Case Law Details
M/s Himadri Chemicals & Industries Ltd. Vs Pr. CIT (ITAT Kolkata)
Ordinarily under the mercantile system of accounting, expenditure is deductible when the liability to settle the same is accrued, irrespective of whether it is ‘due’ or not. However, in the case of a contingent liability, there is no present existence to discharge the same ; it is payable only when the contingency occurs. A contingent liability is essentially a conditional liability which is uncertain and may or may not materialise. Thus, any amount payable in respect of a contingent liability cannot be considered as expenditure for the purpose of computing the taxable income. In contrast, the MTM losses arise on account of a fall in the value of the underlying derivative contract as on the reporting date. The same represents a loss on an onerous contract existing as on the reporting date, albeit to be discharged / settled on a future date. Thus, MTM losses are not notional or contingent but accrue as on the balance sheet date and hence should be allowable. Moreover, we find that the Hon’ble Supreme Court in the case of CIT vs Woodward Governor of India Ltd reported in 312 ITR 254 (SC) had held that “the expression ‘any expenditure’ has been used in section 37 of the Income Tax Act, 1961, to cover both ‘expenses incurred’ as well as an amount which is really a ‘loss’ even though such amount has not gone out from the pocket of the assessee.”
Accordingly we hold that the MTM loss is an actual and ascertained liability and only the payment of the same falls on a future date after the Balance Sheet date and the loss is real and accurately determined on such date. Accordingly the view of the ld CIT while invoking revisionary jurisdiction u/s 263 of the Act that the provision for MTM lossess on foreign currency swaps is contingent liability is totally wrong.
FULL TEXT OF THE ITAT JUDGMENT
1. This appeal by the assessee arises out of the order of the Learned Principal Commissioner of Income Tax, Circle-1, Kolkata [in short the ld. CIT] in Memo no. Pr. CIT(C)-1/sec.263/2017-18/10180-183 dated 28.03.2018 passed u/s 263 of the Act against the order passed by the ACIT, Central Circle-2(1), Kolkata [in short the ld. AO] under section 143(3) of the Income Tax Act, 1961 [in short “the Act”] dated 01.02.2016 for the Assessment year 2012-13.
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