Can the Assessee claim revaluation loss on index linked debentures issued by the assessee ?
The Hon;ble Supreme Court has considered the issue relating to the effect of changes in foreign exchange rates in the case of Woodward Governor India (P) Ltd (supra). In the case of foreign currency also, the conversion rates keep fluctuating and hence the liability of the assessee in respect of foreign currency loan would also keep changing. The Hon’ble Supreme Court examined the Accounting standard -11 issued by ICAI, where in it is provided that any difference, loss or gain, arising on conversion of the said liability at the closing rate should be recognized in the P&L account for the reporting period. The Hon’ble Supreme Court held that the loss suffered by an assessee as on the date of balance sheet in respect of a revenue liability, on account of exchange difference, is an item of expenditure deductible u/s 37(1) of the Act.
In the present case, the liability would depend upon the performance of nifty index level. So whenever the nifty index level crosses the index level that prevailed at the time of allotment of debentures, the liability of the assessee would also simultaneously increase. It is an accepted and prudent accounting practice to provide for all known liabilities and losses as on the date of Balance Sheet. The accounting standards also mandate the companies to provide for known liabilities and losses. During the years under consideration, the claim of the assessee is that the nifty index level has gone up vis-à-vis the level existed at the time of allotment of debentures, meaning thereby the liability of the assessee was known as on the date of Balance Sheet. Accordingly, we are of the view that the said liability would fall in the category of ‘expenditure’, since it is in the nature of interest liability only. Accordingly, we are of the view that the ratio of the decision rendered by the Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd shall apply to the facts of the present case also.
IN THE ITAT MUMBAI BENCH ‘K’
J.P. Morgan Securities India (P.) Ltd.
v.
Additional Commissioner of Income-tax, Range -(2), Mumbai
AND AMIT SHUKLA, JUDICIAL MEMBER
IT APPEAL NOS. 1759 (MUM.) OF 2014 AND 452 (MUM.) OF 2015
[ASSESSMENT YEAR 2009-10]
SEPTEMBER 16, 2015
Nishant Thakur for the Appellant. G.M. Doss for the Respondent.
ORDER
B.R. Baskaran, Accountant Member – The assessee has filed both the appeals challenging the assessment orders passed for assessment years 2009-10 and 2010-11 by the AO in conformity with the directions issued by the Dispute Resolution Panel (DRP) of the Act. Since issues urged in both the years are identical in nature, both these appeals were heard together and are being disposed of by this common order, for the sake of convenience.
2. The assessee is engaged in the business of securities trading, NBFC activities and is also a professional clearing member for the derivatives segment with National Securities clearing corporation Ltd.
3. The first common issue urged in both the years relate to assessment of notional interest on the alleged loan given by the assessee to its AE. The facts relating thereto are stated in brief. During the financial year ended 31.3.2008 relevant to the AY 2008-09, the assessee issued 9 crores equity shares of Rs.10/- each at a price of Rs.36/- each. The TPO considered the same as international transaction and determined the arms length price of shares at Rs.51.74 per share. The difference between the ALP and the issue price was also treated as “deemed loan” by the TPO in AY 2008-09. During the two years under consideration, the TPO took the view that the deemed loan is continuing and accordingly computed the “Notional interest” on the deemed loan. The said notional interest determined by the TPO was also confirmed by Ld DRP and hence the AO assessed the same in both the years under consideration.
4. The Ld Counsel appearing for the assessee submitted that the assessee challenged the addition relating to difference in issue price of shares and also the issue relating to “deemed loan” in AY 2008-09 before the Tribunal and the Tribunal, vide its order dated 25.3.2015 passed in iTA No.7572/Mum/2012 for AY 2008-09, has deleted the addition by following the decision rendered by Hon’ble Bombay High Court in the cases of Vodafone india Services Pvt Ltd. v. Union of India and Ors (368 ITR 01) and M/s Shell India Markets Pvt Ltd (369 ITR 516). The Ld D.R did not dispute these facts.
5. Thus, we notice that the very foundation, on which the notional interest has been levied i.e., the addition relating to the difference in issue price which was considered to be the deemed loan”, has since been deleted by the Tribunal. In that case, the impugned addition pertaining to notional interest made in both the years under consideration does not survive and is accordingly liable to be deleted. Accordingly, we direct the AO to delete the addition relating to notional interest in both the years.
6. The next common issue relates to disallowance made in both the years in respect of revaluation loss on index linked debentures issued by the assessee. The assessee claimed revaluation loss of debentures under the head “Interest & financial charges”. The assessee furnished following reply, vide its letter dated 14.3.2013, during the course of assessment proceedings relating to AY 2009-10:-
| “(i) | During the year, the assessee had issued 100% principally protected debentures at par, having a pre defined return payable on the maturity of the debentures. The return on these debentures is determined based on the Nifty index level prevailing on the date of maturity. On the date of maturity, the investor would receive the principal of the debenture, as protected. In addition, the investor may also receive a coupon based on the Nifty index level prevailing on the date of maturity. | |
| (ii) | The assessee has designated the debenture as at fair value and accounted for estimated liability for the future coupon payments based on the fair value (mark-to-market) and made a corresponding provision at the year end. The amount of provision is arrived at based on a pre-defined formula based on the concept of prudence and following the principles of AS-30. | |
| (iii) | The AS-1 provides that accounting policies adopted by an assessee should be such that it represents a true and fair view of the state of affairs of the business in the financial statements prepared and presented on the basis of such accounting policies. As per the standard, under the consideration of ‘prudence’, provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and only represents a best estimate in the light of available information. | |
| (iv) | Mercantile system of accounting requires that all liabilities should be taken into consideration. It need not be only a present liability, but also a future liability in respect of a concluded transaction, which is certain. | |
| (v) | A provision should be recognized when the following conditions are satisfied i.e. an enterprises has a present obligation as a result of past event, it is probable that an outflow of resource will be required to settle the obligation, and, a reliable estimate can be made of the obligation. The assessee claims to have met the said condition.” |
2. According to the assessee, the interest is payable on the basis of Nifty index level and hence if the index level as on the balance sheet date is more than the level at which the debentures were issued, then interest liability is created as on the Balance sheet date. Hence the assessee is required to provide for the interest liability so arrived at in terms of mercantile system of accounting and accounting standard. Accordingly, the assessee has computed the interest element under the name “Loss on revaluation of debentures” and claimed the same as deduction.
7. The explanations furnished by the assessee were not acceptable to the Ld DRP/AO and accordingly the claim so made by the assessee was disallowed in both the years.
8. The Ld A.R submitted that the Non convertible debentures having maturity period of 21 months /36 months were issued by the assessee during the year under consideration. These debentures are principal protected and they are linked to the performance of Nifty index. Accordingly, the debenture holders are given a Coupon and the value of coupon shall be determined as per the pre-determined formula, which is based on the nifty index level at the time of allotment and the nifty index level at the time of redemption. The Ld A.R submitted that the assessee is also liable to deduct tax at source on the value of coupon at the time of redemption. He submitted that the liability arising on debentures is in effect, in the nature of interest only, but the interest element is linked to the Nifty index level. Since the nifty index level keeps changing, the liability of the assessee also keeps changing. Accordingly, the assessee has provided for interest liability as at the Balance Sheet date as per the accounting standards and mercantile system of accounting, if the nifty index level as on the Balance Sheet date is higher than the level that existed at the time of allotment of debentures. The Ld A.R further placed reliance on the decision of Hon’ble Supreme Court rendered in the case of CIT v. Woodward Governor India (P) Ltd [2009](312 ITR 254) and submitted that the ratio laid down by the Hon’ble Apex Court in the above said case is applicable to the issue under consideration. He further submitted that the liability of the assessee has fallen down in subsequent years and hence the assessee has offered the reduction in liability as its income in AY 2011-12 and 2012-13.
9. On the contrary, the Ld D.R submitted that the debentures issued by the assessee are only principally protected and there is no guarantee about the payment of interest. The interest liability can be determined only at the time of redemption of debentures and hence the provision made by the assessee cannot be considered to be accrued liability.
10. We have heard the rival contentions on this issue and perused the record. There is no dispute with regard to the fact that the assessee has to pay some amount over and above the principal amount of debentures, if the nifty index level at the time of redemption is more than the nifty index level that prevailed at the time of allotment of debentures. If the nifty index level at the time of redemption is lower than the nifty index level that prevailed at the time of allotment of debentures, then the assessee is not required to pay any amount over and above the principal amount of debentures. There should not be any dispute that the amount payable by the assessee to the debenture holders is, in effect, in the nature of interest compensation only. The fixed rate of interest is the common method generally adopted and also known to everyone. However, the assessee has chosen to issue debentures, which would earn interest depending upon the performance of nifty index. It can be seen that the methodology adopted by the assessee is only a different method of computing the interest liability of the assessee.
11. It is also a known fact that the nifty index level shall not increase at a constant rate, but it will fluctuate depending upon the market conditions. So whenever the nifty index level crosses the index level that prevailed at the time of allotment of debentures, the liability of the assessee would also simultaneously increase. Conversely, if the index level goes down, the liability of the assessee would also go down.
12. The Hon;ble Supreme Court has considered the issue relating to the effect of changes in foreign exchange rates in the case of Woodward Governor India (P) Ltd (supra). In the case of foreign currency also, the conversion rates keep fluctuating and hence the liability of the assessee in respect of foreign currency loan would also keep changing. The Hon’ble Supreme Court examined the Accounting standard -11 issued by ICAI, where in it is provided that any difference, loss or gain, arising on conversion of the said liability at the closing rate should be recognized in the P&L account for the reporting period. The Hon’ble Supreme Court held that the loss suffered by an assessee as on the date of balance sheet in respect of a revenue liability, on account of exchange difference, is an item of expenditure deductible u/s 37(1) of the Act.
13. In the instant case also, there is no dispute with regard to the fact that there exists a liability to pay coupon rate at the time of redemption of debentures. As stated earlier the liability would, however, depend upon the performance of nifty index level. So whenever the nifty index level crosses the index level that prevailed at the time of allotment of debentures, the liability of the assessee would also simultaneously increase. It is an accepted and prudent accounting practice to provide for all known liabilities and losses as on the date of Balance Sheet. The accounting standards also mandate the companies to provide for known liabilities and losses. During the years under consideration, the claim of the assessee is that the nifty index level has gone up vis-à-vis the level existed at the time of allotment of debentures, meaning thereby the liability of the assessee was known as on the date of Balance Sheet. Accordingly, we are of the view that the said liability would fall in the category of ‘expenditure’, since it is in the nature of interest liability only. Accordingly, we are of the view that the ratio of the decision rendered by the Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd shall apply to the facts of the present case also.
14. However, we notice that the assessing officer did not examine the workings relating to the liability quantified by the assessee. We notice that the terms and conditions relating to the debentures prescribe a particular methodology to arrive at the interest liability at the time of redemption of debentures. In our view, the liability of the assessee as on the Balance sheet date should be determined under the very same methodology. Accordingly, we are of the view that the computation made by the assessee requires verification at the end of the assessing officer.
15. In view of the above, we set aside the order of the AO/Ld DRP on this issue in both the years under consideration and restore the same to the file of the AO for the limited purpose of examining the computation made by the assessee in both the years.
16. In AY 2009-10, the assessee has raised one more ground relating to non-granting of the TDS amounting to Rs.2.69 crores. The AO may take up this matter before the assessing officer.
17. Other grounds urged in both the years are consequential in nature.
18. In the result, both the appeals filed by the assessee are treated as allowed for statistical purposes.