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TMI Blog2009 (9) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... ores incurred in connection with swapping of foreign currency funds in the year under consideration, i.e., the assessment year 1995-96?" 3. The factual backdrop under which this question of law was framed consideration may first be recapitulated. 4. The assessee is a financial institution and the main business of the assessee is that of making loans and advances to various industrial concerns. It is a public sector undertaking. For meeting its lending requirements, the assessee also raises foreign currency borrowings. The assessee swapped such foreign currency into Indian rupees in order to augment its rupee resources for meeting its lending requirements. The foreign currencies borrowed were repayable to the foreign lenders on later dates falling within the current previous year ending on 31-3-1995 and in some cases falling in the next previous year relevant to subsequent assessment year. 5. For repurchasing these currencies on their respective due date of repayment, the assessee entered into forward contracts with banks as a safeguard against foreign currency fluctuations. The assessee recognized the difference between the forward contract rate and the exchange rate on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his assessment year and treatment thereof by the Tribunal. 9. Ms. Prem Lata Bansal, learned counsel appearing for the revenue, submitted that the issue involved in the present appeal was to determine the year of allowability. She pointed out that the assessee had adopted mercantile system of accounting and, therefore, any expenditure accrued during the year only was allowable. In the present case, the assessee has borrowed foreign currency to augment Indian currency funds. This borrowing has to be repaid on a future date. In order to secure itself, the assessee entered into forward contracts i.e., to purchase the foreign currency at a future date for which, the exchange difference is paid in the year. Thus, this exchange difference is an upfront payment, benefit of which pertained to the period during which borrowing subsisted in lieu of periodical payment for the use of fund borrowed. Therefore, matching concept would be applied. 10. She submitted that in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 8021 , the Supreme Court had referred to this matching concept. It was held that ordinarily revenue expenditure, incurred wholly or exclusively for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by the parties to whom they are debited-see Keshav Mills Ltd. v. CIT [1953] 23 ITR 230, 239 (SC). Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the Mercantile System of Accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assessee is following Mercantile System of Accounting. This matching concept is very relevant to compute taxable income particularly in cases involving DRE. It has been recognised by numerous judgments. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) the facts were as follows: The assessee bought lands and sold them in plots. When the plots were sold the purchasers paid only a portion of the purchase price and undertook to pay the balance in instalments. The assessee, in turn, agreed to develop the plots within six mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on a due date. He submitted that swapping cost incurred by the assessee, by entering into forward contract, was capable of determination at the time of execution of the forward contract and such determination does not get postponed. Once it is crystallized, and formalized on the date of entering into the contract, the liability arising on account of such contractual obligation is to be allowed in entirety in the year in which the same has occurred, having regard to the terms of the contract and cannot be treated as a deferred expenditure. To buttress this submission, he referred to the judgment of the Apex Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 . He submitted that this principle was followed and reiterated in the following judgments :- (a) Jasjeet Films (P.) Ltd. v. CIT [2007] 165 Taxman 599 (Delhi). (b) Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC). (c) Asstt. CIT v. Shree Synthetics Ltd. [2008] 303 ITR 106 (MP). 13. His submission was that in the instant case too, the assessee, in terms of its contractual obligation, is obliged to take, at a later date, deli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , authored by Simon, wherein 'accrued liability' is defined as under :- "'In cases, however, where an actual liability exists, as is the case with accrued expenses, a deduction is allowable; and this is not affected by the fact that the amount of the liability and the deduction will subsequently have to be varied. A liability, the amount of which is deductible for income-tax purposes, is one which is actually existing at the time of making the deduction, and is distinct from the type of liability accruing in Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) [1948] 30 Tax Cas. 496, C.A., which although allowable on accountancy principles, is not deductible for the purposes of Income-tax'." (p. 6) 16. In the light of the aforesaid observations, the Apex Court proceeded to determine the nature of liability which was undertaken by the appellant therein in regard to the development of the land in question. It held that though the appellant had to carry out the developments within six months from the dates of deeds of sale, the undertaking to carry out the development was unconditional and the appellant had bound itself absolutely to carry out the same. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. ****** In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account. Contingent rights, if capable of valuation, can similarly be taken into account as trading receipts where it is necessary to do so in order to ascertain the true profits: - see C.N. Bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. Thus, in case of a forward contract, assessee enters into a legally binding, enforceable contract for purchase of foreign currency on a future date at the pre-determined rates. The date and the rate of purchase of the foreign currency are decided at the time of entering into contract. The difference between the forward contract and the exchange rate on the date of entering into the contract has to be recognized as income or expenses, which is ascertained and definite, in terms of the contract and cannot be regarded as notional or contingent. It is clear that the swapping cost incurred by the assessee is capable of determination at the time of execution of the forward contract and such determination does not get postponed. 21. Therefore, the test laid down in the aforesaid judgments to treat it as business expenditure in the same year, though part of the liability occurs on a future date, is allowable as expenditure in this very year. It was a debt owed by the assessee, which accrued on the date of entering into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirely in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474 , the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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