TMI Blog2017 (5) TMI 1591X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income under the normal provisions as well as under the deeming provisions of the Act, then such receipt is out of the purview of the provisions of section 115JB. We find the decisions in support of this proposition that a capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB Addition on account of unexpired foreign currency forward contract on Marked to Market (MTM for short) basis - Held that:- Instructions issued by the CBDT are not binding on the Courts. So there is no value in the argument of the DR. However, we disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. We reject the submission of the Appellant in these appeals that the increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year is notional or contingent and, therefore, cannot be allowed as a deduction - Decided against revenue - ITA No.1222/Kol /2014 And ITA No.1223-1224/Kol /2014 - - - Dated:- 3-5-2017 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, a limited company, is engaged in the business of manufacturing of PET resins. The assessee in the year under consideration has received incentive of ₹ 15,13,56,924/- from the Government of West Bengal in the form of remission of sales tax under the West Bengal Incentive Schemes 1999. The assessee has shown the incentive as income in its profit and loss account. The assessment was framed u/s 143(3) of the Act at the returned income of the assessee. However, the assessee before the ld CIT(A) has challenged the taxability of incentive income on the ground that the aforesaid incentive is not taxable being capital in nature. The assessee by mistake has offered the same to the tax but the AO should have excluded the same from the taxable income. Thus, the issue of taxability of impugned incentive income was first time raised before the ld CIT(A). 6. The assessee before the ld CIT(A) submitted that the object of the scheme was to promote the new industries in the state of West Bengal. The impugned incentive was not connected with the operations of the business and it was solely provided for setting up of new industrial project or undertaking for major expansion in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount or capital in nature needs to be decided on the basis of the objects for which it was given. Thus the impugned capital receipt is neither taxable under the normal provisions of the Act nor under the MAT provisions of the Act. The ld. CIT(A) for holding so has relied on various judgments of Hon ble Courts. Accordingly, the ld CIT(A) directed the AO to delete the addition of subsidy amount under the normal computation of income and MAT provisions of the Act by holding it as capital in nature which is not chargeable to tax. The Revenue, being aggrieved, is in appeal before us. 8. The ld. DR before us vehemently supported the order of AO whereas The ld. AR reiterated the submissions as made before the ld CIT(A) and relied in the order of ld CIT(A). 9. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. The issue in the instant case relates to the taxability of subsidy received by the assessee from the Government of the West Bengal. There is no dispute with regard to the facts of the case of which have been elaborated in the foregoing paragraphs and therefore the same are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales-tax paid by the industry concerned, for any quarter under the Sales-tax Act in respect of sales of such goods. The object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and thus, those are for the assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent of the sales-tax paid by the beneficiary does not imply that the same was in the form of refund of sales-tax paid. It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. Thus, the amount paid as subsidy was really capital in nature.-CIT vs. Ponni Sugars Chemicals Ltd. Ors. (2008) 219 CTR (SC) 105 : (2008) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidy was provided to assist/ enable the assessee in carrying on its trade or business in more profitable manner. The subsidy was provided only after the set up of industry. Payments were not being made in the form of subsidy for the purpose of setting up of the industries. Similarly the Kolkata Tribunal in the case of DCIT vs Teesta Agro Industries Ltd . in ITA No. 1237, 1053, 1753/Kol/2010 vide order dated 07.01.2011 has observed that the subsidy given in the form of the remission of sales-tax under the West Bengal State Incentive Scheme 1999 is in the nature of capital receipt and therefore not assessable to income tax. In view of above, we are of the opinion that the impugned subsidy is capital in nature and therefore not liable to tax. Simply the assessee has inadvertently offered the same to tax does not mean the capital receipt has become taxable. 9.2 Similarly the impugned receipt of subsidy will not be taxable being capital in nature under the provisions of MAT. Under the Act, income is chargeable to tax when it comes within the definition of income as specified u/s 2(24) of the Act. The Hon ble Supreme Court in the case of Padmaraje R Kadambande Vs CIT reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to exclude the above said profit from the computation of Book Profit for the reasons discussed above. In the instant case, the assessee also has duly disclosed the fact of forfeiture of share warrants amounting to ₹ 12,65,75,000/- in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence respectfully following the aforesaid decision of the Mumbai Tribunal, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon'ble Apex Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in (2011) 330 ITR 363 (SC), adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment , should be considered for the purpose of computation of book profits u/s 115JB of the Act and thereafter, the Learned AO has to make adjustments for additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, the AO called upon the assessee to explain the aforesaid loss of ₹84.51 lakh on account of MTM basis. In compliance thereto, the assessee submitted that certain contracts were entered in connection with Foreign Currency Forward Contracts for the business purposes and on the date of balance-sheet these were valued where loss of ₹85.51 lakhs was identified, though these contracts were not matured on the balance-sheet date. However, the AO disregarded the contention of the assessee by holding that the liability in respect of unexpired contracts has not been crystallized on the balance-sheet date and therefore the aforesaid loss is notional loss in nature. Thus, the AO disallowed the loss of ₹ 84.51 lakh and added to the total income of assessee. 16. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that the loss was claimed in pursuance to the provision of Accounting Standard-11 issued by the ICAI. The Accounting Standard issued by the ICAI mandates to record the loss arising out of unexpired FOREX contracts on the balance-sheet date. Further, assessee relied on several judicial pronouncements in supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d contracts on which loss of ₹ 84.51 lacs claimed in the year under appeal were matured/settled in FY 2009-10 relevant to AY 2010-11 wherein the appellant company declared the gain and credited to the profit and loss account. Such gain was assessed to tax by the AO in AY 2010-11. The Contention o the AO in the remand report that if at all, the appellant may have grievance in AY 2010-11 as the gain was brought to tax and not in the year under appeal for disallowance of loss; is not acceptable. The appellant had given the reference of AY 2010-11 to prove its point that same system of accounting is followed by the company regularly and if there is gain on MTM transactions, that is credited to the profit and loss account and if there is loss, it was debited. Thus, the AO cannot take divergent view in two different assessment years assessing the gain and disallowing the loss treating the same as notional. In any case, I am of the opinion that the claim of the appellant company of MTM loss is fully covered in its favour by the decision of the Hon'ble Supreme Court in the case of Woodward Governor India Ltd. (supra) which the AO unsuccessfully tried to distinguished in the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, we disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. The relevant extract of Accounting Standard 11 is reproduced below:- 3.6 The Accounting Standards (A) 11, the Effects of changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004. Relevant extract of the Accounting Standard is reproduced as follows:- 9. A foreign currency transactions should be recorded on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transactions. 10 11 (a) At each balance sheet date foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disbu ..... 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