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TMI Blog2018 (9) TMI 528X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs Nil under normal provisions of the Act and Book Profits u/s 115JB of the Act of Rs. 80,89,27,608/-. The loss returned by the assessee under normal provisions of the Act in the return was Rs. 46,64,69,826/-. The assessment was completed u/s 143(3) of the Act on 1.2.2016 determining the assessed loss of Rs. 23,14,14,360/- under normal provisions of the Act. The Book Profits of Rs. 80,90,27,270/- u/s 115JB of the Act after making disallowance of Rs. 99,658/- u/s 14A of the Act was determined by the ld AO in the scrutiny assessment completed u/s 143(3) of the Act dated 1.2.2016. Later the said assessment was sought to be revised by the ld CIT u/s 263 of the Act for which a show cause notice was issued on 26.3.2018 to the assessee on the following grounds :- "1. Foreign Exchange Fluctuation Loss: It was noticed from Note 33 of annual accounts- "Change in Accounting Policy" that the assessee company had exercised option under Para 46A of AS 11 "The Effect of Change in foreign Exchange Rates" in respect of the accounting for fluctuations in foreign exchange relating to long term moneraty items. Accordingly, the assessee company had adjusted exchange fluctuations amounting to R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Swaps amounting to Rs. 29,92,34,031/- was inadvertently not added back while computing book profit u/s 115JB at the time of assessment. This resulted in under assessment of income to the tune of Rs. 29,92,34,031/-. 3. Exemption u/s 10B of the I.T. Act. 3.1 In the profit and loss account, assessee has shown income from SEZ unit of Rs. 12,98,79,467/- which was exempt u/s 10B and in the computation of income the assessee had deducted the same before arriving at the Gross Total Income. However, inadvertently at the time of assessment, the exemption u/s 10B was allowed. 3.2 As per CBDT circular on section 10A, 10AA, 10B and 10BA dated 16.07.2013 the income computed under various heads of income in accordance with the provisions of chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter IV of the I.T. Act, 1961. This means that first the income/loss from various sources i.e. eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act, Thereafter the income from one head is aggregated with the income or loss of the other head in accordance with the provision of section 71 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d directed the ld AO to grant deduction u/s 10AA of the Act accordingly. Hence we hold that the ld CIT himself in his order passed u/s 263 of the Act had admitted deduction of Rs. 12,98,79,467/- u/s 10AA of the Act while computing the Gross total income under Chapter IV of the Act as has been claimed by the assessee company in its return of income and accepted by the ld AO in the course of assessment proceedings. Accordingly, the Ground No. 5 raised by the assesee is allowed. 6. With regard to Foreign Exchange Fluctuation Loss, the primary facts emanating from record are that the assessee had availed External Commercial Borrowings (ECB in short) from abroad and had utilized the same for purchase of assets in India. As per mandatory Accounting Standard 11 (AS-11) issued by The Institute of Chartered Accountants of India (ICAI in short), the outstanding foreign currency loan is required to be translated into Indian rupees by applying the foreign exchange rate as on the closing day of reporting period and the net exchange difference resulting on such translation is required to be recognized as income or expense for the respective financial year. Accordingly, in compliance with AS-11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of allowability of foreign exchange fluctuation loss by issuing a notice u/s 142(1) of the Act together with the questionnaire dated 9.7.2015 asking for the following details, among others :- 7. Please furnish the details of exchange fluctuation loss on o/s ECB capitalize under Rule 46 of AS-11. We find that the assessee had duly responded to the same before the ld AO in the course of assessment proceedings. We find that the assessee had also given a detailed write up vide its letter dated 29.12.2015 on the allowability on the said foreign exchange fluctuation loss in response to a specific query raised by the ld AO as to why the loss on foreign exchange fluctuation on ECB utilized for the purpose of acquiring fixed assets should not be capitalized /adjusted with the cost of assets and WIP in terms of section 43A of the Act. 6.2.1. The ld AO having examined the various details furnished by the assessee together with the relevant supporting explanations, consciously had reached a conclusion that the said exchange fluctuation loss is squarely allowable as deduction and hence it cannot be said that the requisite enquiry has not been made by the ld AO in the assessment. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s 263 of the Act merely because it is prejudicial to the interests of the revenue. It is now well settled by the Hon'ble Supreme Court that the twin conditions precedent for invoking revisionary jurisdiction viz. (i) Order of AO should be erroneous and (ii) it should be prejudicial to the interests of the revenue, and both these conditions should be satisfied cumulatively in any case, in order to invoke revisionary jurisdiction u/s 263 of the Act. Even if one is absent, then the proceedings u/s 263 of the Act fails. Reliance in this regard is placed on the decision of Hon'ble Apex Court in the case of Malabar Industrial Co Ltd reported in 243 ITR 83 (SC). 6.5. We find that there is no discrepancy in claim of figures of Rs. 1751.95 lacs ; Rs. 483.46 lacs and Rs. 510.76 lacs as all these figures are duly reflected in the tax audit report and also in the details furnished by the assessee before the ld AO. It can at best be held to be incorrect appreciation of facts by the ld CIT in his revision order u/s 263 of the Act probably due to limited time available with him for passing the revision order u/s 263 of the Act. This is stated in as much as the proceedings u/s 263 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded back while computing the book profits u/s 115JB of the Act. The brief facts of this issue are that the assessee entered into derivative financial instruments with banks to hedge foreign currency risk of firm commitments and highly probable forecasted transactions and interest rate risks. The assessee had not used these hedging instruments / contracts for speculative or trading purposes. In respect of derivative instruments being foreign currency swaps which are not classified as hedging instruments, the assessee made provision for Mark to Market Losses arising in respect thereof as at the end of the relevant financial year. Accordingly, during the relevant financial year, the assessee made provision of Rs. 29,92,34,031/- for Mark to Market Losses (MTM losses) on foreign currency swaps. In this regard, it would be relevant to reproduce the relevant portion of the Announcement of ICAI dated 29.3.2008 on Accounting for derivatives, as per which, an entity is required to provide for losses in respect of all outstanding derivative contracts on the balance sheet date by marking them to market. The relevant extract of the abovementioned announcement of ICAI is as under:- "Announceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision in clause 17K of the Tax Audit Report under the head ' particulars of any liability of a contingent nature' which was not accepted by the assessee company, as according to assessee, the said provision is mandatorily to be made as per the announcement provided by the ICAI. However, no revised return was filed by the assessee company in this regard as there was no change in tax liability of the assessee company as ultimately income was determined only u/s 115JB of the Act and according to assessee, there would be no change in the computation of book profits u/s 115JB of the Act. 7.2. It is not in dispute that the announcement of ICAI in the form of Accounting Standards are mandatorily to be followed by every Indian company u/s 211(3C) of the Companies Act, 1956. Hence a provision when made in accordance with the notified accounting standards u/s 211(3C) of the Companies Act, 1956 which is mandatory in nature and the same are subject to certification by the statutory auditors of the company that the said standards are followed or not, then the said provision cannot be considered as contingent in nature. We find that the tax auditor has certified the tax audit report in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of foreign currency swaps and the same has been duly certified by the statutory auditors of the company, then the said provision cannot fall under the ambit of contingent liability. As stated earlier, even the accounting standards does not mandate making of provision for contingent liability. The very fact that the provision has been made for MTM losses in the profit and loss account itself goes to prove that the said provision is not a contingent liability. The MTM loss is on an onerous contract and had arose out of a contractual obligation existing as at the reporting date. The reliable estimate of the amount of loss could be ascertained on the basis of the valuation document provided by the contracting bankers. The mere fact that such losses are to be discharged at a future date shall not construe the same as being unascertained in nature. We find that as on the date of the balance sheet, the trigger for the loss i.e the event which is the contract has already taken place and therefore it is not contingent. Hence in our considered opinion, the same does not fall under the ambit of 'unascertained liability' as per clause (c ) of Explanation to section 115JB(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the only ground on which the ld CIT seeks to treat the order of the ld AO as erroneous as far as the impugned issue is concerned is that, the assessee had added back the said provision for MTM losses under normal computational provisions of the Act but had inadvertently not added the same under clause( c) of Explanation 1 to section 115JB(2) of the Act (i.e increasing the net profit as shown in the profit and loss account by "the amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities") which was not corrected by the ld AO in his order. Accordingly, the order of the ld AO is erroneous to this extent as per ld CIT. In this regard, we hold that an addition / disallowance made under normal provisions of the Act need not necessarily be made in the computation of book profits u/s 115JB of the Act automatically. We hold that the provisions of Section 115JB of the Act, being a self contained code in itself, which starts with a non-obstante clause, specifically provides for specific items of additions and deletions to net profit as profit and loss account in order to arrive at the book profits thereon. We hold that this provision for MTM losses do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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