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TMI Blog2012 (9) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of an open position with reference to exchange rates prevailing at the end of the relevant previous year. As per the A.O., the forward contract had not become conclusive and being still open, any loss based on application of exchange rate at the end of the year was notional and anticipated only and such notional loss could not be allowed in view of CBDT Instruction No.03/2010 dated 23.3.2010. In this view of the matter, she disallowed the provision. 4. In its appeal before CIT(Appeals), argument of the assessee was that forward contract was taken by it for covering the risk on account of fluctuation in currency rate on a receivable amount of US $ 6,00,000 on account of power purchase agreement with TNEB. As per the assessee, the provision was arrived at after netting off loan liabilities to Power Finance Corporation and IOB. Assessee also submitted that it was obliged to follow Accounting Standard-11 of Institute of Chartered Accountants of India, and by virtue of Section 211(3C) of Companies Act, 1956, it was obliged to make a market valuation of the forward contract cover. Reliance was placed by the assessee on the decision of Hon'ble Apex Court in the case of CIT v. Woodw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last financial year is reported to have resulted in substantial losses to an assessee on account of trading in forex-derivatives. A large number of assessees are said to be reporting such losses on 'marked to market' basis either suo motu or in compliance of the Accounting Standard or advisory circular issued by Institute of Chartered Accountants. The issue whether such losses on account of forex-derivatives can be allowed against the taxable income of an assessee has been considered by the Board. In this connection, I am directed to say that the Assessing Officers may follow the guidelines given below: ……………" It is clear that the said Instruction applied to foreign exchange derivative transactions. 9. Notification No.FEMA 25/RB-2000 dated 3rd May, 2000 issued by Reserve Bank of India under Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000, defines foreign exchange derivative contract as under:- "(v) 'Foreign exchange derivative contract' means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer, failed to adduce reasons why it had made a provision based on such agreements on an ad hoc basis, when actual amounts could be calculated. As per the A.O., there was no satisfactory explanation from the assessee to prove that expenditure on account of operations and maintenance were charged to its accounts on actual basis. As against this, provisions were made with reference to factors which could not be ascertained with reasonable accuracy. He, therefore, considered provision of ₹ 6,19,86,628/- as not admissible and made an addition of like amount. 13. In its appeal before CIT(Appeals), argument of the assessee was that the provisions made based on long term maintenance agreement and long term parts supply agreement with GE Inc. USA, were part of the cost for continuous maintenance of main plant and for supply of spares for preventive maintenance and meeting unplanned break down. Based on such agreements, monthly fixed fee had to be paid to M/s GE Inc. USA. At the end of the year, in line with the agreements, provisions were made in the books based on actual factored fire hours of gas turbine. These were identified contractual obligation and assessee following merca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for clearing the liability as per these agreements, was purely on an ad hoc basis and not based on any scientific work out. The A.O. in paras 7.6 and 7.7 of his order has clearly given why he considered the provision to be ad hoc. These paras are reproduced hereunder:- "7.6 Under these circumstances, provisions made by the assessee has to be treated as adhoc and excessive in nature without reference to the actuals. The said inference is furthered strengthened by a data presented in the following table: Particulars Opening Balance Current year Provision Current year Payments Closing Balance Escalation payable 47,09,987 7474322.64 Nil 12184309.64 Incentive payable 1,49,92,486 9281486.19 2452730.00 21821242.19 Adder Provision (10768436) 35693144.88 Nil 24924708.88 Adder LTSA duty provision 35616842 19312695.50 Nil 54929537.50 Adder duty paid (39117657) Nil 9582766.00 (48700423.00) LTMA MOB Advance (3503399) 334359.00 Nil (3169040.00) LTMA/LTSA Qtrly Provisions 65252 32526710.80 32595670.00 (3707.20) Total 1995075.00 104622719.00 44631166.00 61986.628 7.7 The assessee has also given break up for provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee would have incurred routine expenditure for maintaining its establishment and a portion thereof could be attributed to the activity of earning dividend on the investment made by it. He, therefore, applied Rule 8D and made disallowance of ₹ 84,02,068/- computed as under:- (i) The amount of expenditure directly relating to income which does not form part of total income NIL (ii) Interest expenses not directly attributable to any particular income or receipt then A X B / C* (2,08,907,500 X 173374593 /4806677798) 75,35,195 (iii) ½ % of the average of the value of investments, income from which does not or shall not form part of the total income (0 + 346,749,186) / 2 8,66,873 Disallowance as per Rule 8D 84,02,068 22. In its appeal before CIT(Appeals), argument of the assessee was that in the earlier year, it had made short term investment in debt oriented mutual funds, but as on 31.3.2009, the balance was NIL. In other words, as per the assessee, investment in debt oriented mutual funds, which stood at ₹ 34.67 Crores as on 1.4.2008, was reduced to nil by 31.3.2009. Assessee submitted that surplus on account of appreciation in Net Asset Value (NAV) ..... 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