2018 (12) TMI 566 - HC - Income Tax

MAT computation - loss arising from foreign exchange fluctuation as an unascertained liability to be added back to the book profit as per Clause (c) of Explanation to Section 115JA - Held that - The scheme of Section 115J is a complete code by itself and a decision rendered in respect of a deduction under Section 37 of the Act cannot be made applicable. This very question was considered in the case of NHPC Limited 2018 (4) TMI 47 - PUNJAB AND HARYANA HIGH COURT in which one of the questions, to be precise question no.6 was relating to computation of book profits for the purpose of Minimum Alternate Tax (MTA) under Section 115JB. In the said case, the Assessing Officer held that the amount was merely provisional and at the time of actual repayment of loan, the position may vary resulting in a profit and therefore, it was not an ascertained liability. Though before us the Revenue contended that the assessee has made only a provision, we find that nowhere in the assessment proceedings such a statement was made. Even while passing the assessment order, the Assessing Officer has shown the same as loss on account of exchange fluctuation and not as a provision - Decided in favour of the assessee. Income eligible for deduction under Section 80IB - Interest from deposit with Tamil Nadu Electricity Board and Interest received from housing and vehicle loans advanced to its employees - Held that - It is not disputed by the Revenue that the assessee borrows amounts from the bank at a higher rate of interest and extends housing and vehicle loans to its employees at subsidised rates. Thus, these loans and advances being incentives to the employees, has to be held to be directly relatable to the interest of industrial undertaking. In Arul Mariammal Textiles Limited 2018 (8) TMI 1729 - MADRAS HIGH COURT we had an occasion to consider similar issue and after taking note of several decisions on the point, decided the question in favour of the assessee holding that the interest income earned by the assessee is merely incidental and not the prime purpose of doing the act in question -it is not the case of the Revenue that the amount was deposited in fixed deposit solely for the purpose of earning interest nor it is the case of the Revenue that the amount, which was deposited in fixed deposit was a surplus money, which was lying idle in the hands of the Assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the loss arising from foreign exchange fluctuation is an unascertained liability to be added back to the book profit under Section 115JA of the Income Tax Act.
2. Whether interest received from employees and paid over to HDFC on account of loans availed by employees from HDFC is income in the hands of the appellant and if treated as income, whether it is eligible for relief under Section 80IB.
3. Whether interest received on advances paid to suppliers can form part of business income for the purpose of deduction under Section 80IA of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Foreign Exchange Fluctuation Loss:
The primary question was whether the loss arising from foreign exchange fluctuation should be treated as an unascertained liability and added back to the book profit under Section 115JA. The Assessee contended that the loss was determined with reference to the rate of foreign exchange as on the last date of the financial year and was therefore an ascertained liability. The Tribunal had previously ruled in favor of the Revenue, holding that the foreign exchange fluctuation was an unascertained liability. However, the High Court referenced several Supreme Court decisions, including CIT v. Woodward Governor India (P) Ltd., which established that losses due to exchange rate fluctuations are deductible under Section 37(1) if they are part of the regular accounting system. The Court concluded that the loss on account of foreign exchange fluctuation was an ascertained liability and should not be added back to the book profit. The substantial question of law was answered in favor of the Assessee.

2. Interest from Employee Loans and HDFC:
The second issue was whether the interest received from employees, which was paid over to HDFC on account of loans availed by employees from HDFC, constituted income in the hands of the appellant and if so, whether it was eligible for relief under Section 80IB. The Assessee argued that the interest was a partial reimbursement of the expenditure incurred and was directly derived from the industrial undertaking. The Tribunal had rejected this contention, relying on the Supreme Court's decision in CIT v. Pandian Chemical Limited, which held that the term "derived from" was narrower than "attributable to." The High Court, however, found that the interest received was directly related to the business activities of the Assessee and was eligible for deduction under Section 80IB. The substantial question of law was answered in favor of the Assessee.

3. Interest on Advances to Suppliers:
The third issue was whether the interest received on advances paid to suppliers could form part of business income for the purpose of deduction under Section 80IA. The Assessee contended that the advances were made to ensure prompt supplies, which was directly related to the business. The Tribunal had dismissed this claim, but the High Court found that the interest earned was incidental to the business activity and should be considered as business income eligible for deduction under Section 80IA. The substantial question of law was answered in favor of the Assessee.

Conclusion:
The High Court ruled in favor of the Assessee on all three issues, allowing the appeals and answering the substantial questions of law in favor of the Assessee. The Court emphasized that the foreign exchange fluctuation loss was an ascertained liability, and the interest received from employee loans and advances to suppliers was directly related to the business activities and eligible for deductions under the relevant sections of the Income Tax Act.