Ita/136/2015 Of Commissioner Of Income Tax Faridabad v. M/S Nhpc Ltd Sec-33 Nhpc Complex Faridabad

I N THE HI GH COURT OF PUNJAB AND HARYANA AT CHANDI GARHI NCOME TAX APPEAL No. 136 of 2015 ( O&M)DATE OF DECI SI ON: 28. 02. 2018 The Commi ssi oner of I ncome- t ax Far i dabad …. . Appel l antver sus M/ s NHPC Lt d. . . . . . Respondent CORAM: - HON’ BLE MR. JUSTI CE S. J. VAZI FDAR, CHI EF JUSTI CE HON’ BLE MR. JUSTI CE AVNEESH JHI NGAN Pr esent :Mr . Taj ender K. Joshi , Advocat e f or t he appel l antMr . Ved Jai n, Advocat e f or t he r espondent. . S. J. VAZI FDAR, CHI EF JUSTI CE: Thi s i s an appeal agai nst t he or der oft he I ncome TaxAppel l at e Tr i bunal uphol di ng t he or der of t he Commi ssi oner I ncomeTax ( Appeal s) . The mat t er per t ai ns t o t he Assessment Year 2006- 07. 2.The appel l antcont ends t hat t he f ol l owi ng subst ant i alquest i ons of l aw ar i se i n t hi s appeal : - “ 1.Whet her on t he f act s and i n ci r cumst ancesof t he case and i n l aw, t he Hon’ bl e I TATwas r i ght i n l aw i n di smi ssi ng appeal oft he Revenue obser vi ng t hat‘ i n vi ew ofcat egor i cal f i ndi ng of t he Supr eme Cour twe hol d t hat t heCI T( A) wascor r ecti nhol di ng t hat advance agai nst depr eci at i oncannot be added under t he comput at i on oft he nor mal i ncome’ , wher eas t he Hon’ bl eSupr eme Cour t i n i t s deci si on dat ed05. 01. 2010 has hel d t hat t he ‘ advanceagai nst depr eci at i on’ i s ‘ i ncome r ecei vedi n advance’ , t hus maki ng t he sai d i ncomesubj ect t o ‘ Char ge’ under Chapt er - I I , asbusi ness i ncome under Chapt er - I V- D r eadwi t h sub cl ause ( i ) of sub- sect i on 24 ofsect i on 2 of t he I ncome Tax Act ? est abl i sh t hese pr ovi si ons t o be ofascer t ai ned i n nat ur e? 6.Whet her , on t he f act s and i nci r cumst ances of t he case and i n l aw, t heHon’ bl e I TAT was r i ght i n l aw i n del et i ngaddi t i on of Rs. 22, 99, 80, 552/ - made by t heAssessi ng Of f i cer i n comput i ng t he book-pr of i t u/ s 115JB as wel l as i n nor mali ncome i n r espect of ‘ pr ovi si ons f or l ossi n hedgi ng t r ansact i on’ whi ch wer e not anascer t ai ned l i abi l i t y? 7.Whet her , on t he f act s and i nci r cumst ances of t he case and i n l aw, t heHon’ bl e I TAT was r i ght i n l aw i n del et i ngaddi t i on of Rs. 7, 01, 00, 000/ - whi ch wasmade by t he Assessi ng Of f i cer undersect i on 14A by appl yi ng Rul e 8D?8.Whet her , on t he f act s and i nci r cumst ances of t he case and i n l aw, t heHon’ bl e I TAT was r i ght i n l aw i n del et i ngt he addi t i on of Rs. 5, 07, 00, 000/ - made byt he Assessi ng Of f i cer i n r espect ofi ndi r ect expenses i ncur r ed onadmi ni st r at i ve and ot her heads r el at i ngt o t he i ncome t o whi ch sect i on 10appl i es?” None of t hese ar e subst ant i al quest i ons of l aw and, i f t hey ar e,t hey ar e answer ed by t he j udgment of t he Supr eme Cour t and oft hi s Cour t . 3.Re: Quest i ons 1 & 2: These quest i ons ar e cover ed agai nst t he appel l ant i nvi ew of our or der and j udgment dat ed 14. 02. 2018 i n t he assessee’ scase i n I TA No. 151 of 2015. 4.Re: Quest i on No. 5: I t i s agr eed t hat t hi s i ssue i s cover ed agai nst t heappel l ant by an or der and j udgment dat ed 06. 07. 2010 i n t heassessee’ s case i n I TA No. 385 of 2009. 5.Re: Quest i ons 3 & 4: Quest i on 3 was deal t wi t h by t he Tr i bunal on t he basi sof i t s deci si on dat ed 30. 09. 2014 f or t he Assessment Year 2004- 05( Appeal bef or e t he Tr i bunal f or t he year 2004- 05 vi de I TANo. 2449/ Del / 2008) . 3.Re: Quest i ons 1 & 2: These quest i ons ar e cover ed agai nst t he appel l ant i nvi ew of our or der and j udgment dat ed 14. 02. 2018 i n t he assessee’ scase i n I TA No. 151 of 2015. 4.Re: Quest i on No. 5: I t i s agr eed t hat t hi s i ssue i s cover ed agai nst t heappel l ant by an or der and j udgment dat ed 06. 07. 2010 i n t heassessee’ s case i n I TA No. 385 of 2009. 5.Re: Quest i ons 3 & 4: Quest i on 3 was deal t wi t h by t he Tr i bunal on t he basi sof i t s deci si on dat ed 30. 09. 2014 f or t he Assessment Year 2004- 05( Appeal bef or e t he Tr i bunal f or t he year 2004- 05 vi de I TANo. 2449/ Del / 2008) . 6.The assessee debi t ed an amount of Rs. 6. 12 cr or es t o t hepr of i t and l oss account on account of depr eci at i on of l and. Thi swas under account i ng pol i cy 2. 4 i nt r oduced dur i ng t he year and asper not es t o t he account s. Thi s l ed t o a r educt i on of pr of i t by t hesai d amount . The assessee cont ended t hat t he cl ai m was i naccor dance wi t h account i ng st andar d 6 and i n compl i ance wi t h t heCompani es Act . The Assessi ng Of f i cer hel d t hat t he assessee had notf ur ni shed any det ai l s f r om whi ch i t coul d be ver i f i ed t hat t he l andamor t i zed had a l i mi t ed usef ul l i f e f or i t . I t must be not i ced att hi s st age t hat a r emand r epor t was cal l ed f or when t he mat t er wascar r i ed i n appeal . The Assessi ng Of f i cer r ej ect ed t he cont ent i ont hat t he cl ai m was i n accor dance wi t h t he pr ovi si ons of t heCompani es Act and hel d t hat no r at e f or depr eci at i on i s pr escr i bedi n schedul e 14 of t he Compani es Act . The Assessi ng Of f i cer added anamount of Rs. 6. 12 l akhs f or amor t i zat i on of l and. 7.The CI T( A) al l owed t he appeal and del et ed t hi s addi t i on.The Tr i bunal uphel d t he or der of t he CI T( A) . I t not edt hat t he l and was not owned by t he assessee company. I t was t akenf or use f r om t he St at e Gover nment . The St at e Gover nment di d nott r ansf er t he t i t l e of t he l and t o t he assessee. The l and was onl yt aken f or r el i ef and r ehabi l i t at i on of t he evacuees. The peopl e hadevacuat ed t he l and on account of t he submer gence of t he l and onaccount of t he const r uct i on put up by t he assessee. The cost i ncur r ed by t he assessee i n t hi s r egar d wasamor t i zed f or t heusef ul l i f e of t he pr oj ect . The l and was pr esumabl y acqui r ed by t heSt at e Gover nment but at t he i nst ance of t he assessee i n or der t oenabl e t he assessee t o i mpl ement i t s pr oj ect s. 8.Theassessee’ spol i cy deci si on r egar di ng t he pr oj ect ,t he use of t he l and f or r ehabi l i t at i ng t he evacueesand t heamor t i zat i on had been appr oved by t he audi t or s of t he company andby t he Compt r ol l er and Audi t or Gener al . The assessee’ s account swer e audi t ed by t he st at ut or y audi t or s and al so by t he Compt r ol l erand Audi t or Gener al and wer e appr oved by t he company at i t s AGM andf i l ed wi t h t he Regi st r ar of Compani es. The Tr i bunal r ej ect ed t hecont ent i on on behal f of t he r evenue t hat l and i s not a depr eci abl easset and depr eci at i on char ged i n t he pr of i t and l oss account i snot i n accor dance wi t h t he pr ovi si ons of t he Compani es Act r eadwi t h t he account i ng st andar d 6.I t i s not t he appel l ant ’ s caset hat t he assessee’ s account s wer e not dul y audi t ed, cer t i f i edand appr oved. 9.The Tr i bunal r i ght l y pl aced r el i ance upon t he j udgmentof t he Supr eme Cour t i n Apol l o Tyr es Lt d. vs. Commi ssi oner ofI ncome Tax, ( 2002) 255 I TR 0273. I n Apol l o Tyr es,one of t hequest i ons r ai sed and t he obser vat i ons of t he Supr eme Cour t i nr egar d t her et o ar e as f ol l ows: - 9.The Tr i bunal r i ght l y pl aced r el i ance upon t he j udgmentof t he Supr eme Cour t i n Apol l o Tyr es Lt d. vs. Commi ssi oner ofI ncome Tax, ( 2002) 255 I TR 0273. I n Apol l o Tyr es,one of t hequest i ons r ai sed and t he obser vat i ons of t he Supr eme Cour t i nr egar d t her et o ar e as f ol l ows: - “ 2.…. …. . …. …. …. . … …. . …… . . …. . . …. . … …. . …. . . …. . . …. . …. . ( i )Can an AO whi l e assessi ng a company f ori ncome- t ax under s. 115J of t he I T Act quest i on t hecor r ect ness of t he P&L a/ c pr epar ed by t heassessee- company and cer t i f i ed by t he st at ut or yaudi t or s of t he company as havi ng been pr epar ed i naccor dance wi t h t he r equi r ement s of Par t s I I andI I I of Sch. VI t o t he Compani es Act ?…. …. . …. …. …. . … …. . …… . . …. . . …. . … …. . ….. . …. . . …. .…. .. …… 5.For deci di ng t hi s i ssue, i t i s necessar y f orus t o exami ne t he obj ect of i nt r oduci ng Sect i on115- J i n t he I T Act whi ch can be easi l y deducedf r om t he Budget speech of t he t hen Hon’ bl e Fi nanceMi ni st er of I ndi a made i n Par l i ament whi l ei nt r oduci ng t he sai d sect i on whi ch i s as f ol l ows: “ I t i s onl y f ai r and pr oper t hat t he pr osper ousshoul d pay at l east some t ax. The phenomenon ofso- cal l ed ‘ zer o- t ax’ hi ghl y pr of i t abl e compani esdeser ves at t ent i on. I n 1983, a new Sect i on 80-VVA was i nser t ed i n t he Act so t hat al lpr of i t abl e compani es pay some t ax. Thi s does notseem t o have hel ped and i s bei ng wi t hdr awn. Inow pr opose t o i nt r oduce a pr ovi si on wher ebyever y company wi l l have t o pay a ‘ mi ni mumcor por at e t ax’ on t he pr of i t s decl ar ed by i t i ni t s own account s. Under t hi s new pr ovi si on, acompany wi l l pay t ax on at l east 30% of i t s bookpr of i t . I n ot her wor ds, a domest i c wi del y hel dcompany wi l l pay t ax of at l east 15% of i t s bookpr of i t . Thi s measur e wi l l yi el d a r evenue gai nof appr oxi mat el y Rs 75 cr or es. ” The above speech shows t hat t he I ncome TaxAut hor i t i es wer e unabl e t o br i ng cer t ai n compani eswi t hi n t he net of i ncome t ax because t hesecompani es wer e adj ust i ng t hei r account s i n such amanner as t o at t r act no t ax or ver y l i t t l e t ax. I ti s wi t h a vi ew t o br i ng such of t hese compani eswi t hi n t he t ax net t hat Sect i on 115- J wasi nt r oduced i n t he I T Act wi t h a deemi ng pr ovi si onwhi ch makes t he company l i abl e t o pay t ax on atl east 30% of i t s book pr of i t s as shown i n i t s ownaccount . For t he sai d pur pose, Sect i on 115- J makest he i ncome r ef l ect ed i n t he compani es’ books ofaccount s as t he deemed i ncome f or t he pur pose ofassessi ng t he t ax. I f we exami ne t he sai d pr ovi si oni n t he above backgr ound, we not i ce t hat t he use oft he wor ds “ i n accor dance wi t h t he pr ovi si ons ofPar t s I I and I I I of Schedul e VI t o t he Compani esAct ” was made f or t he l i mi t ed pur pose of empower i ngt he assessi ng aut hor i t y t o r el y upon t he aut hent i cst at ement of account s of t he company. Whi l e sol ooki ng i nt o t he account s of t he company, anAssessi ng Of f i cer under t he I T Act has t o acceptt he aut hent i ci t y of t he account s wi t h r ef er ence t ot he pr ovi si ons of t he Compani es Act whi ch obl i gat est he company t o mai nt ai n i t s account i n a mannerpr ovi ded by t he Compani es Act and t he same t o bescr ut i ni sed and cer t i f i ed by st at ut or y audi t or s andwi l l have t o be appr oved by t he company i n i t sGener al Meet i ng and t her eaf t er t o be f i l ed bef or e t he Regi st r ar of Compani es who has ast at ut or yobl i gat i on al so t o exami ne and sat i sf y t hat t heaccount s of t he company ar e mai nt ai ned i naccor dance wi t h t he r equi r ement s of t he Compani esAct . I n spi t e of al l t hese pr ocedur es cont empl at edunder t he pr ovi si ons of t he Compani es Act , we f i ndi t di f f i cul t t o accept t he ar gument of t he Revenuet hat i t i s st i l l open t o t he Assessi ng Of f i cer t or escr ut i ni ze t hi s account and sat i sf y hi msel f t hatt hese account s have been mai nt ai ned i n accor dancewi t h t he pr ovi si ons of t he Compani es Act . I n ouropi ni on,r el i ance pl aced by t he Revenue on sub-sect i on ( 1- A) of Sect i on 115- J of t he I T Act i nsuppor t of t he above cont ent i on i s mi spl aced. Sub-sect i on ( 1- A) of Sect i on 115- J does not empower t heAssessi ng Of f i cer t o embar k upon a f r esh i nqui r y i nr egar d t o t he ent r i es made i n t he books of accountof t he company. The sai d sub- sect i on, as a mat t erof f act , mandat es t he company t o mai nt ai n i t saccount i n accor dance wi t h t he r equi r ement s of t heCompani es Act whi ch mandat e, accor di ng t o us, i sbodi l y l i f t ed f r om t he Compani es Act i nt o t he I TAct f or t he l i mi t ed pur pose of maki ng t he sai daccount so mai nt ai ned as a basi s f or comput i ng t hecompany’ s i ncome f or l evy of i ncome t ax. Beyondt hat , we do not t hi nk t hat t he sai d sub- sect i onempower s t he aut hor i t y under t he I ncome Tax Act t opr obe i nt o t he account s accept ed by t he aut hor i t i esunder t he Compani es Act . I f t he st at ut e mandat est hat i ncome pr epar ed i n accor dance wi t h t heCompani es Act shal l be deemed i ncome f or t hepur pose of Sect i on 115- J of t he Act , t hen i t shoul dbe t hat i ncome whi ch i s accept abl e t o t heaut hor i t i es under t he Compani es Act . Ther e cannotbe t wo i ncomes, one f or t he pur pose of t heCompani es Act and anot her f or t he pur pose of i ncomet ax, bot h mai nt ai ned under t he same Act . I f t hel egi sl at ur e i nt ended t he Assessi ng Of f i cer t or eassess t he company’ s i ncome, t hen i t woul d havest at ed i n Sect i on 115- J t hat “ i ncome of t he companyas accept ed by t he Assessi ng Of f i cer ” . I n t heabsence of t he same and on t he l anguage of Sect i on115- J, i t wi l l have t o be hel d t hat t he vi ew t akenby t he Tr i bunal i s cor r ect and t he Hi gh Cour t haser r ed i n r ever si ng t he sai d vi ew of t he Tr i bunal . Ther ef or e, we ar e of t he opi ni on, t he Assessi ngOf f i cer whi l e comput i ng t he i ncome underSect i on 115- J has onl y t he power of exami ni ngwhet her t he books of account ar e cer t i f i ed byt he aut hor i t i es under t he Compani es Act ashavi ng been pr oper l y mai nt ai ned i n accor dance wi t h t he Compani es Act . The Assessi ng Of f i cert her eaf t er has t he l i mi t ed power of maki ngi ncr eases and r educt i ons as pr ovi ded f or i n t heExpl anat i on t o t he sai d sect i on. To put i tdi f f er ent l y, t he Assessi ng Of f i cer does nothave t he j ur i sdi ct i on t o go behi nd t he netpr of i t shown i n t he pr of i t and l oss accountexcept t o t he ext ent pr ovi ded i n t heExpl anat i on t o Sect i on 115- J. ” The j udgment of t he Supr eme Cour t i s a compl et e answer i n f avourof t he assessee and agai nst t he appel l ant i n r espect of quest i onNos. 3 and 4.I t i s not t he appel l ant ’ s case t hat t he assessee’ sbooks of account wer e not cer t i f i ed by t he aut hor i t i es under t heCompani es Act as havi ng been pr oper l y mai nt ai ned i n accor dance wi t ht he Compani es Act . The Assessi ng Of f i cer coul d not , t her ef or e, havegone behi nd t he same and come t o a di f f er ent concl usi on. The j udgment of t he Supr eme Cour t i s a compl et e answer i n f avourof t he assessee and agai nst t he appel l ant i n r espect of quest i onNos. 3 and 4.I t i s not t he appel l ant ’ s case t hat t he assessee’ sbooks of account wer e not cer t i f i ed by t he aut hor i t i es under t heCompani es Act as havi ng been pr oper l y mai nt ai ned i n accor dance wi t ht he Compani es Act . The Assessi ng Of f i cer coul d not , t her ef or e, havegone behi nd t he same and come t o a di f f er ent concl usi on. 10.Accor di ngl y, quest i on Nos. 3 and 4 ar e answer ed i n f avourof t he assessee and agai nst t he appel l ant . 11.Re: Quest i on 5: As we ment i oned ear l i er , quest i on 5 i s answer ed i nf avour of t he assessee and agai nst t he appel l ant i n vi ew of t hej udgment of t hi s cour t dat ed 06. 07. 2010 i n t he assessee’ s case,namel y, I TA No. 385 of 2009. 12.Re: Quest i on 6: The f act s ar e admi t t ed.I n Febr uar y, 2004, t he assesseeavai l ed a l oan of 5347 mi l l i on Japanese Yen ( JPY) ( equi val ent t o USD50 mi l l i on) f r om Bar cl ays Bank and St andar d Char t er ed Bank. Thel oans wer e sanct i oned under t he aut omat i c r out e of RBI ’ s Ext er nalCommer ci al Bor r owi ng ( ECB) . TheRBI gui del i nes r equi r e f or ei gncur r ency exposur e under t he ECB t o be hedged bef or e avai l i ng t he ECB f aci l i t i es. The assessee, accor di ngl y, ent er ed i nt o a hedgi ngagr eement wi t h t he sai d banks t o pr ot ect i t sel f agai nst mar ketf l uct uat i ons i n spot exchange cur r ency r at es f or payment ofi nt er est and r epayment of pr i nci pl e i n f or ei gn cur r ency. I t was agener al pur pose l oan and not f or t he acqui si t i on of any asset s. Onaccount of a f l uct uat i on adver se t o i t , t he assessee was l i abl e f ora di f f er ent i al amount ofi nt er est t o t he ext ent of about Rs. 23cr or es. The assessee f ol l owed t he mer cant i l e syst em of account i ng.I n accor dance wi t h t he gui del i nes of t he I CAI , t he assesseepr ovi ded f or a l oss of Rs. 23 cr or es. 13.The Assessi ng Of f i cer added t hi s amount i n comput at i onof t he book- pr of i t f or t he pur pose of mi ni mum al t er nat e t ax undersect i on 115JB hol di ng t hat t he amount was mer el y pr ovi si onal and att he t i me of act ual r epayment of l oan t heposi t i on may var yr esul t i ng i n a pr of i t . He hel d, t her ef or e, t hat t hi s was not anascer t ai ned l i abi l i t y. Accor di ngl y, t he Assessi ng Of f i cer added t heamount of Rs. 23 cr or es t o t he book- pr of i t under sect i on 115JB aswel l as t o t he nor mal i ncome. 14.The Tr i bunal not i ced t hat account i ng st andar d 11 i ssuedby I CAI deal s wi t h t he i ssue of account i ng f or f l uct uat i on i nf or ei gn exchange r at es as i mpact i ngt he cur r ent asset s andl i abi l i t i es.The Tr i bunal r i ght l y pl aced r el i ance upon a j udgmentof t he Supr eme Cour t i n Commi ssi oner of I ncome Tax v. Woodwar dGover nor I ndi a P. Lt d. , [ 2009] 312 I TR 254 ( SC) . Al t hough t he r at i oi n par agr aph15i s suf f i ci ent t o answer t he quest i ons underconsi der at i on, we i nt end r ef er r i ng t o t he pr ocess of r easoni ngl eadi ng t o i t as wel l . I n t hat case, t he Supr eme Cour t r ai sed t he f ol l owi ng quest i on and made t he f ol l owi ng obser vat i ons i n r egar dt her et o: - “ 3.I n t hi s bat ch of ci vi l appeal s, t he f ol l owi ngquest i ons ar i se f or det er mi nat i on: f ol l owi ng quest i on and made t he f ol l owi ng obser vat i ons i n r egar dt her et o: - “ 3.I n t hi s bat ch of ci vi l appeal s, t he f ol l owi ngquest i ons ar i se f or det er mi nat i on: ( i ) Whet her , on t he f act s and ci r cumst ances of t hecase and i n l aw, t he addi t i onal l i abi l i t y ar i si ngon account of f l uct uat i on i n t he r at e of exchangei n r espect of l oans t aken f or r evenue pur posescoul d be al l owed as deduct i on under Sect i on 37( 1)i n t he year of f l uct uat i on i n t he r at e of exchangeor whet her t he same coul d onl y be al l owed i n t heyear of r epayment of such l oans? . . …. . . …. . …. . . …… 13. As st at ed above, one of t he mai n ar gument sadvanced by t he l ear ned Addi t i onal Sol i ci t orGener al on behal f of t he Depar t ment bef or e us wast hat t he wor d “ expendi t ur e” i n Sect i on 37( 1)connot es “ what i s pai d out ” and t hat whi ch has gonei r r et r i evabl y. I n t hi s connect i on, heavy r el i ancewas pl aced on t he j udgment of t hi s Cour t i n I ndi anMol asses Co. [ AI R 1959 SC 1049 : ( 1959) 37 I TR 66]Rel yi ng on t he sai d j udgment , i t was sought t o bear gued t hat t he i ncr ease i n l i abi l i t y at any poi ntof t i me pr i or t o t he dat e of payment cannot be sai dt o have gone i r r et r i evabl y as i t can al ways comeback. I n I ndi an Mol asses Co. case [ AI R 1959 SC 1049: ( 1959) 37 I TR 66] , t he Supr eme Cour t wasconsi der i ng t he meani ng of t he expr essi on“ expendi t ur e i ncur r ed” whi l e deal i ng wi t h t hequest i on as t o whet her t her e was a di st i nct i onbet ween t he act ual l i abi l i t yi n pr aesent i and al i abi l i t y de f ut ur o. The wor d “ expendi t ur e” i s notdef i ned i n t he 1961 Act . The wor d “ expendi t ur e” i s,t her ef or e, r equi r ed t o be under st ood i n t he cont exti n whi ch i t i s used. Sect i on 37 enj oi ns t hat anyexpendi t ur e not bei ng expendi t ur e of t he nat ur edescr i bed i n Sect i ons 30 t o 36 l ai d out or expendedwhol l y and excl usi vel y f or t he pur poses of t hebusi ness shoul d be al l owed i n comput i ng t he i ncomechar geabl e under t he head “ pr of i t s and gai ns ofbusi ness” . I n Sect i ons 30 t o 36, t he expr essi ons“ expenses i ncur r ed” as wel l as “ al l owances anddepr eci at i on” have al so been used. For exampl e,depr eci at i on and al l owances ar e deal t wi t h i nSect i on 32. Ther ef or e, Par l i ament has used t heexpr essi on “ any expendi t ur e” i n Sect i on 37 t o coverbot h. Ther ef or e, t he expr essi on “ expendi t ur e”asused i n Sect i on 37 may, i n t he ci r cumst ances of a par t i cul ar case, cover an amount whi ch i s r eal l y a“ l oss” even t hough t he sai d amount has not gone outf r om t he pocket of t he assessee. par t i cul ar case, cover an amount whi ch i s r eal l y a“ l oss” even t hough t he sai d amount has not gone outf r om t he pocket of t he assessee. 14. I n M. P. Fi nanci al Cor pn. v. CI T [ ( 1987) 165 I TR765 ( MP) ] t he Madhya Pr adesh Hi gh Cour t has hel dt hat t he expr essi on “ expendi t ur e” as used i nSect i on 37 may, i n t he ci r cumst ances of apar t i cul ar case, cover an amount whi ch i s a “ l oss”even t hough t he sai d amount has not gone out f r omt he pocket of t he assessee. Thi s vi ew of t he MadhyaPr adesh Hi gh Cour t has been appr oved by t hi s Cour ti n Madr as I ndust r i al I nvest ment Cor pn. Lt d. v.CI T[ ( 1997) 4 SCC 666 : ( 1997) 225 I TR 802] .Accor di ngt o Law and Pr act i ce of I ncome Tax by Kanga andPal khi val a, Sect i on 37( 1) i s a r esi duar y sect i onext endi ng t he al l owance t o i t ems of busi nessexpendi t ur e not cover ed by Sect i ons 30 t o 36. Thi ssect i on, accor di ng t o t he l ear ned aut hor , cover scases of busi ness expendi t ur e onl y, and not ofbusi ness l osses whi ch ar e, however , deduct i bl e onor di nar y pr i nci pl es of commer ci al account i ng ( seep. 617, Vol . I of t he 8t h Edn. ) . I t i s t hi spr i nci pl e whi ch at t r act s t he pr ovi si ons of Sect i on145. That sect i on r ecogni ses t he r i ght s of a t r adert o adopt ei t her t he cash syst em or t he mer cant i l esyst em of account i ng. The quant um of al l owancesper mi t t ed t o be deduct ed under di ver se heads underSect i ons 30 t o 43- C f r om t he i ncome, pr of i t s andgai ns of a busi ness woul d di f f er accor di ng t o t hesyst em adopt ed. Thi s i s made cl ear by def i ni ng t hewor d “ pai d” i n Sect i on 43( 2) , whi ch i s used i nsever al sect i ons i . e. Sect i ons 30 t o 43- C, asmeani ng act ual l y pai d or i ncur r ed accor di ng t o t hemet hod of account i ng upon t he basi s on whi chpr of i t s or gai ns ar e comput ed under Sect i ons 28/ 29.That i s why i n deci di ng t he quest i on as t o whet hert he wor d “ expendi t ur e” i n Sect i on 37( 1) i ncl udest he wor d “ l oss” one has t o r ead Sect i on 37( 1) wi t hSect i on 28, Sect i on 29 and Sect i on 145( 1) . One mor epr i nci pl e needs t o be kept i n mi nd. Account sr egul ar l y mai nt ai ned i n t he cour se of busi ness ar et o be t aken as cor r ect unl ess t her e ar e st r ong andsuf f i ci ent r easons t o i ndi cat e t hat t hey ar eunr el i abl e.One mor e aspect needs t o behi ghl i ght ed. Under Sect i on 28( i ) , one needs t odeci de t he pr of i t s and gai ns of any busi ness whi chi s car r i ed on by t he assessee dur i ng t he pr evi ousyear . Ther ef or e, one has t o t ake i nt o accountst ock- i n- t r ade f or det er mi nat i on of pr of i t s. The1961 Act makes no pr ovi si on wi t h r egar d t oval uat i on of st ock. But t he or di nar y pr i nci pl e ofcommer ci al account i ng r equi r est hat i n t he P&L account t he val ue of t he st ock- i n- t r ade at t hebegi nni ng and at t he end of t he year shoul d beent er ed at cost or mar ket pr i ce, whi chever i s t hel ower . Thi s i s how busi ness pr of i t s ar i si ng dur i ngt he year need t o be comput ed. Thi s i s one mor er eason f or r eadi ng Sect i on 37( 1) wi t h Sect i on 145.For val ui ng t he cl osi ng st ock at t he end of apar t i cul ar year , t he val ue pr evai l i ng on t he l astdat e i s r el evant . Thi s i s because pr of i t s/ l oss i sembedded i n t he cl osi ng st ock. Whi l e ant i ci pat edl oss i s t aken i nt o account , ant i ci pat ed pr of i t i nt he shape of appr eci at ed val ue of t he cl osi ng st ocki s not br ought i nt o account , as no pr udent t r aderwoul d car e t o show i ncr eased pr of i t s bef or e act ualr eal i sat i on. Thi s i s t he t heor y under l yi ng t he r ul et hat cl osi ng st ock i s t o be val ued at cost ormar ket pr i ce, whi chever i s t he l ower . As pr of i t sf or i ncome t ax pur poses ar e t o be comput ed i naccor dance wi t h or di nar y pr i nci pl es of commer ci alaccount i ng, unl ess, such pr i nci pl es st andsuper seded or modi f i ed by l egi sl at i ve enact ment s,unr eal i sed pr of i t s i n t he shape of appr eci at edval ue of goods r emai ni ng unsol d at t he end of t heaccount i ng year and car r i ed over t o t he f ol l owi ngyear ’ s account i n a cont i nui ng busi ness ar e notbr ought t o t he char ge as a mat t er of pr act i ce,t hough, as st at ed above, l oss due t o f al l i n t hepr i ce bel ow cost i s al l owed even t hough such l osshas not been r eal i sed act ual l y. At t hi s st age, weneed t o emphasi se once agai n t hat t he above syst emof commer ci al account i ng can be super seded ormodi f i ed by l egi sl at i ve enact ment . Thi s i s wher eSect i on 145( 2) comes i nt o pl ay. Under t hat sect i on,t he Cent r al Gover nment i s empower ed t o not i f y f r omt i me t o t i me t he account i ng st andar ds t o bef ol l owed by any cl ass of assessees or i n r espect ofany cl ass of i ncome. Accor di ngl y, under Sect i on 209of t he Compani es Act , mer cant i l e syst em ofaccount i ng i s made mandat or y f or compani es. I not her wor ds, account i ng st andar d whi ch i scont i nuousl y adopt ed by an assessee can besuper seded or modi f i ed by l egi sl at i ve i nt er vent i on.However , but f or such i nt er vent i on or i n casesf al l i ng under Sect i on 145( 3) , t he met hod ofaccount i ng under t aken by t he assessee cont i nuousl yi s supr eme. I n t he pr esent bat ch of cases, t her e i sno f i ndi ng gi ven by t he AO on t he cor r ect ness orcompl et eness of t he account s of t he assessee.Equal l y, t her e i s no f i ndi ng gi ven by t he AOst at i ng t hat t he assessee has not compl i ed wi t h t heaccount i ng st andar ds. 15.For t he r easons gi ven her ei nabove, we hol dt hat , i n t he pr esent case, t he “ l oss” suf f er ed byt he assessee on account of t he exchange di f f er enceas on t he dat e of t he bal ance sheet i s an i t em ofexpendi t ur e under Sect i on 37( 1) of t he 1961 Act. ” ( emphasi s suppl i ed) The j udgment of t he Supr eme Cour t cl ear l y appl i es t o t he pr esentcase. The Tr i bunal , accor di ngl y, r i ght l y del et ed t he addi t i on. 15.Quest i on 6 i s, t her ef or e, answer ed i n f avour of t heassessee/ r espondent . 16.Re: Quest i ons 7 & 8: 15.For t he r easons gi ven her ei nabove, we hol dt hat , i n t he pr esent case, t he “ l oss” suf f er ed byt he assessee on account of t he exchange di f f er enceas on t he dat e of t he bal ance sheet i s an i t em ofexpendi t ur e under Sect i on 37( 1) of t he 1961 Act. ” ( emphasi s suppl i ed) The j udgment of t he Supr eme Cour t cl ear l y appl i es t o t he pr esentcase. The Tr i bunal , accor di ngl y, r i ght l y del et ed t he addi t i on. 15.Quest i on 6 i s, t her ef or e, answer ed i n f avour of t heassessee/ r espondent . 16.Re: Quest i ons 7 & 8: On t he basi s oft he assessee’ sbal ance- sheet , t heAssessi ng Of f i cer not i ced t hatt her e wer e di vi dend bear i ngi nvest ment s and t he assessee ear ned di vi dend dur i ng t he year onsuch i nvest ment s; t hat t he assessee ear ned exempt i ncome of aboutRs. 36 cr or es and t hat , t her ef or e, t he expenses on account of suchi ncome wer e l i abl e t o be di sal l owed as per t he pr ovi si ons ofsect i on 14A. The assessee was al so asked t o f i l e a comput at i on asper r ul e 8D. The Assessi ng Of f i cer comput ed t he di sal l owance as perr ul e 8D i n t he sum of Rs. 5. 07 cr or es. I t was f ur t her obser ved t hatby appl yi ng r ul e 8D t he quant um of di sal l owance came t o Rs. 24. 90cr or es as agai nst whi ch t he assessee had i t sel f made a di sal l owanceof Rs. 17. 89 cr or es and t hat accor di ngl y a f ur t her di sal l owance ofRs. 7. 01 cr or es ( Rs. 24. 90- Rs. 17. 89 cr or es) was made under sect i on14A. The Assessi ng Of f i cer not i ced t hat t he assessee whi l e addi ngan amount of Rs. 17. 89 cr or es had onl y account ed f or t he di r ectexpendi t ur e and not f or i ndi r ect expendi t ur e, such as, underadmi ni st r at i ve and ot her heads. 17.The i ssue i s cover ed by a j udgment of a Di vi si on Benchof t hi s Cour t dat ed 06. 09. 2016 i nCommi ssi oner of I ncome Tax, Jal andhar - I , Jal andhar vs. M/ s Max I ndi a Li mi t ed, I TA No. 186 of2013. Bef or e deal i ng wi t h t he j udgment , i t i s necessar y t o not e af ew f act s. Rs. 521 cr or es was t he assessee’ s t ot al busi nessexpendi t ur e by way of i nt er est on l oans. The assessee’ s busi nessasset s wer e about Rs. 26, 930 cr or es of whi ch Rs. 1014 cr or es wer ei nvest ed i n i t s whol l y owned subsi di ar i es. I t i s f r om t hei nvest menti n i t s subsi di ar i es t hat t he assessee ear ned Rs. 36. 06cr or es by way of di vi dend. However , i t i s i mpor t ant t o not e t hatt he assessee had,f r ee f unds of i t s own of a sum of Rs. 17, 275cr or es avai l abl e t o i t . Thus,as agai nst t he i nvest ment of Rs. 1014cr or es whi ch yi el ded di vi dend of Rs. 36. 06 cr or es, t he assessee hadavai l abl e t o i t Rs. 17, 275 cr or es. As Mr . Ved Jai n, t he l ear nedcounsel appear i ng on behal f of t he assessee, r i ght l y submi t t ed, t hepr esumpt i on i s t hat t he assessee used i t s own f unds whi l e maki ngt he i nvest ment of Rs. 1014 cr or es i n t he subsi di ar i es. Ther e i snot hi ng t o r ebut t hi s pr esumpt i on. The Tr i bunal , t her ef or e, r i ght l yhel d t hat t her e was no quest i on of di sal l owance under sect i on 14A. 18.Quest i on Nos. 7 and 8 ar e, t her ef or e, answer ed i n f avourof t he assessee 19.I n t he ci r cumst ances, t he appeal i s di smi ssed. ( S. J. VAZI FDAR)CHI EF JUSTI CE 28. 02. 2018 ( AVNEESH JHI NGAN)JUDGE par kashNOTE: Whet her speaki ng/ non- speaki ng: Speaki ng Whet her r epor t abl e: NO