2011 (8) TMI 1257 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of loss on account of valuation of interest rate swap.
2. Applicability of accounting principles and standards in computing business income.
3. Timing of deduction for anticipated losses.

Summary:

Disallowance of Loss on Account of Valuation of Interest Rate Swap:
The assessee challenged the correctness of CIT(A)'s order confirming the disallowance of Rs. 98,84,000 as a notional or imaginary loss on interest rate swap valuation. The assessee argued that the loss was computed based on RBI guidelines and consistent valuation methods, and should be allowed as a deduction. The Assessing Officer (AO) rejected this claim, viewing it as an unascertained liability and a contingent liability, not allowable under mercantile accounting principles.

Applicability of Accounting Principles and Standards in Computing Business Income:
The Tribunal noted that u/s 145 of the Income Tax Act, business income must be computed in accordance with the cash or mercantile system of accounting regularly employed by the assessee. The mandatory accounting standards require provisions for all known liabilities and losses, even if not determined with certainty. The Tribunal emphasized that anticipated losses should be accounted for, aligning with the principle of conservatism recognized by the Supreme Court in Chainrup Sampatram vs. CIT.

Timing of Deduction for Anticipated Losses:
The Tribunal observed that the real issue was the timing of the deduction, not its deductibility. The loss on interest rate swap valuation as on the balance sheet date should be allowed in the relevant previous year, subject to verification of corresponding adjustment in the year of settlement. The Tribunal upheld the assessee's grievance, directing the AO to delete the disallowance of Rs. 98,84,000, consistent with the decision for the assessment year 2003-04.

Conclusion:
The appeal was allowed, and the impugned disallowance was deleted, subject to verification of corresponding adjustment in the year of settlement. The Tribunal pronounced the judgment in the open court on 26th August 2011.