According to the learned counsel, such double
standards cannot be countenanced. Learned counsel f urther
gave the f ollowing example in support of his contentions:

1. Where amount is borrowed and used in business:

2. The liability thus was, since by way of loan, the increased
liability of Rs. 500/- was towards business increased by Rs.
18
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
500/- which resulted into business loss as a result of
modif ication of existing liability. Likewise if on fluctuation, the
dollar rate is reduced to Rs. 32/- per dollar, the liability will
get reduced by Rs. 300/- and there would be a business gain of
Rs. 300/-.

8. In the light of the above illustration, learned counsel urged
that when the assessee(s) borrows 100 US$ on 1.4.1999 he
incurs a crystallised liability, however, the value of that liability
undergoes a change by 31.3.2000 on account of the f all in the
rupee value. In other words, the rate of exchange f luctuated
from Rs. 35 per dollar as on 1.4.1999 to Rs. 40 per dollar as on
31.3.2000, thus, increasing the liability of the assessee by
Rs.500. According to the learned counsel, the assessee was
entitled theref ore to deduction under Section 37(1) for such
enhanced liability. Similarly, if the dollar rate had reduced from
Rs. 35 to Rs. 32 per dollar, then the assessee’s liability would
stand reduced by Rs. 300 and there would be a gain of Rs. 300
which would become taxable. From this hypothetical example,
learned counsel urged that the liability stood incurred on the
date on which the assessee borrows 100 $ which in the above
example is 1.4.1999, however, on account of fluctuation in the
dollar rate, the liability may enhance or may reduce by
31.3.2000. This has to be taken into account by the Department.
The learned counsel submitted that whenever the dollar rate
stood reduced, the Department has taxed in the past the
business gains, therefore, as a corollary, the Department has to
allow deduction in the year in which the assessee incurs
business loss on account of the increase in the dollar rate.
Theref ore, according to the learned counsel, there is no warran t
for interfering in the impugned judgment of the High Court.

10. As stated above, on f acts in the case of M/s Woodward
Governor India P. Ltd., the Department has disallowed the
deduction/debit to the P&L account made by the assessee in the
sum of Rs. 29,49,088.00 being unrealized loss due to foreign
exchange f luctuation. At the very outset, it may be stated that
there is no dispute that in the previous years whenever the
dollar rate stood reduced, the Department had taxed the gains
which accrued to the assessee on the basis of accrual and it is
only in the year in question when the dollar rate stood
increased, resulting in loss that the Department has disallowed
the deduction/debit. This f act is important. It indicates the
double standards adopted by the Department.

13. As stated above, one of the main arguments advanced by
the learned Additional Solicitor General on behalf of the
19 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
Department before us was that the word “expenditure”
in Section 37(1) connotes “what is paid out” and that which
has gone irretrievably. In this connection, heavy reliance was
placed on the judgment of this Court in the case of Indian
Molasses Company (supra). Relying on the said judgment, it
was sought to be argued that the increase in liability at any
point of time prior to the date of payment cannot be said to have
gone irretrievably as it can always come back. According to the
learned counsel, in the case of increase in liability due to
foreign exchange f luctuations, if there is a revaluation of the
rupee vis-`-vis f oreign exchange at or prior to the point of
payment, then there would be no question of money having gone
irretrievably and consequently, the requirement of “expenditure”
is not met. Consequently, the additional liability arising on
account of f luctuation in the rate of foreign exchange was
merely a contingent/notional liability which does not crystallize
till payment. In that case, the Supreme Court was considering
the meaning of the expression “expenditure incurred” while
dealing with the question as to whether there was a distinction
between the actual liability in presenti and a liability de futuro.
The word “expenditure” is not def ined in the 1961 Act. The word “expenditure” is, theref ore, required to be understood in the
context in which it is used. Section 37enjoins that any
expenditure not being expenditure of the nature described
in Sections 30 to 36 laid out or expended wholly and
exclusively for the purposes of the business should be allowed
in computing the income chargeable under the head “prof its and
gains of business”. In Sections 30 to 36, the expressions “expenses incurred” as well as “allowances and depreciation”
has also been used. For example, depreciation and allowances
are dealt with in Section 32. Therefore, Parliament has used the
expression “any expenditure” in Section 37 to cover both.
Theref ore, the expression “expenditure” as used in Section
37 may, in the circumstances of a particular case, cover an
amount which is really a “loss” even though the said amount
has not gone out from the pocket of the assessee.

14. In the case of M.P. Financial Corporation v. CIT reported in
165 ITR 765 the Madhya Pradesh High Court has held that the
expression “expenditure” as used in Section 37 may, in the
circumstances of a particular case, cover an amount which is a “loss” even though the said amount has not gone out from the
pocket of the assessee. This view of the Madhya Pradesh High
Court has been approved by this Court in the case of Madras
Industrial Investment Corporation Ltd. v. CIT reported in 225
ITR 802. According to the Law and Practice of Income Tax by
Kanga and Palkhivala, Section 37(1) is a residuary section
20 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
extending the allowance to items of business expenditure not
covered by Sections 30to 36. This Section, according to the
learned Author, covers cases of business expenditure only, and
not of business losses which are, however, deductible on
ordinary principles of commercial accounting. (see page 617 of
the eighth edition). It is this principle which attracts the
provisions of Section 145. That section recognizes the rights of
a trader to adopt either the cash system or the mercantile
system of accounting. The quantum of allowances permitted to
be deducted under diverse heads underSections
30 to 43C from the income, prof its and gains of a business
would diff er according to the system adopted. This is made
clear by def ining the word “paid” in Section 43(2), which is
used in several Sections 30 to 43C, as meaning actually paid
or incurred according to the method of accounting upon the
basis on which prof its or gains are computed under Section
28/29. That is why in deciding the question as to whether the
word “expenditure” in Section 37(1) includes the word “loss”
one has to read Section 37(1) with Section 28, Section
29 and Section 145(1). One more principle needs to be kept in
mind. Accounts regularly maintained in the course of business
are to be taken as correct unless there are strong and suff icient
reasons to indicate that they are unreliable. One more aspect
needs to be highlighted. Under Section 28(i), one needs to
decide the prof its and gains of any business which is carried on
by the assessee during the previous year. Theref ore, one has to
take into account stock-in-trade f or determination of prof its. The
1961 Act makes no provision with regard to valuation of stock.
But the ordinary principle of commercial accounting requires
that in the P&L account the value of the stock-in- trade at the
beginning and at the end of the year should be entered at cost
or market price, whichever is the lower. This is how business
prof its arising during the year needs to be computed. This is one
more reason for reading Section 37(1) with Section 145. For
valuing the closing stock at the end of a particular year, the
value prevailing on the last date is relevant. This is because
prof its/loss is embedded in the closing stock. While anticipated
loss is taken into account, anticipated prof it in the shape of
appreciated value of the closing stock is not brought into
account, as no prudent trader would care to show increase
prof its before actual realization. This is the theory underlying
the Rule that closing stock is to be valued at cost or market
price, whichever is the lower. As prof its for income-tax purposes
are to be computed in accordance with ordinary principles of
commercial accounting, unless, such principles stand
superseded or modif ied by legislative enactments, unrealized
prof its in the shape of appreciated value of goods remaining
21 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
unsold at the end of the accounting year and carried over to the
following years account in a continuing business are not
brought to the charge as a matter of practice, though, as stated
above, loss due to f all in the price below cost is allowed even
though such loss has not been realized actually. At this stage,
we need to emphasise once again that the above system of
commercial accounting can be superseded or modif ied by
legislative enactment. This is where Section 145(2) comes into
play. Under that section, the Central Government is empowered
to notif y from time to time the Accounting Standards to be
followed by any class of assessees or in respect of any class of
income. Accordingly, under Section 209 of the Companies Act,
mercantile system of accounting is made mandatory f or
companies. In other words, accounting standard which is
continuously adopted by an assessee can be superseded or
modif ied by Legislative intervention. However, but f or such
intervention or in cases f alling under Section 145(3), the
method of accounting undertaken by the assessee continuously
is supreme. In the present batch of cases, there is no f inding
given by the AO on the correctness or completeness of the
accounts of the assessee. Equally, there is no f inding given by
the AO stating that the assessee has not complied with the
accounting standards.

15. For the reasons given hereinabove, we hold that, in the
present case, the “loss” suffered by the assessee on account of
the exchange difference as on the date of the balance sheet is
an item of expenditure under Section 37(1) of the 1961 Act.

16. In the light of what is stated hereinabove, it is clear that
prof its and gains of the previous year are required to be
computed in accordance with the relevant accounting standard.
It is important to bear in mind that the basis on which stock- in-
trade is valued is part of the method of accounting. It is well
established, that, on general principles of commercial
accounting, in the P&L account, the values of the stock-in-trade
at the beginning and at the end of the accounting year should
be entered at cost or market value, whichever is lower – the
market value being ascertained as on the las t date of the
accounting year and not as on any intermediate date between
the commencement and the closing of the year, f ailing which it
would not be possible to ascertain the true and correct state of
affairs. No gain or prof it can arise until a balance is struck
between the cost of acquisition and the proceeds of sale. The
word “prof it” implies a comparison between the state of
business at two specif ic dates, usually separated by an interval
of twelve months. Stock-in-trade is an asset. It is a trading
22 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad. asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Section 145(1) enacts that for the purpose of Section 28 and Section 56 alone, income, prof its and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with Section 28. Therefore, Section 145(1) is attracted to the f acts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure f or which a legal liability has been incurred bef ore it is actually disbursed. (see judgment of this Court in the case of United Commercial Bank v. CIT reported in 240 ITR 355). Therefore, the accounting method followed by an assessee continuously f or a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not ref lect true and correct prof its. As stated, there is no f inding given by the AO on the correctness of the accounting standard f ollowed by the assessee(s) in this batch of Civil Appeals.

17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard (“AS”).

6.3 Thus, it is clear that the loss on account of fluctuation of foreign currency on the date of balance sheet is not a notional loss as held by the A.O and the CIT(A) and in allowable as expenditure if it is on revenue account.
6.4 The other ground on which the loss has not been allowed is on the ground that it is capital loss. The co-

ordinate Bench of the Tribunal in the case of M/s Crane Software Ind Ltd., (supra) (to which, one of us, i.e JM is a
23 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
signatory), has considered the issue as to whether the FCCB issue expenses are in the nature of capital or Revenue and has held as under:
” 34.1. Next is whether FCCB issue expenses are capital or revenue in nature. The assessee company had incurred expenses in connection with the issue of foreign currency convertible bonds. Assessee claimed the expenses as deductible as the expenses were incurred to raise loan f inance. The assessing authority held that the bond holders had the option to convert the bonds to equity shares and therefore, the collection of f unds through the issue of bonds needs to be treated as to increase the capital and theref ore the connected expenses would be capital in nature and hence disallowed.

34.2. We agree with the view of the Commissioner of Income- tax(A) that the expenses are not capital in nature. As on 31.03.2006, the previous year ending for the asst. year 2006- 07, the funds collected by the assessee company through the issue of FCCB, were in the nature of liability. The assessee company was bound to discharge the bonds on due dates. The assessee was paying interest to bond-holders. It is clear that the bond f inance was in the nature of loan f inance.

34.3. It becomes the capital of the company only when the bond holders exercise their option at the appropriate time in f uture. That conversion is only a future event, that mayor may not happen, depending on the option exercised by the bond-holders. Theref ore, the possible equity character of the f unds was contingent on the f act whether bonds would be converted or not in a f uture date. The nature of a present day loan f und cannot be held as equity fund on the basis of such contingency.

34.4. As f ar as the nature of the f unds for the asst. year 2006- 07 is concerned, it was a liability in the nature of loan, that too interest bearing loan. If the funds are treated as equity capital for asst. year 2006-07, how the payment of bond interest would be justif ied in law, as law does not permit payment of interest on a company’s equity capital.

34.5. In the f acts and circumstances of the case, the issue is decided in f avour of the assessee”.
24
ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
6.5 Thus, it is clear that till the bonds are converted into share capital, they remain as a loan fund and cannot be held as equity fund and thus capital in nature. From the financial statements for the F.Y 2008-09, and schedule 4 thereof, it is seen that unsecured loans include FCCBs worth Rs. 101,72,00,000/-. Therefore, the above decision is clearly applicable to the facts of the case before us. In the case of Gati Ltd. (cited supra), this bench was considered the nature of the expenses incurred for issuance of FCCBs and it was held as under:
“2. Brief f acts of the case are that the assessee company, which is in the business of Cargo Transport and Trading, f iled its return of income for the A.Y. 2007- 08 on 31.10.2007 declaring a total income of Rs.15,54,67,315 and book profit of Rs.2,62,85,309 under section 115JB of the Act. During the assessment proceedings under section 143(3) of the I.T. Act, the income of the assessee was determined at Rs.16,36,43,200. Subsequently, the CIT assumed jurisdiction under section 263 of the I.T. Act and directed the A.O. (i) to bring to tax the gain on account of foreign exchange f luctuation of Rs.15,46,428 as income from other sources; (ii) to disallow gratuity of Rs.1,32,95,577; and (iii) to disallow expenditure amounting to Rs.2,69,26,757 relatable to issue of foreign currency convertible bonds. Aggrieved by the order of the Ld. CIT under section 263 of the I.T. Act, the assessee pref erred an appeal bef ore the ITAT. The ITAT vide orders dated 04.01.2013 in ITA.No.749/Hyd/2012 upheld the initiation of proceedings under section 263 of the I.T. Act and as f ar as the disallowability of FCCB related expenses, the Tribunal directed the A.O. to examine the issue of allowability or otherwise of the expenses, keeping in view the ratio of various decisions relied upon by both the parties and as discussed by the Tribunal in its order. Against the order of the ITAT, the assessee pref erred an appeal bef ore the Hon’ble High Court but the Hon’ble High Court dismissed assessee’s appeal holding that there was no
25 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
substantial question of law involved in the matter. Therefore,
the A.O., while giving eff ect to the order of ITAT, re-examined
the allowability of expenditure incurred by the assessee on
issue of FCCBs and held that FCCB bonds were issued with an
option to the bond holders to convert them to ordinary shares or
to redeem their claim of bonds on 06.12.2011 at 147.882% of
the principal. He observed that since the said bonds are
convertible and have the characteristic of equity shares,
proportionate expenditure on the issue of bonds has to be
treated as capital expenditure. He f urther observed that the
main purpose of FCCBs was for expansion of their business,
i.e., investment in wide ranging capital investment projects and
the advantage that would accrue to the assessee from such
capital investment would be of an enduring nature. He f urther
observed that the bonds were not meant to be part of prof it
earning process or a part of the working capital but was meant
for investment in the capital f ield such as off -shore acquisition,
acquisition/ purchase of scrips, / investment in wholly owned
subsidiaries etc., He therefore, treated the expenditure of
Rs.2,64,26,757 incurred on issue of the bonds as capital
expenditure and accordingly, brought it to tax. Aggrieved,
assessee f iled an appeal bef ore the Ld. CIT(A) who conf irmed
the order of the A.O. and the assessee is in second appeal
before us.

3. The Ld. Counsel for the assessee, Mr. Y. Ratnakar, while
reiterating the submissions made by the assessee before the
authorities below, and submitted that the assessee company
has issued unsecured Foreign Currency Convertible Bonds
(“FCCB”) on 05.12.2006 f or $ 20,000 million US dollars and the
bond holders were given an option to convert FCCBs into
original shares on or before 05.11.2011 and in the event the
bond holder is not opting for such conversion, he is entitled to
redemption on 06.12.2014 at 147.882% of the bond amount. He
submitted that the bonds were issued for securing f unds f or
business purposes including expansion of the business and the
amount received is thus an unsecured loan in the hands of the
company. He submitted that the expenditure of Rs.2,64,26,757
incurred by the assessee company for issuing these bonds is
therefore revenue expenditure. He also submitted that during
the F.Y. 2006-07 relevant to the A.Y. 2007-08, the funds
collected by the assessee company continued to remain with the
assessee only as a liability in the f orm of unsecured loans as
none of the bond holders exercised any option f or conversion of
their bonds into shares during the relevant f inancial year. He,
further submitted that in the F.Y. 2007-08, the bonds to the
extent of 5 million US dollars were converted into share capital
26 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
as the bond holders exercised their option f or conversion during
the said F.Y. 2007-08 and this was also declared in the public
accounts for the F.Y. 2007-08. He has submitted that the
remaining outstanding amount in respect of the balance FCCBs
has been fully repaid on 31.12.2011 with premium to the bond
holders which f act has also been taken note of by the
Commissioner in his order under section 263 of the I.T. Act. He
has submitted that as the bonds were issued only f or the
purpose of securing loan f inance, the assessee has not obtained
any asset or advantage of any enduring nature and the
expenditure made is for securing the use of money in business
for certain period. He has submitted that it is irrelevant to
consider the object f or which the loan is obtained so long as it is
for the business purposes of the assessee, to consider the same
as revenue expenditure. According to him, the utilisation of
FCCB proceeds has nothing to do with capital of the company
and therefore, is allowable as revenue expenditure. Thus,
according to him, the f indings of the A.O. as well as the Ld.
CIT(A) are erroneous. He placed reliance upon the following
decisions in support of his contention.

1. India Cements Ltd., vs. CIT (1966) 60 ITR 52 (SC) 2. CIT vs. Tumus Electric Corpn. Ltd., (1990) 49 Taxman 249
(MP) (HC) 3. CIT vs. East India Hotels Ltd., (2001) 119 Taxman 235 (Cal.) 4. CIT vs. South India Corpn. (Agencies) Ltd., (2007) 164
Taxman 249 (Mad.) 5. CIT vs. First Leasing Co. of India Ltd., (2008) 304 ITR 67
(Mad.) 6. CIT vs. Secure Meters Ltd., 321 ITR 611 7. CIT vs. ITC Hotels Ltd., 334 ITR 109 8. M/s. Crane Sof tware International Ltd. vs. DCIT, Bangalore
Order dated 08.02.2011 in ITA.Nos. 741 & 742/Bang/2010.

9. CIT vs. Havells India Ltd., 352 ITR 376 10. DCIT vs. UAG Builders (P) Ltd., Delhi (2012) 25
taxmann.com 205 (Del.)
27 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
3.1. Further he has also relied upon the CBDT circular No.56
dated 19th March, 1971 on the provisions of section
35Dwherein it was clarif ied that the provisions of section
35D will not have the effect of bringing the expenditure covered
by the decision of the Hon’ble Supreme Court in the case of
India Cements Ltd., reported in (1966) 60 ITR 52 within the
scope of the expenditure to be amortized against prof its over ten
year period under section 35D of the Act. Thus, according
to him, the expenditure on the issue of FCCB is allowable as
revenue expenditure.

4. The Ld. D.R., on the other hand, supported the orders of the
A.O. and has placed reliance upon the f indings of the A.O. and
the CIT(A).

5. Having regard to the rival contentions and the material on
record, we f ind that the only dispute is to the nature of
expenditure incurred by the assessee on issue of FCCBs. The
Hon’ble Supreme Court in the case of “India Cements” (cited
supra) was considering the allowability of claim of expenditure
of the assessee therein, incurred by it, on stamps, registration
fees etc., f or securing a loan, as business expenditure
under section 37(1) of the Act, and held that loan obtained
cannot be treated as an asset or advantage of an enduring
nature f or the benefit of the business of the assessee, as, a loan
is a liability and has to be repaid and it is theref ore, erroneous
to consider the liability as an asset or an advantage. It was
further held that the nature of the expenditure incurred in
raising a loan would not depend upon the nature or purpose of
the loan as the loan may be intended to be used f or the
purchase of raw material when it is negotiated but the company
may, af ter raising the loan, change its mind and spend it on
secured capital assets. Therefore, the purpose for which the
loan was required was irrelevant to the consideration of the
question, whether the expenditure f or obtaining the loan was a
revenue expenditure or capital expenditure and theref ore, it
was held that the expenditure incurred f or availing loan is
allowable undersection 37(1) of the Act. This decision of the
Hon’ble Supreme Court has been followed by various High
Courts in the cases cited by the Ld. Counsel f or the assessee
cited supra. The Hon’ble Madhya Pradesh High Court in the
case of CIT vs. Tumus Electric Corpn. Ltd., (1990) 49 Taxman
249 (MP) (cited supra), af ter considering the above judgment of
the Hon’ble Supreme Court has held that the expenditure
incurred by the assessee therein in connection with the
execution of a mortgage deed to secure a loan was revenue
28 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
expenditure as there was no regulation regarding the
application of capital subsidy to any specif ic purpose.

6. In the case of CIT vs. East India Hotels Ltd., (cited supra),
the Hon’ble High Court of Calcutta was considering the
allowability of the expenditure on account of issue of
debentures and the applicability of Section 35D to such
expenses and it was held that Section 35D has been
introduced w.e.f. 01.04.1971 to give benef it to the assessees in
case of capital expenses but a deduction, which is otherwise
allowable as revenue expenditure, cannot be denied af ter
insertion of Section 35D. The Hon’ble High Court also took note
of the CBDT Circular No.56 dated 19.03.1971 which clarif ied
the provision of section 35D and the amortization allowable
and the said provision has f urther been clarif ied that it is not
intended to supersede any other provision of the I.T. Act, under
which such expenditure is admissible as a deduction. In the
case before the Hon’ble Calcutta High Court, 20% of the
debentures was payable by the end of three years from the date
of issue of debentures by way of issue of shares and the
balance 20% at the end of 8th, 9th , 10th and 11th years from
the date of allotment of debentures by payment in cheques. The
Hon’ble High Court held the above f acts of conversion of 20% of
the debentures into shares by the end of 3 years to make the
debentures more lucrative/attractive does not change the
character of repayment of the loan within 11 years as it retains
the character of a loan.

7. In the case of CIT vs. South India Corporation (Agencies)
Ltd., (cited supra), the Hon’ble High Court of Madras was seized
of the issue as to whether the expenditure incurred on issue of
debentures was capital or revenue and af ter considering the
decision of the Hon’ble Supreme Court in the case of India
Cements (cited supra) as well as the Delhi High Court decision
in the case of CIT vs. Thirani Chemicals Ltd., reported in 290
ITR 196, held that the expenditure incurred on the issue of
debentures is permissible deduction under section 37 of the
I.T. Act. Similar view was expressed by the Hon’ble High Court
of Madras in the case of First Leasing Company & India Limited
(cited supra).

8. The Hon’ble Karnataka High Court in the case of ITC Hotels
Ltd., (cited supra) has also considered the judgment of the
Rajasthan High Court in the case of Secure Metres Ltd., (cited
supra), to hold that even if the debentures were to be converted
into the shares at a later date, the expenditure incurred on such
convertible debentures has to be treated as revenue
29 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad. expenditure. We find that ‘A’ Bench of this Tribunal at Bangalore in the case of M/s. Crane Sof tware International Ltd., Bangalore vs. DCIT, Circle-11(2) (cited supra), has considered whether FCCB issue expenses are in the nature of capital or revenue and has held the same to be revenue in nature. Similar view has been expressed by the Hon’ble Delhi High Court in the cases of CIT vs. Havells India Ltd., (cited supra) and also DCIT vs. UAG Builders (P.) Ltd., Delhi (cited supra). We, theref ore, find that this issue is f airly covered by the above cited decisions. Hence, we hold that the expenditure incurred by the assessee on issue of FCCB is revenue expenditure allowable under section 37(1) of the I.T. Act.

6.6 Further the Hon’ble Supreme Court in the case of CIT Vs Woodward Governor India Pvt Ltd., (supra) has held that the expression ‘expenditure’ as used in Sec. 37 of the Act, covers the amount which is really a loss, even though the said amount has not gone out from the pocket of the assessee, and that the loss suffered by the assessee on account of foreign exchange difference as on date of balance sheet, is an item of expenditure allowable u/s 37(1) of the Act. The Hon’ble Supreme Court had also taken note of the fact that in the previous years, whenever the dollar rates would be reduced, the department had taxed the gains which accrued to the assessee therein on the basis of accrual and it was only in the relevant year when the dollar rates increased resulting in a loss, that the department disallowed the deduction / debit and that it indicated the double standards adopted by the department.

Even in the case before us, the assessee has stated that
30 ITA.Nos.1689 & 1735 /Hyd/2012, M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
the disallowance is made only in A.Y 2009.10, whereas the balance of the expenditure which has been claimed in subsequent assessment years, has been allowed as a deduction in the assessment completed u/s 143(3) r.w.s 147 of the IT Act for the A.Y 2010-11. Respectfully following the above decisions (cited supra), we hold that the assessee, which is following a uniform and consistence method of accounting, and has claimed the expenditure in accordance with the notification of the Min of Corporate Affairs and the A.O has allowed the same in the subsequent assessment years, the revenue cannot take a contrary stand only for the A.Y 2009-10. In the result, the grounds of the appeal of the assessee on this issue are allowed.
7. In the result both the assessee’s appeal as well as Revenue’s appeal are partly allowed for statistical purposes.
Pronounced in the open court on 22 nd May, 2018.
Sd/- Sd/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 22 nd May, 2018
31 ITA.Nos.1689 & 1735 /Hyd/2012,
M/s Country Club Hospitality and Holidays Ltd., Hyderabad.
KRK
1) Country Club Hospitolity & Holidays Ltd., C/o P. Murali & Co., CAs, 6-3-655/2/3, Ist floor, Somajiguda, Hyderabad-82
2) ACIT, Circle-1(2), Hyderabad.
3) CIT(A)-2, Hyderabad
4) Addl.CIT, Range-1, Hyderabad.
4) The Departmental Representative, I.T.A.T., Hyderabad.
5) Guard File.

News Reporter

Leave a Reply

Your email address will not be published. Required fields are marked *

%d bloggers like this: