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TMI Blog2011 (1) TMI 1244X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant. In respect of such assets the appellant continues to be a rightful owner and is, therefore, entitled for the depreciation on the basis of, among others, the user of the assets in the business of leasing. 3. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the disallowance of loss amounting to Rs. 98,27,032 on unmatured foreign exchange contracts and ignoring the fact that the appellant maintains the accounts on mercantile system where liability already accrued though discharged at a future date is a proper deduction regard being had to the accepted principles of commercial practice and accountancy. 4. On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in reducing the claim under section 36(1)(vii) from Rs. 110,49,17,280 to Rs.103,99,74,646 by doubly deducting the provisions u/s.36(1)(vii) for financial year 1999-2000." 2. Apropos Ground No.2, material facts are like this. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had excluded Rs. 91,99,67,252/- on the ground that this amount though accrued but not received during the year being not due, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon'ble Bombay High court in the case of American Express International banking Corporation v CIT, 258 ITR 602 and Taparia Tools Ltd v. JCIT, 269 ITR 102. These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank's case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit & loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355. In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e moot point for consideration is whether keeping in view the nature of contract, can it be said that a liability accrued on 31st March in respect of unmatured forward foreign exchange contract on account of fluctuation in rate of foreign currency or not. Therefore, it is necessary to first examine the nature of contract entered into by the assessee. Forward Foreign exchange contract means an agreement to exchange different currencies at a forward rate. Forward rate is a specified rate for exchange of currency at a specified date. The assessee enters into forward contract with clients to buy or sell foreign exchange at an agreed price at a future date in order to hedge against the possible future financial loss on account of wide fluctuation in the rate of foreign currency. Thus, firstly, forward foreign exchange contract creates a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and secondly, it is in the nature of hedging contract because it is a contract entered into against possible financial losses .... In view of the above discussion, we allow the assessee's appeal for the following reasons:- i) A binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is written off as irrecoverable in the accounts of the assessee for the previous year : Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause; (viia)(b) in respect of any provision for bad and doubtful debts made by- (a) [Not relevant for our purposes] (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A); 6. On a careful analysis of these provisions, it is immediately clear that the deduction s. 36(1)(vii), so far as a foreign bank is concerned, is only supplemental in nature inasmuch as it comes to the play only when, and is admissible to the extent, the provision for bad and doubtful debts allowed under s. 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable. Learned Departmental Representative, however, contends that the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision under s. 36(1)(viia)(b) for the current previous year, for the purpose of computing deduction under s. 36(1)(vii) of the Act. The computations made by the AO in the impugned order show that deduction allowed under s. 36(1)(viia) is Rs. 40,48,390 and net business income is Rs. 6,41,77,764, but then the deduction under s. 36(1)(viia) does not work out to 5 per cent of the profits before allowing this deduction (6,41,77,764 + 40,48,390 = 6,82,26,154) which should have been then Rs. 34,11,307. The inconsistency has arisen because the AO computed the admissible deduction under s. 36(1)(viia)(b) even before computing deduction under s. 36(1)(vii) because he wanted to restrict the deduction under s. 36(1)(vii) on the basis of deduction permissible for the current year under s. 36(1)(viia)(b). This methodology adopted by the AO is inherently contrary to the scheme of the Act, and is, in our humble understanding, bound to give results which fail the equation. We are, therefore, of the opinion that the CIT(A) indeed erred in upholding the action of the AO in taking into account the admissible deduction under s. 36(1)(viia)(b) for the relevant previous year, for computing shortfall for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion created under s. 36(1)(viia)(b) at the end of the relevant year. The above observations made by the Hon ' ble Rajasthan High Court, therefore, do not come in our way in taking the stand that we have taken in the preceding paragraph. 8. We now come to another plea strenuously argued by the learned Departmental Representative, and that is with regard to the proposition that in case the assessee ' s plea is to be upheld, the assessee will get undue benefit in the first year of operations, because, on one hand, the assessee will be entitled to an ad hoc claim on the basis of taxable business income and, on the other hand, such an ad hoc claim will not be set off in deduction for actual bad debts. According to the learned Departmental Representative, this incongruity will end up in a situation that the assessee will get deduction for more than actual bad debts - something which is clearly contrary to the scheme of the Act and patently absurd. 9. There are two aspects to this issue. In the first place, the ad hoc deduction under s. 36(1)(viia) (b) being the last item on the computation of taxable business profits, it cannot be taken into account at the time of allowing deduction un ..... 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