TMI Blog2012 (9) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... h reference to exchange rates prevailing at the end of the relevant previous year. As per the A.O., the forward contract had not become conclusive and being still open, any loss based on application of exchange rate at the end of the year was notional and anticipated only and such notional loss could not be allowed in view of CBDT Instruction No.03/2010 dated 23.3.2010. In this view of the matter, she disallowed the provision. 4. In its appeal before CIT(Appeals), argument of the assessee was that forward contract was taken by it for covering the risk on account of fluctuation in currency rate on a receivable amount of US $ 6,00,000 on account of power purchase agreement with TNEB. As per the assessee, the provision was arrived at after netting off loan liabilities to Power Finance Corporation and IOB. Assessee also submitted that it was obliged to follow Accounting Standard-11 of Institute of Chartered Accountants of India, and by virtue of Section 211(3C) of Companies Act, 1956, it was obliged to make a market valuation of the forward contract cover. Reliance was placed by the assessee on the decision of Hon ble Apex Court in the case of CIT v. Woodward Governor India P. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar is reported to have resulted in substantial losses to an assessee on account of trading in forex-derivatives. A large number of assessees are said to be reporting such losses on marked to market basis either suo motu or in compliance of the Accounting Standard or advisory circular issued by Institute of Chartered Accountants. The issue whether such losses on account of forex-derivatives can be allowed against the taxable income of an assessee has been considered by the Board. In this connection, I am directed to say that the Assessing Officers may follow the guidelines given below: It is clear that the said Instruction applied to foreign exchange derivative transactions. 9. Notification No.FEMA 25/RB-2000 dated 3rd May, 2000 issued by Reserve Bank of India under Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000, defines foreign exchange derivative contract as under:- (v) Foreign exchange derivative contract means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying assets, and includes, (a) a transaction w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons why it had made a provision based on such agreements on an ad hoc basis, when actual amounts could be calculated. As per the A.O., there was no satisfactory explanation from the assessee to prove that expenditure on account of operations and maintenance were charged to its accounts on actual basis. As against this, provisions were made with reference to factors which could not be ascertained with reasonable accuracy. He, therefore, considered provision of ₹ 6,19,86,628/- as not admissible and made an addition of like amount. 13. In its appeal before CIT(Appeals), argument of the assessee was that the provisions made based on long term maintenance agreement and long term parts supply agreement with GE Inc. USA, were part of the cost for continuous maintenance of main plant and for supply of spares for preventive maintenance and meeting unplanned break down. Based on such agreements, monthly fixed fee had to be paid to M/s GE Inc. USA. At the end of the year, in line with the agreements, provisions were made in the books based on actual factored fire hours of gas turbine. These were identified contractual obligation and assessee following mercantile system of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the liability as per these agreements, was purely on an ad hoc basis and not based on any scientific work out. The A.O. in paras 7.6 and 7.7 of his order has clearly given why he considered the provision to be ad hoc. These paras are reproduced hereunder:- 7.6 Under these circumstances, provisions made by the assessee has to be treated as adhoc and excessive in nature without reference to the actuals. The said inference is furthered strengthened by a data presented in the following table: Particulars Opening Balance Current year Provision Current year Payments Closing Balance Escalation payable 47,09,987 7474322.64 Nil 12184309.64 Incentive payable 1,49,92,486 9281486.19 2452730.00 21821242.19 Adder Provision (10768436) 35693144.88 Nil 24924708.88 Adder LTSA duty pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that the provisioning done by it was in accordance with such agreements, the table extracted above, does not substantiate such contention. We are, therefore, of the opinion that the matter requires re-visit by the A.O. We set aside the orders of authorities below and remit the issue back to Assessing Officer for verifying the provisioning done by assessee vis- -vis the agreements entered with M/s GE Inc. USA. If it is strictly in accordance with agreements, the amount shown as provision has to be allowed. Amounts in excess of what is payable as per the agreements, can be disallowed. 18. In the result, we set aside the orders of authorities below on this aspect and remit the issue back to the file of A.O. for consideration afresh, in accordance with law. 19. Ground No.3 is allowed for statistical purposes. 20. Vide its ground No.4, grievance raised by the Revenue is that CIT(Appeals) deleted the disallowance of ₹ 84.02 lakhs made by the A.O. relying on Section 14A of the Act and Rule 8D of Income-tax Rules, 1962. 21. Facts apropos are that assessee had in its balance sheet shown investment under the head mutual funds . The investment as on 31.3.2008, as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though the investment in mutual funds was reduced to 0 by the end of the relevant previous year, nothing has been brought on record by the assessee to show that income earned by such mutual funds were taxed. According to him, capital gains might have been taxed, but any dividend earned by the assessee on mutual funds would be exempt from tax and therefore, Section 14A applied. 25. Per contra, learned A.R. reiterated the stand taken before CIT(Appeals) that there were no tax-free investment made by the assessee. 26. We have perused the orders and heard the rival submissions. As per the assessee, its investments were all in mutual funds, which were based on debts. Surplus due to appreciation NAV, on sale of such mutual fund units were offered by it as capital gains. There is no doubt that as on the end of the relevant previous year, there were no investments in the books of the assessee. Whatever investment it had made, had come down to 0 by the end of the relevant previous year. If the claim of the assessee that investments were made in debt oriented mutual funds, is correct, and if the gains arising on sale thereof had been offered to tax, then of course, in our opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
