TMI Blog2021 (4) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... :- As the provision for the gratuity in the year under consideration stands at ₹ 2,98,71,626/- which can be verified from note 26 of the audited balance sheet placed on page 22 of the paper book. As such the sum of ₹ 15,74,957/- represents the amount paid during the year towards the opening balance of gratuity provision which not claimed as expenditure in the year under consideration. However, the auditor inadvertently in his tax audit report has recorded the amount of disallowance at ₹ 3,14,46,585/- only. Accordingly we hold that there cannot be any question of disallowing the payment towards the opening balance represented under the provision for gratuity. At the time of hearing, the learned DR has not brought anything on record contrary to the finding of the learned CIT (A). Accordingly, we do not find any infirmity in the order of learned CIT (A) - Decided against revenue. - ITA No. 1471/AHD/2018 - - - Dated:- 17-3-2021 - Shri Mahavir Prasad, Judicial Member And Shri Waseem Ahmed, Accountant Member For the Assessee : Shri S.N. Soparkar, Sr.Advocate with Shri Parin Shah, A.R For the Revenue : Shri Mohd. Usman, CIT.D.R ORDER PER WASEE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to the learned CIT (A) who deleted the addition made by the AO by observing as under: 3.6 On careful consideration of entire facts, it is observed that during the course of Assessment Proceedings Appellant has submitted ledger account with summary of interest rate swap loss along with method of accounting followed by it. The undisputed facts of such loss are that they are on account of revenue transaction and not held to be capital account transaction by AO. When Appellant has enters:] into interest rate swap I by converting floating rate of interest into fixed rate of interest to hedge its exposure against ECB interest payment, loss incurred by Appellant is interest expenditure allowable under Section 36(1)(Hi) of the Act. It is observed .that out of the loss of ₹ 20.68 crores, ₹ 11.26 crore is realized loss on account of ECB interest paid during the year which cannot be held as notional loss and even Instruction relied upon by AO cannot be made applicable. The AO has made entire disallowance treating such loss as notional loss whereas the fact is that ₹ 11.26 crores represent realized loss hence disallowance made by AO to that extent is deleted. , , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 in the case of Elitecore Technologies Pvt Limited. The Hon'ble Ahmedabad ITAT has held that instruction cannot over rule Hon'ble Supreme Court decisions. It is held that when appellant is consistently following same method of accounting for recognizing income/loss of M2M, such loss cannot be disallowed treating it as notional loss. As held in preceding paras, appellant has been consistently following same method of accounting and had recognized significant M2M gain in subsequent assessment yeats hence ratio of above referred decisions scuarely applies to present case. The Hon'ble Delhi High court in the case of Munja! Showa Limited Vs DCIT (supra) has also held that CBDT Instruction No 3 of 2010 caynot possible override the existing decisions of Supreme Court/High court on similar ii'$ue . It is also observed that in following decisions, courts have held that M2M losses cannot be considered as notional or unascertained losses even after instruction no. 3 of 2010. (i) Decision of Hon ble Hyderabad ITAT in case of VST Industries Ltd. vs. Addl. CITvide ITA No.647/Hyd/2012 dated 23/08/2013. (ii) Decision of Hon ble Bangalore ITAT in case of Subex L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on general principles of commercial accounting, in the P L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower- the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word profit implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Sec. 145(1) enacts that for the purpose of s. 28 and s. 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under s. 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Sec. 145. Method of accounting - (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-s. (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-s. (1) or accounting standards as notified under sub-s. (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in s. 144. 13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 25. In the present case also, the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assesse is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the Assessing Officer has not even raised any issues with respect to the above. His case is confined to the loss being notional in nature and contrary to the CBDT guidelines, but then, in the same breath, he taxes the gains on foreign exchange which are computed on the same basis. If losses are held to be notional, even the gains must be held notional too. However, this aspect of the matter is conveniently ignored. As a matter of fact, it was somewhat similar situation in the case before Hon ble Supreme Court and Their Lordships could not help remarking that it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully considered the Assessment Order and submission filed by the appellant. The brief facts of the case are that AO has referred to tax audit report in Form No. 3CD wherein in point No. 21 (e), Auditor has stated that gratuity disallowance u7s 40A(vii) is for ₹ 3,14,46,5857- whereas Appellant has made disallowance in Return of Income for ₹ 2,98,71,6267- which represents short disallowance of ₹ 15,74,957. During the course of Assessment Proceedings, Appellant has, submitted copy of ledger account of gratuity expenses and argued that during the year under consideration it has claimed gratuity expenses of ₹ 2,98,71,626/- and payment of ₹ 15,74,9597- was towards outstanding opening balance of gratuity provision. It was submitted by Appellant that when expenditure of ₹ 15,74,959/- is not claimed as expenditure in current year, no disallowance u7s.40A(vii) can be made in current year. The Appellant has also referred to audited annual accounts wherein in point No.26 details of employee benefits expenses debited in current year are given which proves that Appellant has claimed gratuity expenses of ₹ 2.99 crores in current year. However, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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