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2010 (5) TMI 716 - AT - Income TaxDisallowance u/s 43A - not adding the loss incurred on account of difference in rate of exchange in foreign currency contract to the cost of the asset - AO disallowed the claim on the ground that the payments were not actually made by the assessee-company and further forward contracts are not covered by section 43A - HELD THAT - Amended law of section 43A applies. Now whether the assessee is entitled for claiming the loss on account of settlement of the foreign exchange forward contract or not has to be considered in the light of the recent judgment of the hon ble Supreme Court in the case of Asst. CIT v. Elecon Engineering Co. Ltd. 2010 (2) TMI 23 - SUPREME COURT as considered the impact of section 43A both before amendment and after amendment. The court was in fact examining the deductibility of roll over premium in respect of foreign exchange forward contracts. The court has held that wherever the foreign exchange loans were availed of for securing capital assets the decrease or increase would affect the capital asset. If the foreign exchange loan was acquired for working capital or other revenue commitments the fluctuation effect shall be adjusted in revenue account. Till the amendment brought in by the Finance Act 2002 this adjustment has to be made on yearly basis evaluating the position on 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 there is no doubt that the loss arising out of the forward contracts would be very much entitled to deduction or adjustment if it is a loss. We are of the view that the issue raised by the assessee is squarely covered by the judgment in the case of Asst. CIT v. Elecon Engineering Co. Ltd. 2010 (2) TMI 23 - SUPREME COURT . In the present case there is no dispute regarding the facts of the case as explained by the assessee that the foreign exchange contracts were made for the purpose of acquiring capital assets and the forward contracts were settled during the previous year relevant to the AY under appeal. Therefore the claim of the assessee to adjust for the loss is legitimate. As the settlement has resulted in loss to the above extent the said amount needs to be added to the cost of the concerned capital assets. Depreciation shall be allowed on the enhanced value of the capital assets. This issue is decided in favour of the assessee. Alternative contention that the amount be allowed as revenue expenditure - This alternate contention is not sustainable in view of the judgment of the hon ble Supreme Court in the case of Asst. CIT v. Elecon Engineering Co. Ltd 2010 (2) TMI 23 - SUPREME COURT . The alternate ground is rejected. Levy of interest u/s 234B - amount of tax payable u/s 115JB - add back the deferred tax provision to compute the book profits - Finance Act 2008 has made a retrospective amendment to section 115JB by inserting clause (h) in Explanation 1 to section 115JB according to which the book profit is required to be increased by an amount of deferred tax and provision thereof - HELD THAT - As in the case of Royal Jordanian Airlines 2008 (8) TMI 392 - ITAT DELHI-A that where one assessee is under a bona fide belief that income is not chargeable to tax interest cannot be levied under section 234B. This proposition tremendously supports the case in hand. Not only bona fide belief but even the statutory mandate to add back the deferred tax provision to the book profits under section 115JB was unknown during the period of the relevant previous years. We hold that the levy of interest under section 234B on the incremental amount of tax computed under section 115JB is not justified in the present case. Accordingly the levy of the said interest is deleted. Allowable business expenditure or not? - inter-corporate deposits written off - Case of the Revenue is that the business of the assessee-company is manufacture and sale of pellets hot and cold rolled coils and sheets etc. and not the activity of making investments and in dealing with finances - HELD THAT - As decided in assessee own case memorandum of association of the assessee-company enables the assessee to carry on the business of investment for inter-corporate deposits etc. and the assessee has indulged in such business by virtue of special resolution passed by the shareholders as required by the Companies Act and therefore the contention of the assessee that the loss was in the nature of business loss has to be accepted. The Tribunal accepted the contention of the assessee and held that the amount of inter-corporate deposits written off by the assessee was entitled to deduction in computing the taxable income. The Commissioner of Income-tax (Appeals) has allowed the ground raised by the assessee on this point following the above order of the Tribunal. The Revenue has not placed any order reversing the said order of the Tribunal or the judgment of any other High Courts before us. Therefore the Commissioner of Income-tax (Appeals) as well as the Tribunal both are bound to follow the earlier order of the Tribunal. Recompute the book profits u/s 115JB by deleting debenture redemption reserve from the net profit - HELD THAT - In the present case the debenture redemption reserve even though in the nature of provision for ascertained liabilities is in the capital account. When the debentures were issued and monies were collected by the assessee the proceeds were not treated as income of the assessee-company. They were treated as loans which always come in the category of capital liability. When the same capital loan is returned it would be a capital expenditure. So also the provision made for such repayment of debenture loan is capital in nature and not deductible in working out the net profits. Therefore in the present case even if the DRR set apart by the assessee-company is the provision for ascertained liabilities it cannot be deducted in computing book profits. This position is supported by clause (b) of Explanation 1 to section 115JB. Therefore we find that the Commissioner of Income-tax (Appeals) has erred in allowing the assessee to deduct Rs. 25 crores from computation of book profits under section 115JB. We reverse the order of the CIT (Appeals) on this point and restore the order of the Assessing Officer to add back the amount to the book profits of the assessee-company.
Issues Involved:
1. Disallowance of loss on foreign exchange forward contracts under Section 43A. 2. Levy of interest under Section 234B on tax payable under Section 115JB. 3. Allowability of inter-corporate deposits written off as business expenditure. 4. Computation of book profits under Section 115JB concerning debenture redemption reserve. Detailed Analysis: 1. Disallowance of Loss on Foreign Exchange Forward Contracts under Section 43A: The assessee-company, engaged in manufacturing and sale of various products, incurred a loss of Rs. 39,78,92,211 due to settlement of foreign exchange forward contracts, which was disallowed by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals). The Tribunal examined Section 43A of the Income-tax Act, 1961, as amended by the Finance Act, 2002, and referenced the Supreme Court judgment in Asst. CIT v. Elecon Engineering Co. Ltd. [2010] 322 ITR 20. The Tribunal concluded that the loss from foreign exchange contracts, being for acquiring capital assets, should be added to the cost of the assets, thereby allowing depreciation on the enhanced value. The issue was decided in favor of the assessee. 2. Levy of Interest under Section 234B on Tax Payable under Section 115JB: The assessee contended that interest under Section 234B should not be levied on the tax payable under Section 115JB due to a retrospective amendment introduced by the Finance Act, 2008, which required adding deferred tax liability to book profits. The Tribunal noted that the amendment was retrospective from the assessment year 2001-02, but by the time it was enacted in 2008, the relevant previous years had already passed, making it impossible for the assessee to pay advance tax retrospectively. The Tribunal relied on the principle "lex non cogit ad impossibilia" and judgments from the Madras High Court and the ITAT Delhi Bench, concluding that the levy of interest under Section 234B was not justified. This issue was decided in favor of the assessee. 3. Allowability of Inter-Corporate Deposits Written Off as Business Expenditure: The Revenue challenged the Commissioner of Income-tax (Appeals)'s decision to allow inter-corporate deposits written off as business expenditure. The Tribunal referred to its earlier decision in the assessee's case for the assessment year 1995-96, which held that such deposits were part of the assessee's business activities as per its memorandum of association. The Tribunal found no new evidence from the Revenue to overturn this precedent and upheld the Commissioner of Income-tax (Appeals)'s decision, deciding this issue against the Revenue. 4. Computation of Book Profits under Section 115JB concerning Debenture Redemption Reserve: The Revenue contended that the Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to exclude Rs. 25 crores set aside as debenture redemption reserve (DRR) from the book profits. The Tribunal examined the nature of DRR and concluded that it is a provision for ascertained liabilities of a capital nature, which should not be deducted in computing book profits under Section 115JB. The Tribunal reversed the Commissioner of Income-tax (Appeals)'s decision and restored the Assessing Officer's order to add back the DRR amount to the book profits. This issue was decided in favor of the Revenue. Conclusion: Both the assessee's and the Revenue's appeals were partly allowed. The issues concerning the disallowance of loss on foreign exchange contracts and the levy of interest under Section 234B were decided in favor of the assessee. The issues concerning the allowability of inter-corporate deposits written off and the computation of book profits under Section 115JB concerning DRR were decided in favor of the Revenue.
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