2021 (6) TMI 202 - AT - Income Tax

Disallowance of salary provisions u/s. 43B(f) - provision for leave salary was disallowed by the Assessing Officer by holding that the leave salary is contingent in nature - AO observed that the leave salary may or may not be encashed by the employees in future date as some of the employees may actually take leave. Hence he made the disallowance of the provision under section 43B(f) - CIT(A) deleted the addition - HELD THAT - As decided in the case of the appellant's group company Aditya Birla Nuvo Ltd. 2014 (8) TMI 1032 - ITAT MUMBAI leave salary is not attracted by Section 43B(f), Further, as per Explanation 2 to Section 43B, the leave encashment must be both due and payable to be disallowed under Section 43B. - Decided in favour of assessee. Grant received from holding company as capital receipt - As per revenue the same was not used for creating any capital asset but was used to pay salary to the director - assessee has treated the amount received from its holding company as a tax-free grant and at the same time treated the utilisation out of it as an expenditure in its computation of income - HELD THAT - It is not the issue of taxability or the chargeable of the receipt in isolation. But the claim of deduction for utilisation of the so-called exempt grant which has to be considered alongwith. This is the actual subject matter of debate over here. Hence this claim of the learned counsel of the assessee that assessing officer has quoted wrong section is not at all sustainable. Moreover, it is settled law that quoting a wrong section is not fatal. AO has not specifically invoked section 56(2). The dubious method adopted by the assessee of claiming the utilisation of grant as deduction from taxable income without offering the corresponding grant as income cannot be brushed aside on the claim that it is not debited to profit and loss account. As in substance the assessee is claiming the utilisation of grant as deduction in the computation of income. CIT(A) has completely erred in this regard. The amount received from the holding company cannot be allowed to be treated as exempt if the utilisation out of it is allowed as deduction from the total income chargeable to tax. The assessee cannot treat the grant as its not taxable income and at the same time claim utilisation out of it as a deduction from total income. Hence, we are of the considered opinion that the sum has been rightly brought to tax in as much as its utilisation as remuneration has been claimed and allowed as deduction. The effect of this addition/disallowance is assessee s dubious act of not having claimed the expenditure/utilisation of grant ostensibly though profit and loss account but claiming it though deduction in computation of income surreptitiously is nullified. Hence, we set aside the orders of learned CIT(A) and allow the Revenue s appeal on aforesaid reasoning. Disallowance of loss on forward contracts - no benefit of adjustment of income or gain on account of mark to market losses or gain will be given as per the CBDT instruction No.3/2010 - HELD THAT - As per decision of CIT v. D. Chetan Co. 2016 (10) TMI 629 - BOMBAY HIGH COURT , where it was held that Forward contracts for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuations would not be speculative activity, but business activity. Tribunal in the case of Foods and Inns Ltd. 2016 (6) TMI 333 - ITAT MUMBAI where it was held that where assessee engaged in manufacture and export of processed food products, in order to safeguard itself against fluctuations in exchange rates of foreign currency, entered into foreign exchange forward contracts with banks against confirmed export order, hedging loss suffered by assessee in respect of said forward contracts was to be allowed as business loss - we find ourselves in agreement with the contention that the issue is duly covered in favour of the assessee.

Summary

Issues Involved:
1. Disallowance of salary provisions under Section 43B(f) of the Income Tax Act, 1961.
2. Treatment of a grant received from the holding company as capital receipt.
3. Applicability of case law CIT vs. Deutsche Post Bank Home Finance Ltd. to the grant received.
4. Disallowance of loss on forward contracts.

Issue-wise Detailed Analysis:

1. Disallowance of Salary Provisions under Section 43B(f):
The Assessing Officer (AO) disallowed the provision for leave salary, treating it as contingent since it may or may not be encashed by employees. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, relying on ITAT's decision in the case of Aditya Birla Nuvo Ltd. v ACIT, which held that leave salary is not attracted by Section 43B(f) as it is a contractual liability, not a statutory one. The Tribunal upheld the CIT(A)’s decision, noting no contrary decision was presented.

2. Treatment of Grant from Holding Company as Capital Receipt:
The assessee received a grant of ?2,27,74,314 from its holding company to pay director remuneration, which exceeded the limit set by the Companies Act. The AO treated the grant as income from other sources under Section 56, arguing it was not a loan/advance and thus taxable. The CIT(A) observed that the grant was to ensure business continuity and safeguard the holding company’s interest, thus treating it as a capital receipt. The Tribunal, however, found this treatment unsustainable, noting that the assessee deducted the director’s remuneration from its income without offering the grant as income. The Tribunal concluded that the grant should be treated as taxable income if its utilization is claimed as an expenditure deduction.

3. Applicability of CIT vs. Deutsche Post Bank Home Finance Ltd.:
The CIT(A) referred to the Supreme Court and Delhi High Court decisions, including CIT v Deutsche Post Bank Home Finance Ltd., to support the treatment of the grant as a capital receipt. The Tribunal noted that these cases involved grants to loss-making companies for survival, which was not the case here. The Tribunal found the CIT(A)’s reliance on these cases misplaced, as the assessee was profitable and the grant was used to pay director remuneration.

4. Disallowance of Loss on Forward Contracts:
The AO disallowed the mark-to-market loss of ?74,306 on forward contracts, distinguishing it from future contracts and relying on case law that notional foreign exchange losses are not allowable. The CIT(A) allowed the deduction, noting that the loss was incurred for business purposes and was revenue in nature, referencing several case laws. The Tribunal upheld the CIT(A)’s decision, agreeing that the issue was covered in favor of the assessee by jurisdictional High Court and Tribunal decisions, which treated such losses as business activities rather than speculative.

Conclusion:
The Tribunal upheld the CIT(A)’s decisions on the disallowance of salary provisions and the loss on forward contracts but reversed the CIT(A)’s decision on the treatment of the grant from the holding company, ruling it taxable if its utilization is claimed as a deduction. The appeal was partly allowed.