2011 (12) TMI 222 - AT - Income Tax

Assessee's Appeal Dismissed for Foreign Exchange Fluctuation Deduction: Tribunal Upholds Disallowance

The appeal by the assessee was dismissed, and the disallowance of the deduction of Rs. 33,11,687/- from the net profit on account of foreign exchange ... Dis-allowance of deduction from the net profit on account of foreign exchange fluctuation due to restatement of term loan at the year-end while computing the tax u/s.115JB – Held that:- Provisions of section 115JB being code by itself, therefore the adjustments can be made as prescribed within this code. Under this code if a P/L account has been made in terms of the Companies Act, then no adjustment or tinkering is available except as provided in Explanation. See Apollo Tyres Ltd. v. CIT [2002 - TMI - 6081 - Supreme Court] As far as the 'AS-11' is concerned, in simple language, it is expected from a business enterprise to adjust the interest difference, so that the amounts outstanding in Indian Rupees in the books of account of the assessee should match with the corresponding amount shown as outstanding by a bank or any third party in Foreign Exchange by applying the current Foreign Exchange Rate. Though at present we are not concerned about the interpretation and applicability of 'AS-11' but to our humble understanding the Auditor have rightly accounted for the Foreign Exchange Fluctuation due to restated term loan and that was made the component of the net profit of the assessee-company. Further assessee has not demonstrated that as per Schedule-VI of Companies Act, the impugned income is beyond the scope of profit of the company. By very adoption and inclusion of the said income in the profits of the company it has been affirmed that the same had come within the ambits of the 'book profit'. We therefore hold that the assessee was not justified in reducing the said amount while computing the 'book profit' – Decided against the assessee. Issues Involved:1. Disallowance of deduction of Rs. 33,11,687/- from the net profit on account of foreign exchange fluctuation due to restated term loan at the year-end.Detailed Analysis:I. Disallowance of Deduction of Rs. 33,11,687/- from the Net Profit on Account of Foreign Exchange Fluctuation Due to Restated Term Loan at the Year End1. Background and Appeal:- The appeal by the assessee emanates from the order of the CIT(Appeals)-VI, Ahmedabad dated 10/10/2008.- The primary issue is the disallowance of a deduction of Rs. 33,11,687/- while computing the tax under section 115JB of the Income Tax Act, 1961 (I.T. Act).2. Arguments by the Assessee:- The assessee, engaged in the business of running a multiplex theatre, filed a return of income at a loss of Rs. (-) 58,92,889/- and disclosed 'book profit' of Rs. 1,58,06,285/- under section 115JB.- The deduction of Rs. 33,11,687/- was claimed as it pertained to 'Foreign exchange fluctuation due to restated term loan at the year-end'.- The assessee argued that this deduction was due to the difference in the term loan payable as per books and the amount restated at the market rate of dollars as on 31/3/2005, which was not a capital receipt nor real income, but a notional receipt due to Accounting Standard 11 (AS-11).3. Assessing Officer's View:- The Assessing Officer (A.O) disallowed the deduction, stating that there was no provision under section 115JB for such a deduction.- The A.O computed the 'book profit' under section 115JB at Rs. 1,91,17,972/-.4. CIT(Appeals) Decision:- The CIT(A) discussed the purpose of Minimum Alternate Tax (MAT) and the definition of 'book profit' under section 115JB.- The CIT(A) affirmed the A.O's computation of 'book profit' and disallowed the deduction.5. Assessee's Argument in Appeal:- The assessee's representative argued that the income was notional and should not be taxed under section 115JB.- The representative cited various case laws to support the argument that notional income should not be included in 'book profit'.6. Revenue's Argument:- The Revenue argued that section 115JB(2) clearly states that the Profit & Loss account should be prepared as per the Companies Act, and no adjustments are permissible except those specified.- They cited various judgments, including Apollo Tyres Ltd. v. CIT and N.J. Jose & Co. Ltd. v. Asstt. CIT, to support their stance.7. Tribunal's Analysis:- The Tribunal noted that the assessee's accounts were prepared and audited as per the Companies Act and laid before the AGM.- Section 115JB(2) mandates that the Profit & Loss account should be prepared as per the Companies Act, and no adjustments are permissible except those specified in the Explanation to section 115JB.- The Tribunal emphasized that the provisions of section 115JB are a separate code, and adjustments can only be made as prescribed within this code.- The Tribunal rejected the argument that the income was not real, stating that the inclusion of the income in the 'book profit' was affirmed by the auditors and was part of the net profit of the company.8. Conclusion:- The Tribunal held that the assessee was not justified in reducing the amount of Rs. 33,11,687/- while computing the 'book profit'.- The Tribunal affirmed the view taken by the lower authorities and dismissed the appeal.Judgment:- The appeal by the assessee is dismissed, and the disallowance of the deduction of Rs. 33,11,687/- from the net profit on account of foreign exchange fluctuation due to restated term loan at the year-end is upheld.