TMI Blog2011 (1) TMI 1244X X X X Extracts X X X X X X X X Extracts X X X X ..... st the possible future financial loss on account of wide fluctuation in the rate of foreign currency - where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract – Decided in favour of Assessee. Reduction of claim of bad debt u/s 36(1)(vii) of the Act – Held that:- The decision in Oman International Bank, SAOG vs. DCIT [2003 (11) TMI 286 - ITAT BOMBAY-H ] followed - The deduction s. 36(1)(vii) 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 u/s 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable – thus, the AO is directed to allow deduction u/s 36(1)(vii), without taking into account the admissible deduction u/s 36(1) (viia)(b) for the relevant previous year which can only be taken into account for computing deduction u/s 36(1)(vii) for subsequent year(s) – D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 62,63,63,964 being the amount already taxed in the assessment year 1999-2000, added the balance amount of Rs. 29,36,03,288 to the total income of the assessee. Aggrieved, the assessee carried the matter in appeal but without any success. 4. At the time of hearing, learned counsel for the assessee contended that this issue is covered by the decision of the ITAT Mumbai (SB) in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait, 41 SOT 290 (Mum)(SB). On the other hand, learned Departmental Representative relied upon the Hon ble Supreme Court judgement in the case of Ramabai v.CIT, 181 ITR 400(SC) and contended that income has to be taken on accrual basis. 5. Having heard both the sides, we find that the issue is squarely covered by the decision of the ITAT (SB) in the case of DCIT v. Bank of Bahrain and Kuwait (supra), wherein, it was held as follows:- 11.Ld Counsel for the assessee submitted that this issue is covered in assessee s own case for the assessment years 1992-93, 1993-94, 1995-96 and 1996-97. ld Counsel submitted that interest on Government Securities does not accrue on day to day basis but on fixed dates and the entry made in the books ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit loss account for the interest on day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal. Consistent with the precedents, we dismiss this ground of the revenue. We see no reasons to take any other view of the matter than the view so approved by the Special Bench. As regards, Hon ble Supreme court s judgement in the case of Ramabai (supra), the ratio of this judgement would not apply on interest on securities, since, as noted by the Tribunal in the above case, in the case of Government securities, interest does not accrue on day to day basis but only on the fixed dates. That si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange contracts. ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31. iv) A liability is said to have crystalised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing. v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. vi) The forward foreign exchange contracts have all the trappings of stock-in-trade. vii) In view of the decision of Hon ble Supreme Court in the case of Woodward Governor India (I) P.Ltd., the assessee s claim is allowable. viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. We, accordingly, hold that where a forward contract is entered into by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause", it is not material as to what was the actual deduction under s. 36(1)(viia) allowed by the Revenue, but as long as the bad debt is less than the total credit balance in the provision account, deduction under s. 36(1)(vii) cannot be allowed in respect of the same. This objection, in our considered view, is fallacious inasmuch as the reference is for "credit balance in the provision for bad and doubtful debts account made under that cl. [36(1)(viia)]", and, therefore, only such provision can be taken into account as is admissible under s. 36(1)(viia). Clauses (vii) and (viia) are two independent clauses of s. 36(1) and as per the scheme of the Act, in our considered view, the deduction under s. 36(1)(vii) is supplemental in nature and it, therefore, comes to the play to the extent deduction already allowed under s. 36(1)(viia) falls short of the actual bad debts. It is, therefore, at the first sight quite logical to assert that deduction under s. 36(1)(vii) should only be allowed to the extent actual bad debts unrecoverable and written off fall short of deductions allowabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on Hon ble Punjab Haryana High Court s judgment in the case of Nandlal Sohanlal vs. CIT 1978 CTR (P H)(FB) 5 : (1977) 110 ITR 170 (P H)(FB) suffice to mention that, in our considered view, the view canvassed by the Revenue is not a correct or acceptable view of the matter. We, therefore, reject the same as an untenable view and decline to go into the controversy as to what will be the legal position in a situation in which more than one views on an issue are possible views. 7. We must, however, also deal with the judgment of Hon ble Rajasthan High Court in the case of CIT vs. Bank of Rajasthan Ltd. (2002) 174 CTR (Raj) 400 : (2002) 255 ITR 599 (Raj) which has been heavily relied upon by the learned Departmental Representative. In particular, learned Departmental Representative has invited our attention to the following observations made by their Lordships in the aforesaid judgment : "The use of the words any such debt or part thereof clearly indicate that the exclusion of provision in proviso to s. 36(1)(vii) will apply only in cases, where a provision for bad and doubtful debts have been made in the relevant accounting year on the bad and doubtful debts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utable to bad debts [i.e. 36(1)(vii) plus 36(1)(viia)(b)] will indeed be more than the actual bad debts in that year. However, since the provision so allowed under s. 36(1)(viia)(b) is to be taken into account while allowing deduction for actual bad debts in the subsequent year, the effect of excess deduction, if any, will be squared up in that subsequent year. Secondly, a view seems perfectly acceptable that the provision for bad debts allowable under s. 36(1)(viia)(b) being inherently attributable to the debts outstanding at the end of the year, provision allowable as such is against future bad debts out of debts outstanding at the year end, and, therefore, it need not be mixed up with actual bad debts incurred during the year. Viewed from these points of view, there is no such incongruity as perceived by the learned Departmental Representative. Accordingly, we are not inclined to uphold the objection taken by the Revenue. 10. For the detailed reasons set out above, we deem it fit and proper to direct the AO to allow deduction under s. 36(1)(vii), without taking into account the admissible deduction under s. 36(1) (viia)(b) for the relevant previous year, which, in our consider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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