2014 (5) TMI 198 - HC - Income Tax

Provision in P&L account Whether the liability has been crystilised or loss has accrued in the current year or not Held that - The assessee company is engaged in the purchase and sale of Government securities, public sector undertaking bonds, commercial papers and other money market instruments the Tribunal was rightly was of the view that the guidelines issued by RBI in repo and reverse repo transaction requires uniform accounting of repo/reverse repo transactions, and that the company in question has followed those guidelines and accordingly debited the sum as a loss - It has been actually incurred, and finding that it has been actually incurred that the Department s stand in this case has been rejected - Beyond that the Tribunal or CIT(A) have not rendered any findings and which would have far-reaching consequences - All such findings and conclusions must be seen in the backdrop of peculiar facts and circumstances of the case of the assesee - No general principle or rule has been laid down Decided against Revenue.

Summary

Issues:
1. Appeal against the order passed by the Income Tax Appellate Tribunal regarding the Assessment year 2004-05.
2. Interpretation of RBI guidelines on provision for outstanding repo transactions.
3. Disallowance of provision for accrued liability or loss labeled as "provision" in profit and loss account.

Analysis:
1. The appellant, representing the Revenue, argued that the issue raised concerns larger public interest regarding a Repo transaction with the RBI. The appellant contended that making a provision in the Profit and Loss account, as required by RBI guidelines, does not necessarily mean that the liability has crystallized or the loss has accrued in the current year. The appellant sought an authoritative pronouncement by the Court due to the potential impact on various assessees, including banks. However, the Court found that the appellant's argument did not hold in the specific case at hand, where the assessee company was engaged in trading securities and money market instruments.

2. The assessee company had debited an amount under "provision for outstanding repo transactions" in accordance with RBI guidelines. The Assessing Officer questioned this provision, and the company provided a detailed explanation, citing RBI guidelines on repo transactions. The Tribunal noted that the sale of securities had taken place during the year, resulting in an actual loss that needed to be allowed in computing the business income. The Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) that the amount debited to the profit and loss account was an actual loss incurred by the company. The Tribunal found that the company had followed RBI guidelines in accounting for repo transactions, leading to the rejection of the Revenue's appeal.

3. The Court emphasized that the Tribunal's decision was based on the specific facts and circumstances of the case, without establishing any general principle or rule. The Court concluded that the appeal did not raise any substantial question of law and dismissed the appeal without costs. The judgment highlighted the importance of understanding the specific context of each case in determining the application of legal principles and guidelines, such as those provided by the RBI.