Assessee wins appeal on foreign exchange & leave encashment, excludes forex loss from book profits

The tribunal allowed the assessee's appeal on all grounds, disallowing the foreign exchange fluctuation loss and leave encashment provision, and excluding the foreign exchange loss from book profits u/s 115JB. The tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow higher depreciation rates.

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Issues Involved:

1. Disallowance of Foreign Exchange Fluctuation loss.
2. Disallowance of leave encashment claimed on provision basis.
3. Addition of Foreign Exchange Fluctuation loss in computing Book Profit u/s 115JB.
4. Disallowance of depreciation claimed by the assessee at a higher rate.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation loss:

The assessee, a Public Limited Company engaged in infrastructure/construction equipment rental service, debited a foreign exchange fluctuation loss of Rs. 18,11,419/- (Net) in its annual accounts. The Assessing Officer disallowed the loss, treating it as capital in nature, relying on the decision in Woodward Governor India Pvt. Ltd. 312 ITR 254 (S.C). The CIT(A) upheld this disallowance. However, the tribunal noted that the foreign exchange loss should be allowed as revenue expenditure as per AS-11 and the decision in Indian Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC). The tribunal concluded that the CIT(A) erred in disallowing the foreign exchange fluctuation loss by treating it as capital in nature, and thus, the assessee's appeal on this ground was allowed.

2. Disallowance of leave encashment claimed on provision basis:

The assessee claimed a provision for leave encashment amounting to Rs. 4,66,803/-. The Assessing Officer disallowed this, stating it was allowable only on payment basis as per Section 43B(F). The CIT(A) upheld this disallowance. The tribunal, however, relied on the decision in Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (Cal) and Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC), which held that leave encashment is an ascertained liability and not a statutory one, thus not covered by Section 43B. The tribunal allowed the assessee's appeal on this ground.

3. Addition of Foreign Exchange Fluctuation loss in computing Book Profit u/s 115JB:

The Assessing Officer included the foreign exchange fluctuation loss of Rs. 30,88,634/- in the book profits u/s 115JB, treating it as a capital loss. The CIT(A) upheld this addition. The tribunal noted that Section 115JB is an overriding section, and in the absence of any provision in Explanation 1 to Sec. 115JB to add such expenditure, the addition made by the AO was erroneous. The tribunal relied on the decision in Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC), which restricted the Assessing Officer's power to scrutinize entries in the profit and loss account certified by statutory auditors. The tribunal allowed the assessee's appeal on this ground.

4. Disallowance of depreciation claimed by the assessee at a higher rate:

The Revenue appealed against the CIT(A)'s decision to allow depreciation at 60% on Oilers Gas, which the Assessing Officer had restricted to 15%, contending that the higher rate was only for Mineral Oil Concerns. The tribunal noted that the issue was covered by the decision in CIT vs. HLS India Ltd. (2011) 335 ITR 292 (Del), where it was held that depreciation at higher rates is allowable for assets used in the business of mineral oil concerns, regardless of ownership. The tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Conclusion:

The tribunal allowed the assessee's appeal on all grounds, disallowing the foreign exchange fluctuation loss and leave encashment provision, and excluding the foreign exchange loss from book profits u/s 115JB. The tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow higher depreciation rates.

Order Pronounced:

The order was pronounced in the Open Court on 03rd April, 2019.

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