Income Tax Appellate Tribunal – Hyderabad
M/S Country Club India Limited, … vs Dcit, Circle-3(2), Hyderabad, … on 22 May, 2018 ITA No 1714 of 2014 Country Club India Ltd Hyderabad. IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ A ‘ Bench, Hyderabad Before Smt. P. Madhavi Devi, Judicial Member AND Shri S.Rifaur Rahman, Accountant Member ITA No.1714/Hyd/2014 (Assessment Year: 2010-11) Country Club Hospitality & Vs Dy. Commissioner of Income Holidays Ltd (formerly Tax, Circle 3 (2) known as Country Club Hyderabad India Ltd) Hyderabad PAN: AAACC8276B
(Appellant) (Respondent) For Assessee : Shri P. Murali Mohan Rao For Revenue : Dr. K. Srinivas Reddy, DR Date of Hearing: 22.02.2018 Date of Pronouncement: 22.05.2018 ORDER

Per Smt. P. Madhavi Devi, J.M.

This is assessee’s appeal for the A.Y 2010-11 against
the order of the CIT (A)-2, Hyderabad, dated 23.02.2014.
2. Brief facts of the case are that the assessee company,
engaged in the business of clubs and hospitality, filed its return of
income for the A.Y 2010-11 on 15.10.2010 declaring taxable
income at Rs.10,69,92,500. During the assessment proceedings
u/s 143(3) of the Act, the AO called for various details and
observing that the assessee has not given the details called for,
has made the disallowance of Rs.65,23,667 u/s 40A(3) of the Act;
disallowance of Rs.11,03,706 in respect of on loss on sale of fixed Page 1 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
asset; and of Rs.15,80,701 as foreign exchange fluctuation loss of
and donation of Rs.60,984. Aggrieved, the assessee preferred an
appeal before the CIT (A) stating that the disallowance u/s 40A(3)
should be only of Rs.39,96,583 and not Rs.65,23,667. The CIT (A)
considered the assessee’s contentions and verified the assessment
records and observed that the cash payments which are
disallowable u/s 40A(3) of the Act are to the extent of
Rs.39,96,583 only. She accordingly granted partial relief with
regard to this ground of appeal.
3. As regards the disallowance of loss on sale of fixed
assets and loss on account of foreign exchange fluctuation is
concerned, the CIT (A) confirmed the order of the AO. Thus, the
appeal of the assessee was partly allowed against which the
assessee is in second appeal before us by raising the following
grounds of appeal:
“1. The order of the learned CIT (A)-II, Hyderabad is erroneous both on facts and in law.

2. The learned CIT (A) erred in directing the AO to disallow the amount of Rs.39,96,583/- u/s 40A(3) of the I.T. Act.
3. The learned CIT (A) erred in upholding the view of the AO regarding the disallowance of loss on sale of fixed asset amounting to Rs.11,03,706/-.

4. The learned CIT (A)-II, erred in upholding the view of AO regarding the disallowance of foreign exchange loss amounting to Rs.15,80,701/-.

5. The assessee may add, alter or modify or substitute any other point to the grounds of appeal at any time before or at the time of hearing of the appeal”.
4. Grounds of appeal Nos. 1 & 5 are general in nature
and need no adjudication.
Page 2 of 18
ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
5. As regards ground of appeal No.2, we find that similar
issue had arisen in the assessee’s own case for the A.Ys 2008-09
& 2009-10 and this Tribunal in ITA Nos.1504 & 1654/Hyd/2012,
dated 27.04.2018 for the A.Y 2008-09, has considered the
arguments of the assessee that out of the total payments made in
cash/bearer cheques, many payments are made to the employees
of the assessee and therefore, they are not covered by section
40A(3) of the Act and has remitted the issue to the file of the AO
for verification of the contentions of the assessee and directed that
on verification, if it is found that the payments are made to the
employees for meeting the expenditure of the assessee, then no
disallowance u/s 40A(3) shall be made. Respectfully following the
said decision in the case of the assessee, for the earlier A.Ys 2008-
09 (to which both of us are signatory) we remit this issue to the
file of the AO with similar direction. Accordingly, Ground No.2 is
treated as allowed for statistical purposes.
6. As regards Ground No.3, the assessee has filed written
submissions stating that the assessee has not claimed the loss on
sale of fixed assets of Rs.11,03,706 and that the sale proceeds
are in fact reduced from the block of assets and that the
depreciation is claimed on the reduced amount, resulting in no
impact on the income of the assessee and hence cannot be
disallowed and brought to tax. He also drew our attention to
Schedule-5 of the financials, relating to the fixed assets, and the
balance sheet wherein an amount of Rs.20,12,461 is reduced
from the block of the asset, and an amount of Rs.17,07,065 was Page 3 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
reduced from the written down value of the assets. Thus, he
prayed that the additions made by the AO and confirmed by the
CIT (A) be deleted.
7. Having considered the rival contentions, we find that
the said contentions of the assessee have not been made before
the AO or before the CIT (A), but have been raised for the first
time before us. Therefore, these contentions of the assessee need
verification. We accordingly remit this issue to the file of the AO
for verification and the AO is directed to take a decision in
accordance with the law after giving the assessee a fair
opportunity of hearing.
8. As regards ground No.4, we find that the facts in the
relevant A.Y are similar to the facts in the A.Y 2009-10 and for the
detailed reasons given by us in the assessee’s appeal for the A.Y
2009-10, this ground of appeal is to be allowed. For the purpose
of convenience and ready reference, the relevant paragraphs of
the ITAT order in ITA No.1689/Hyd/2012, dated 22.05.2018 are
reproduced hereunder:
“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) 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 Page 4 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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, 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
au thorities 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. (c) CIT Vs Woodward Governor India Pvt Ltd., reported 179 taxman.com 326 (SC) Page 5 of 18
ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
(d) Gati Limited Vs ITO, in ITA No. 1325/Hyd/2015. (e) Crane Software 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 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 filed 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 u nder Section
143(1)(a) on 23.3.1999. On 16.8.1999 a notice u nder 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 A ccount a sum of Rs. 41,06,746.00 out of which a sum of
Rs.29,49,088.00 was the u nrealized loss due to f oreign
exchange fluctuation 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 fluctuation. In other words, the debit to the P&L
account was disallow ed. 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 flu ctuation as on the last date of the previous Page 6 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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 filed 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 residu ary provision, as there is no specific 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 accou nt). According to the
learned counsel, the essence of deductibility u nder Section
37 is that the increase in liability due to foreign exchange
fluctuations must fulfill the twin requirements of “expenditure”
and the factum 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 fall within the
meaning of the word “expenditure” in Section 37(1). Theref ore,
according to the learned counsel, the requirement of
expenditure is not met in this case. According to the learned
cou nsel, similarly the requirement of money being “expended or
laid out” is also not satisfied and thus additional liability
arising on account of fluctuation in foreign exchange rate is not
deductible u nder Section 37(1).

7. Shri C.S. Aggarw al, learned senior counsel appearing for 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 fluctuation. 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 amou nt 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 definition of
the word “paid” in Section 43(2). According to the learned
cou nsel, 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. Therefore, according to the learned cou nsel,
when it comes to “income”, the Department says that accrual is
enough for taxability and “payment” is irrelevant but w hen it
comes to “loss”, the Department says that “payment” alone is
relevant for taxability. According to the learned counsel, such
double standards cannot be cou ntenanced. Learned counsel
further gave the following example in support of his
contentions:
Page 7 of 18
ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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 bu siness increased by Rs.
500/- which resulted into business loss as a result of
modification of existing liability. Likewise if on fluctuation, the
dollar rate is reduced to Rs. 32/- per dollar, the liability will
get redu ced by Rs. 300/- and there would be a business gain of
Rs. 300/-.

8. I n 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 fall
in the rupee value. In other words, the rate of exchange
fluctuated 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 cou nsel, the
assessee was entitled therefore 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 w hich 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 redu ced, the
Department has taxed in the past the business gains, theref ore,
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. Therefore, according to the
learned cou nsel, there is no warrant for interfering in the
impugned judgment of the High Court.

10. As stated above, on facts 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 u nrealized loss due to
foreign exchange fluctuation. At the very outset, it may be
stated that there is no dispute that in the previous years
whenever the dollar rate stood redu ced, 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 fact 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
Department before us was that the word “expenditure”
in Section 37(1) connotes “what is paid out” and that w hich has
gone irretrievably. In this connection, heavy reliance was Page 8 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
placed on the ju dgment 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 fluctuations, if there is a revaluation of the
rupee vis-`-vis foreign 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 fluctuation 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 w ord “expenditure” is not defined in the
1961 Act. The word “expenditure” is, therefore, 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 “profits
and gains of business”. In Sections 30 to 36, the expressions “expenses incurred” as well as “allowances and depreciation”
has also been u sed. 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.
Therefore, 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
circu mstances 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
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, dedu ctible 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 accou nting. The quantum of allow ances permitted to
be deducted under diverse heads u nderSections 30 to 43C from
the income, profits and gains of a business would differ
according to the system adopted. This is made clear by defining Page 9 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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 profits or gains are computed under Section 28/29.
That is why in deciding the question as to w hether 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. Accou nts
regularly maintained in the course of business are to be taken
as correct u nless there are strong and sufficient reasons to
indicate that they are u nreliable. One more aspect needs to be
highlighted. Under Section 28(i), one needs to decide the profits
and gains of any business w hich is carried on by the assessee
during the previou s year. Therefore, one has to take into
account stock-in-trade for determination of profits. 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 accou nt 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 low er. This is how business
profits arising during the year needs to be computed. This is
one more reason for reading Section 37(1) with Section 145. For
valu ing the closing stock at the end of a particular year, the
valu e prevailing on the last date is relevant. This is because
profits/loss is embedded in the closing stock. While anticipated
loss is taken into account, anticipated profit in the shape of
appreciated value of the closing stock is not brought into
account, as no prudent trader would care to show increase
profits before actual realization. This is the theory underlying
the Rule that closing stock is to be valu ed at cost or market
price, whichever is the lower. As profits for income-tax
purposes are to be computed in accordance with ordinary
principles of commercial accounting, u nless, such principles
stand superseded or modified by legislative enactments,
unrealized profits in the shape of appreciated value of goods
remaining 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 fall 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 su perseded or modified by
legislative enactment. This is where Section 145(2) comes into
play. Under that section, the Central Government is empowered
to notify 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 for
companies. In other words, accounting standard w hich is
continu ously adopted by an assessee can be superseded or
modified by Legislative intervention. However, but for such
intervention or in cases falling u nder Section 145(3), the
method of accounting undertaken by the assessee continuously
is supreme. In the present batch of cases, there is no finding
given by the AO on the correctness or completeness of the
accounts of the assessee. Equ ally, there is no finding given by Page 10 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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
profits 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 valu ed is part of the method of accounting. It is well
established, that, on general principles of commercial
accounting, in the P&L accou nt, 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 last date of the
accounting year and not as on any intermediate date between
the commencement and the closing of the year, failing which it
would not be possible to ascertain the true and correct state of
affairs. No gain or profit can arise until a balance is struck
between the cost of acquisition and the proceeds of sale. The
word “profit” implies a comparison between the state of
business at two specific dates, usually separated by an interval
of twelve months. Stock-in-trade is an asset. It is a trading
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, profits 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 facts of the present case. Under the mercantile
system of accounting, w hat is due is brou ght into credit before
it is actually received; it brings into debit an expenditure for
which a legal liability has been incurred before it is actually
disbursed. (see ju dgment 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
for a given period of time needs to be presu med to be correct
till the AO comes to the conclusion for reasons to be given that
the system does not reflect true and correct profits. As stated,
there is no finding given by the AO on the correctness of the
accounting standard followed by the assessee(s) in this batch of
Civil Appeals.

17. Having come to the conclusion that valuation is a part of
the accou nting system and having come to the conclusion that
business losses are deductible under Section 37(1) on the basis
of ordinary principles of commercial accou nting and having
come to the conclusion that the C entral Government has made
Accou nting Standard-11 mandatory, w e are now required to
examine the said Accou nting Standard (“AS”).
Page 11 of 18
ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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
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 issu e of foreign currency
convertible bonds. Assessee claimed the expenses as deductible
as the expenses were incurred to raise loan finance. The
assessing authority held that the bond holders had the option
to convert the bonds to equity shares and theref ore, the
collection of funds through the issue of bonds needs to be
treated as to increase the capital and therefore 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 finance was in the nature of loan finance.

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

34.4. As far as the nature of the funds 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 justified in law, as law does not permit payment of interest
on a company’s equity capital.

34.5. In the facts and circumstances of the case, the issu e is
decided in favour of the assessee”.

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 Page 12 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
thereof, it is seen that unsecured loans include FCCBs
worth Rs. 101,72,00,000/-. Therefore, the above decision
is clearly applicable to the f acts 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 f or the A.Y. 2007- 08 on 31.10.2007 decl aring a
total income of Rs.15,54,67,315 and book prof it 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 f oreign exchange f luctuation of Rs.15,46,428 as
income f rom other sources; (ii) to disal low gratuity of
Rs.1,32,95,577; and (iii) to disallo w expenditure amounting to
Rs.2,69,26,757 relatabl e to issue of f oreign 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
disallo wability of FCCB rel ated expenses, the Tribunal directed
the A.O. to examine the issue of all owabil ity or other wise of the
expenses, keeping in vie w the ratio of various decisions rel ied
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’bl e High Court but the Hon’ble High Court
dismissed assessee’s appeal holding that there was no
substantial question of law involved in the matter. Theref ore, the
A.O., while giving effect 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 f or
expansion of their business, i.e., investment in wide ranging
capital investment projects and the advantage that would accrue
to the assessee f rom 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 f or investment in the capital f ield
such as off -shore acquisition, acquisition/ purchase of scrips, /
investment in wholly owned subsidiaries etc., He theref ore,
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 bef ore us.
Page 13 of 18
ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
3. The Ld. Counsel f or the assessee, Mr. Y. Ratnakar, while
reiterating the submissions made by the assessee bef ore the
authorities belo w, and submitted that the assessee company has
issued unsecured Foreign Currency Convertible Bonds (“FCCB”)
on 05.12.2006 f or $ 20,000 mill ion US dollars and the bond
holders were given an option to convert FCCBs into original
shares on or bef ore 05.11.2011 and in the event the bond holder
is not opting f or 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 f or securing f unds f or business purposes
incl uding 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 f or issuing these bonds is theref ore revenue
expenditure. He also submitted that during the F.Y. 2006-07
relevant to the A.Y. 2007-08, the f unds collected by the assessee
company continued to remain with the assessee onl y 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, f urther submitted
that in the F.Y. 2007-08, the bonds to the extent of 5 million US
dollars were converted into share capital as the bond holders
exercised their option f or conversion during the said F.Y. 2007-
08 and this was al so decl ared in the public accounts f or the F.Y.
2007-08. He has submitted that the remaining outstanding
amount in respect of the bal ance FCCBs has been f ully repaid on
31.12.2011 with premium to the bond holders which f act has
al so 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 mad e is f or securing the
use of money in business f or certain period. He has submitted
that it is irrel evant to consider the object f or which the l oan is
obtained so long as it is f or 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 theref ore, is al lowable as
revenue expenditure. Thus, according to him, the f indings of the
A.O. as wel l as the Ld. CIT(A) are erroneous. He pl aced reliance
upon the f oll owing decisions in support of his contention.

1. India Cements Ltd., vs. C IT (1966) 60 IT R 52 (SC)
2. CIT vs. Tumus Electric Corpn. Ltd., (1990) 49 Taxman 249
(MP) (HC)
3. CIT vs. E ast India Hotel s Ltd., (2001) 119 Taxman 235 (Cal.)
4. CIT vs. South India Corpn. (Agencies) Ltd., (2007) 164 T axman
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. D CIT, Bangal ore
Order dated 08.02.2011 in ITA.Nos. 741 & 742/Bang/2010.
9. CIT vs. H avell s India Ltd., 352 ITR 376 Page 14 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
10. DCIT vs. UAG Buil ders (P) Ltd., Delhi (2012) 25 taxmann.com
205 (Del.) 3.1. Further he has al so rel ied upon the CBDT circular No.56
dated 19th March, 1971 on the provisions of section 35D wherein
it was clarif ied that the provisions of section 35D wil l not have
the eff ect 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 C IT(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 allo wability of claim of expenditure
of the assessee therein, incurred by it, on stamps, registration
f ees 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 benef it 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
f urther held that the nature of the expenditure incurred in
raising a loan woul d not depend upon the nature or purpose of
the l oan 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. Theref ore, the purpose f or 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 al lowable undersection
37(1) of the Act. This decision of the Hon’ble Supreme Court has
been f ollowed 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 El ectric 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 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 Hotel s Ltd., (cited supra), the
Hon’ble High Court of Calcutta was considering the allo wability
of the expenditure on account of issue of debentures and the
applicability of Section 35D to such expenses and it was held Page 15 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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 al so took note of the CBDT Circul ar No.56 dated
19.03.1971 which clarif ied the provision of section 35D and the
amortization allo wable 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 admissibl e as a
deduction. In the case bef ore the Hon’bl e Calcutta High Court,
20% of the debentures was payabl e by the end of three years
f rom the date of issue of debentures by way of issue of shares
and the bal ance 20% at the end of 8th, 9th , 10th and 11th years
f rom 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, hel d that the expenditure incurred on the issue of
debentures is permissible deduction under section 37 of the I.T.
Act. Simil ar vie w 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 al so 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 expenditure.
We f ind that ‘A’ Bench of this Tribunal at Bangal ore 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. Simil ar vie w has been
expressed by the Hon’bl e Delhi High Court in the cases of CIT vs.
Havells India Ltd., (cited supra) and al so DCIT vs. UAG Builders
(P.) Ltd., Delhi (cited supra). We, theref ore, f ind 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 allo wable 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 Page 16 of 18 ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
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 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.
9. Respectfully following the same, this ground of appeal
No.4 is allowed.
10. In the result, assessee’s appeal is partly allowed for
statistical purposes.
Order pronounced in the Open Court on 23rd May, 2018.

Sd/- Sd/- (S.Rifaur Rahman) (P. Madhavi Devi) Accountant Member Judicial Member Hyderabad, dated 23rd May 2018.
Vinodan/sps Page 17 of 18
ITA No 1714 of 2014 Country Club India Ltd Hyderabad.
Copy to:

1 P. Murali & Co. CAs, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad 500082
2 Dy. CIT, Circle 3(2) Hyderabad
3 CIT (A)-II Hyderabad
4 CIT – I, Hyderabad
5 The DR, ITAT Hyderabad
6 Guard File By Order Page 18 of 18

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