TaxTMI 
TaxTMI 
2019 (5) TMI 541
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.... at its various tea estates, being medical reimbursements, leave encashment, staff pension & foreign pension, in conformity with the Accounting Standard - 15 ('AS-15') prescribed by the Institute of Chartered Accountants of India ('ICAI'). In the relevant year the said AS-15 was revised by the ICAI and the methodology to measure the employer's obligation towards long term retirement benefits was amended with a view to ensure a more realistic and correct ascertainment of the liability. In terms of the Revised AS-15, every reporting corporate entity was required to re-measure its past as well as present obligations and restate such liability in it's books, based on the revised methodology. The additional liability of Rs. 11,04,14,367/- arising as a consequence of restatement of the past obligations was provided by way of transitional provision in the assesee's books of account which was charged to Reserve account. The liability of Rs. 1,65,51,581/- based on revised AS-15 pertaining to the relevant financial year was charged off to the Profit & Loss Account. Provision for retirement benefits based on application of Revised AS-15 was claimed by way of deduction in the computation of in....
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....ordingly held that the deduction was allowable in computing the business income of the assessee. Following the ITAT decision for AY 1997-98, no disallowances were made in the case of Eveready Industries India Limited or the appellant till AY 2007-08 even though in the accounts of the relevant years the provision for Employee Retirement benefits was debited and deduction therefor was claimed. 4.3 From these facts it therefore appeared that in the past assessments the AOs in principle accepted that the deduction for provision for post retirement benefits was permissible in arriving at the taxable income of the assessee since the relevant liability was incurred during the relevant years in which the employees performed their services. While assessing total income in the past years the AOs also accepted that the provision was to be allowed in accordance with the method prescribed in AS-15 issued by I CAI even though no specific provision of the I. T. Act dealt with such claim. Yet in the past assessments deduction for such provision was allowable because retirement benefits were payable to employees in terms of contract of employment with the employees. 4.4 In the imp....
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....-09 so as to disallow the current year's liability of Rs. 1,65,51,581/- 4.6. In the impugned order the AO justified the disallowance also on the ground that the appellant did not specify any specific provision of the I.T. Act under which deduction was permissible. In my considered opinion this reason is inappropriate. It is not disputed by the AO that in terms of the contract of employment, the assessee had assured certain benefits to employees which were payable either during the period of employment or at the time of retirement or during the post retirement period. The retirement benefits were payable by the assessee to Its employees only at the time of or after the employees retired from the active service. But in either case these benefits could not have been claimed by the employees while they were. in active service. However the fact remained that the retirement benefits were promised to be paid by the assessee employer in consideration for the services rendered or performed during their time when employees were in active service. It was apparent that the contract of employment envisaged payment of remuneration to employees which was partly payable during the per....
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....ty. The actuarial valuation of a liability or expenditure is always based on assumptions which are statistically proven. The Supreme Court in the case of Bharat Earth Movers Limited Vs CIT (245 ITR 248) accepted that the liability for leave encashment though payable at future unspecified date yet the provision therefor made on scientific basis was allowable as deduction in computing the profits. The relevant observations of the Supreme Court were as follows: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the-liability-may-have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at i future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. Applying the principles laid down in Metal Box Co. ....
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.... It is a well-accepted proposition that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute. The Tribunal, after referring to authoritative books on accountancy, had found that the assessee was maintaining the accounts correctly in accordance with the principles of accountancy applicable to underwriting accounts and keeping in view the said principles the underwriting commission on the shares which were not subscribed by the public and were purchased by the assessee could not be treated as profit earned by the assessee in the transaction and the said commission could only be treated as reducing the price of the shares purchased by the assessee. The Tribunal had also stated that there was no contrary provision in the Act. The revenue had not shown that the accountancy practice followed by the assessee was repugnant to any provision of the Act. In the circumstances, it must be held that the Tribunal and the High Court had not committed any error in taking the view that the underwriting commission earned by the assessee in respe....
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....able to employees according to their contracts of employment with the appellant. 4.10. In the impugned order the AO justified the disallowance also on the ground that the deduction claimed inter alia included the liability of the earlier years amounting to Rs. 11,00,14,367/- and which was not debited to the P&L A/c but was debited to the General Reserve brought forward from the earlier years In this regard I find that the ICAI revised AS-15 and prescribed new methodology for determining the liability which the enterprise was required to provide in its books. The revised method prescribed was mandatory. Based on the revised methodology the enterprises were required to recompute their existing liabilities. The ICAI was aware that revision of the existing liabilities would result in either increase or decrease in the quantum of the provision made in the accounts till the revision was made effective. The ICAI therefore recommended that where as a result of the revision enterprise was required to make additional provision in its books then the additional liability could either be set off against the General Reserves or additional liability could be written off to the P&L A/c in....
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....t bring about any change in the basis character or nature of the expenditure which was always considered in the past assessments to be revenue in the earlier year' assessments the deduction for the same expense was allowed by the AOs following pre-amended AS-15 and therefore there was no reason for AO to adopt contrary view with regard to allowability of the additional expenditure which accrued as a result of revision in AS-15. The revision in AS-15 having become effective during the relevant previous year, the deduction was permissible in the relevant year of the revision. , therefore hold that the assessee was entitled to claim deduction both for Rs. 11,00,14,367/- and Rs. 1,65,51,581/- which represented the assessee's liability to pay post retirement employees benefits based on revised AS-15. The AO is accordingly directed to re-compute the income after allowing the deduction for Rs. 12,65,65,948/-. Ground Nos.1 to 6 are therefore allowed." Being aggrieved, Revenue is now in appeal before us against the foregoing finding of the Ld. CIT(A). 3. We have carefully perused the material on record. The Ld. DR appearing on behalf of the Revenue contended that although the ....
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.... the past income-tax assessments the Revenue disputed the allow ability of the provision for retirement benefits claimed on accrual basis and provided in conformity with AS-15. We note that dispute regarding the allow ability of provision for employee retirement benefits was raised by the AO only once in AY 1997-98. This Tribunal vide its order in ITA No. 959/Kol/2002 however held that the provision for employee's retirement benefit ascertained by following AS-15 was an allowable deduction u/s 37 of the Act. The order of this Tribunal was affirmed by the Hon'ble Calcutta High Court in its judgment reported in 258 Taxman 313 wherein the following observation was made : "10. As far as question no. (v) is concerned, Mr. Agarwal very strenuously argued that the provisions for Rs. 82, 64, 000/- was a benefit conferred on the employees on superannuation or was a retirement benefit. 11. Analysing the question, we find that this issue does not appear from the question raised. The issue which is raised is whether the provision regarding Rs. 82, 64, 000/- was in the nature of a contingent liability and thus not allowable. Neither was the issue raised in the way Mr. Agarwal ....
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....ere a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." 8. Now we proceed to deal with the Ld. DR's contention regarding the applicability of provision of Section 43B to such provision for employee's retirement benefits. For this we first need to examine the provisions of Section 43B of the Act which is as under: "Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in clause (ii) of sub-section (1) of section 36, or (d) any sum payable by the assessee as interest on ....
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....parately added back u/s 43B(f) while assessing the taxable income, the AO could not have again disallowed the said provision in light of AS-15 (Revised) and that the impugned addition amounted to double disallowance. For the reasons set out in the foregoing therefore we find no infirmity in the order of the Ld. CIT(A) deleting the disallowance of provision for leave encashment made by the AO in light of AS-15 since it had already been added back separately u/s 43B(f) of the Act. 11. For the reasons set out above we do not find any infirmity in the reasoning and conclusions of the Ld. CIT(A) deleting the disallowance of provision for employees' retirement benefits. This ground of the Revenue is therefore dismissed. 12. Ground No. 2 of the appeal is against the Ld. CIT(A)'s action directing the AO to allow marked-to-market loss of Rs. 65.56 lacs arisen on realignment of open foreign exchange derivative contracts as on the year-end. The brief facts of this issue are that the AO observed that the assessee had booked mark to market ('MTM') loss on unsettled forward contracts amounting to Rs. 65.56 lacs which was created by corresponding debit to profit and loss account and the sam....
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....oss. The assessee followed accounting method of restating the unsettled open contracts on the last date of the previous year consistently and the gain or loss incurred was accounted in the books in conformity with AS-11. I therefore find that the loss which the assessee incurred was a definitive loss and it accrued on the last date of the previous year i.e. 31.03.2008. The loss was quantified with reference to exchange rate prevailing on 31.03.2008 and therefore such loss accrued in AY 2008-09. 10.4 The issue as to whether exchange fluctuation loss accounted by an assessee with reference to exchange rate prevailing on the date of balance sheet is a notional or contingent loss or ascertained loss was considered and decided by the Hon'ble Apex Court in the case of CIT Vs Woodward Governor India Pvt. Ltd. (312 ITR 254). In this judgment the Supreme Court essentially considered the question whether the loss arising from restatement of an expenditure or liability pursuant to exchange fluctuation in respect of unpaid trade receivable or trade payable was allowable in computing business income of an assessee. In the case before the Supreme Court it was the Revenue's argument that....
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.... CIT Vs. Woodward Governor India Pvt. Ltd. (supra) CIT Vs. & Oil and Natural Gas Corpn. Limited (supra) had accorded judicial recognition to AS-11 and held that the loss on restatement of outstanding foreign exchange transactions were ascertained losses and could not considered to be notional or contingent one. In view of the binding judicial precedents therefore I have no hesitation in holding that loss of Rs. 39.55 lacs accounted by the appellant in its books of account on restatement of outstanding forward contracts where underlying was exports receivable, was allowable in computing assessee's business income. 10.6 The second component of MTM loss of Rs. 26.01 lacs pertained to re0statement of unsettled derivative contracts booked under interest rate swap arrangement which the appellant entered with ICICI Bank. The assessee had obtained loan of Rs. 40 crores from banks & institutions for its business purposes. Interest payable thereon was being claimed as business expenditure. The loans were obtained in Indian currency carrying interest @ 11.25%. Since interest rates globally were much lower, to reduce its servicing cost the assessee entered into interest rate swap arra....
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..... 97.39 lacs accounted as income in the books of that was however assessed as income of AY 2010-11. I therefore find that the year in which the derivatives transactions was ultimately settled, the AO did allow the deduction for the loss accounted in the books of prior years but the income reported in the relevant year was assessed without demure. I, therefore, find that while making assessment the AO did not even follow the CBDT Instructions No. 3 of 2010 in its true letter and spirit. 10.8 From the instruction No. 3 of 2010, it is apparent that the Board did not lay down a proposition that losses incurred from foreign exchange derivatives should be disallowed in all circumstances. The only proposition put forth in this instruction is that MTM loss which is considered by the Board to be notional or contingent should not be allowed from year to year but be allowed only in the year in which derivative contract is ultimately settled. Applying the letter and spirit of instruction No. 3 of 2010, the AO should have therefore, allowed the deduction for loss of Rs. 691.38 lacs in AY 2010-11. However from the assessment order of AY 2010-11, I find that the AO did not allow deductio....
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....an in foreign currency i.e. Swiss Francs. Effectively therefore the assessee was able to reduce the interest rate to 9.25% payable on their borrowings. However as a consequence of this interest swap derivative the assessee incurred the risk of depreciation of Indian currency against Swiss Francs. Due to adverse fluctuation in exchange rate, upon re-alignment of the foreign exchange forward contracts & interest rate derivative, the assessee incurred MTM losses at the close of the financial year. In terms of the mandatory Accounting Standards prescribed by ICAI for accounting for such derivative contracts and following the doctrine ofprudence, the assessee was mandatorily required to provide for such losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market. Accordingly with reference to the open derivative contracts outstanding as on 31.3.2008, the assessee determined the loss of Rs. 65.56 lacs with reference to the exchange rate prevailing at the end of the year i.e. 31.3.2008. The said loss was provided in the assessee's accounts for 31.3.2008 and such provision was reversed in the next year and the assessee accounted for the ....
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....09-10. It was submitted that had the MTM losses of Rs. 26.03 lacs and Rs. 762.75 lacs not been recognized in AYs 2008-09 & 2009-10, then instead of gain of Rs. 97.39 lacs there would have been a loss of Rs. 691.36 lacs and consequently the taxable profit of AY 2010-11 would have been a lower by that amount. The Ld. AR submitted that the fact that AO who framed the income-tax assessment for AY 2010-11 did not dispute the exchange gain of Rs. 97.39 lacs and the same amount was assessed as the appellant's income with reference to the re-aligned position of the interest rate derivative, showed that the Revenue adopted selective approach to treat the gain derived from derivative contract to be true & real but losses to be notional & contingent. The Ld. AR therefore submitted that the Ld. CIT(A) was justified in treating the MTM loss incurred on derivative contracts to be real & therefore allowable as deduction from business profits. He also argued that the reliance placed by the Ld. DR on the CBDT Instruction No. 3/2010 dated 23.3.2010 was misplaced in as much as it talks about losses arising to an assessee on account of trading in forex derivatives. Admittedly in the facts of the....
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....duce effective interest cost in respect of loan of Rs. 40 crores borrowed in the ordinary course of business. Interest paid on such loan has been allowed as revenue deduction by the AO. Accordingly any gain or loss arising from such interest rate derivative was also in the revenue field since the underlying was the interest payable on the loan. Now theissue as to whether the loss arising on account of restatement of foreign currency denominated trade payables or receivables arising from exchange rate variation is real or contingent has been dealt with by the Hon'ble Apex Court in in the case of Woodward Governor of India Ltd vs, CIT( 312 ITR 254) and CIT Vs. ONGC Ltd (322 ITR 180). In both these judgments the Hon'blethe Supreme Court categorically held that the loss debited in the P & L account by an assessee on account of restatement of foreign currency denominated trade payables or receivables pursuant to exchange rate variation at the yearend is defined or ascertained loss and not contingent loss and hence allowable as deduction from the business profits.Applying the ratio laid down in these judgments to the facts of the present case, in our considered view since the underlyings....
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....s a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative butonly disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. vinodkumar Diamonds (P) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar (supra) are identical/similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar Diamonds (P.) Ltd. (supra), the Tribunal held the forward contract on facts before it to be speculative in nature in view of Section 43(5) of the Act. However, it appears that the decision of this court in CITv. BadridasGauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 37....
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....itionallynote that when such contract was finally settled in AY 2010-11 the assessee had accounted for a profit of Rs. 97.39 lacs after taking into re-aligned position of the derivative contract i.e. after accounting for the MTM losses of earlier years. In the income tax assessment order passed u/s 143(3) for AY 2010-11 which was much later than passing of the impugned order for AY 2008-09, the AO assessed such profit of Rs. 97.39 lacs without allowing the deduction for the MTM losses disallowed in the earlier AYs 2008-09 & 2009-10. We therefore note that the Revenue authorities did not faithfully follow the proposition incorporated in the CBDT Instruction of 2010 in the subsequent year but adopted a selective criteria by assessing the profit arising in AY 2010-11 (computed based on the re-aligned position) without allowing for the deduction of MTM losses which was disallowed in the prior years. 22. In view of the facts as discussed above and respectfully following the judgment of the Hon'ble Supreme Court in the case of Woodward Governor of India Ltd (supra) and Bombay High Court in the case of D Chetan& Co. (supra), we do not find any infirmity in the order of the Ld.CIT(A) in....
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....he entire interest debited in the Profit & Loss A/c also did not have element of expenditure incurred wholly & exclusively in relation to business of growing and manufacture of tea. In any business; fund position undergoes change on day- to-day& from moment to moment. Interest is a charge for use of funds. Interest income is a charge received for use of assessee's business funds by other persons. Similarly interest expenditure is a charge paid by the assessee for use of funds belonging to others. To determine the effective cost of borrowings; it is therefore necessary to set off the interest received against interest paid and only the net interest can be considered to be business expenditure for tax purposes. In the present case after setting off interest received against interest paid there was net interest expenditure of Rs. 41,79,88,000/-. which was incurred in connection with business of growing and manufacture of tea to which Rule - 8 was applicable. I do not find substance in the AO's hypothesis that gross interest paid represented expenditure of tea business to which Rule - 8 was applicable whereas gross interest received represented non agricultural income to which ....
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....as raised: "Whether the interest income derived from temporary investment of surplus borrowed funds for the business of growing and manufacturing of tea, would fall within the scope of Rule 8 of the Income Tax Rules, 1962? 8. In its judgment the Hon'ble Calcutta High Court found merit in the assessee's case and set aside the decision of this Tribunal and restored the order of the Ld. CIT(A) holding that the interest income was liable to be set off against the interest expense and only the net interest expenditure was liable to be considered for assessing income from composite business to which Rule 8 was applicable. The Ld. AR also brought to our attention the decision of the coordinate Bench of this Tribunal in the case of Eveready Industries India Ltd for the AY 1997-98 in ITA No. 959/Kol/2002 wherein also the identical view was expressed by the Tribunal. The Tribunal held that since assessee paid interest on loans and also derived interest on deposits, the interest received had to be netted off against interest payment and only the net interest expenditure could be considered in computing the composite income of growing & manufacture of tea. Against this order ....