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2015 (1) TMI 869 - AT - Income TaxProvision for loss on derivative contracts disallowed - speculative transaction - Held that - Accounting Standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However but for such intervention or in cases falling under s. 145(3) the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally there is no finding given by the AO stating that the assessee has not complied with the Accounting Standards. Thus we hold that in the present case the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act. In the case on hand there has been an existing contract with a binding obligation accrued against the assessee when it entered into for-ex forward contracts. The forward contracts are in respect of consideration for exports proceeds which are revenue items. There is an actual contract for sale of merchandise. In this factual matrix it is clear in our view that the transaction in question will not qualify to be called as speculative transaction. In view of the facts and circumstances of the case on hand as discussed above we hold that the provision for losses on derivative contracts is allowable as expenditure u/s 37. - Decided in favour of assessee. Disallowance u/s.14A - Held that - Where the assessee has not earned any income exempt u/s. 10(38) of the Act disallowance of expenditure u/s. 14A of the Act is not tenable. Thus we also hold that the disallowance of expenditure u/s. 14A of the Act is not tenable and therefore delete the disallowance of 7, 34, 975 made by the Assessing Officer. - Decided in favour of assessee. Recomputation of MAT Credit u/s.115JAA considering the enhanced income on account of the disallowance made in the order of assessment for Assessment Year 2008-09 - Held that - It is settled principle that the provisions of section 115 of the Act is a separate code in itself and that the book profits have to be computed as provided under that section. If the disallowances made are not as per the provisions of that section then those cannot be considered in computing the book profits. The Assessing Officer is directed to examine and verify the disallowances made while computing the book profits and allow credit in accordance with law. - Decided in favour of assessee for statistical purposes. Interest under section 234B - Held that - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter and we therefore uphold his action of charging the said interest. - Decided against assessee.
Issues Involved:
1. Disallowance of provision for loss on derivative contracts. 2. Disallowance under section 14A of the Income Tax Act. 3. Re-computation of Minimum Alternate Tax (MAT) under section 115JA. 4. Levy of interest under section 234B. 5. Initiation of penalty proceedings under section 274 read with section 271. Detailed Analysis: 1. Disallowance of Provision for Loss on Derivative Contracts: Facts and Contentions: - The assessee, engaged in computer-aided engineering analysis and software services, claimed a provision for loss on derivative contracts amounting to Rs. 19,96,59,000, which was disallowed by the Assessing Officer (AO) on the grounds that it was speculative and contingent in nature. - The AO argued that the forward contracts were speculative transactions meant to hedge against future sales which are uncertain, thus not allowable as expenditure. - The CIT(A) upheld the AO's decision, stating that the provision for losses on derivative contracts is unascertained and contingent. Tribunal's Findings: - The Tribunal examined the nature of derivatives and concluded that forward contracts create a binding obligation on the date of the contract and are used to hedge against financial losses due to currency fluctuations. - The Tribunal referred to the Supreme Court's decision in Woodward Governor India Pvt. Ltd. and concluded that anticipated losses due to currency fluctuations should be accounted for as per prudent accounting standards. - The Tribunal held that the provision for losses on derivative contracts is allowable as expenditure because: - A binding obligation accrued when the forward contracts were entered. - The forward contracts relate to revenue items (export proceeds). - The liability is determinable with reasonable certainty. - The accounting treatment is as per Accounting Standards and ICAI guidelines. - The principles from the Woodward Governor case apply. Conclusion: - The Tribunal allowed the assessee's appeal on this issue, holding that the provision for losses on derivative contracts is allowable as expenditure. 2. Disallowance Under Section 14A: Facts and Contentions: - The AO disallowed Rs. 7,34,975 under section 14A read with Rule 8D, despite the assessee not earning any exempt income during the year. - The CIT(A) upheld the AO's decision, relying on the Special Bench decision in Cheminvest Ltd., which held that disallowance could be made even if no exempt income was earned. Tribunal's Findings: - The Tribunal noted that several High Courts, including the Gujarat High Court in Corrtech Energy Pvt. Ltd. and the Allahabad High Court in Shivam Motors (P) Ltd., have held that if no exempt income is earned, no disallowance under section 14A is warranted. - The Tribunal followed these High Court decisions and held that disallowance under section 14A is not tenable when no exempt income is earned. Conclusion: - The Tribunal deleted the disallowance of Rs. 7,34,975 made by the AO under section 14A. 3. Re-computation of Minimum Alternate Tax (MAT) Under Section 115JA: Facts and Contentions: - The assessee contended that the AO erred in recomputing MAT credit by considering enhanced income due to disallowances made in the previous assessment year. Tribunal's Findings: - The Tribunal directed the AO to examine and verify the disallowances made while computing the 'book profits' and allow credit in accordance with the law. Conclusion: - The Tribunal disposed of the grounds by directing the AO to recompute the MAT credit as per the law. 4. Levy of Interest Under Section 234B: Facts and Contentions: - The assessee challenged the levy of interest under section 234B. Tribunal's Findings: - The Tribunal upheld the AO's action of charging interest under section 234B, noting that it is consequential and mandatory. Conclusion: - The Tribunal upheld the charging of interest under section 234B but directed the AO to recompute the interest while giving effect to the order. 5. Initiation of Penalty Proceedings Under Section 274 Read with Section 271: Facts and Contentions: - The assessee challenged the initiation of penalty proceedings by the AO. Tribunal's Findings: - The Tribunal observed that at the stage of initiation of penalty proceedings, no cause of grievance arises to the assessee since no penalty has been levied yet. Conclusion: - The Tribunal dismissed this ground as premature and not maintainable. Separate Judgments: - The Tribunal delivered a single judgment covering all issues raised in both the assessee's and the revenue's appeals. Final Outcome: - The assessee's appeal was partly allowed. - The revenue's appeal was dismissed.
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