TMI Blog2010 (5) TMI 716X X X X Extracts X X X X X X X X Extracts X X X X ..... oans were availed of for securing capital assets, the decrease or increase would affect the capital asset. If the foreign exchange loan was acquired for working capital or other revenue commitments, the fluctuation effect shall be adjusted in revenue account. Till the amendment brought in by the Finance Act, 2002, this adjustment has to be made on yearly basis evaluating the position on the last day of the concerned previous year. But after the amendment, the adjustment shall be made on the actual payment or settlement of contracts and dues. This position has been made clear by the hon'ble court in the above case. The hon'ble court has further deliberated upon the capital nature and revenue nature of such adjustments arising out of foreign exchange fluctuation. Apart from the above general proposition of law, the hon'ble court further examined whether the roll over premium in respect of foreign exchange forward contract is eligible for depreciation in the nature of expenditure to be added to the cost of the capital asset ; or to be debited in the profit and loss account, if it is in the revenue account. If roll over premium on forward contract by itself is held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able business expenditure or not? - inter-corporate deposits written off - Case of the Revenue is that the business of the assessee-company is manufacture and sale of pellets, hot and cold rolled coils and sheets, etc., and not the activity of making investments and in dealing with finances - HELD THAT:- As decided in assessee own case memorandum of association of the assessee-company enables the assessee to carry on the business of investment for inter-corporate deposits, etc., and the assessee has indulged in such business by virtue of special resolution passed by the shareholders as required by the Companies Act and, therefore, the contention of the assessee that the loss was in the nature of business loss has to be accepted. The Tribunal accepted the contention of the assessee and held that the amount of inter-corporate deposits written off by the assessee was entitled to deduction in computing the taxable income. The Commissioner of Income-tax (Appeals) has allowed the ground raised by the assessee on this point following the above order of the Tribunal. The Revenue has not placed any order reversing the said order of the Tribunal or the judgment of any other High Courts befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of difference in rate of exchange in foreign currency contract, to the cost of the asset as per the provisions of section 43A of the Income-tax Act, 1961. The assessee is a public limited company engaged in the business of manufacturing and sale of pellets, hot and cold rolled coils and sheets, galvanised coils and sheet and plates and slag cement. The assessee-company had borrowed foreign currency loans for purchase of plant and machinery. In order to safeguard itself from the effect of foreign exchange rate fluctuation, the assessee had entered into forward contracts with authorised dealers. During the previous year relevant to the assessment year under appeal, the assessee had actually settled such forward contracts and thereby incurred a loss of Rs. 39,78,92,211. This loss was claimed by the assessee in computing its taxable income. The Assessing Officer disallowed the claim on the ground that the payments were not actually made by the assessee-company and further forward contracts are not covered by section 43A. This position was confirmed by the Commissioner of Incometax (Appeals) and thus upheld the disallowance of the loss. We have considered the matter in detail. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day of the concerned previous year. But after the amendment, the adjustment shall be made on the actual payment or settlement of contracts and dues. This position has been made clear by the hon'ble court in the above case. The hon'ble court has further deliberated upon the capital nature and revenue nature of such adjustments arising out of foreign exchange fluctuation. Apart from the above general proposition of law, the hon'ble court further examined whether the roll over premium in respect of foreign exchange forward contract is eligible for depreciation in the nature of expenditure to be added to the cost of the capital asset ; or to be debited in the profit and loss account, if it is in the revenue account. If roll over premium on forward contract by itself is held to be admissible as a deduction or adjustment, then there is no doubt that the loss arising out of the forward contracts would be very much entitled to deduction or adjustment if it is a loss. We are of the view that the issue raised by the assessee is squarely covered by the judgment of the hon'ble Supreme Court rendered in the case of Asst. CIT v. Elecon Engineering Co. Ltd. reported in [2010] 322 ITR 20. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt brought with reference to the assessment year under appeal and by no means of imagination it would be possible for the assessee to provide any additional amount towards advance tax and to make payment thereof. Therefore, no such liability really existed in respect of the deferred tax liability element. When such liability did not exist, there cannot be a levy of interest under section 234B. In support of the above contentions, the assessee has placed reliance on the following decisions : (1) Ford Credit Kotak Mahindra Ltd. v. Deputy CIT 41 ITD 188 (Mum). (2) Star India Pvt. Ltd. v. CCE [2006] 280 ITR 321 (SC). (3) CIT v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48 (SC). The learned Departmental representative on the other hand relied on the judgment of the hon'ble Karnataka High Court rendered in the case of Jindal Thermal Power Co. Ltd. v. Deputy CIT [2006] 286 ITR 182. We considered the issue in detail. It is a fact that clause (h) in Explanation 1 to section 115JB of the Act was inserted by the Finance Act, 2008. This new sub-clause made it mandatory to add back the amount of deferred tax for the purpose of computing book profits under section 115JB. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vied on it. The hon'ble Karnataka High Court observed that the CBDT has clarified the issue vide Circular No. 13 of 2001 dated November 9, 2001 that provisions of sub-clause (5) to section 115JB (which provides that all other provisions of the Act would apply) created the liability to pay advance tax in the case of minimum alternate tax existed even prior to the amendment by the Finance Act, 2002. Thus, it is to be seen that the issue in the case of JTPCL decided by the hon'ble Karnataka High Court in Jindal Thermal Power Co. Ltd. v. Deputy CIT [2006] 286 ITR 182 was on the constitutional validity of the retrospective amendment of section 115JB, wherein the hon'ble court held that the retrospective operation of section 115JB with effect from April 1, 2001 cannot be said to be unreasonable, excessive or harsh, so as to declare the amendment as unconstitutional. The above judgment of the hon'ble Karnataka High Court is not applicable to the present case. In the case considered by the Karnataka High Court in JTPCL, the amendment was brought in by the Finance Act, 2002, with immediate retrospective effect from April 1, 2001. The assessment year involved was 2001-02. The proximity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of CIT v. Revathi Equipment Ltd. [2008] 298 ITR 67 is directly applicable. In a recent order, the Income-tax Appellate Tribunal, Delhi "A" Bench has considered a similar situation. The Tribunal held in the case of Royal Jordanian Airlines v. Deputy DIT (International Taxation) [2010] 3 ITR (Trib) 181 (Delhi) that where one assessee is under a bona fide belief that income is not chargeable to tax, interest cannot be levied under section 234B. This proposition, tremendously supports the case in hand. Not only bona fide belief, but even the statutory mandate to add back the deferred tax provision to the book profits under section 115JB was unknown during the period of the relevant previous years. Therefore, we hold that the levy of interest under section 234B on the incremental amount of tax computed under section 115JB is not justified in the present case. Accordingly, the levy of the said interest is deleted. The appeal filed by the assessee is partly successful. Next we will consider the appeal filed by the Revenue. The first ground raised by the Revenue is that the Commissioner of Income-tax (Appeals) is not justified in holding that the inter-corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he treated the said amount of Rs. 25 crores as part of the taxable book profits. The contention of the assessee was that DRR was not in fact a reserve as contemplated in section 115JB for the reason that the amount was set aside by the assessee-company to meet an ascertained liability. The assessee placed reliance on the decision of the hon'ble Supreme Court in the case of National Rayon Corporation Ltd. v. CIT [1997] 227 ITR 764. The Commissioner of Income-tax (Appeals) in the light of the above judgment and the explanation offered by the assessee held that the amount set apart by the assessee-company in fact is a provision and not a reserve. The Commissioner of Income-tax (Appeals) found that the hon'ble Supreme Court in the case of National Rayon Corporation Ltd. v. CIT [1997] 227 ITR 764 was in fact examining a very similar case where the amount was set apart for redemption of debenture just like the assessee. The court has held therein that the amount set apart to meet known liability cannot be regarded as reserve. Therefore, the Commissioner of Income-tax (Appeals) excluded Rs. 25 crores from the computation of book profits under section 115JB. It is the case of the Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility is towards expenses and other revenue items, the same would be charged to the profit and loss account. Now coming to the specific context of section 115JB, even if the provision is made for ascertained liability the same cannot be deducted in computing the book profits if the ascertained liabilities are in the nature of capital liabilities. Even in the case of provision for ascertained liabilities, the deduction can be claimed only in respect of liabilities assumed for revenue expenditure. The fundamental distinction between capital and revenue in the context of computing the profits of an assessee, cannot be overlooked only for the reason that the expression used in the Explanation to section 115JB is the provision made for meeting ascertained liabilities. In this context, it is necessary to find that the provision made for ascertained liabilities is provision relating to revenue expenditure. In the present case, the debenture redemption reserve, even though in the nature of provision for ascertained liabilities, is in the capital account. When the debentures were issued and monies were collected by the assessee, the proceeds were not treated as income of the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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