2019 (5) TMI 541 - AT - Income Tax

Disallowance of provision for retirement benefits - such provision is not permissible for not complying with Section 43B - although the provision made on scientific basis but it could be allowed in view of Section 43B - HELD THAT - Only the provision for employee s benefits being in the nature of gratuity, superannuation, provident fund leave encashment are subject to Section 43B(b) (f) and therefore allowable only on actual payment basis. Unable to agree with the contention of the DR that all the provisions for employee s post retirement benefits payable to employees are subject to application of Section 43B - since the employee s benefits in form of medical reimbursements, foreign pension and staff pension do not find mention in any of the specific clauses of Section 43B, the same is held to be allowable u/s 37 on mercantile basis. We find merit in the Ld. AR s submissions that when the provision for leave encashment had been separately added back u/s 43B(f) while assessing the taxable income, the AO could not have again disallowed the said provision in light of AS-15 (Revised) and that the impugned addition amounted to double disallowance. For the reasons set out in the foregoing therefore we find no infirmity in the order of the Ld. CIT(A) deleting the disallowance of provision for leave encashment made by the AO in light of AS-15 since it had already been added back separately u/s 43B(f). No infirmity in the reasoning and conclusions of the CIT(A) deleting the disallowance of provision for employees retirement benefits. This ground of the Revenue is therefore dismissed. Allowability of marked-to-market loss arisen on realignment of open foreign exchange derivative contracts as on the year-end - notional and contingent - HELD THAT - Loss debited in the P L account by an assessee on account of restatement of foreign currency denominated trade payables or receivables pursuant to exchange rate variation at the yearend is defined or ascertained loss and not contingent loss and hence allowable as deduction from the business profits. Applying the ratio laid down in OIL NATURAL GAS CORPORATION LTD. 2010 (3) TMI 81 - SUPREME COURT and M/S WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT to the facts of the present case, in our considered view since the underlyings of the derivative contracts entered into by the assessee were export bills loan commitments, the gain/loss arising its restatement as on 31st March was real in nature and in the revenue field. In respect of the interest rate derivative, we additionally note that when such contract was finally settled in AY 2010-11 the assessee had accounted for a profit of ₹ 97.39 lacs after taking into re-aligned position of the derivative contract i.e. after accounting for the MTM losses of earlier years. In the income tax assessment order passed u/s 143(3) for AY 2010-11 which was much later than passing of the impugned order for AY 2008-09, the AO assessed such profit of ₹ 97.39 lacs without allowing the deduction for the MTM losses disallowed in the earlier AYs 2008-09 2009-10. We therefore note that the Revenue authorities did not faithfully follow the proposition incorporated in the CBDT Instruction of 2010 in the subsequent year but adopted a selective criteria by assessing the profit arising in AY 2010-11 (computed based on the re-aligned position) without allowing for the deduction of MTM losses which was disallowed in the prior years. - Decided against revenue. Interest income under the head Business - whether interest income earned by the assessee from FDs and financial institutions had no nexus with the assessee s business of growing manufacturing tea? - HELD THAT - As relying on assessee's own case 2019 (2) TMI 1617 - ITAT KOLKATA interest from FDs and financial institutions was assessable under the head Business and the benefit of Rule 8 was granted to the assessee. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of provision for retirement benefits.
2. Allowability of marked-to-market (MTM) loss on foreign exchange derivative contracts.
3. Classification of interest income under the head 'Business' and applicability of Rule 8.

Issue-Wise Detailed Analysis:

1. Disallowance of Provision for Retirement Benefits:
The primary issue was whether the provision for retirement benefits, which includes medical reimbursements, leave encashment, staff pension, and foreign pension, was allowable as a deduction under the Income-tax Act, 1961. The appellant company had made provisions in conformity with the revised Accounting Standard 15 (AS-15) issued by the Institute of Chartered Accountants of India (ICAI).

The Assessing Officer (AO) disallowed the deduction, arguing that there was no specific provision in the Income-tax Act permitting such a deduction and that the provision was contingent in nature. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, noting that the provision was made in accordance with AS-15 and had been consistently allowed in past assessments. The CIT(A) emphasized the principle of judicial consistency, referencing the Supreme Court's ruling in Radhasoami Satsang vs. CIT (193 ITR 321), which upheld that a consistent position taken in past assessments should not be altered without significant changes in facts or law.

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the provision for retirement benefits was based on actuarial valuation, which is a scientifically accepted method. The ITAT referenced the Supreme Court's decision in Bharat Earth Movers Limited Vs CIT (245 ITR 248), which allowed deductions for liabilities that are certain and can be estimated with reasonable accuracy, even if payable at a future date.

2. Allowability of Marked-to-Market (MTM) Loss on Foreign Exchange Derivative Contracts:
The second issue was whether MTM losses on unsettled foreign exchange derivative contracts were allowable as business expenses. The AO disallowed the MTM loss, considering it notional and contingent, and relied on CBDT Instruction No. 3/2010. The CIT(A) deleted the disallowance, noting that the loss was real and definitive, as it was accounted for in accordance with AS-11 and related to the appellant's export receivables and interest rate swap arrangements.

The ITAT upheld the CIT(A)'s decision, referencing the Supreme Court's rulings in CIT Vs Woodward Governor India Pvt. Ltd. (312 ITR 254) and CIT Vs. Oil & Natural Gas Corpn. Limited (322 ITR 180), which recognized MTM losses as real and allowable if accounted for in accordance with accepted accounting standards. The ITAT also noted that the AO had inconsistently applied the CBDT Instruction No. 3/2010, allowing gains from derivative contracts in subsequent years while disallowing losses.

3. Classification of Interest Income Under the Head 'Business' and Applicability of Rule 8:
The third issue was whether interest income earned from fixed deposits (FDs) and financial institutions should be classified under the head 'Business' and whether Rule 8, which pertains to the computation of income from the business of growing and manufacturing tea, was applicable.

The CIT(A) ruled in favor of the appellant, stating that the interest income should be set off against interest expenses, and only the net interest expenditure should be considered for assessing income from the composite business of growing and manufacturing tea. This was in line with the jurisdictional Calcutta High Court's decision in the appellant's own case for AY 2007-08.

The ITAT upheld the CIT(A)'s decision, referencing the Calcutta High Court's judgment, which recognized that interest income derived from temporary investments of surplus borrowed funds for the business of growing and manufacturing tea falls within the scope of Rule 8.

Conclusion:
The ITAT dismissed the Revenue's appeals for both AY 2008-09 and AY 2009-10, upholding the CIT(A)'s decisions on all three issues. The Tribunal emphasized the principles of judicial consistency, adherence to accounting standards, and the proper classification of income and expenses in accordance with established legal precedents.