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2019 (5) TMI 541

in view of Section 43B - HELD THAT:- Only the provision for employee’s benefits being in the nature of gratuity, superannuation, provident fund& leave encashment are subject to Section 43B(b) & (f) and therefore allowable only on actual payment basis. Unable to agree with the contention of the DR that all the provisions for employee’s post retirement benefits payable to employees are subject to application of Section 43B - since the employee’s benefits in form of medical reimbursements, foreign pension and staff pension do not find mention in any of the specific clauses of Section 43B, the same is held to be allowable u/s 37 on mercantile basis. We 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- .....

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see’s business of growing & manufacturing tea? - HELD THAT:- As relying on assessee's own case [2019 (2) TMI 1617 - ITAT KOLKATA] interest from FDs and financial institutions was assessable under the head ‘Business’ and the benefit of Rule 8 was granted to the assessee. - Decided against revenue - I.T.A. Nos. 114-115/Kol/2016 - 3-5-2019 - Shri A. T. Varkey, JM And Dr. A. L. Saini, AM For the Appellant : Shri A. K. Singh, CIT, DR For the Respondent : Shri D. S. Damle, AR ORDER PER SHRI A.T.VARKEY, JM These appeals filed by the Revenue are against the orders of the Ld. CIT(A) dated 11th September 2015 for the Assessment Years 2008-09 & 2009-10. Since the issues involved in these appeals are common, these appeals were heard together and are being disposed by this common order. 2. We first take up the appeal filed by the 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 .....

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duction for provision for post retirement benefits debited in accounts in consonance with AS-15. I further note that prior to AY 2005-06 tea business of the appellant belonged to Eveready Industries India Limited. The appellant company succeeded to the tea business of Eveready Industries India Limited on account of the scheme of demerger approved by Calcutta High Court. Eveready Industries India Limited in its books made provision for post retirement benefits to Employees in conformity with AS-15. In income-tax assessments of the said company also the deduction was allowed by the AOs in all regular assessments except for AY 1997-98. The ITAT, Kolkata in its appellate order for AY 1997-98 in ITA No. 959/Kol/2002 however allowed the assessee's claim for provision for post retirement benefits to Employees taking the view that the said provision was 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 .....

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ast years, deduction for retirement benefits as debited in the accounts in accordance with AS- 15 was always allowed. On the basis of the principle of judicial consistency therefore the AO could not depart from the admitted position when there was no change in the factual matrix except for the fact that the ICAI had recommended revision in the method for ascertaining the liability. 4.5 The Supreme Court in the case of Radhasoami Satsang vs. CIT (193 ITR 321) has held as follows: "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." The principle of consistency has also been applied by the jurisdictional 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 .....

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t of employment. The only difference was that such benefits were receivable by the employees in future upon retirement. However there being no material difference in the character of payment in the benefit receivable by the employees the AO could not disallow the provision for retirement benefits when the deduction was fully allowed in respect of remuneration paid to employees under the same contract of employment. 4.7. In order to disclose true & fair amount of Income earned, It was therefore mandatory for the assessee to determine its liability; which accrued during the impugned year. In respect of services performed by the employees during that period but which would be payable at future unspecified date The AS-15 methodology by which the assessee was required to make fair estimate of such future liability which accrued with reference to services 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 .....

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n be estimated by following a method which has scientific basis. In the appellant's case such liability was ascertained by obtaining report from an actuary. In various judgments the Courts have accepted in principle that obtaining actuarial valuation report is the scientific way of ascertaining the quantum of an expenditure or liability. Moreover AS-15 issued by ICAI and which was mandatory u/s 209 of the Companies Act 1956 makes it compulsory that the reporting enterprise should obtain actuarial valuation of the post retirement employee benefit liability and based thereon provision should be made in the accounts. On these facts I agree with the AR's submissions that in arriving at the amount of business income which was to be assessed on the basis of generally accepted principle and method of accounting, the assessee was entitled to claim 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 .....

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f the present appeal. Save & except the item of leave encashment, there was no other employee benefit payable to retired employees' which was prohibited by any specific provision of the Act. Even the liability for leave encashment provided in terms of AS-15 was disallowed separately by the AO and therefore the AO could not have disallowed the same item again while dealing with the issue of provision as per AS-15. From the AR's submissions it appeared that the liability as provided in the accounts pertained to the period when the employees were in employment and benefit of their services had been availed by the appellant for carrying on its business. Applying the ratio laid down by the Supreme Court in the case of Bharat Earth Movers Limited Vs CIT (Supra) the assessee's own case in AY 1997-98 in ITA NO.959/KoI/2002, I am therefore of 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 acco .....

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owed in the respective years. The material change, if any, which occurred during the previous year relevant to AY 2008-09 was revision in the methodology prescribed by ICAI for estimating the liability in accordance with revised AS-15. As a result of the revision in AS-15, the assessee was mandatorily required to recomputed or rework the quantum of its existing provision because the revision prescribed in AS-15 was retroactive in operation. Because of the retroactive revision not only the current years liability but entire liability of the company accruing upto the date of revision becoming effective was required to be quantified and provided in the accounts. As a consequence the assessee's liability to pay such expenditure went up by ₹ 11,00,14,367/-. 4.12 Additional liability of ₹ 11,00,14,367/- however got crystallised as a consequence 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 .....

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llowed the provision for leave encashment while dealing with it from the angle of AS- 15 (Revised). With regard to the deductibility of remaining three provisions on mercantile basis, he fully supported the order of the Ld. CIT(A).He relied on the decisions of the Hon ble Supreme Court in the case of Bharat Earth Movers Ltd Vs CIT (245 ITR 428) &Rotork Control (I) Ltd (189 Taxman 422); Vishakapatnam Bench of this Tribunal in the case of RashtriyaIspath Nigam Ltd (ITA No.13/Vizag/2013) dated 22.11.2017 and the decision of coordinate Bench of this Tribunal in the case of Eveready Industries India Ltd for AY 1997-98 in ITA No. 959/Kol/2002which has since been upheld by the Hon ble Calcutta High Court. 5. We have carefully considered the submissions of the rival parties. From the material on record it is noted that the provision for employees post 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 assessm .....

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employee retirement benefits stands squarely covered in favour of the assessee by the judgment of the Hon ble Calcutta High Court (supra). 7. It is also noted that in all income-tax assessmentscompleted upto AY 2007-08 the AO himselfallowed deduction in respect of provision for retirement benefits on accrual basis and claimed on the basis formulated in AS-15. The Ld. AR also drew our attention to the fact that in the income-tax assessment orders passed u/s 143(3) for AYs 2010-11 and onwards the AO once again allowedthe assessee s claim of deduction for provision for post retirement employee benefits u/s 37 of the Act on accrual basis. We therefore find force in the submissions of the Ld. AR that on the principle of judicial consistency the AO was not permitted to depart from the accepted position,which permeated in earlier years as well as subsequent 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 assessm .....

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auses of Section 43B of the Act, the same is held to be allowable u/s 37 on mercantile basis. 10. With regard to provision for leave encashment,we agree with the contention of the Ld. DR to the effect that such provision is allowable only on actual payment basis. However from the facts on record it is noted that the appellant had already added back the provision for leave encashment in the computation of income for AY 2008-09 under Section 43B(f) of the Act. The Ld. AR also drew our attention to the fact that even the AO had taken specific note of theseparate disallowance made in the computation of income in his assessment order and that the AO had separately made addition in respect of provision for leave encashment on the ground of being not admissible in terms of Section 43B(f) of the Act. We further note that this separate disallowance made u/s 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 ligh .....

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outstanding forward contracts pertaining to appellant s export receivables. 10.3 From the audited accounts of the appellant, I find that during the relevant year the assessee s exports were ₹ 145.15 crores which proved that assessee carried on international trade on substantial scale. In the circumstances the assessee was exposed to the risk of exchange rate fluctuations and therefore it was in the appellant s business interest that assessee hedged its exchange rate flutctuation risks by entering into forward contracts. In terms of AS-11 issued by the ICAI, values of outstanding open contracts as on 31.03.2008 were rested at the prevailing exchange rates. Any gain or loss incurred on restatement of the outstanding position was accounted in its books. The underlying transactions in relation to which the assessee executed forward were its export 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 y .....

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r such transactions were revenue items such as trade receivables, trade payables or working capital. This view was reiterated by the same Court in its later decision in the case of CIT Vs. Oil & Natural Gas Corpn. Limited Vs CIT (322 ITR 180). 10.5 The A/R s reliance on the decisions of the ITAT, Delhi in the case of Bechtel India PVT. Ltd. Vs. Addl. CIT (32 Taxmann.com 123) and ITAT, Mumbai Special Bench in the case of DCIT v. Bank of Bahrain and Kuwait (41 SOT 290) also found to be relevant. In arriving at the finding that MTM losses were definitive and not notional or contingent, the ITAT Benches had taken into account not only the decisions of the Apex Court referred above but also the CBDT Instruction No. 3 of 2010 on which the AO placed reliance in the impugned order. Even after considering Instruction No. 3 of 2010, the ITAT Benches did 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 r .....

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urrency contracts was consistently followed in the subsequent years as well. The interest rate swap transactions were ultimately settled in the assessment year 2010-11. In the books for AY 2010-11 when the outstanding interest swap derivatives were ultimately settled the assessee accounted profit of ₹ 97.39 lacs. Such profit was accounted after taking into account the opening provision for MTM loss from currency interest rate swaps amounting to ₹ 788.77 lacs. The provision for MTM loss was made in the accounts for the AY 2008-09 & 2009-10 respectively. After taking into account loss of ₹ 788.77 lacs accounted in the earlier years the assessee reported net gain of ₹ 97039 lacs in AY-2010-11 form interest rate swap transaction. From the assessment order for AY 2010-11, I find that even though loss of ₹ 788.77 lacs arising 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. .....

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os. 15 & 16 are therefore allowed. Being aggrieved by the order of the Ld. CIT(A), the Revenue is now in appeal before us. 13. We have heard the rival submissions and perused the material on record. It is noted that the assessee is engaged in the business of production and marketing of tea and substantial revenue is derived from exports. The total export turnover during the year was ₹ 145.15crores. In order to hedge its exchange risk, the assessee entered into foreign exchange forward contracts with banks for its export bills. Apart from foreign exchange forward contracts;the assessee had also entered into an interest swap derivative with ICICI Bank with a view to reduce effective interest cost on the borrowings. The assessee had originally borrowed loan of ₹ 40 crores in Indian rupees carrying interest rate of 11.25%. Since the interest 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 re .....

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vs D Chetan& Co (75 taxmann.com 300) (Bom HC) - Bechtel India (P) Ltd VsAddl CIT (33 taxmann.com 213) (ITAT Delhi) - Reliance Industries Ltd Vs CIT (40 taxmann.com 431) (ITAT Mumbai) 15. In respect of the interest rate derivatives, the Ld. AR submitted that the underlying of this derivative contract was the loan commitments. The interest paid on the borrowings was allowed by the AO as deduction from the business profits. He therefore contended that the interest rate derivative which was entered into in the ordinary course of business with a view to reduce the effective cost of borrowings, the MTM loss incurred on such derivative as on 31.03.2008 was real, crystallized and on revenue account. The Ld. AR also invited our attention to the fact that when the interest rate derivative was ultimately settled in FY 2009- 10 relevant to AY 2010-11andnet 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 re .....

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low mercantile system of accounting should evaluate derivatives contract on the basis of exchange rate prevailing on the Balance Sheet date and on restatement of outstanding derivative or forward contracts the enterprise should account for income or loss arising from restatement of outstanding foreign currency derivative contracts. The assessee has consistently followed the said method recommended by ICAI in the past as well as in the subsequent years and accordingly the income or loss arising from restatement of outstanding foreign exchange derivative contracts were offered as income or claimed as loss in the earlier years as the case may be. 18. The facts on record demonstrate that the foreign exchange forward contracts were entered into by the assessee with reference to underlying which were export bills in the ordinary course of its business. In 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 .....

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change rate which would impact its business of import and export of diamonds. These concurrent finding of facts are not shown to be perverse in any manner. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the Respondent assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safe guard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand 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 t .....

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he ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon ble Supreme Court judgment in the case of Woodward Governor India (P) Ltd. (supra). Our view is further fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in AY 2008-09. Therefore, the allowability of the loss on actual payment in AY 2009-10 has been made subject to the allowability of the loss for AY 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under 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 la .....

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ered in ITAT No. 92 of 2013 dated 19.06.2018 for the AY 2007-08. The Ld. AR submitted that in AY 2007-08 also the assessee had earned interest from FDs and financial institutions which was assessed by the AO under the head Other Sources and benefit of Rule 8 was denied to the assessee. On appeal the Ld. CIT(A) upheld the assessee s contention by observing as follows: 14. I have carefully considered the submissions of the A/R and have perused the decision of the Jurisdictional High Court in the case of Eveready Industries (I) Ltd for the A.Y. 1991-92 & 1992-93. In the audited accounts for the year ended 31st March 2007 appellant had debited gross interest of ₹ 43,44,53,000lacs and separately credited ₹ 1,64,65,000, out of which ₹ 4,74,687 being exempt interest, i.e. ₹ 1,59,90,313/- being gross interest received on loans and 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 &am .....

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squarely answers the question raised in Ground No. 6 of the present appeal. In appellant's case also after netting of interest received against interest paid there is net expenditure of ₹ 41,79,88,000/- which could only be considered to be expenditure incurred in connection with assessee's business of growing and manufacture of tea. The AO could not treat interest paid and interest received of different footings. I therefore direct AO to consider interest receipt of ₹ 1,59,90,313/- as part of assessee's income of growing and manufacture of tea and therefore in computing book profits only 40% of such interest could be brought to tax for the purposes of Sec. 115 JB of the Act. The AO shall accordingly re-compute the book Profits." 7. On further appeal the coordinate Bench of this Tribunal reversed the Ld. CIT(A) s order and 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 fu .....

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of the Hon ble High Court. Respectfully following the judgment of the Hon ble Calcutta High Court and this Tribunal rendered in assessee s own case, we see no reason to interfere with the order of the Ld. CIT(A). Accordingly Ground No. 3 raised by the Revenue is rejected. 25. In the result, appeal of the Revenue in ITA No. 114/Kol/2016 is dismissed. 26. Now we proceed to deal with the Revenue's appeal in ITA No. 115/Kol/2016 for AY2009-10. Ground No. 1of the appeal relate to the disallowance of provision for retirement benefits of ₹ 55,58,000/-.After considering the rival submissions, it is observed that the issue involved in this ground is identical to Ground No.1 of departmental appeal in A.Y. 2008-09. The reasons for making the disallowance in the year under consideration are same as discussed in the assessment order for AY 2008-09. The 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 A .....

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