Income Tax Appellate Tribunal - Ahmedabad
M/S. Power Build Ltd.,, Anand vs The Dcit, Anand Circle,, Anand on 21 February, 2020
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'D' अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, AHMEDABAD BEFORE SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER आयकर अपील सं./I.T.A. No. 23/Ahd/2018 ( नधा रण वष / Assessment Year : 2014-15) M/s. Power Build Ltd. बनाम/ DCIT Post Box No. 28, Vithal Vs. Anand Circle, Anand Udyognagar, Anand 388121 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCP2464K (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से /Appellant by : Shri Sunil Talati, A.R यथ क ओर से / Shri Vikram Singh Sharma, Sr.D.R. Respondent by :
सन ु वाई क तार ख / Date of 20/02/2020 Hearing घोषणा क तार ख /Date of 21/02/2020 Pronouncement आदे श/O R D E R PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-4, Vadodara ('C IT(A)' in short), dated 30.10.2017 arising in the assessment order dated 23.12.2016 passed b y the Assessing Officer (AO) under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning AY 2014-15.
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2. The substantive grounds of appeal raised b y assessee read hereunder:
"1. The CIT(A) -4 Baroda has erred in confirming the disallowance of Rs. 2,50,000/- on adhoc and estimated basis by invoking provision of section 14A of the Act, which is against the provisions of the Act. The Ld CIT(A) Baroda has erred in interpreting the provi sions of section 14A r .w.r 8D of the Act by not appreciating the submission made during the course of hearing. Thus, the addition made in this behalf is unjust and uncalled for and be deleted now.
Without prejudice to above, it is submitted t hat the appellant has itself disallowed Rs 2,87,076/- which be considered and no addition can be made as held by CIT(A) Bar oda.
2. The CIT(A)-4 Baroda has erred in confirming the addition of Rs.
1,50,50,000/- on account of unrealized gain arising on account of fluctuation of exchange rate as on Balance Sheet Date. It is submitted that the gai n is accounted in the books of the accounts as per AS 11 issued by ICAI. Thus the gain in exchange fluctuation rate is not realized and the same does not amount to income for the year as per Income Tax Act since this is only a book entry as per the provisions of the Companies Act (As 11). The unrealized gain/loss if any to be offered to tax as and when actually realized."
2. The first issue relates to disallowance of Rs.2,50,000/- on ad hoc and estimated basis b y invoking provisions of Section 14A of the Act.
3. We have heard rival submissions on the issue. As pointed out on behalf of the assessee, the assessee has claimed exempt income to the extent of Rs.2,87,076/-. As against the aforesaid exempt income, assessee itself has disallowed equivalent amount of Rs.2,87,076/- under s.14A of the Act. Therefore, no additional disallowance is permissible in view of the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Corrtech Energy P. Ltd. 372 ITR 97 (Guj.). In another judgment in the case of CIT vs. Vision Finstock Ltd. Tax Appeal No. 486 of 2017 dated 31.07.2017 the Hon'ble Gujarat High Court has once again expressed the similar view and held that disallowance of expenditure in terms of Section 14A r.w. Rule 8D cannot exceed the exempt income itself. It is noticed that SLP(Civil) [Diary No. 13152/2018] filed b y the I T A N o . 2 3 / Ah d / 1 8 [ M / s . P o w e r B u i l d Lt d . v s . D C I T ] A. Y . 2 0 1 4 - 1 5 - 3 -
Revenue against the judgment of the Hon'ble Gujarat High Court in Vision Finstock Ltd. (supra) has been dismissed on merits b y the Hon'ble Supreme Court vide order dated 07.05.2018. The reference is also made to the decision of Hon'ble Supreme Court of India in CIT vs. Chettinad Logistics (P.) Ltd. (2018) 95 taxmann.com 250 (SC). Thus, in the light of judicial precedents noted above, no additional disallowance is called for under s.14A of the Act in excess of exempt income. Ground No.1 of the assessee's appeal is accordingly allowed.
4. As the assessee has alread y disallowed expenses in excess of the exempt income, we do not see an y merit in the action of the CIT(A) for confirming a further sum b y way of ad hoc disallowance in controvers y. The appeal of the assessee is accordingl y allowed.
5. The second issue relates to addition of Rs.1,50,50,000/- on account of interest earned on investment made in a foreign subsidiar y and transfer to 'foreign currency translation reserve' under the head 'reserve and surplus' in the balance sheet without routing the same through the P&L account. In the course of the assessment, the AO inter alia observed that the assessee has credited in its 'reserve and surplus account' an amount to the tune of Rs.150.50 Lakhs under the head 'foreign currency translation reserve'. On enquiry into such credit made b y the assessee in its book, the AO found that the reserve pertains to interest accrued on investment made in foreign currency that; i. That the reserve pertains to interest accrued on investment made in a foreign subsidiary.
ii. The same has been transferred to the Foreign Currency Translation Reserve in view of Accounting Standard AS-11 iii. The same shall be recognized as income onl y when the assessee demands repayment of entire loan from the subsidiary.
6. The AO observed that the assessee is following mercantile s ystem or accrual s ystem of accounting and consequentl y, the assessee was I T A N o . 2 3 / Ah d / 1 8 [ M / s . P o w e r B u i l d Lt d . v s . D C I T ] A. Y . 2 0 1 4 - 1 5 - 4 -
under obligation to record such credit as revenue item in P&L account and offer tax es thereon. The AO accordingl y added the aforesaid amount to the total income of the assessee as revenue receipt while framing the assessment under s.143(3) of the Act.
7. In the first appeal, against the aforesaid addition, the assessee could not get an y relief.
8. Further aggrieved, the assessee preferred appeal before the Tribunal.
9. The learned AR for the assessee submitted at the outset that the impugned income of Rs.150.50 Lakhs has been recognized as capital receipt under the head 'reserve & surplus' owing to uncertaint y in interpretation of complex provisions of accounting standard 11 (AS-11) notified b y the ICAI. It was pointed out that similar provisions were made for notional interest accrued on money advanced in the subsequent year as well. A legal opinion was obtained thereafter and the aforestated foreign currency credit placed in the reserve & surplus as capital item was dul y offered for taxation as income in AY 2018-19 appl ying the prevailing foreign currency rate. A computation of income for AY 2018- 19 was placed before the Tribunal to support the claim towards declaration of impugned income (with minor differences) in the later year when the confusion clouding the applicabilit y of AS-11 was drifted . The learned AR thus finall y submitted that the impugned income from foreign currency fluctuation has been ultimatel y declared albeit in the later year. It was thus contended that when it does not make a difference to the department, it should not contest whether a particular year is taxable in one year or other. The learned AR accordingl y urged that addition so made towards foreign currency translation reserve should be reversed.
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10. Learned DR, on the other hand, relied upon the order of the Revenue authorities and submitted that the income which ought to have been taxed in AY 2014-15 could not be deferred to AY 2018-19 even if the averments of the assessee are found to be true, as it will cause loss of interest on tax to the Revenue. The learned DR accordingly submitted that remed y lies, if an y, in AY 2018-19 where the income has been declared.
11. We have carefull y considered the rival submissions. The controvers y is essentiall y involved towards year of taxabilit y of interest accrued on investment made b y the assessee in a foreign subsidiary. It is the case of the assessee that AS-11 provides for treatment of such unrealized interest accrued on investments. The AS-11 was understood b y the management as well as statutory Auditors in a particular manner and the unrealized surplus was credited in the reserve and surplus account. On receiving clarit y at a subsequent stage, the assessee has volunteered the income from such transactions in AY 2018-19. It is thus the case of the assessee that so long as the income has been alread y taxed b y the department, the action of the assessee should not be disturbed merel y on the ground of year of deductibilit y where the entire exercise is revenue neutral. We find that in the long line of judicial precedents, the Courts have echoed in chorus that the Revenue authorities should desist from making adjustments in the returned income where the entire exercise is revenue neutral. The decision rendered in the case of CIT vs. Bilahari Investment Pvt. Ltd. [2008] 299 ITR 1 and CIT vs. Nagri Mills Co. Ltd. 33 ITR 681 would be relevant to take note of. The department has alread y collected the tax in the subsequent year and therefore, in the given set of circumstances, where the applicabilit y of the accounting standard was understood in a manner not compatible with the view of the department, the bonafide action of the assessee should not be altered in view of the larger tax neutralit y.
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12. Having adjudicated the issue in favour of the assessee on first principles, we however consider it just and expedient to restore the issue back to the file of the AO for verification of the new fact brought to our notice for the first time that the income in question from foreign currency translation has alread y been offered for tax in the subsequent assessment year as noted above. The AO is directed to delete the addition on being satisfied that the income in controvers y is dul y included in the later assessment year. It shall be open to the assessee to support its claim before the AO in this regard in the light of aforesaid observations.
13. In the result, Ground No.2 of the assessee's appeal is allowed for statistical purposes.
14. In the result, appeal of the assessee is allowed.
This Order pronounced in Open Court on 21/02/2020
Sd/- Sd/-
(MAHAVIR PRASAD) (PRADIP KUMAR KEDIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: Dated 21/02/2020
True Copy
S. K. SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं*धत आयकर आयु,त / Concerned CIT
4. आयकर आयु,त- अपील / CIT (A)
5. 0वभागीय 3त3न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड9 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ*धकरण, अहमदाबाद ।