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TMI Blog2011 (11) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st March, 2000, collected on bills purchased during the year. It was, therefore, claimed that this amount did not pertain to assessment year 2000-2001. The Assessing Officer did not accept this contention by observing that the transactions involving discounting of bills took place in the year when the bills were discounted and since the assessee acquired the right to receive such discount during the year, the same was chargeable to tax in the year in question. He, therefore, made addition for the said sum. The learned CIT(A) differed with the view expressed by the Assessing Officer and ordered for the deletion of this addition. 3. We have heard the rival contentions and perused the relevant material on record. In so far as the discount relating to the period up to the close of the financial year is concerned, the assessee offered such amount as income, which has been accepted by the AO. The controversy has arisen in respect of the discount collected by the assessee, which related to the period beyond the close of the previous year relevant to the assessment year under consideration. There is no dispute on the fact that the said amount of Rs. 72.15 lakh represents future discoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income means the growth of income irrespective of its receipt or becoming due. The word 'due' is sometimes confused with the word 'accrue' and it is argued that since income is not due it cannot be charged to tax or vice versa. The connotation of these two words needs to be properly appreciated. Whereas the word 'accrue' refers to the growth of income or acquiring dominion over the income, the word 'due' refers to the stage of acquiring the right to receive. It can be illustrated by a simple illustration. If a depositor goes to the bank and purchases FDR of Rs. 100 for one year on 1.1.2011 with interest @ 10%, the total interest income on such FDR will be Rs. 10 and the depositor will get back Rs. 110 on 1.1.2012. Suppose the depositor is closing its accounts on financial year basis. The year ending will come on 31.3.2011. Albeit the interest income of Rs. 3 for the period 1.1.2011 to 31.3.2011 shall accrue to the depositor in the year ending 31.3.2011, but it shall not be due as on that date. The due date of the entire income of Rs. 10 will be on 1.1.2012, being the maturity date of the FDR. Thus it can be seen that although interest income of Rs. 3 accrued to the assessee in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of advancing loan. In that case the borrower will effectively receive Rs. 90 net after interest (Rs. 100 principal minus Rs. 10 interest). In such a case though the interest of Rs. 10 became due and was also received by the lender on 1.1.2011, but interest which shall accrue as income at the end of the financial year ending 31.3.2011 shall be Rs. 3. In both the above cases, the lender, following the mercantile system of accounting, shall become liable to offer interest income of Rs. 3 in the year ending 31.3.2011, even if he received interest of Rs. 10 in advance at the time of advancing loan itself or no amount is received during the year because of it becoming due at the maturity period falling after the close of the year. 9. Discounting of bills is one of the modes of financing. It bears close resemblance to the borrower and lender agreeing that the interest shall be paid at the time of accepting loan. In a case of discounting of bill by a financer, the drawer of the bill gets the amount of bill net of discounting charges at the very threshold, when he goes for getting it discounted. The amount of discounting charges depends upon the period of the bill. The financer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year of guaranty irrespective of the period for which guaranty was furnished. Drawing strength from this order, it was argued that the same ratio shall apply to the discounting charges as well and hence the entire amount of discounting charges including that relating to the period falling in the subsequent year shall accrue in this year. 11. There is no doubt that the special bench in the aforenoted order has held that the guarantee commission is to be taxed in the year in which the guarantee is actually been given irrespective of the period of guarantee, unless such commission is refundable on the revocation of guarantee. Let us try to understand the logic behind the accrual of guarantee commission at the very threshold. When a promisor undertakes to perform some promise and the promise, in order to ensure that no default is committed, may require the promisor to arrange for guarantee. In such a case, the guarantor undertakes to fulfill the obligation undertaken by the promisor, in case there is any default by the later. Suppose there is a failure by the promisor, the promisee shall invoke the guarantee and the guarantor will have to step into the shoes of the promisor and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become deductible in the current year, naturally, the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year. We are of the considered opinion that the ld. CIT(A) has taken an unexceptionable view in holding that the future discount i.e. the amount of discount pertaining to the period after 31st March, 2000 cannot be charged to tax in this year. This ground is not allowed. 13. Second ground is against the deletion of disallowance of Rs. 13,66,667 made by the Assessing Officer u/s 14A of the Act. 14. We have heard the rival submissions and perused the relevant material on record. It is noted that the question of making disallowance u/s 14A is no more res integra in view of the judgment of the Hon'ble Bombay High Court in Godrej & Boyce Ltd. Mfg. Co. v. DCIT [2010] 328 ITR 81 (Bom) holding that the provisions of section 14A are applicable in circumstances as are prevailing presently and the disallowance has to be worked out by the AO on some 'reasonable basis' and not rule 8D. Under such circumstances, we set aside the impugned order and restore the matter to the file of the AO for deciding the quantum of disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; ** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that where in the case of a bank to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. 19. It is imperative to note at this stage that the quantum aspect of the provision as not exceeding five percent of the specified income, has not been disputed by the AO. The dispute has arisen only on the question of reducing the opening or the closing provision for bad and doubtful debts. 20. Now coming to the sequence of allowing deduction under clauses (vii) and (viia), deduction is first allowed towards bad debts actually written off under clause (vii) as reduced by the amount of provision already allowed and then towards provision under clause (viia). It is interesting to observe that in common parlance when we talk of firstly creating the provision and then allowing deduction on account of bad debts, it is qua the specific debt(s) on micro basis turning bad in this year for which the provision was made earlier. But when we talk of creating provision on a macro basis at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the year for computing the amount deductible under clause (vii) and it is only thereafter that the provision is made under clause (viia) in respect of the remaining debts outstanding as at the end of the year. 21. This view is fortified from the practical angle of the position as well. Advances of the banks are broadly classified into performing or non-performing assets. In case an account does not pose any problem as regards the recovery of interest or installments of principal loan, it is categorized as performing. No provision is required to be made in respect of such advances. In case an account is not doing well, it slips into non-performing asset. The non-performing advances are further classified into sub-standard or doubtful depending upon the period for which an account remains non-performing. But once the loss is identified by the bank on account of advances, but the amount has not been written off, wholly or in part, these are considered as loss assets. Provisioning is required to be done as per the health of the advances. Provision is done at a lower percentage in respect of sub-standard advances (assets), but for doubtful debts the percentage of provision goes u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing year and under clause (vii) in the current year, can exceed the amount of any bad debt written off as irrecoverable in the accounts of the current year. In our considered opinion the ld. CIT(A) was justified in directing the AO to restrict the claim of bad debts by the amount of opening balance in the provision for bad and doubtful debts account as at the beginning of the year instead of the closing balance and then allowing deduction u/s 36(1)(viia). This ground of the Revenue's appeal fails. 23. The assessee is aggrieved against the confirmation of disallowance of loss on revaluation of foreign exchange contracts amounting to Rs. 26,86,979. The learned Counsel for the assessee drew our attention towards the orders passed by the Tribunal in assessee's own case for the assessment years 1998-99 and 1999-2000. This issue arose in both these years and the Tribunal was pleased to send this matter back to the file of A.O. for a fresh decision as per law. Respectfully following the precedents, we set aside the impugned order and restore this issue to the file of A.O. for taking a fresh decision on the basis of the guideline given by the Tribunal in assessee's own case in the immedia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the rates of Rs.43.565 and Rs. 45.165 when multiplied with $2,50,000 was stated to be resulting loss of Rs. 4,00,000 covering the period 14.01.2000 to 29.12.2000. It was explained that out of total loss of Rs. 4 lakh arising out of this transaction covering the above referred period, loss on pro-rata basis from January 14 to March 31,2000 amounting to Rs. 85,302 was considered as SWAP cost in this year. In support of its claim for deduction, the ld. AR relied on the Special Bench order of the Tribunal in the case of DCIT (International Taxation) v. Bank of Bahrain & Kuwait (2010) 132 TTJ (Mum.) (SB) 505. 27. At this stage it will be relevant to note that page 4 of the assessee's paper book is a copy of the letter dated 13.03.2011 issued by the RBI to all commercial banks advising them to follow the guidelines dated 5.6.1996 for finalizing the accounts for the year ending 31.3.2000 and 31.3.2001 as the applicability of the Accounting Standard 11 to banks was under examination. It thus becomes evident that assessee-bank did not disclose the profit or loss on forward contracts in the light of the AS-11. The authorities below have also not examined the issue in light of the AS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re or less than the rate earlier contracted, there shall arise the question of profit or loss due to forward contract. To illustrate, if a forward contract is made, say on 1st January for purchase of dollar as on 31st January at the rate of Rs. 45, the profit or loss from such contract will arise by considering the rate of dollar prevailing as on 31st January. The rate of dollar as on the date of entering into forward contract cannot cause profit or loss. It is only if the rate of dollar on such date is say Rs. 46, the assessee will be benefitted with Re.1 per dollar on 31st January. Had he not entered into forward contract, he would have to spend Rs. 46 for purchasing dollar on 31st January to discharge his business obligations. Now by virtue of the earlier forward contract, the assessee will get dollars at cheaper rate of Rs. 45, thereby causing profit at the rate of Re.1 per dollar. If however, the rate of dollar comes down to Rs. 44 as on 31st January, the assessee will have to purchase the dollar as on that date as the settled rate of Rs. 45, resulting into loss of Re.1 per dollar. 30. It is axiomatic that the question of earning profit or incurring loss on a forward contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate at which the assessee get converted $2,50,000 at the rate of Rs. 43.565 during the current year. Whether such rate would be higher or lower at the time of maturity in the succeeding year is not capable of ascertainment as at the close of the year on 31.3.2000. The decision of the Special Bench in the case of Bank of Bahrain & Kuwait (supra) applies to a forward transactions and permits deduction towards loss on the rate at which the contract was entered vis-à-vis the rate prevailing as at the close of the year. Suppose the assessee in the instant case having entered into forward contract for buying dollars on 29.12.2000 at Rs.45.165 had found that as at the end of the year i.e. 31st March, 2000 the rate of dollar was higher or lower than the rate at which it had entered into forward contract at Rs. 45.165, it could have rightly claimed deduction in respect of the resultant loss or offered to tax the resultant gain on the comparison of the rate as eventually entered vis-à-vis that prevailing as on 31st March, 2000. There is absolutely no basis for determining the loss by considering the rate at which the assessee converted US$ on the receipt of deposit with that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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