TaxTMI 
TaxTMI 
2018 (12) TMI 566
X X X X Extracts X X X X
X X X X Extracts X X X X
....n is an unascertained liability that has to be added back to the book profit as per Clause (c) of Explanation to Section 115JA of the Income Tax Act ?". 3. T.C.A.No.350 of 2008 has been admitted vide order dated 30.06.2008 on the following substantial question of law: "Whether on the facts and in the circumstances of the case, the interest received from the employees and paid over to the HDFC on account of the loan availed by the employees from HDFC is income in the hands of the appellant and whether the same if treated as income is not eligible for relief under Section 80IB?". 3.1. In T.C.A.No.350 of 2008, learned counsel for the appellant has filed a memo raising an additional substantial question of law. Having considered the facts and circumstances, we deem it appropriate to frame the additional substantial question of law in T.C.A.No.350 of 2008, which is as follows : "Whether on facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that interest received on advances paid to suppliers cannot form part of business income for the purpose of deduction u/s.80IA of the Income Tax Act?" 4. Heard Ms.S.Sree Lakshmi Valli, learn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Tribunal for two years is applicable in the facts of the instant case and the decision in the case of Sterling Steels and Wires Limited is distinguishable. However, the contention raised by the Assessee was rejected and the appeal filed by the Revenue was allowed holding that the foreign exchange fluctuation was an unascertained liability. 8. Challenging the same, the Assessee has filed T.C.A.No.349 of 2008. 9. The appeal in T.C.A.No.350 of 2008 also pertains to the very same Assessment Year 1998-1999, but a separate order came to be passed by the Tribunal dated 28.11.2007 with reference to deductions under Section 80IB of the Act and interest from deposits with the Tamil Nadu Electricity Board (in short, TNEB) and interest received from Housing and Vehicle Loans advanced to employees, and also interest charged on advances paid to suppliers. 10. In the return of income filed on 26.11.1998 for the Assessment Year 1998-1999, the Assessee claimed deduction under Section 80IB in respect of its business income. The return was selected for scrutiny and order was passed on 30.01.2006, wherein, the Assessing Officer restricted the deduction claimed under Section 80IB and held that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that apart from being a partial reimbursement of the expenditure incurred by the Assessee, the same is directly derived from the industrial undertaking and are integral and vital to its very existence. 13. The Tribunal, by order dated 20.11.2007, dismissed the appeal filed by the Assessee and while doing so, relied on the decision of the Hon'ble Supreme Court in the case of CIT V. Pandian Chemical Limited, 262 ITR 278, wherein, it was held that the expression "derived from" was narrower in application than the expression "attributable to". Challenging the said order, the Assessee had preferred an appeal in T.C.A.No.350 of 2008. 14. We first take up for consideration T.C.A.No.349 of 2008. The question to be decided is : Whether the loss arising from foreign exchange fluctuation is an unascertained liability required to be added back to the book profit as per Clause (c) of Explanation to Section 115JA of the Act. 15. The Assessee's contention is that such loss arising from the foreign exchange fluctuation was determined with reference to rate of foreign exchange as on the last date of the financial year and was, therefore, an ascertained liability for the purpose of Clau....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is in conflict with the substantive provision of the Act and was ultra vires of the Act. While rejecting the challenge to the rule and holding that Rule 115 cannot be struck down as being ultra vires of the provision of the Act, the Hon'ble Supreme Court pointed out that the Assessee was entitled to receive the price of the goods sold in foreign exchange and therefore, Rule 115 was clearly attracted and the amount of foreign exchange received by the Assessee will have to be valued on the last day of the accounting period on the basis of the rate prevalent on that day. 16.5. Learned counsel referred to Section 211 of the Companies Act, 1956 and in particular, Sub-section 3A and 3B, which mandates that the accounting standards have to be followed. It is submitted that what was done by the Assessee is not a provision, but an ascertained liability. Learned counsel for the Assessee also referred to the annual report of the Assessee for the year 1997- 1998. 16.6. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd., V. CIT, (2002) 255 ITR 0273 (SC) for the proposition that while assessing a company for income tax under Section 115J....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, submitted that foreign exchange is volatile and hence, it has to be treated as an unascertained liability. It is further submitted that the decision in the assessee's own case in T.C.A.No.1151 and 1153 of 2007 was in respect of deduction under Section 37, which was allowed by accepting it as an ascertained liability and not otherwise. 17.1. Learned counsel sought to sustain the order passed by the Tribunal by contending that the Tribunal rightly held that the exchange fluctuation is not an ascertained liability on the date of balance sheet and the liability is to be ascertained only on the date of payment and hence, the Explanation (c) to Section 115JA is squarely applicable to the facts of the case, and therefore, the order passed by the Tribunal calls for no interference. 18. With regard to interest received from the deposits with TNEB, interest received from Housing and Vehicle Loans and interest received from Advances paid to suppliers, learned counsel for the Assessee relied upon the decision of this Court in the case of Arul Mariammal Textiles Limited V. ACIT, (T.C.A.No.909 of 2008, dated 07.08.2018), wherein, the Assessee was required to furnish a fixed deposit, whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s arising from exchange fluctuation. The Assessing Officer observed that it is an unascertained liability and hence, should be added back. Hence, the assessment was reopened and a notice under Section 148 of the Act was issued. In response thereto, the assessee contended that it is an ascertained liability and has been made based on the market rate of exchange available at the last date of the previous year. The Assessing Officer held that loss is not ascertained, as it crystallises only at the time of payment of dues to the foreign creditors. 22. Further, the Assessing Officer held that what the assessee claimed is a notional loss and not an actual loss. Accordingly, it was held that it was not an ascertained one, not allowable as an expenditure in computation of book profit under Section 115JA. Thus, treating it as an unascertained liability, added the same to the book profit. 23. On appeal before the CIT(A), the CIT(A) followed the decision of the Tribunal in the assessee's own case for the assessment years 1996-97 to 1998-99 and directed the Assessing Officer to delete the said amount of Rs. 59.70 Lakhs from the book profits. 24. The Revenue filed appeal before the Tribu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t reflect true and correct profits. 27. Further, it was held that having come to the conclusion that the valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard No.11 mandatory, the Court proceeded to examine the said Accounting Standard. Ultimately, the Court held that the loss suffered by the assessee therein on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the Act. 28. In American Power Conversion (India) Pvt. Ltd. (supra), the substantial question of law, framed for consideration, was whether the Tribunal was right in setting aside the order of the CIT and holding that loss arising out of fluctuation in foreign exchange for restatement liabilities as at the end of the financial year is not a contingent liability. The Division Bench, following the decision of the Hon'ble Apex Court in ONGC Ltd. (supra), held that the restatement of the liability itself came at the end of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Assessing Officer in computing book profits under Section 115JB in respect of provision for loss in hedging transactions which according to the Revenue was an unascertained liability. The operative portions of the judgment read as follows:- "13. The Assessing Officer added this amount in computation of the book-profit for the purpose of minimum alternate tax under section 115JB holding that the amount was merely provisional and at the time of actual repayment of loan the position may vary resulting in a profit. He held, therefore, that this was not an ascertained liability. Accordingly, the Assessing Officer added the amount of Rs. 23 crores to the book-profit under section 115JB as well as to the normal income. 14. The Tribunal noticed that accounting standard 11 issued by ICAI deals with the issue of accounting for fluctuation in foreign exchange rates as impacting the current assets and liabilities. The Tribunal rightly placed reliance upon a judgment of the Supreme Court in Commissioner of Income Tax v. Woodward Governor India P. Ltd., [2009] 312 ITR 254 (SC). Although the ratio in paragraph 15 is sufficient to answer the questions under consideration, we intend referri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly a "loss" even though the said amount has not gone out from the pocket of the assessee. 14. In M.P. Financial Corpn. v. CIT [(1987) 165 ITR 765 (MP)] the Madhya Pradesh High Court has held that the expression "expenditure" as used in Section 37 may, in the circumstances of a particular case, cover an amount which is a "loss" even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in Madras Industrial Investment Corpn. Ltd. v. CIT [(1997) 4 SCC 666 : (1997) 225 ITR 802]. According to Law and Practice of Income Tax by Kanga and Palkhivala, Section 37(1) is a residuary section extending the allowance to items of business expenditure not covered by Sections 30 to 36. This section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting (see p. 617, Vol. I of the 8th Edn.). It is this principle which attracts the provisions of Section 145. That section recognises the rights of a trader to adopt either the cash system or the mercantile system of accounting. The qua....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o time the accounting standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under Section 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, accounting standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under Section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the accounting standards. 15.For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1961 Act." (emphasis supplied) The judgment of the Supreme Court clearly applies to the present case. The Tribunal, accordingly, rightly deleted the addition."" 32. The Revenue see....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has shown the same as loss on account of exchange fluctuation and not as a provision. Therefore, in our considered view, the substantial question of law framed for consideration in the case on hand, requires to be answered in favour of the assessee. 37. In the result, T.C.(A) No.349 of 2008 is allowed and the substantial question of law, framed for consideration, is answered in favour of the assessee and against the Revenue. No costs. T.C. (A) No.350 of 2008:- 38. The substantial question of law, which has been framed for consideration in the instant case, is whether the Tribunal is right in law in excluding the following from income eligible for deduction under Section 80IB:- (i) Interest from deposit with Tamil Nadu Electricity Board; and (ii) Interest received from housing and vehicle loans advanced to its employees. 39. The learned counsel for the assessee requested the Court to frame an additional substantial question of law with regard to the interest received on advances paid to suppliers. 40. We find that this issue was contested by the assessee and appears to have been inadvertently omitted while framing the substantial question of law when the appeal was lodged.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anufacture of the industrial undertaking. Thus, by relying on the decision in the case of Pandian Chemicals (supra), the assessee's case was rejected. 45. The learned counsel appearing for the assessee relied on the decision of this Court in the case of Arul Mariammal Textiles Limited vs. The Assistant Commissioner of Income Tax [T.C.A.No.909 of 2008: Dated 07.08.2018] and submitted that whatever income accrued is merely incidental and not the prime purpose of doing the act in question. 46. The Revenue placed reliance on the decision of the Hon'ble Apex Court in the case of Commissioner of Income Tax vs. Sterling Foods [(1999) 104 Taxman 204 (SC)]. 47. In Sterling Foods (supra), it was held that income from selling import entitlement was not profits and gains from the industrial undertaking and it formed part of income and the same has to be included in the working out of the relief under 80HH. 48. In Liberty India vs. Commissioner of Income-tax [(2009) 183 Taxman 349 (SC)], the assessee claimed deduction under Section 80IB on the increased profits earned/derived on account of Duty Entitlement Passbook (DEPB) Scheme and Duty Drawback Scheme. The Assessing Officer denied....
X X X X Extracts X X X X
X X X X Extracts X X X X
....emical's case and held that the Assessee is not entitled for deduction under Section 80 IA of the Act. The application filed by the Assessee to recall the said order was allowed and the Tribunal afforded one more opportunity to the Assessee. Nevertheless, the Assessee appeared before the Tribunal and sought for adjournment, which in the opinion of the Tribunal was a delaying tactics and accordingly, it reiterated its order dated 17.03.2006 and held that the interest earned from bank deposit for the purpose of margin money do not qualify for deduction. In other words, it is held that Pandian Chemical's case will hold the field and accordingly, allowed the Revenue's appeal. 11. Thus, we are first required to examine as to whether the decision in Pandian Chemical's case would apply to the facts and circumstances of the case. In preceding paragraphs, we have referred to the factual position of the Assessee's case. The margin money by way of fixed deposit was available with the Assessee's bankers so as to enable the Bank to open a Foreign Letter of Credit, which was essential for the purpose of import of critical components for the purpose of manufacture of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and this error committed by the Tribunal goes to the root of the matter affecting the very correctness of the order passed by the Tribunal. 15. In the case of CIT V. M/s.T.T.G. Industries Limited, 2012 SCC Online 1691, the question arose was whether the service charges for maintenance, charges for transportation, etc., to be included as profits and gains of an industrial undertaking for the purpose of computation of deduction under Section 80IA of the Act. The Court, after taking note of the decision in the case of Liberty India, pointed out that Section 80IA/80IB of the Act, has a common scheme and a reading of Section 80IA makes it clear that the only requirement for the applicability is deriving of income by an undertaking or an enterprise from any business referred to in sub section (4) and thus, any profits and gains derived from an industrial undertaking from any business would qualify for deduction under Section 80IA of the Act. In our view, the decision rendered in the case of T.T.G. Industries Limited would squarely apply to the case on hand. 16. In the case of Priviera Home Furnishing V. Additional CIT, (2016) 237 Taxmann 520 (Delhi), the Assessee has stated that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terest accrued on such deposit is merely incidental. In the present case, the responsibilities was statutorily required to keep the share application money in the bank till the allotment of shares was complete. In that sense, we are of the view that the High Court was right in holding that the interest accrued to such deposit of money in the bank is liable to be set-off against the public issue expenses that the company has incurred as the interest earned was inextricably linked with requirement of the company to raise share capital and was thus adjustable towards the expenditure involved for the share issue." 19. In the above referred decision, the Court analysed the purpose of deposit and held that it was not for some additional income, but to comply with the statutory requirements and the interest accrued on such deposit is merely incidental. In our considered view, this will be the right test to be applied to the case on hand and essentially, the answer to the substantial question should be in favour of the Assessee. 20. In the case of CIT V. Jaypee DSC Ventures Ltd., CDJ 2011 DHC 308, the Court held that the deposit made by the Assessee was not the surplus money lying idle....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on hand. 23. So far as the decision in the case of Liberty India (supra) is concerned, the same would not apply to the facts of present case, because the said decision arouse out of a drawback incentive, which was on account of a scheme framed by the Central Government and the Court held that the incentive profits are not profits derived from eligible business under Section 80IB of the Act and they belong to the category of ancillary profits of such undertakings. Therefore, on facts, learned counsel for the Revenue cannot place reliance on the case of Liberty India (supra) to deny the benefit to the Assessee. 24. So far as the decision in the case of Cyber Pearl IT Park Limited, the Court, after taking into consideration various decisions, pointed out that in order to come to a conclusion as to whether such profits or gains, that is, income would be amenable to deduction, the effective source of income is to be looked at. Thus, essential factual matrix needs to be looked to arrive at a conclusion as to the effective source from which such income earned and if it is found that it is derived from secondary source, it is not the effective source, which falls outside the purview o....