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2019 (5) TMI 541

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..... d not have again disallowed the said provision in light of AS-15 (Revised) and that the impugned addition amounted to double disallowance. For the reasons set out in the foregoing therefore we find no infirmity in the order of the Ld. CIT(A) deleting the disallowance of provision for leave encashment made by the AO in light of AS-15 since it had already been added back separately u/s 43B(f). No infirmity in the reasoning and conclusions of the CIT(A) deleting the disallowance of provision for employees’ retirement benefits. This ground of the Revenue is therefore dismissed. Allowability of marked-to-market loss arisen on realignment of open foreign exchange derivative contracts as on the year-end - notional and contingent - HELD THAT:- Loss debited in the P & L account by an assessee on account of restatement of foreign currency denominated trade payables or receivables pursuant to exchange rate variation at the yearend is defined or ascertained loss and not contingent loss and hence allowable as deduction from the business profits. Applying the ratio laid down in OIL & NATURAL GAS CORPORATION LTD. [2010 (3) TMI 81 - SUPREME COURT] and M/S WOODWARD GOVERNOR INDI .....

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..... Revenue in ITA No. 114/Kol/2016 for AY 2008-09. Ground No. 1 raised by the Revenue relates to disallowance of provision for retirement benefits on the ground that such provision is not permissible for not complying with Section 43B of the Act. Briefly stated the facts of the case are that the appellant company sets aside provision in it s annual accounts for payment of post retirement benefits to employees employed at its various tea estates, being medical reimbursements, leave encashment, staff pension & foreign pension, in conformity with the Accounting Standard - 15 ( AS-15 ) prescribed by the Institute of Chartered Accountants of India ( ICAI ). In the relevant year the said AS-15 was revised by the ICAI and the methodology to measure the employer s obligation towards long term retirement benefits was amended with a view to ensure a more realistic and correct ascertainment of the liability. In terms of the Revised AS-15, every reporting corporate entity was required to re-measure its past as well as present obligations and restate such liability in it s books, based on the revised methodology. The additional liability of ₹ 11,04,14,367/- arising as a consequence of r .....

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..... s made in respect of a liability which accrued during the relevant year in relation to services performed by the employees although payable in future at unspecified date. The Tribunal further found that the provision for post retirement benefits was ascertained on the basis of actuarial valuation certificate obtained by the assessee. Such provision was made in conformity with AS-15 prescribed by the ICAI. The ITAT accordingly held that the deduction was allowable in computing the business income of the assessee. Following the ITAT decision for AY 1997-98, no disallowances were made in the case of Eveready Industries India Limited or the appellant till AY 2007-08 even though in the accounts of the relevant years the provision for Employee Retirement benefits was debited and deduction therefor was claimed. 4.3 From these facts it therefore appeared that in the past assessments the AOs in principle accepted that the deduction for provision for post retirement benefits was permissible in arriving at the taxable income of the assessee since the relevant liability was incurred during the relevant years in which the employees performed their services. While assessing total income in the p .....

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..... urisdictional Calcutta High Court in the case of Russell Properties P Ltd vs. Addl CIT (109 ITR 229). I therefore find that if the provision for retirement benefits of employees made in accordance with AS-15 was considered as an allowable deduction in the past assessments, then apparently there was no reason for the AO to depart from the said position and take entirely a contrary view in AY 2008-09 so as to disallow the current year's liability of ₹ 1,65,51,581/- 4.6. In the impugned order the AO justified the disallowance also on the ground that the appellant did not specify any specific provision of the I.T. Act under which deduction was permissible. In my considered opinion this reason is inappropriate. It is not disputed by the AO that in terms of the contract of employment, the assessee had assured certain benefits to employees which were payable either during the period of employment or at the time of retirement or during the post retirement period. The retirement benefits were payable by the assessee to Its employees only at the time of or after the employees retired from the active service. But in either case these benefits could not have been claimed by the emplo .....

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..... vices performed employees during the relevant reporting period. AS-15 contained the Rules as the methodology to be followed by the enterprises in ascertaining the quantum of the liability for employee retirement benefits to be discharged in future. For ascertaining such liability, AS-15 mandated that the enterprise should obtain a report from the actuary estimating the liability. The actuarial valuation of a liability or expenditure is always based on assumptions which are statistically proven. The Supreme Court in the case of Bharat Earth Movers Limited Vs CIT (245 ITR 248) accepted that the liability for leave encashment though payable at future unspecified date yet the provision therefor made on scientific basis was allowable as deduction in computing the profits. The relevant observations of the Supreme Court were as follows: "The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the-liability-may-have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual q .....

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..... deduction for retirement benefits payable to employees. 4.9 The Supreme Court in the case of UP State Industrial Development Corporation (225 ITR 703) has observed as follows: The accounting practice followed by the assessee in the instant case was in consonance with general principles of accountancy governing underwriting accounts. It is a well-accepted proposition that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute. The Tribunal, after referring to authoritative books on accountancy, had found that the assessee was maintaining the accounts correctly in accordance with the principles of accountancy applicable to underwriting accounts and keeping in view the said principles the underwriting commission on the shares which were not subscribed by the public and were purchased by the assessee could not be treated as profit earned by the assessee in the transaction and the said commission could only be treated as reducing the price of the shares purchased by the assessee. The Tribunal had also stated that there was no contrary provisi .....

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..... f the opinion that the assessee was entitled to claim deduction for provision for post retirement employees' benefits computed on the basis of actuarial valuation in terms of Sec 37 of the Act since such expenditure was incurred or laid out wholly for the assessee's business purposes and the benefits were payable to employees according to their contracts of employment with the appellant. 4.10. In the impugned order the AO justified the disallowance also on the ground that the deduction claimed inter alia included the liability of the earlier years amounting to ₹ 11,00,14,367/- and which was not debited to the P&L A/c but was debited to the General Reserve brought forward from the earlier years In this regard I find that the ICAI revised AS-15 and prescribed new methodology for determining the liability which the enterprise was required to provide in its books. The revised method prescribed was mandatory. Based on the revised methodology the enterprises were required to recompute their existing liabilities. The ICAI was aware that revision of the existing liabilities would result in either increase or decrease in the quantum of the provision made in the accounts ti .....

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..... quence of the revision of AS-15 made by ICAI and which came in force w.e.f. 01.04.2007. The crystallization of the liability pertained to an item of expenditure which was in nature. I therefore find that the liability of ₹ 11,00,14,367/- crystallised during FY 2007-08. The revision in the quantum of liability did not bring about any change in the basis character or nature of the expenditure which was always considered in the past assessments to be revenue in the earlier year' assessments the deduction for the same expense was allowed by the AOs following pre-amended AS-15 and therefore there was no reason for AO to adopt contrary view with regard to allowability of the additional expenditure which accrued as a result of revision in AS-15. The revision in AS-15 having become effective during the relevant previous year, the deduction was permissible in the relevant year of the revision. , therefore hold that the assessee was entitled to claim deduction both for ₹ 11,00,14,367/- and ₹ 1,65,51,581/- which represented the assessee's liability to pay post retirement employees benefits based on revised AS-15. The AO is accordingly directed to re-compute the incom .....

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..... retirement benefits was regularly provided inthe appellant s annual financial accounts in conformity with mandatory AS-15. The said AS-15 was consistently followed in the past assessments and the AO allowed the deduction from the profits of the business in respect of such provisions on accrual basis. In none of the past income-tax assessments the Revenue disputed the allow ability of the provision for retirement benefits claimed on accrual basis and provided in conformity with AS-15. We note that dispute regarding the allow ability of provision for employee retirement benefits was raised by the AO only once in AY 1997-98. This Tribunal vide its order in ITA No. 959/Kol/2002 however held that the provision for employee s retirement benefit ascertained by following AS-15 was an allowable deduction u/s 37 of the Act. The order of this Tribunal was affirmed by the Hon ble Calcutta High Court in its judgment reported in 258 Taxman 313 wherein the following observation was made : 10. As far as question no. (v) is concerned, Mr. Agarwal very strenuously argued that the provisions for ₹ 82, 64, 000/- was a benefit conferred on the employees on superannuation or was a retirement benef .....

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..... ent years, without pointing out any change in the factual matrix or provisions of law in the relevant AY 2008-09. In this regard we may gainfully refer to the judgment of the Hon ble Supreme Court in the case of RadhasoamiSatsang (193 ITR 321)wherein it was held as under: where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. 8. Now we proceed to deal with the Ld. DR s contention regarding the applicability of provision of Section 43B to such provision for employee s retirement benefits. For this we first need to examine the provisions of Section 43B of the Act which is as under: Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any providen .....

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..... 43B(f) was confirmed by the Ld. CIT(A) against which no appeal has been preferred by the assessee. We therefore find merit in the Ld. AR s submissions that when the provision for leave encashment had been separately added back u/s 43B(f) while assessing the taxable income, the AO could not have again disallowed the said provision in light of AS-15 (Revised) and that the impugned addition amounted to double disallowance. For the reasons set out in the foregoing therefore we find no infirmity in the order of the Ld. CIT(A) deleting the disallowance of provision for leave encashment made by the AO in light of AS-15 since it had already been added back separately u/s 43B(f) of the Act. 11. For the reasons set out above we do not find any infirmity in the reasoning and conclusions of the Ld. CIT(A) deleting the disallowance of provision for employees retirement benefits. This ground of the Revenue is therefore dismissed. 12. Ground No. 2 of the appeal is against the Ld. CIT(A) s action directing the AO to allow marked-to-market loss of ₹ 65.56 lacs arisen on realignment of open foreign exchange derivative contracts as on the year-end. The brief facts of this issue are that the AO .....

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..... rt sales i.e. to say, revenue item. In the circumstances any gain or loss incurred on restatement of open forward contracts and where underlying security was the export receivables, represented revenue gain or revenue loss. The assessee followed accounting method of restating the unsettled open contracts on the last date of the previous year consistently and the gain or loss incurred was accounted in the books in conformity with AS-11. I therefore find that the loss which the assessee incurred was a definitive loss and it accrued on the last date of the previous year i.e. 31.03.2008. The loss was quantified with reference to exchange rate prevailing on 31.03.2008 and therefore such loss accrued in AY 2008-09. 10.4 The issue as to whether exchange fluctuation loss accounted by an assessee with reference to exchange rate prevailing on the date of balance sheet is a notional or contingent loss or ascertained loss was considered and decided by the Hon ble Apex Court in the case of CIT Vs Woodward Governor India Pvt. Ltd. (312 ITR 254). In this judgment the Supreme Court essentially considered the question whether the loss arising from restatement of an expenditure or liability pursuant .....

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..... not agree with the Department s view that MTM loss accounted by the assessee in their books as per AS-11 was notional. On the contrary the ITAT Benches held that the Apex Court in its judgments in the cases of CIT Vs. Woodward Governor India Pvt. Ltd. (supra) CIT Vs. & Oil and Natural Gas Corpn. Limited (supra) had accorded judicial recognition to AS-11 and held that the loss on restatement of outstanding foreign exchange transactions were ascertained losses and could not considered to be notional or contingent one. In view of the binding judicial precedents therefore I have no hesitation in holding that loss of ₹ 39.55 lacs accounted by the appellant in its books of account on restatement of outstanding forward contracts where underlying was exports receivable, was allowable in computing assessee s business income. 10.6 The second component of MTM loss of ₹ 26.01 lacs pertained to re0statement of unsettled derivative contracts booked under interest rate swap arrangement which the appellant entered with ICICI Bank. The assessee had obtained loan of ₹ 40 crores from banks & institutions for its business purposes. Interest payable thereon was being claimed a .....

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..... ising from restatement of interest rate swap derivatives was disallowed in AY 2008-09 and 2009-10, no deduction therefore was allowed in AY 2010-11 being the year in which the derivative transaction was ultimately settled. The gain of ₹ 97.39 lacs accounted as income in the books of that was however assessed as income of AY 2010-11. I therefore find that the year in which the derivatives transactions was ultimately settled, the AO did allow the deduction for the loss accounted in the books of prior years but the income reported in the relevant year was assessed without demure. I, therefore, find that while making assessment the AO did not even follow the CBDT Instructions No. 3 of 2010 in its true letter and spirit. 10.8 From the instruction No. 3 of 2010, it is apparent that the Board did not lay down a proposition that losses incurred from foreign exchange derivatives should be disallowed in all circumstances. The only proposition put forth in this instruction is that MTM loss which is considered by the Board to be notional or contingent should not be allowed from year to year but be allowed only in the year in which derivative contract is ultimately settled. Applying the l .....

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..... erest rates globally were lower, the assessee under a derivative contract entered into with ICICI Bank swapped the loan amount notionally in Swiss Francs and thereby the assessee was entitled to received interest of 2% on such converted amount of loan in foreign currency i.e. Swiss Francs. Effectively therefore the assessee was able to reduce the interest rate to 9.25% payable on their borrowings. However as a consequence of this interest swap derivative the assessee incurred the risk of depreciation of Indian currency against Swiss Francs. Due to adverse fluctuation in exchange rate, upon re-alignment of the foreign exchange forward contracts & interest rate derivative, the assessee incurred MTM losses at the close of the financial year. In terms of the mandatory Accounting Standards prescribed by ICAI for accounting for such derivative contracts and following the doctrine ofprudence, the assessee was mandatorily required to provide for such losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market. Accordingly with reference to the open derivative contracts outstanding as on 31.3.2008, the assessee determined the loss of  .....

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..... t gain of ₹ 97.39 lacs determined at the time of actual settlement was offered to tax in that year; such gain was computed after taking into consideration the re-aligned position of the interest rate swap for AYs 2008-09 & 2009-10. It was submitted that had the MTM losses of ₹ 26.03 lacs and ₹ 762.75 lacs not been recognized in AYs 2008-09 & 2009-10, then instead of gain of ₹ 97.39 lacs there would have been a loss of ₹ 691.36 lacs and consequently the taxable profit of AY 2010-11 would have been a lower by that amount. The Ld. AR submitted that the fact that AO who framed the income-tax assessment for AY 2010-11 did not dispute the exchange gain of ₹ 97.39 lacs and the same amount was assessed as the appellant s income with reference to the re-aligned position of the interest rate derivative, showed that the Revenue adopted selective approach to treat the gain derived from derivative contract to be true & real but losses to be notional & contingent. The Ld. AR therefore submitted that the Ld. CIT(A) was justified in treating the MTM loss incurred on derivative contracts to be real & therefore allowable as deduction from busin .....

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..... n our considered view therefore any gain or loss arising on restatement ofsuch foreign exchange forward contracts alsoarose in the ordinary course of assessee s business. Similarly we note that the intent & purpose of the interest rate derivative was to reduce effective interest cost in respect of loan of ₹ 40 crores borrowed in the ordinary course of business. Interest paid on such loan has been allowed as revenue deduction by the AO. Accordingly any gain or loss arising from such interest rate derivative was also in the revenue field since the underlying was the interest payable on the loan. Now theissue as to whether the loss arising on account of restatement of foreign currency denominated trade payables or receivables arising from exchange rate variation is real or contingent has been dealt with by the Hon ble Apex Court in in the case of Woodward Governor of India Ltd vs, CIT( 312 ITR 254) and CIT Vs. ONGC Ltd (322 ITR 180). In both these judgments the Hon blethe Supreme Court categorically held that the loss debited in the P & L account by an assessee on account of restatement of foreign currency denominated trade payables or receivables pursuant to exchange ra .....

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..... of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-l l is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative butonly disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. vinodkumar Diamonds (P) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar (supra) are identical/similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar Diamonds (P.) Ltd. (supra), the Tribunal .....

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..... nder these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee in this year. This ground of the assessee is allowed. 21. In respect of the interest rate derivative, we additionallynote that when such contract was finally settled in AY 2010-11 the assessee had accounted for a profit of ₹ 97.39 lacs after taking into re-aligned position of the derivative contract i.e. after accounting for the MTM losses of earlier years. In the income tax assessment order passed u/s 143(3) for AY 2010-11 which was much later than passing of the impugned order for AY 2008-09, the AO assessed such profit of ₹ 97.39 lacs without allowing the deduction for the MTM losses disallowed in the earlier AYs 2008-09 & 2009-10. We therefore note that the Revenue authorities did not faithfully follow the proposition incorporated in the CBDT Instruction of 2010 in the subsequent year but adopted a selective criteria by assessing the profit arising in AY 2010-11 (computed based on the re-aligned position) without allowing for the deduction of MTM losses which was disallowed in the prior years. 22. In view of the facts as discussed above and respectfully following .....

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..... nd deposits. The net interest expenditure was therefore ₹ 41,79,88,000/-. According to A.O. Rule-8 was not applicable to the interest received as it did not have any element of agricultural income. By the same logic, the entire interest debited in the Profit & Loss A/c also did not have element of expenditure incurred wholly & exclusively in relation to business of growing and manufacture of tea. In any business; fund position undergoes change on day- to-day& from moment to moment. Interest is a charge for use of funds. Interest income is a charge received for use of assessee's business funds by other persons. Similarly interest expenditure is a charge paid by the assessee for use of funds belonging to others. To determine the effective cost of borrowings; it is therefore necessary to set off the interest received against interest paid and only the net interest can be considered to be business expenditure for tax purposes. In the present case after setting off interest received against interest paid there was net interest expenditure of ₹ 41,79,88,000/-. which was incurred in connection with business of growing and manufacture of tea to which Rule - 8 wa .....

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..... nd restored the AO s order assessing interest income wholly to Central Income-tax without giving benefit of Rule 8. Being aggrieved the assessee carried the matter before the Hon ble Calcutta High Court wherein the following the question was raised: "Whether the interest income derived from temporary investment of surplus borrowed funds for the business of growing and manufacturing of tea, would fall within the scope of Rule 8 of the Income Tax Rules, 1962? 8. In its judgment the Hon ble Calcutta High Court found merit in the assessee s case and set aside the decision of this Tribunal and restored the order of the Ld. CIT(A) holding that the interest income was liable to be set off against the interest expense and only the net interest expenditure was liable to be considered for assessing income from composite business to which Rule 8 was applicable. The Ld. AR also brought to our attention the decision of the coordinate Bench of this Tribunal in the case of Eveready Industries India Ltd for the AY 1997-98 in ITA No. 959/Kol/2002 wherein also the identical view was expressed by the Tribunal. The Tribunal held that since assessee paid interest on loans and also derived interest .....

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..... e order of the Ld. CIT(A) was also passed on identical lines on which the relief was allowed in the appellate order for AY 2008-09. Following our conclusions drawn in A.Y. 2008-09, we therefore dismiss Ground No. 1 raised by the Revenue and uphold the order of Ld. CIT(A). 27. Ground No. 2 is against the order of Ld. CIT(A) directing the AO to assess interest income under the head Business and grant the benefit of Rule 8. After considering the rival submissions and the orders of the authorities below, it is observed that the issue involved in this ground is similar to the Ground No. 3 of department appeal in A.Y. 2008- 09. Following our conclusion in A.Y. 2008-09, we uphold the order of Ld. CIT(A) and dismiss this ground of the revenue. 28. Ground No. 3 is against the order of Ld. CIT(A) deleting the disallowance of ₹ 941.52 lacs made by the AO on account of MTM losses incurred on open derivative contracts. After considering the rival submissions and the orders of the authorities below, it is observed that the issue involved in this ground is similar to the Ground No. 2 of department appeal in A.Y. 2008-09. Following our conclusion in A.Y. 2008-09, we uphold the order of Ld. C .....

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