TMI Blog2019 (5) TMI 541X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 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 discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree 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 assessments the Revenue disputed the allow ability of the provision for retirement benefits claimed on accrual basis and provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment years has been fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefits in form of medical reimbursements, foreign pension and staff pension do not find mention in any of the specific clauses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as incurred on account of unsettled outstanding forward contracts which the appellant executed into in relation to its export sales. The main component of the loss thus pertained to open 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrect. The Apex Court particularly held that loss recognized and accounted by an assessee on account of restatement of foreign exchange denominated liabilities was allowed as revenue deduction if the underlying for 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited Vs CIT (supra), such MTM loss of ₹ 26.01 lacs incurred and accounted in the appellant s books therefore constituted Revenue loss. 10.7 From the A/R s submissions it further appeared that the assessee s method of restatement of outstanding open foreign currency 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il Natural Gas Corpn. Limited vs CIT (supra), MTM loss was not a contingent or notional loss but the same was real loss which was allowable in the year in which the loss was accounted in the appellant s books. The AO is therefore directed to delete the disallowance of ₹ 65.56 lacs. Ground Nos. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts entered into by the assessee were export orders/bills and therefore any gain/loss which accrued or arose on account of re-alignment of foreign exchange forward contracts at the year was in the nature of revenue gain/loss incurred in the ordinary course of assessee s business. The Ld. AR placed reliance on the following decisions in support of his arguments :- - CIT 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce it s effective cost of servicing the borrowings raised in the ordinary course of it s tea business. The forward contracts entered into by the assessee were not by way of trading per se in foreign exchange derivatives. In our considered view therefore Instruction No. 3/2010 had no relevancein the facts of the instant case. 17. It is noted that the ICAI relying on the principle of prudence has recommended that the entities and enterprises who follow 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 forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer on account of disallowance of loss on foreign exchange forward contract loss and not appreciating the fact that the said loss was a notional loss and hence cannot be allowed? 7. The impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals), independently. come to the conclusion that the transaction entered into by the Respondent assessee is not in the nature-of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange 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 recorde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the assessee after considering the Instruction No. 3/2010 wherein it was held as follows :- 8. Coming to the corporate additions i.e. disallowance of loss, it clearly emerges from the record that the assessee in respect of foreign exchange realization follows mercantile system of accounting and not cash system of accounting. The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest. The loss has been incurred on the basis of scientific method in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision the Tribunal had followed the judgment rendered by the jurisdictional Hon ble Calcutta High Court in assessee s own case in ITAT No. 92 of 2013 dated 19.06.2018 for the AY 2007-08 wherein the Hon ble High Court had held that the interest from FDs and financial institutions was assessable under the head Business and the benefit of Rule 8 was granted to the assessee. The relevant findings of the said decision is as follows: ..At the outset the Ld. AR of the assessee pointed out that this very issue was adjudicated in assessee sfavour by the jurisdictional Hon ble Calcutta High Court in assessee s own case in its judgment rendered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est to be part of the composite business of growing and manufacture of tea thereby assessed only 40% of such income under central income tax assessment. The C I T in his order u/s 263 directed to AO to assess gross interest received as fully chargeable to tax under Central Income Tax. The Order of the CIT u/s 263 was upheld by the Tribunal. On further appeal, the Calcutta High Court however held that the interest income was rightly treated by the AO to be part of assessee's business of growing and manufacture of tea subject to Rule - 8 and therefore only 40% of interest income could be brought to Central Income Tax. 15. The decision of the Calcutta High Court 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. In its judgment dated 09.08.2018 in ITA No. 789 of 2004, the Hon ble Calcutta High Court dismissed the appeal of the Revenue inter alia including the question raised above. The Ld. DR was unable to controvert the submissions of the Ld. AR as also the findings of the Ld. CIT(A) which are in consonance with the view taken by the Hon ble Calcutta High Court in assessee s own case for AY 2007-08. Respectfully following the judgement of the Hon ble Calcutta High Court rendered in assessee s own case, we therefore see no reason to take any contrary view. Accordingly Ground No. 2 raised by the Revenue is rejected. 24. The Ld. DR fairly stated that the issue now stands covered in the favour of the assessee by the said judgment 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 dea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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