Friday, 28 November 2014

Whether loss suffered on hedging for payment of interest and repayment of principal amount of loan in foreign currency is deductible as ascertained liability in computation of book profit u/s 115JB - YES: ITAT

THE issue before the Bench is - Whether the loss suffered on hedging for payment of interest and repayment of principal amount of loan in foreign currency is deductible as an ascertained liability in the computation of book profit u/s 115JB.
Facts of the case


The assessee showed Tariff adjustment of Rs 51.80 crore out of the sale of Rs.1713.79 crore. The AO held that the quantification of reduction in sales was based on the assessee's pending application before CERC and as such this was not an ascertained liability. He, therefore, added back the provision of Rs.51.80 crore to the book profit u/s 115JB. The CIT(A) reversed the action of the AO.

The assessee claimed depreciation amounting to Rs.1.30 crore. Out of total depreciation on land amounting to Rs.1.30 crore, an amount of Rs.1.00 crore was debited to the Profit and Loss account and the balance amount of Rs. 30.25 lac was added to the cost of capital work-in-progress. The AO held that no depreciation was admissible on land. While computing book profit as per section 115JB of the Act, the AO added back this amount. The CIT(A) deleted this addition.

Having heard the parties, the Tribunal held that,

++ on the issue of deletion of addition of Rs.51,80,00,000/- on account of Tariff adjustment u/s 115JB similar issue was raised before the tribunal by the Revenue in its appeal for A.Y 2005-06. The Tribunal has confirmed the deletion of this addition;

++ on the issue of deletion of addition of Rs.100,25,510/- on account of Depreciation on land amortized u/s 115JB, the Tribunal in its order for the A.Y 2004-05 deleted similar addition. The Tribunal upheld the view taken by the CIT(A) in deleting this addition in the computation u/s 115JB. Respectfully following the precedent, we approve the view taken by the CIT(A) on this issue;

++ on the issue of deletion of addition of Rs. 27,05,83,117/- made by the AO in computing book profit u/s 115JB in respect of Provision for gratuity, leave encashment and post retirement benefits, the mandate of Explanation 1 to section 115JB, it becomes clear that clause (c) talks of making addition to book profit for 'the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;. In the computation of book profit u/s 115JB, deduction is available for such provision of ascertained liability. The impugned order needs to be upheld. It is however, made clear that if the income under the normal provisions of the Act turns out to be more than the book profit u/s 115JB and the total income is to be computed as per the normal provisions, then no deduction for such provision would be admissible unless the amount of such provision is paid before the due date u/s 139(1);

++ on the issue of deletion of addition of Rs.7.74 crore towards provision for doubtful and obsolescence in inventory in the computation of book profit u/s 115JB, similar issue has been decided by the Tribunal against the assessee in its own case for the A.Y. 2004-05;

++ on the issue of confirmation of addition of Rs.47.88 crore on account of 'Advance against depreciation' in the computation of income under the normal provisions, the Advance against depreciation cannot be treated as a revenue receipt;

++ on the issue of the deletion of addition of Rs.22,99,80,552/- on account of provision for loss in hedged transaction for the purposes of computation of book profit u/s 115JB, as the loan was taken not for acquisition of any capital asset but on revenue account, the loss suffered on hedging for payment of interest and repayment of principal amount of loan in foreign currency is deductible as an ascertained liability. Such amount, being a provision for an ascertained liability, is deductible in the computation of income, both under the normal provisions and also u/s 115JB;

++ on the issue of deletion of disallowance of Rs.7.01 crore u/s 14A in the computation of income under the normal provisions and also under the MAT provisions, there can be no question of disallowance of interest u/s 14A in this case because the amount of Shareholders fund is much higher than the amount of Investments yielding exempt income. It is discernible that the assessee itself voluntarily made disallowance of Rs. 17.89 crore u/s 14A. As the remaining amount disallowable as per rule 8D is less than the amount suo motu disallowed by the assessee, there is no need for making any further disallowance

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