TMI Blog2016 (8) TMI 1468X X X X Extracts X X X X X X X X Extracts X X X X ..... Movers [ 2000 (8) TMI 4 - SUPREME COURT] , CIT(A) recorded a finding to the effect that it was not a contingent liability. Accordingly we do not find any reason to interfere in the order of the CIT(A), which is a well reasoned order. Appeal of the Revenue is dismissed. - ITA No. 6170/Mum/2014 - - - Dated:- 24-8-2016 - Shri R. C. Sharma, AM And Shri Sandeep Gosain, JM Revenue by : Shri Abhishek Sharma Assessee by : Shri Prakash Jotwani ORDER Per R. C. Sharma ( A. M ) This is an appeal filed by the revenue against the order of CIT(A), Mumbai, for the assessment year 2009-2010 in the matter of order passed u/s. 154, thereby enhancing the book profit computed u/s.115JB of I.T. Act, wherein following grounds have been taken by the revenue :- 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the claim of the assessee that the amortised amount of exchange differences arising out of foreign currency borrowings are not contingent liability and should not form part of computation of Book Profit for the purposes of S.115JB of the I.T.Act, 1961 without appreciating that loss on account of foreign exchange flu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956 (1 of 1956), which is different from the previous year under this Act, - (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. Explanation. - For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by- (a) the amount of income-tax paid or payable, and the provision therefore; or (b) the amounts carried to any reserves, by whatever name called [, other than a reserve specified under section 33Acl; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section; or (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. Explanation. - For the purposes of this clause, net worth shall have meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1ofI986). (3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (lA) of section 115J does not empower the assessing officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. 1.3.3 The Hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. reported in (2008) 305 ITR 409, rendered in the context of section 115JA (whose sub-section (4) is analogous to sub-section (5) of section 115JB), wherein the views expressed in the case of Apollo Tyres Ltd. (2002) 255 ITR 273 were extensively quoted, relied on and reiterated. From the above Apex Court decisions, the court laid down the following principles with regard to section 115JB of the Act: (i) The assessing officer has to accept the authenticity of the accounts maintained by the company in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, which are certified by the auditors and laid before the company at the annual general meeting. (ii) The assessing officer cannot go beyond the net profit shown in the profit and loss account prepared in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representation but only a difference of opinion as to whether a particular amount should be properly shown in the profit and loss account or in the balance-sheet. (2) If accounting policies, accounting standards are not adopted for preparing such accounts and method, rates of depreciation which have been incorrectly adopted for preparation of the profit and loss account laid before the annual general meeting. Except for the above two cases, the assessing officer has no power to alter the net profit shown by the companies for the purpose of computing the book profit. Thus it is clear that under the minimum alternate tax, the assessing officer should take the net profit as computed by the assessee and then make the adjustment under section 115JB of the Act. It is common that some companies follow an accounting year under the Companies Act, 1956, which is different from the financial year under Income Tax Act, 1961. 1.3.6 The Ld. AO has made the addition of the provision created under the explanation to section 115JB clause c which states that book profit be increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e possible. If these requirements are satisfied the liability is not a contingent one. The liability is in the praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 1.3.7 Similarly, the Bombay High Court in Echjay Forging (P) Ltd. s case (2001) 166 CTR (Bom) 100, where the assessee had made a provision for gratuity on the basis of actuarial valuation, had held it to be ~ ascertained liability. Delhi High Court in Vinitec Corporation (P) Ltd. s case(2005) 278 ITR 337 (Del) while analyzing whether provision for future liability under warranty was a contingent or ascertained liability, had observed as follows: 11 The ratio decidendi of the above cases is squarely applicable to the facts of the present case. It is not disputed that the warranty clause is part of the sale document and imposes a liability upon the assessee to discharge its obligations under that clause for the period of warranty. It is a liability which is capable of being construed in definite terms which has arisen in the accounting year. May be its actual quantification and discharge is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT vs. Woodward Governor India (P) Ltd (2009) 312 ITR (SC) 254, the Hon'ble Supreme Court held that the quantum of allowances permitted to be deducted under diverse heads under ss. 30 to 43C from the income, profits and gains of a business would differ according to the system adopted .. This is made clear by defining the word paid in s. 43(2), which is used in several ss. 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under s. 28/29. That is why in deciding the question as ~o whether the word expenditure in s. 37(1) includes the word loss one has to read s. 37(1) with s. 28, s. 29 and s. 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P L a/ c the value of the stock-in- trade at the beginning and at the end of the year should be entered at cost or market price, whichever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last day of the concerned previous year. But after the amendment, the adjustment shall be made on the actual payment or settlement of contracts and dues. This position has been made clear by the Hon'ble Court in the above case. The Hon'ble Court has further deliberated upon the capital nature and revenue nature of such adjustments arising out of foreign exchange fluctuation. Apart from the above general proposition of law, the Hon'ble Court further examined whether the Roll over premium in respect of foreign exchange forward contract is eligible for depreciation in the nature of expenditure to be added to the cost of the capital asset; or to be debited in the profit and loss account, if it is in the Revenue account. If Roll over premium on forward contract by itself is held to be admissible as a deduction or adjustment, then rre is no doubt that the loss arises out of the forward contracts would be very much entitled for deduction or adjustment if it is a loss. 1.3.11 Oil Natural Gas Corporation Ltd. Vs ClT (2010) 322 lTR 180(SC), the assessee is a public sector undertaking, engaged in exploration and prospecting oil. It largely depends on foreign loans to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under the IT Act in respect of those liabilities which crystallise during the previous year. Therefore, the concept of crystallisation of liability under IT Act assumes significance yis-a-vis commercial principles in vogue. As per the commercial principles of policy of prudence, all anticipated liabilities have to be accounted for but as per IT Act, only that liability will be allowed which has actually accrued. As a matter of fact, Courts have time and again given due weightage to commercial principles in deciding such issues. However, those anticipated liabilities are not allowable which are contingent in nature but, if an anticipated liability is coupled with present obligation and only quantification can vary depending upon the terms of contract, then a liability is said to have crystallised on the balance sheet date. It is in conformity with the principles of prudence also. A contingent liability depends purely on the happening or not happening of an event whereas if an event has already taken place, which, in the present case, is of entering into the contract and undertaking of obligation to meet the liability, and only consequential effect of the same is to be determined, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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