2020 (3) TMI 398 - HC - Income Tax

Depreciation loss - loss arising due to forward contracts as these contracts stood terminated during the current assessment year and the corresponding amount was deemed to be added to the value of the assets even when these assets had not been acquired or payments made - HELD THAT - Section 43A as it is stood before the amendment required an assessee to revalue the foreign exchange liability at the end of every previous year and provide for the increase or decrease as a result of foreign exchange fluctuation. The aforesaid adjustment has to be made even in a case where the payment was not actually made and the adjustments have to be made on the basis of the liability as on the last day of the previous year. By way of an amendment in the year 2002, the requirement of making of payment was inserted. The assessee even under unamended provision is entitled to benefit of the loss claimed by the assessee to the tune on account of settlement of forward contracts in the previous year, which was shown as loss while computing the taxable income of the assessee. We agree with the view taken by the Tribunal on this issue. Accordingly, the first substantial question of law is answered against the revenue and in favour of the assessee. No interest u/s 234B levied on the amount of tax payable u/s 115JB as clause (h) to Explanation 1 to Section 115JB was inserted with retrospective effect by Finance Act, 2008 which could not haven anticipated during the current assessment year 2005-06 and consequently reading the provision which was not within its jurisdiction - HELD THAT - The Supreme Court in the case of Star India P. Ltd. 2005 (3) TMI 10 - SUPREME COURT has held that liability to pay interest arising on default is in the nature of quasi punishment and even though it is permissible for the legislature to retrospectively legislate yet, such retrospectivity is normally not permissible to create an offence retrospectively. It is true that the assessee could not have paid advance tax in case of a deferred tax liability in respect of AY 2005-06, when the amendment was brought into force in 2008. However, it is pertinent to mention here that clause (h) to second proviso to Section 115JB(2) of the Act has been incorporated with effect from 01.04.2001. The retrospective operation of the aforesaid provision has not been challenged by the assessee and therefore, the aforesaid provision has to be given effect to. The Tribunal clearly acceded to its jurisdiction in holding that no interest could be levied u/s 234B. Second substantial question of law is answered in favour of the revenue and against the assessee.

Summary

Issues:
1. Treatment of depreciation loss arising from forward contracts.
2. Levying of interest under Section 234B of the Income Tax Act.

Issue 1: Treatment of Depreciation Loss:
The appeal before the Karnataka High Court involved the treatment of a depreciation loss claimed by the assessee due to forward contracts that were terminated during the assessment year. The Assessing Officer disallowed the claimed loss of ?39,78,92,211 as the assessee had not acquired the assets or made payments but had only entered into forward contracts. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Income Tax Appellate Tribunal reversed this, citing the Supreme Court's decision in a similar case. The Tribunal held that adjustments should be allowed even if payments were not made, and the loss claimed by the assessee was justified. The High Court agreed with the Tribunal's view, stating that the assessee was entitled to benefit from the claimed loss even under the unamended provision of Section 43A of the Act. Therefore, the first substantial question of law was answered against the revenue and in favor of the assessee.

Issue 2: Levying of Interest under Section 234B:
The second issue revolved around whether interest under Section 234B of the Act could be levied on the tax payable under Section 115JB. The Tribunal held that no interest could be imposed under Section 234B due to a retrospective amendment brought in by the Finance Act, 2008. The revenue argued that interest was leviable based on the incorporation of clause (h) to Explanation 1 to Section 115JB with effect from 01.04.2007. The High Court noted that while the assessee could not have paid advance tax retrospectively, the retrospective operation of the provision had not been challenged. Therefore, the High Court ruled in favor of the revenue on this issue, stating that interest could be levied under Section 234B. Consequently, the second substantial question of law was answered in favor of the revenue and against the assessee.

In conclusion, the Karnataka High Court partially allowed the appeal, ruling in favor of the assessee regarding the treatment of depreciation loss arising from forward contracts but in favor of the revenue regarding the levying of interest under Section 234B of the Income Tax Act.