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.
2. The only effective issue involved in this appeal is as to whether the ld CIT was justified in invoking revisionary jurisdiction u/s 263 of the Act in the facts and circumstances of the case.
3. The brief facts of this appeal are that the assessee filed its return of income on 30.11.2012 declaring total income of Rs Nil under normal provisions of the Act and Book Profits u/s 115JB of the Act of Rs 80,89,27,608/- . The loss returned by the assessee under normal provisions of the Act in the return was Rs 46,64,69,826/-. The assessment was completed u/s 143(3) of the Act on 1.2.2016 determining the assessed loss of Rs 23,14,14,360/- under normal provisions of the Act. The Book Profits of Rs 80,90,27,270/- u/s 115JB of the Act after making disallowance of Rs 99,658/- u/s 14A of the Act was determined by the ld AO in the scrutiny assessment completed u/s 143(3) of the Act dated 1.2.2016. Later the said assessment was sought to be revised by the ld CIT u/s 263 of the Act for which a show cause notice was issued on 26.3.2018 to the assessee on the following grounds :-
“1. Foreign Exchange Fluctuation Loss:
It was noticed from Note 33 of annual accounts- “Change in Accounting Policy” that the assessee company had exercised option under Para 46A of AS 11 “The Effect of Change in foreign Exchange Rates” in respect of the accounting for fluctuations in foreign exchange relating to long term moneraty items. Accordingly, the assessee company had adjusted exchange fluctuations amounting to Rs. 2235.41 lakh to the cost of its fixed assets including capital work in progress during the year which was hitherto charged to profit & Loss Account.
1.2 In this context it was also observed that during the F.Y. 2010-11, the assessee had taken various ECB loans which were available only for establishment of new projects or expansion of existing projects.
1.3 It was further noticed from the computation of income that the assessee claimed deduction of 27,56,16,665/- towards exchange fluctuation loss on O/s ECB which was to be capitalized during the year and inadvertently at the time of assessment, the same was allowed in the assessment order.
1.4 Since, the ECB was taken for purchase of capital asset, the foreign exchange fluctuation loss arising there from was also to be treated as capital expenditure and as a result, the assessee capitalized the same in the balance-sheet. Therefore, there was no scope claiming deduction of foreign exchange fluctuation loss which was capitalized and thus, required to be disallowed. This resulted in excess carry forward of loss amounting to Rs. 27,46,16,665/-.
2. Provision for Marked to Market loss on foreign currency swaps.
2.1 It was noticed from clause 17(k) of Tax Audit Report that the assessee debited an amount of Rs. 29,92,34,031/- to the Profit and Loss account being provision for Market to Market loss on Foreign Currency Swaps and in its computation of income the assessee added back the above expenditure for determining the taxable income, under normal provision. The said expenditure was disallowed and added back for computing taxable income under normal provision. However, while computing Book Profit u/s 115JB, the said provision was not added back.
2.2 Para 2 of the CBDT instruction No. 3 of 2010 dated 23.03.2010 provides that MTM losses’ on forex derivatives, being the difference between the purchase price and the values as on the valuation date, is a notional loss and is contingent in nature and therefore not allowable in computing the taxable income.
2.3 Therefore, as per provision u/s 115JB below Explanation l(c), book profit be increased by an amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. Since, a notional loss or contingent liability is an unascertained liability. The provision for Market to Market loss on Foreign Currency Swaps amounting to Rs. 29,92,34,031/- was inadvertently not added back while computing book profit u/s 115JB at the time of assessment. This resulted in under assessment of income to the tune of Rs. 29,92,34,031/-.
3. Exemption u/s J0B of the I.T. Act.
3.1 In the profit and loss account, assessee has shown income from SEZ unit of Rs. 12,98,79,467/- which was exempt u/s 10B and in the computation of income the assessee had deducted the same before arriving at the Gross Total Income. However, inadvertently at the time of assessment, the exemption u/s 10B was allowed.
3.2 As per CBDT circular on section 10A, 10AA, 10B and 10BA dated 16.07.2013 the income computed under various heads of income in accordance with the provisions of chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter IV of the I.T. Act, 1961. This means that first the income/loss from various sources i.e. eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act, Thereafter the income from one head is aggregated with the income or loss of the other head in accordance with the provision of section 71 of the Act. if after giving effect to the provisions of section 70 and 71 of the Act there is any balance income, then the same is eligible for deduction in accordance with the provision of Chapter VI-A or Section 10A, 10B etc of the Act and the same shall be allowed in computing the total income of the assessee.”
4. The ld CIT after issuing the show cause notice to the assessee on 26.3.2018 proceeded to pass the order u/s 263 of the Act on 28.3.2018 by upholding the view taken by him in the show cause notice except in respect of the third issue i.e the claim of deduction u/s 10B of the Act. The ld CIT vide his order dated 28.3.2018 treated the order passed by the ld AO u/s 143(3) of the Act as erroneous in as much as it is prejudicial to the interest of the revenue and accordingly set aside the same by restoring to the file of the ld AO. Aggrieved, the assessee is in appeal before us.
5. We have heard the rival submissions. With regard to the claim of deduction u/s 10B of the Act, we find that the ld CIT by placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs Yokogawa India Ltd reported in 391 ITR 274 (SC) held that the claim of section 10A and 10B of the Act falls only under the expression ‘deduction’ and not ‘exemption’. Accordingly it was held by the Hon’ble Apex Court that the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of total income under Chapter VI which covers section 70 and 71 of the Act. We find from the materials available on record that assessee had claimed exemption from its SEZ unit u/s 10AA of the Act as is evident from Form No. 56F issued by a chartered accountant enclosed at page nos. 110 to 112 of the paper book before us. No deduction u/s 10A / 10B of the Act was claimed by the assessee as stated by the ld CIT in his order. We find that the Hon’ble Delhi High Court in the case of TEI Technologies P Ltd reported in 361 ITR 36 (Del) had held that the stage of deduction u/s 10AA of the Act would be while computing the total income of the eligible unit under Chapter IV of the Act and not at the stage of computing income as per Chapter VI of the Act (which covers section 70 and 71 of the Act). We find that the ld CIT had also agreed to this proposition in his revision order passed u/s 263 of the Act and had directed the ld AO to grant deduction u/s 10AA of the Act accordingly. Hence we hold that the ld CIT himself in his order passed u/s 263 of the Act had admitted deduction of Rs 12,98,79,467/- u/s 10AA of the Act while computing the Gross total income under Chapter IV of the Act as has been claimed by the assessee company in its return of income and accepted by the ld AO in the course of assessment proceedings. Accordingly, the Ground No. 5 raised by the assesee is allowed.
6. With regard to Foreign Exchange Fluctuation Loss , the primary facts emanating from record are that the assessee had availed External Commercial Borrowings (ECB in short) from abroad and had utilized the same for purchase of assets in India. As per mandatory Accounting Standard 11 (AS-11) issued by The Institute of Chartered Accountants of India (ICAI in short) , the outstanding foreign currency loan is required to be translated into Indian rupees by applying the foreign exchange rate as on the closing day of reporting period and the net exchange difference resulting on such translation is required to be recognized as income or expense for the respective financial year. Accordingly, in compliance with AS-11 , the assessee had claimed deduction of foreign exchange fluctuation loss on restatement of ECB loans to the tune of Rs 27,46,16,665/- in the return of income . The breakup of foreign exchange fluctuation loss is as under:-
