2011 (11) TMI 75 - AT - Income Tax

Future discount on bill purchase - Mercantile system of accounting - Matching Concept - held that - The quantum of discounting charges has direct nexus with the due date of the bill, which, in turn, determines the period for which the bank is deprived of its funds in discounting the bill. If the due date of bill crosses the date of closure of the financial year, the bank discounting the bill will incur matching interest cost on its funds in the current year and also the later year. As the interest cost for the subsequent year shall not become deductible in the current year, naturally, the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year. - CIT(A) has taken an unexceptionable view in holding that the future discount i.e. the amount of discount pertaining to the period after 31st March, 2000 cannot be charged to tax in this year. - This ground is not allowed. Claim of bad debts - section 36(1)(vii) - CIT(A) was justified in directing the AO to restrict the claim of bad debts by the amount of opening balance in the provision for bad and doubtful debts account as at the beginning of the year instead of the closing balance and then allowing deduction u/s 36(1)(viia). This ground of the Revenue s appeal fails. Foreign exchange loss - both the transactions of sale and purchase of dollars are totally independent of each other - there is no question of estimating any profit or loss on such transaction in the manner in which the assessee has done so, more specifically without divulging the impact of difference in the rate of dollar as at the end of the year vis-a-vis that agreed as per the forward contract. In view of the foregoing reasons we uphold the impugned order by not allowing this ground.

Issues Involved:
1. Deletion of addition towards discounting charges.
2. Disallowance under Section 14A.
3. Deduction in respect of bad debt under Section 36(1)(vii).
4. Disallowance of loss on revaluation of foreign exchange contracts.
5. Application of tax rate.
6. Disallowance of SWAP cost.
7. Charging of interest under Section 234B.

Detailed Analysis:

1. Deletion of Addition towards Discounting Charges:
The primary issue was whether discounting charges related to the subsequent year could be taxed in the current year. The assessee bank, following the mercantile system of accounting, contended that the Rs. 72.15 lakh represented future discount collected on bills purchased during the year, which should not be taxed in the assessment year 2000-01. The Assessing Officer (AO) disagreed, stating that the right to receive such discount accrued in the current year. However, the Commissioner of Income-tax (Appeals) [CIT(A)] deleted the addition, and the Tribunal upheld this decision. The Tribunal emphasized the "Matching concept" and the principle that income should be recognized on an accrual basis and not merely on receipt. It concluded that the discounting charges related to periods beyond the financial year should not be taxed in the current year.

2. Disallowance under Section 14A:
The AO had disallowed Rs. 13,66,667 under Section 14A, which the CIT(A) deleted. The Tribunal noted the judgment of the Hon'ble Bombay High Court in Godrej & Boyce Ltd. Mfg. Co. v. DCIT, which held that Section 14A disallowance should be based on a "reasonable basis" rather than Rule 8D. The Tribunal remanded the matter back to the AO to determine the quantum of disallowance as per the High Court's guidelines, allowing this ground for statistical purposes.

3. Deduction in Respect of Bad Debt under Section 36(1)(vii):
The assessee claimed a deduction for bad debts amounting to Rs. 1,57,46,917 under Section 36(1)(vii). The AO allowed a deduction of Rs. 1,54,12,252, disallowing Rs. 3,34,665. The CIT(A) overturned this, allowing the full deduction. The Tribunal upheld the CIT(A)'s decision, emphasizing that the deduction for bad debts should be net of the provision already allowed under Section 36(1)(viia) and that the opening balance of the provision should be adjusted against the bad debts written off during the year.

4. Disallowance of Loss on Revaluation of Foreign Exchange Contracts:
The assessee's claim for a loss of Rs. 26,86,979 on revaluation of foreign exchange contracts was disallowed by the AO and upheld by the CIT(A). The Tribunal remanded the issue back to the AO for fresh consideration, following the Tribunal's earlier decisions in the assessee's own case for the assessment years 1998-99 and 1999-2000.

5. Application of Tax Rate:
The assessee contested the application of a 48% tax rate instead of the applicable 35%. The Tribunal upheld the CIT(A)'s decision, following its earlier rulings against the assessee for the assessment years 1998-99 and 1999-2000.

6. Disallowance of SWAP Cost:
The AO disallowed Rs. 85,302 of the SWAP cost, which was confirmed by the CIT(A). The assessee explained that the SWAP cost resulted from variations in exchange rates when buying and selling foreign currency. The Tribunal found the assessee's method of computing loss flawed and upheld the CIT(A)'s decision, noting that the transactions of sale and purchase of dollars were independent and should not be considered together for computing loss.

7. Charging of Interest under Section 234B:
The assessee raised an additional ground regarding the charging of interest under Section 234B due to a retrospective amendment. The Tribunal admitted this ground, noting that the interest should be charged only from the date of the amendment's insertion, following its earlier decisions in the assessee's own case for the assessment years 1998-99 and 1999-2000. The Tribunal allowed this ground in favor of the assessee.

Conclusion:
The Tribunal's judgment addressed multiple issues, providing clarity on the treatment of discounting charges, disallowance under Section 14A, deduction for bad debts, revaluation of foreign exchange contracts, applicable tax rates, SWAP costs, and interest under Section 234B. The Tribunal upheld some of the CIT(A)'s decisions, remanded certain issues back to the AO, and provided detailed reasoning for its conclusions, ensuring adherence to legal principles and precedents.

← Previous Next →