TMI Blog2009 (9) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... vita Jha. JUDGMENT:- PER : A.K. Sikri, J. This is an appeal preferred under section 260A of the Income-tax Act, 1961 (hereinafter referred to as the Act ) against the order dated 31-5-2005 passed by the Income-tax Appellate Tribunal (ITAT) in the case of the respondent in ITA No. 1563/Delhi/1999 for the assessment year 1995-96 whereby ITAT had allowed the claim of the assessee for deduction of expenditure of Rs. 67,06,33,245 incurred by way of forward contracts in connection with swapping of foreign currency funds for augmenting the rupee funds required by it for its business in the year under consideration. 2. The question of law which, thus, falls for consideration is as under : "Whether the assessee is entitled to claim deduction of Rs. 67.06 crores incurred in connection with swapping of foreign currency funds in the year under consideration, i.e., the assessment year 1995-96?" 3. The factual backdrop under which this question of law was framed consideration may first be recapitulated. 4. The assessee is a financial institution and the main business of the assessee is that of making loans and advances to various industrial concerns. It is a public sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer was wrong in treating a portion of the expenditure, not relating to the current assessment year, as capital expenditure but, at the same time, disallowance was sustained on the ground that such expenditure did not relate to the current assessment year. Thus, the said disallowance was upheld. 8. The assessee preferred further appeal to the ITAT, and this time successfully, as this ground raised in the appeal has been accepted by the ITAT and Assessing Officer s order disallowing the aforesaid expenditure has been set aside. We may point out at this stage itself that there were other issues also, however, since in the present appeal we are concerned only with the aforesaid aspect, we have not taken note of other disallowances made by the Assessing Officer in his assessment year and treatment thereof by the Tribunal. 9. Ms. Prem Lata Bansal, learned counsel appearing for the revenue, submitted that the issue involved in the present appeal was to determine the year of allowability. She pointed out that the assessee had adopted mercantile system of accounting and, therefore, any expenditure accrued during the year only was allowable. In the present case, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iodical payment of interest, over the life of the debentures. Strong reliance was placed on the following observations from this judgment : "A. Matching concept - The Mercantile System of Accounting is based on accrual. Basically, it is a Double Entry System of accounting. Under the Mercantile System of Accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the Mercantile System of Accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax insofar as monies due and payable by the parties to whom they are debited see Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, 239 (SC). Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the Mercantile System of Accounting, this matching is required to be done on accrual basis. Under this matching co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the aforesaid judgments, her submission was that expenses were to be allowed proportionately, i.e., the expenditure pertaining to the relevant year was to be allowed in the year under consideration and the balance had to be deferred to the subsequent year, as was done by the Assessing Officer in the instant case, which was wrongly upset by the ITAT. 12. Per contra, Mr. Ajay Vohra, learned counsel appearing for the assessee, submitted that the entire approach of the department was erroneous, inasmuch as, it was not appreciating the nature of agreements entered into by the assessee for raising foreign currency borrowings and forward contracts with banks as a safeguard against foreign currency fluctuations for repayment of foreign currency borrowings on a due date. He submitted that swapping cost incurred by the assessee, by entering into forward contract, was capable of determination at the time of execution of the forward contract and such determination does not get postponed. Once it is crystallized, and formalized on the date of entering into the contract, the liability arising on account of such contractual obligation is to be allowed in entirety in the year in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,392 towards sale price of lands, but in accordance with the mercantile system of accounts adopted by it, it credited in its accounts the sum of Rs. 43,692 representing the full sale price of lands. At the same time, it also debited an estimated sum of Rs. 24,809 as expenditure for the developments it had undertaken to carry out, even though no part of that amount was actually spent. The Department disallowed the expenditure. The Supreme Court was of the view that the aforesaid expenditure was allowable in the year in question though no part of that amount was actually spent as it was accrued liability and not merely a contingent one. The Court quoted from the book "Income-tax" (2nd Edn., Vol. II (page 204), authored by Simon, wherein accrued liability is defined as under : " In cases, however, where an actual liability exists, as is the case with accrued expenses, a deduction is allowable; and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied. A liability, the amount of which is deductible for income-tax purposes, is one which is actually existing at the time of making the deduction, and is distinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account, though not actually paid, the Court allowed the same in the following words, relying upon the judgment in Calcutta Co. Ltd s case (supra) : ". . . In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. ****** In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year. In order to ensure that it is able to repay the foreign lenders in the foreign currency on their respective due dates of repayments, the assessee had entered into forward contracts as a safeguard against foreign currency fluctuations. It is the difference between the forward contract rate and the exchange rate on the date of transaction which was claimed as deduction in that very year. The forward contract is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one of the parties, against payment in domestic currency to the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. Thus, in case of a forward contract, assessee enters into a legally binding, enforceable contract for purchase of foreign currency on a future date at the pre-determined rates. The date and the rate of purchase of the foreign currency are decided at the time of entering into contract. The difference between the forward contract and the exchange rate on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passage in that judgment on which reliance was placed by the learned counsel for the revenue herself : "The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirely in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
