2019 (4) TMI 765 - AT - Income Tax

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 ... Disallowance of Foreign Exchange Fluctuation loss - treating the same as capital in nature - HELD THAT:- The assessee offered the interest earned on loan given to RIDO to income tax. The entire loan was repaid by RIDO during the assessment year under consideration as can be seen from Schedule 9 of the Notes to Accounts. As per AS-11, treatment of foreign exchange loss arising out of foreign currency fluctuations in respect of fixed assets acquired through loan in foreign currency shall required to be given in profit and loss account and the same should be allowed as revenue expenditure. The Hon’ble Apex Court in Woodward Governor India (P) Ltd (2009 (4) TMI 4 - SUPREME COURT) had followed treatment of exchange loss or gain as per AS-11 (1994). In view of revision made in AS-11 in 2003, exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. In the present case, the CIT(A) as well as the AO has not taken into account the decision of the Apex Court in case of Indian Cements Ltd. [1965 (12) TMI 22 - SUPREME COURT] wherein it was held that the nature of expenditure being capital or revenue does not depend on the purpose for which foreign currency loan was obtained or on nature of ultimate utilization of loan amount - as per the accounting policy AS-11 (2003), the assessee is entitled to claim such foreign currency fluctuation loan as an allowable expenditure u/s 37 (1) - CIT(A) was incorrect in disallowing the foreign exchange fluctuation loss of by treating it as capital in nature. - Decided in favour of assessee Disallowance of claim of Leave Encashment on provision basis - Addition u/s 43B - HELD THAT:- Leave Encashment under no circumstance can be called as a statutory liability/payment so as to invoke the provision of Section 43B as it is for the benefit of employees which accrues in lieu of the un-availed leave during the tenure of one’s service in the organization. The ratio set out in case of Exide Industries Ltd. [2007 (6) TMI 175 - CALCUTTA HIGH COURT] is applicable in the present case as in that decision it was held that leave encashment not being a statutory liability or a contingent liability, enactment of Sec. 43B(f) is not consistent with the original provision of Sec. 43B, and the legislature having disclosed no reasons while inserting the said clause, Sec. 43B(f) is struck down being arbitrary and unconscionable. Ground No. 2 of the assessee’s appeal is allowed. Disallowance of loss on account of foreign exchange fluctuation in computing book profit u/s 115JB - HELD THAT:- Section 115JB is an overriding section, as it is specifically mentioned in that section that the other provisions of this act is not applicable while computing book profit u/s 115JB of the Act is correct as per the Income Tax Act, 1961. In the absence of any provision in Explanation 1 to Sec. 115JB to make addition on account of expenditure towards foreign exchange fluctuation loss, the addition made by the AO is erroneous.Assessing Officer while computing the book profits of a company u/s 115J has only the power of examining whether the books of accounts are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of accounts of the company. Ground No. 3 of the assessee’s appeal is allowed. Depreciation at 15% on Oilers Gas - higher rate of depreciation - @15% OR 60% - HELD THAT:- In the instant case of the assessee, both the conditions are duly satisfied since the oil rigs being plant of 'specific category' are owned by the assessee and further it is used in drilling operations for the purpose of exploration & extraction of mineral oil in the field of mineral oil concerns. The assessee claimed depreciation @ 60% on Oil rigs which has been used for drilling operations in the oil field of mineral oil concerns as per entry at Part A-III-(8) (xii) of New Appendix I, applicable from Assessment Year 2006-07 onwards. The same is evident from Annexure B to the Tax Audit Report for relevant assessment year. See M/S. HLS INDIA LTD. [2012 (2) TMI 669 - SUPREME COURT OF INDIA]]. 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.