TaxTMI 
TaxTMI 
TaxTMI 
2026 (3) TMI 221
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....arising on fair valuation of BLDs as on 31 March 2012. While rejecting the Appellant's claim, the Id. NFAC inter alia erred on following counts: 1.1. Considering the unrealized losses of INR 1,84,97,467 arising on fair valuation of BL.Ds as contingent liability. 1.2. Not following the decision of the Honourable Supreme Court of India in the case of Woodward Governor India Pvt. Ltd 312 ITR 254 and stating in the order that the Appellant is not following the condition laid down by the Hon'ble Supreme Court of India in the case Woodward Governor India Pvt Ltd (2009) 179 Taxman 326 without appreciating the detailed submission made by the Appellant explaining how the Appellant satisfies the tests prescribed by Hon'ble Supreme Court 1.3. Not following the decision of Mumbai ITAT decision in case of J.P. Morgan Securities India (P.) Ltd. v. Additional Commissioner of Income-tax, Range-(2), Mumbai [2015] 61 taxmann.com 250 which are squarely applicable to the facts of the Appellant. 1.4. Without prejudice, if the claim of INR 1,84,97,467 arising on fair valuation of BLDs as on 31 March 2012 is not allowed in the current year, the same should ....
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....y assessee has the option to either follow cash' or 'mercantile' basis of accounting. Accordingly, assessee has chosen to follow 'mercantile' basis of accounting. Under mercantile basis of accounting, income and expenses are recognized on accrual basis irrespective of their timing of receipt and payment. Correspondingly, expenditure is recognized in the Profit and Loss A/c as soon as it is incurred, and timing of disbursement is irrelevant. 3.3. In the present case, the liability for fair valuation losses is a crystallized liability as the event giving rise to such liability (i.e. entering into BLD contracts) has already occurred before the Balance Sheet date. Once the liability crystallizes, the next step is its quantification. In this regard, assessee referred to the judicial precedent in the case of Bharat Earth Movers vs. CIT [2000] 245 ITR 428, wherein Hon'ble Supreme Court held that exact quantification of liability is not necessary for claiming deduction and it would suffice if it could be estimated with reasonable certainty. Hon'ble Court held as follows: "The law is settled; if a business liability has definitely arisen in the accounting yea....
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....f the Revenue is that amount of unrealized loss of fair valuation of BLDs claimed by the assessee constitutes contingent liability, not allowable as a deduction u/s. 37(1). It is a liability contingent and not crystallized as it is payable only if the trigger condition i.e., index level at or above 120% of the start level on the final valuation date, if met. According to the Revenue, this condition introduces uncertainty as the liability depends on a future event rendering it contingent. Further, Revenue observed that accounting practice of recognizing losses and not gains due to the principal protected nature of BLDs undermines the claim made by the assessee, it being selective in recognizing only the losses and not the gains which violates the principle of consistency. 4. We have heard both the parties and perused the material on record. The moot point before us is in regard to treating the fair valuation loss arrived at by the assessee in respect of valuation on the balance sheet date of the debentures to be treated as contingent or allowable loss. Admittedly, it is a fact on record that the debentures so issued by the assessee are principal protected meaning thereby, in any ....
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....ed in computing the income chargeable under the head profits and gains of business In sections 30 to 36, the expression expenses incurred as well as 'allowances and depreciation' have also been used For example, depreciation and allowances are dealt with in section 32. Therefore, the Parliament has used the expression 'any expenditure' in section 37 to cover both. Therefore, the expression 'expenditure' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a loss, even though said amount has not gone out from the pocket of the assessee. 4.1. Hon'ble Special Bench of ITAT, Mumbai in the case of DCIT (International Taxation) vs. Bank of Bahrain & Kuwait [2010] 41 SOT 290 had an occasion to determine whether the MTM losses arising on forward foreign exchange contracts could be said to be crystallized losses or contingent / notional losses for the purposes of the provisions of the Act. To determine this, Hon'ble Bench referred to certain settled accounting propositions which have received judicial recognition. The accounting propositions referred to were as follows: (i) The income is to be accounted for....
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....e Court in the case of Bharat Earth Movers v. CIT (supra) held as under: ".........it is evident that the anticipated losses on account of existing obligation as on 31st March, determinable with reasonable accuracy, being in the nature of expenditure / accrued liability, have to be taken into account while preparing financial statements." 4.4. It is clear from the aforesaid decisions that a contingent liability is the one whose occurrence is dependent upon the happening or non-happening of an event. However, where an event has already taken place such as entering into a contract and only consequential effect is to be determined, the same cannot be called a contingent liability. In the present case, assessee has already entered into legally binding BLDs contracts and the losses have arisen on fair valuation of BLDs. Given this, losses arising on fair valuation of BLDs incurred by the assessee cannot be said to be notional/contingent losses. It is only the quantum of losses/profits which is uncertain and would depend upon the level of NIFTY index prevailing on the maturity date. 5. During the year, assessee has claimed an amount of Rs. 1,84,97,467/- as an allowable exp....
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....evailed at the time of allotment of debentures, then the assessee is not required to pay any amount over and above the principal amount of debentures. There should not be any dispute that the amount payable by the assessee to the debenture holders is, in effect, in the nature of interest compensation only. The fixed rate of interest is the common method generally adopted and also known to everyone. However, the assessee has chosen to issue debentures, which would earn interest depending upon the performance of nifty index. It can be seen that the methodology adopted by the assessee is only a different method of computing the interest liability of the assessee. 11. It is also a known fact that the nifty index level shall not increase at a constant rate, but it will fluctuate depending upon the market conditions. So whenever the nifty index level crosses the index level that prevailed at the time of allotment of debentures, the liability of the assessee would also simultaneously increase. Conversely, if the index level goes down, the liability of the assessee would also go down. 12. The Hon'ble Supreme Court has considered the issue relating to the effect of cha....