ADDL. C.I.T. 2(3), MUMBAI V. INDUSIND BANK LTD, MUMBAI

ITA 1879/MUM/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92942 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 04-06-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 07-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KISHAN VYAS; SACCHIDANAND DUBEY
• Assessee Lawyers: H P MAHAJANI; VAIBHAVI PATEL
• Keywords: Capital asset; Business income; Depreciation; Earning of tax free income; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 14A; 260A; 37(1); 32; 28

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - I - BENCH , , BEFORE S/SH. I P BANSAL,JUDICIA L MEMBER & RAJENDRA,ACCOUNTANT MEMBER . . /. ITA NO . . ASSESSMENT YEAR APPELLANT / RESPONDENT/ 2839/MUM/2008 2002 - 03 INDUSIND BANK LTD. 8TH FLOOR, TOWER ONE, ONE INDIA BULLS CENTRE, 841, SENAPATI BAPAT MARG,ELPHINSTONE ROAD - M UMBAI - 13. PAN:AAACH1314 G DCIT - CIR.2(3) ROOM NO.555, AAYAKAR BHAVAN, MUMBAI. - 20 553/MUM/2011 2002 - 03 - DO - ACIT - 2(3) MUMBAI. 7998/MUM/2010 2005 - 06 - DO - ADDL.CIT - 2(3) MUMBAI. 8318/MUM/2010 2005 - 06 DCIT - 2(3), MUMBAI. INDUSIND BANK LTD. 1879/MUM/2011 200 6 - 07 DCIT - 2(3), MUMBAI INDUSIND. BANK LTD. C.O. NO. 194/MUM/2013 ARISING FROM ITA NO. 1879/MUM/11 2006 - 07 INDUSIND BANK LTD. ADDL. CIT, - 2(3) MUMBAI. 555/MUM/2011 2006 - 07 - DO - - DO - 3864/MUM/2011 2007 - 08 - DO - - DO - 4820/MUM/2011 2007 - 08 ADDL.CIT - 2(3), MUMB AI INDUSIND BANK LTD. 7051/MUM/2011 2008 - 09 INDUSIND BANK LTD. ADDL. CIT, - 2(3) 7482/MUM/2011 2008 - 09 ADDL.CIT - 2(3), MUMBAI INDUSIND BANKLTD. 1244/MUM/13 2009 - 10 INDUSIND BANK LTD. ACIT -- 2(3), MUMBAI /ASSESSEE BY :SHRI H.P. MAHAJANI AND MS. VAIBHAVI PATEL / REVENUE BY :SHRI KISHANVYAS CIT - DR AND SHRI SACCHIDANAND DUBEY - DR / DATE OF HEARING : 04 - 06 - 2015 / DATE OF PRONOUNCEMENT : 17 - 06 - 2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER BENCH - ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 2 CHALLENGING THE ORDERS OF THE CS . IT(A),THE ASSESSEE AND THE ASSESSING OFFICERS (AOS), HAVE FILED CROSS APPE ALS /APPEALS FOR THE ABOVE MENTIONED YEARS. GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER : - ITA NO.2839/MUM/2008 (AY :2002 - 03): BEING AGGRIEVED BY THE ORDER PASSED BY TH E COMMISSIONER OF INCOME - TAX (APPEALS) - XXX, MUMBAI, YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUND FOR YOUR SYMPATHETIC CONSIDERATION: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING PENALTY INVOKED U/S. 271(1)(C) OF RS.31,93,520/ - ON ACCOUNT OF DISALLOWANCE OF DE PRECIATION ON LEASED ASSETS. THE LD.CIT(A)FAILED TO APPRECIATE THE FACT THAT THE APPELLANT HAS NEITHER CONCEALED INCOME NOT FURNISHED INACCURATE PARTICULARS OF INCOME. ITA NO.553/MUM/2011 (AY :2002 - 03): BEING AGGRIEVED BY THE ORDER PASSED BY TH E COMMISSI ONER OF INCOME - TAX (APPEALS) - 6, MUMBAI, YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUND FOR YOUR SYMPATHETIC CONSIDERATION: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF AMORTISATION OF SECURITIES TO THE TUNE OF RS. 2,83,00,000 IN RELATION TO PORTFOLIO OF INVESTMENTS UNDER THE HELD TO MATURITY CATEGORY AND AS MANDATED BY RESERVE BANK OF INDIA. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND THE ABOVE GROUND OF APPEAL. ITA NO.7998/MUM/2010 (AY :2005 - 06): BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - 6 MUMBAI (HEREINAFTER REFERRED TO AS 'THE CIT(A)') YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUNDS FO R YOUR SYMPATHETIC CONSIDERATION: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING AN AMOUNT OF RS. 48,17,81,935/ - REPRESENTING INTEREST ACCRUED ON SECURITIES BUT NOT FALLING DUE FOR PAY MENT. SUCH INTEREST, WHICH IS IN THE PROCESS OF ACCRUAL, IS AT INCIPIENT AND INCHOATE STAGE, MATURING INTO TAXABLE INCOME ONLY WHEN IT BECOMES DUE AND PAYABLE IN TERMS OF ISSUE OF SUCH SECURITY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF EXPENDITURE U/ S 14A TO THE TUNE OF RS.1,70,21,73/ - COMPRISING OF INTEREST EXPENDITURE OF RS.1,66,93,458/ - AND OTHER EXPENDITURE OF RS. 3,28,273/ - . 3. ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF NET LOSS AMOUNTING TO RS.23,10,466/ - ON UNMATURED FOREIGN EXCHANGE CONTRACTS IGNORING THE FACT THAT THE APPELLANT MAINTAINS ACCOUNTS ON MERC ANTILE SYSTEM, WHERE LIABILITY HAS ALREADY ACCRUED THOUGH DISCHARGED AT A FUTURE DATE HAVING REGARD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE, ACCOUNTANCY AND THE GUIDELINES ISSUED RESERVE BANK OF INDIA. 4. ON THE FACTS AND IN THE CIRCUMSTA NCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF AMORTISATION OF RS. 15,67,89,044/ - ON INVESTMENTS CLASSIFIED UNDER 'HELD TO MATURITY' CATEGORY COMPUTED AS PER GUIDELINES ISSUED BY RESERVE BANK OF INDIA, WITHOUT APPR ECIATING THAT THE SAID INVESTMENTS CONSTITUTE STOCK IN TRADE. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE GROUNDS OF APPEAL. ITA NO.555/MUM/2011 (AY :2006 - 07): BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - 6, MUMBAI (HEREINAFTER REFERRED TO AS 'THE CIT(A)') YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUNDS FOR YOUR SYMPATHETIC CONSIDERATION: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING AN AMOUNT OF RS.91,80,90,281/ - REPRESENTING INTEREST ACCRUED ON SECURITIES BUT NOT FALLING D UE FOR PAYMENT. SUCH INTEREST, WHICH IS IN THE PROCESS OF ACCRUAL, IS AT INCIPIENT AND INCHOATE STAGE, MATURING INTO TAXABLE INCOM E ONLY WHEN IT BECOMES DUE A ND PAYABLE IN TERMS OF ISSUE OF SUCH SECURITY. ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 3 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF EXPENDITURE U/S. 14A TO THE TUNE OF RS.1,05,00,000/ - . THE LD. COMMISSIONER OF INCOME TAX(APPEALS) FURTHER ERRED IN DIRECTING THE ASSESSING OFFICER TO MAKE ADDITION OF THE SAME AMOUNT IN COMPUTING BOOKS OF PROFIT U/S. 115JB. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED C IT(A) ERRED IN CONFIRMING DISALLOWANCE OF NET LOSS AMOUNTING TO RS.89,93,278/ - ON UNMATURED FOREIGN EXCHANGE CONTRACTS IGNORING THE FACT THAT THE APPELLANT MAINTAINS ACCOUNTS ON MERCANTILE SYSTEM, WHERE LIABILITY HAS ALREADY ACCRUED THOUGH DISCHARGED AT A FUTURE DATE HAVING REGARD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE, ACCOUNTANCY AND THE GUIDELINES ISSUED BY RESERVE BANK OF INDIA. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALL OWANCE OF SOFTWARE EXPENDITURE OF RS.35,91,784/ - TREATING IT AS CAPITAL EXPENDITURE. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE GROUNDS OF APPEAL. ITA NO.3864/MUM/2011 (AY : 2007 - 08): BEING AGGRIEVED BY THE ORDER PASS ED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - 6 MUMBAI (HEREINAFTER REFERRED TO AS 'THE CIT(A)') YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUNDS FOR YOUR SYMPATHETIC CONSIDERATION: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF EXPENDITURE U/S. 14A. THE LD. CIT(A) FURTHER ERRED IN DIRECTING THE ASSESSING OFFICER TO MAKE ADDITION OF THE SAME AMOUNT IN COMPUTING BOOKS OF PROFIT U/S. 115JB. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN CONFIRMING REJECTION OF EXEMPTION U/S. 10(38) IN RESPECT OF LONG - TERM CAPITAL GAINS OF RS.1,87,581/ - ON SALE OF SHARES HELD AS LONG TERM INVESTMENTS AND TAXING IT A S INCOME FROM BUSINESS WITHOUT APPRECIATING THAT THESE SHARES WERE HELD AS INVESTMENTS AND NOT AS STOCK IN TRADE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF SOFTWARE EXPENDITURE O F RS.38,03,485/ - TREATING IT AS CAPITAL EXPENDITURE. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE GROUNDS OF APPEAL. ITA NO.7051/MUM/2011 (AY : 2008 - 09): BEING AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - 6, MUMBAI (HEREINAFTER REFERRED TO AS 'THE CIT(A)') YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUNDS FOR YOUR SYMPATHETIC CONSIDERATION: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) E RRED IN CONFIRMING DISALLOWANCE OF EXPENDITURE U/S. 14A TO THE TUNE OF RS.2,31,00,000/ - . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN CONFIRMING REJECTION OF EXEMPTION U/S. 10(38) IN RESPECT OF LONG - TERM CAPITAL GAINS OF RS.49,63,686/ - ON SALE OF SHARES HELD AS LONG TERM INVESTMENTS AND TAXING IT AS INCOME FROM BUSINESS WITHOUT APPRECIATING THAT THESE SHARES WERE HELD AS INVESTMENTS AND NOT AS STOCK IN TRADE. 3. ON THE FACTS AND IN TH E CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING ASSESSING OFFICERS ACTION OF NOT ALLOWING DEDUCTION OF RS.1,63,03,660/ - BEING AMORTIZATION IN RESPECT OF SECURITIES SOLD IN THE YEAR UNDER CONSIDERATION. HE FAILED TO APPRECIA TE THAT THE SAID AMOUNT HAVING BEEN DISALLOWED IN THE EARLIER ASSESSMENT YEAR SHOULD FORM PART OF COST OF SECURITIES. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE GROUNDS OF APPEAL. ITA NO.1244/MUM/2013 (AY :2009 - 10): BEING AGG RIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME - TAX (APPEALS) - 6 MUMBAI (HEREINAFTER REFERRED TO AS 'THE CIT(A)') YOUR APPELLANT SUBMITS, AMONG OTHERS, THE FOLLOWING GROUNDS FOR ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 4 YOUR SYMPATHETIC CONSIDERATION: 1. ON THE FACTS AND IN THE CIR CUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING DISALLOWANCE OF INTEREST AND OTHER EXPENDITURE U/S. 14A AMOUNTING TO RS.3.00 CRORES BY WRONGLY ATTRIBUTING IT TO EARNING EXEMPT INCOME U/S. 10. 2. ON THE FACTS AND IN THE CIRCUMSTA NCES OF THE CASE AND IN LAW, THE LD. COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN CONFIRMING DENIAL OF EXEMPTION U/S. 10(38) IN RESPECT OF LONG - TERM CAPITAL GAINS TO THE TUNE OF RS. 2,94,998/ - ON SALE OF SHARES HELD AS LONG TERM INVESTMENTS AND TAXING IT A S BUSINESS INCOME. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF SOFTWARE EXPENDITURE TOWARDS LICENCE FEE AMOUNTING TO RS.21,70,351/ - WITHOUT APPRECIATING THAT IT IS REVENUE EXPENDI TURE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF AMORTIZATION OF EMPLOYEE STOCK OPTION PLAN (ESOP) EXPENSES OF RS.64,41,456/ - WITHOUT APPRECIATING THAT IT IS A REVENUE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS BEING EMPLOYEE COMPENSATION COST. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE GROUNDS OF APPEAL. THE AOS HAVE FILED THE FOLLOWING G ROUNDS OF APPEAL : ITA NO.8318/MUM/2010 (AY :2005 - 06): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUGNED IN THE GROUNDS ENUMERATED BELOW: 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN ALLOWING THE PROVISIONS FOR BAD DEBTS OF RS.15,76,77,290/ - IGNORING THE FACT THAT ASSESSEE HAS MADE A PROVISION OF RS.L.1 CRS ONLY IN THE BOOKS OF ACCOUNT AND IGNOR ING THE FACTS BROUGHT ON RECORD BY THE ASSESSEE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN, DELETING THE ADDITION OF RS.8,47,82,800/ - IGNORING THE FACT THAT THESE DEBTS HAVE ACTUALLY BEEN RECOVERED IN THE NE XT FINANCIAL YEAR AND ARE THEREFORE NOT BAD AS PER SEC.36(2). 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.27,12,701/ - IGNORING THE FACT THAT THE EXPENSES WERE CLAIMED BY ASSESSEE ON ESTIMATE BASIS AND ARE NOT ACTUAL LIABILITY AND IGNORING THE DETAILED MATERIAL PLACED ON RECORD BY THE AO. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,26,73,276/ - BEING PROPOR TIONATE COST OF SWAP DEALS IGNORING THE FACT THAT THE EXPENDITURE DOES NOT RELATE TO FINANCIAL YEAR UNDER CONSIDERATION AND IGNORING THE MATERIAL PLACED ON RECORD BY THE AO. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN TREATING THE SOFTWARE EXPENSES AS REVENUE EXPENSES IGNORING THE NATURE OF EXPENSES AND SPECIFIC PROVISIONS OF SEC.32 TO TREAT COMPUTER SOFTWARE AS CAPITAL ASSET. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DEC ISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED. ITA NO.1879/MUM/2011 (AY :2006 - 07): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUGNE D IN THE GROUNDS ENUMERATED BELOW: 1. THE ORDER OF CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE PROVISIONS FOR BAD DEBTS AT RS. 9.06 CRS BEING 7.5% OF THE TOTAL ASSESSED INCOME WITHOUT APPRECIATING THAT THE ASSESSEE IN THE RETURN OF INCOME HAS CLAIMED PROVISION AT RS. 5.42 CRS. ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 5 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE AMOUNT OF RS. 6.72 CR DISALLOWED OUT OF THE BAD DEBT CLAIMED U/S. 36( 1) (VII) WITHOUT APPRECIATING THAT THE AMOUNT OF RS. 6.72 CRS WERE NOT INFACT BAD WHICH WERE RECOVERED IN THE SUBSEQUENT YEAR. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS. 3,68,19,392/ - BEING PROPORTIONATE COST OF SWAP DEALS WITHOUT APPRECIATING THE FACT THAT THE EXPENDITURE DOES NOT RELATE TO THE PREVIOUS YEAR RELEVANT TO THE ASSTT. YEAR UNDER CONSIDERATION AND IG NORING THE MATERIAL BROUGHT ON THE RECORD BY THE A.O. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) ERRED IN HOLDING THAT AMOUNT OF RS. 4.90 CRS ON SALE OF SHARES BEING LONG TERM CAPITAL GAINS IS EXEMPTED U/S.10(38) OF THE I.T.ACT AND NOT ASSESSABLE AS BUSINESS INCOME WITHOUT APPRECIATING THAT ALL THE INVESTMENTS IN THE HANDS OF THE ASSESSEE BANK IS TO BE TREATED AS STOCK - IN - TRADE AS PER THE GUIDELINES OF THE RESERVE BANK OF INDIA AND PROFIT AND GAIN ON SALE O F SUCH INVESTMENTS ARE CHARGEABLE TO TAX U/S.28 OF THE I.T. ACT. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED. ITA NO.4820/MUM/2011 (AY :2007 - 08): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUGNED IN THE GROUNDS ENUMERATED BELOW: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. C IT(A) ERRED IN ALLOWING ASSESSEE'S APPEAL BASED ON ITAT'S DECISION IN THE CASE OF BANK OF BAHARAIN AND KUWAIT WITHOUT APPRECIATING THAT THE DEPARTMENT IS IN APPEAL BEFORE THE HON'BLE HIGH COURT AGAINST THE ORDER. 2. ON THE FACTS AND IN THE CIRCUMSTAN CES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING ASSESSEE'S APPEAL BASED ON ITAT'S DECISION IN THE CASE OF OMAN INTERNATIONAL BANK, SAOG WITHOUT APPRECIATING THAT THE DEPARTMENT IS IN APPEAL BEFORE THE HON'BLE HIGH COURT AGAINST THE ORDER. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING ASSESSEE'S APPEAL BASED ON HIS OWN DECISION IN THE AY 2006 - 07 WITHOUT APPRECIATING THE FACT THAT THE DEPARTMENT IS IN APPEAL BEFORE HON 'BLE ITAT AGAINST T HAT ORDER. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED. ITA NO.7482/MUM/2011 (AY :2008 - 09): ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING RELIEF TO THE ASSESSEE TO THE EXTENT IMPUGNED IN THE GROUNDS ENUMERATED BELOW: 1. THE ORDER OF THE CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, TH E LD. CIT(A) ERRED IN DELETING THE INTEREST ACCRUED BUT NOT DUE ON SECURITIES WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS BEEN FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND, THEREFORE THE INCOME OF RS. 31,66,96,578/ - CORRECTLY ADDED ON THE BASIS OF METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. 3(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS. 2,07,32,129/ - BEING PROPORTIONATE COST OF SWAP DEALS WITHOUT APPRECIATING THE FACT TH AT THE EXPENDITURE DOES NOT RELATE TO THE PREVIOUS YEAR RELEVANT TO THE ASSTT. YEAR UNDER CONSIDERATION AND IGNORING THE MATERIAL BROUGHT ON THE RECORD BY THE AO. (B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN ALLOWING ASSESSEE'S APPEAL BASED ON HIS OWN DECISION IN THE A.Y. 2006 - 07 & 2007 - 08 WITHOUT APPRECIATING THE FACT THAT THE DEPARTMENT IS IN APPEAL BEFORE HON'BLE ITAT AGAINST THAT ORDER. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE DECISION OF THE CIT(A) MAY BE SET ASIDE AND THAT OF THE AO RESTORED. ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 6 GROUNDS OF CO NO.194/MUM/2013(ARISING OUT OF ITA NO.1879/MUM/2011) , FILED BY THE ASSESSEE READ AS UNDER: BEING AGGRIEVED BY THE GROUND RAISED BY THE LEARNED ADDITIONAL COMMISSIONE R OF INCOME TAX RANGE 2(3) MUMBAI ('ADDITIONAL COMMISSIONER') VIDE APPEAL NO. 1879/M/2011, THE RESPONDENT SUBMITS THE FOLLOWING CROSS OBJECTIONS FOR YOUR HONOUR'S SYMPATHETIC CONSIDERATION: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LA W, THE LEARNED ADDITIONAL COMMISSIONER ERRED IN MAKING THE APPEAL BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL ON THE COMMISSIONER OF INCOME TAX (APPEALS) - VI, MUMBAI'S OBSERVATION ALLOWING THE DEDUCTION IN RESPECT OF PROVISION FOR BAD DEBTS AT 7.5% OF TOTAL INCOME ASSESSED AND DIRECTING THE ADDITIONAL COMMISSIONER TO ADD BACK THE DEDUCTION ACTUALLY ALLOWED TO THE ASSESSEE UNDER SECTION 36(1)(VIIA) SINCE IN A.Y. 2006 - 07 THE ASSESSEE HAD ADDED BACK ITS EARLIER YEAR'S CLAIM OF RS. 16,86,77,290/ - AS P ER THE RETURN FILED IN AY. 2005 - 06. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ADDITIONAL COMMISSIONER ERRED IN MAKING THE APPEAL BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL ON THE COMMISSIONER OF INCOME TAX (APPE ALS) - VI, MUMBAI'S OBSERVATION ALLOWING BAD DEBTS CLAIMED UNDER SECTION 36(1)(VII) READ WITH SECTION 36(2) OF THE INCOME TAX ACT, 1961 TO THE TUNE OF RS. 6,72,84,000/ - . THE ADDITIONAL COMMISSIONER ERRED IN APPRECIATING THAT THE CONDITIONS PRESCRIBED IN S ECTION 36(1)(VII) ARE FULFILLED AND RECOVERIES IN THE SUBSEQUENT YEAR, THAT IS, AY 2007 - 08 RELEVANT TO PREVIOUS YEAR ENDED 31ST MARCH 2007 WERE CREDITED TO PROFIT AND LOSS ACCOUNT AND OFFERED TO TAX IN AY 2007 - 08. RECOVERIES ARE NOT ENTIRELY RELATED TO DEBTS WRITTEN OFF DURING THE YEAR UNDER CONSIDERATION AND IT RELATES TO BAD DEBTS OF EARLIER YEARS AND ALSO INCLUDES INTEREST RECEIVED ON SETTLEMENT WHICH IS ACCOUNTED FOR ON RECEIPT BASIS AS PER RBI NORMS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ADDITIONAL COMMISSIONER ERRED IN MAKING THE APPEAL BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL ON THE COMMISSIONER OF INCOME TAX (APPEALS) - VI, MUMBAI'S OBSERVATION ALLOWING AN AMOUNT OF RS. 3,68,19,392/ - BEING PROP ORTIONATE COST OF SWAP DEALS MATURING BEYOND THE BALANCE SHEET DATE. THE ADDITIONAL COMMISSIONER OUGHT TO HAVE APPRECIATED THAT PREMIUM PAID ON SWAP DEALS IS TREATED AS A PERIOD COST AND PREMIUM PERTAINING TO THE PERIOD AFTER THE BALANCE SHEET DATE IS T REATED AS PREPAID BY THE ASSESSEE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ADDITIONAL COMMISSIONER ERRED IN MAKING THE APPEAL BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL ON THE COMMISSIONER OF INCOME TAX (APP EALS) - VI, MUMBAI'S OBSERVATION ALLOWING THE GAIN ON SALE OF SHARES TREATED AS LONG - TERM INVESTMENTS ARE TO BE CHARGEABLE TO TAX UNDER THE HEAD 'CAPITAL GAINS' AND NOT AS 'BUSINESS INCOME', AND THUS TREATING THE CAPITAL GAINS AS EXEMPT UNDER SECTION 10(3 8) OF THE INCOME TAX ACT, 1961. THE ADDITIONAL COMMISSIONER ERRED IN APPRECIATING THAT THE ASSESSEE HAS HELD SHARES FOR MORE THAN 12 MONTHS, WHICH IS THE ELIGIBILITY PERIOD SPECIFIED IN SECTION 10(38) OF THE ACT FOR CONSIDERING THE SHARES AS LONG TERM I N NATURE, AND THAT STT WAS ALSO PAID ON SUCH SALE. 5. THE RESPONDENT PRAYS THAT THE APPEAL FILED BY THE LEARNED ASSISTANT COMMISSIONER BE QUASHED. THE RESPONDENT CRAVES LEAVE TO ADD TO, ALTER, OR AMEND ANY OF THE ABOVE CROSS OBJECTIONS IF NECESSARY. 2. DETAILS OF RETURN INCOMES DATED O F FILING OF RETURNS ASSESSED INCOMES, DATES OF ASSESSMENT ORDERS AND DATES OF APPEAL OF THE FAA CAN BE SUMMARIZED AS UNDER : AY RETURN FILED ON RETURNED INCOME(RS.) ASSESSED ON ASSESSED INCOME(RS.) FAA ORDER 2002 - 03 25 .07.2003 91,45,10,185/ - 31.12.2004 1,00,48,72,878/ - 16.01.2008 2005 - 06 31.10.2005 2,06,93,53,246/ - 27.12.2007 2,52,12,85,649/ - 01.09.2010 2006 - 07 28.11.2006 72,02,82,416/ - 24.12.2007 1,20,57,22,850/ - 01.12.2010 ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 7 2007 - 08 31.10.2007 1,22,95,18,970/ - 30.10. 2008 1,54,84,41,566/ - 11.03.2011 2008 - 09 29.09.2008 1,49,97,78,240/ - 30.10.2008 1,96,66,07,014/ - 18.08.2011 2009 - 10 29.09.2009 2,13,59,83,188/ - 30.09.2010 2,41,45,55,050/ - 31.12.2012 AN ANALYSIS OF THE GROUND OF APPEAL FILED BY THE ASSESSEE AND THE AO REVEAL THAT MOST OF THE GROUNDS ARE COMMON IN AYS 2005 - 06 TO 2008 - 09. FOR THE SAKE OF CONVENIENCE WE ARE PREPARING TABULAR CHART OF THE GROUNDS OF APPEAL. GROUNDS OF APPEAL(G.)AND THE AY.S. APPEAL BY THE ASSESSEE DISALLOWANCE OF INTEREST ACCRUED ON SECURITIES G.1 - AY. 05 - 06 AND 06 - 07 DISALLOWANCE OF INTEREST U/S.14A G.2 AY.05 - 06 ,06 - 07, G.1 - 07 - 08 TO 09 - 10 DISALLOWANCE OF UN - MATURED FOREIGN EXCHANGE LOSS G.3 - AY. - 05 - 06 AND 06 - 07 DISALLOWANCE OF AMORTIZATION OF HTM CATEGORY. G.4 - AY. 05 - 06, G.3 08 - 09 AND G.1 02 - 03 DISALLOWANCE OF SOFTWARE EXPENSES. G.4 - AY.06 - 07, G.3 - 07 - 08 AND 08 - 09 REJECTION OF EXEMPTION U/S.10( 38) G.2 - AY. 07 - 08 TO 09 - 10 DEDUCTION ALLOWED U/S.36(1)(VII)(A) G.1 AY. 05 - 06 AND 06 - 07 DELETION OF ADDITION ON ACCOUNT OF BAD DEBTS. G.2 AY. 05 - 06 TO 07 - 08 GAIN ON FORWARD EXCHANGE CONTRACTS. G.3 - AY. 05 - 06 DISALLOWANCE OF EXPENDITURE ON ESOP G.4 AY. 09 - 10 APPEAL BY THE AO DEDUCTION OF PROVISION FOR BAD DEBTS G.NO.1 FOR AY 05 - 06 AND 06 - 07 ADDITION ON ACCOUNT OF BAD DEBTS G.2 FOR AY 05 - 06 AND 06 - 07 PROPORTIONATE COST OF SWAP DEALS. G.4 AY 05 - 06 AND 06 - 07; G.2 AY 08 - 09 INTEREST ACCRUED ON SECURITIES NOT FALLEN DUE G.1 FOR AY 07 - 08 AND 08 - 09 ALLOWANCE OF SOFTWARE EXPENSES G.5 AY 05 - 06 INTEREST ACCRUED ON SECURITIES G.1 AY 08 - 09 EXEMPTION ALLOWED U/S. 10(38). G.2 AY 06 - 07 DURING THE COURSE OF HEARING THE AUTHORISED REPRESENTATIVE (AR) STATED THAT THE ASSESSEE DO NOT WANT TO PRESS THE GROUNDS OF APPEAL,FILED BY IT IN CROSS OBJECTIONS.HENCE,CO FILED BY THE ASSESSEE STAND S DISMISSED,AS NOT P R E SSED. 3 . F IRST GROUND OF APPEAL FOR THE AY.S.2005 - 06,06 - 07 AND GROUND NO.1 AY.08 - 09 FILED BY THE ASSESEE AND THE AO RESPECTIVEL Y DEAL WITH DISALLOWANCE OF INTEREST ACCRUED ON SECURITIES, BUT NOT FALLING DUE FOR PAYMENT. DURING THE ASSESSMENT PROCEEDING FOR THE AY.2005 - 06, THE AO, VIDE QUESTIONNAIRE DATED 2/8/06, DIRECTED THE ASSESSEE TO GIVE DETAILS OF INTEREST ACCRUED BUT NOT DUE ON 31.3.2005 AND OTHER DETAILS .IT FURNISHED DETAILS OF INTEREST ACCRUED AGGREGATING TO RS.48,17,81,934/ - . AS PER THE AO , THE ASSESSEE WAS NOT CONSIDERING THE INTEREST ACCRUED BUT NOT DUE ON INVESTMENT AS ON BALANCE - SHEET AS TAXABLE INCOME, THAT IN THE CO MPUTATION OF INTEREST INCOME THE TOTAL INCOME OF INVESTMENT WAS REDUCED FROM THE INCOME, THAT ONLY THE INTEREST INCOME RECEIVED ON INVESTMENT WAS ADDED TO ITS INCOME, THAT THE INCOME RECEIVED DURING YEAR WAS TREATED AS TAXABLE, THAT THE INCOME ACCRUED ON I NVESTMENT ON BALANCE SHEET DATE WAS NOT CONSIDERED AS INCOME. REF ERRING TO THE DECISION OF ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 8 E.D.SASSON & CO. LTD. & ORS. (26 ITR 27) OF THE HONBLE APEX COURT THE AO HELD THAT THE ASSESSEE WAS ACCRUING ON BANKING BUSINESS AND OTHER ACTIVITIES AS PERMITTED BY THE RBI, THAT IT WOULD MAKE INVESTMENT IN GOVT. SECURITIES, DEBENTURES, BONDS, THAT THOSE INVESTMENTS HAD FIXED RATE OF RETURN, THAT THE OWNERSHIP IN ALL THE INVESTMENTS HAD BEEN TRANSFERRED IN THE NAME OF THE ASSESSEE ON OR BEFORE THE DATE OF BALANCE S HEET, THAT THOSE INVESTMENTS WERE PART OF THE BALANCE SHEET UNDE R THE HEAD INVESTMENTS. FINALLY. THE AO ADDED AN AMOUNT OF RS.3,02,33,84,021/ - BEING INTEREST INCOME DUE / RECEIVED ON INVESTMENT. 3.1 AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFOR E THE FIRST APPELLATE AUTHORITY (FAA). FOLLOWING THE ORDER OF HIS PREDECESSORS FOR THE AY 2004 - 05 AND EARLIER YEARS THE FAA DECIDED THE ISSUE AGAINST THE ASSESSEE . 3.2 DURING THE COURSE OF HEARING BEFORE US, THE AR STATED THAT THE ISSUE S TANDS DEC IDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL ,THAT WHILE ADJUDICATING THE APPEAL FILED FOR THE AY.2000 - 01 , 2001 - 02 AND 2004 - 05, THAT THE TRIBUNAL HAD FOLLOWED THE DECISION OF THE SPECIAL BENCH DELIVERED IN THE CASE OF BANK OF BAHRAIN (45 SOT 290). HE ALSO REFERRED TO THE ORDER OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CREDIT SUISSE FIRST BOSTON (CYPRUS) LTD. ITA NO.1026 OF 2011. THE DEPARTMENTAL REPRESENTATIVE AGREED THAT IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN EARLIER YEARS. 3.3 WE F IND THAT THE ISSUE OF DISALLOWANCE OF INTEREST ACCRUED BUT NOT DUE WAS DELIBERATED UPON BY THE TRIBUNAL AND WAS DECIDED IN FAVOUR OF THE ASSESSEE.WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL FOR THE AY.2004 - 05AND SAME READ S AS UNDER: 9.WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND RELEVANT RECORD.THE CONTENTIONS OF THE LEARNED DR ARE THAT WHEN THE ASSESSEE IS RECOGNIZING THE EXPENDITURE ON ACCRUAL BASIS AND PARTICULARLY THE PAYMENT WITH REGARD TO THE INTEREST ACCRUED ON DAY TO DAY BASIS ON PURCHASE OF SECURITIES THEN THE SAME PRINCIPLE HAS TO BE FOLLOWED FOR RECOGNIZING THE INCOME. THE SAID ISSUE IS NOT BEFORE US AND THE CONTENTION OF THE LEARNED DR IS BASED ON HYPOTHETICAL CIRCUMSTANCES AS THERE IS NO DISPUTE BEFORE US REGAR DING THE ALLOWABILITY OF THE EXPENDITURE OF PURCHASE OF SECURITY. WHEN THIS ISSUE IS NOT BEFORE US THEN WE DO NOT PROPOSE TO COMMENT OR EXPRESS OUR VIEW ON THIS ISSUE OF ALLOWABILITY OF EXPENDITURE ON THE DATE OF PAYMENT MADE BY THE ASSESSEE ON ACCOUNT OF INTEREST BUT NOT BECAME DUE AT THE TIME OF PURCHASE. AS FAR AS THE ISSUE OF THE INTEREST ACCRUED BUT NOT RECEIVED AFTER ACQUIRING THE SECURITIES, WE FIND THAT THE SAID ISSUE IS NOW SQUARELY COVERED BY THE DECISION OF ITAT MUMBAI (SB) IN THE CASE OF DCII (I NTERNATIONAL TAXATION) VS. BANK OF BAHRAIN AND KUWAIT, 41 SOT 290 (MUM)(SB).THE ISSUE BEFORE THE SPECIAL BENCH WAS 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) HAS ERRED IN HOLDING THAT, INCOME ARISING FROM SECURITIES AND ON DEBE NTURE TO THE ASSESSEE IS LIABLE TO BE TAXED ON DUE BASIS AND NOT ON THE BASIS OF THE DAY TO DAY' 11. THE SPECIAL BENCH HAS ADJUDICATION UPON THE ISSUE IN PARAGRAPH 12 AS UNDER: 'WE HAVE CAREFULLY PERUSED THE ORDER OF THE TRIBUNAL CITED ABOVE. IN THAT CASE ALSO, THE ISSUE WAS IDENTICAL, NAMELY, WHETHER IN THE CASE OF GOVERNMENT SECURITIES, INTEREST ACCRUES ON DAY TO DAY BASIS OR ONLY ON THE COUPON DATES. THE TRIBUNAL HELD THAT INTEREST ACCRUES ONLY ON THE COUPON DATES AND NOT ON DAY TO DAY BASIS. IN COMING T O THIS CONCLUSION, THE TRIBUNAL PLACED RELIANCE ON THE JUDGMENT OF THE LAHORE HIGH COURT IN HAVELI SHAH SARDARILAL V CIT,PUNJAB, 4 ITR 297, THE FULL BENCH OF THE PATNA HIGH COURT IN RANJIT PRASAD SINGH V CIT, BIHAR & ORISSA (4 ITC 264) AND THE KARNATAKA HI GH COURT JUDGMENT IN ADDI CIT, MYSORE V. THE VIJAY BANK LTD., MANGALORE (1976) TAX LR 524. IT WAS ALSO NOTICED BY THE TRIBUNAL THAT THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE BEFORE TRIBUNAL IN THAT CASE WAS TOTALLY CONTRADICTORY TO THE CONTENTION AD VANCED BY THE REVENUE BEFORE THE KARNATAKA HIGH COURT IN THE CASE OF VIJAY BANK(SUPRA) BEFORE THE TRIBUNAL. THE DEPARTMENT HAD PLACED RELIANCE ON THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 9 CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATI ON V CIT, 258 ITR 602 AND TAPARIA TOOLS LTD V. JCIT,269 ITR 102. THESE TWO JUDGMENTS'WE HAVE CAREFULLY PERUSED THE ORDER OF THE TRIBUNAL CITED ABOVE. IN THAT CASE ALSO, THE ISSUE WAS IDENTICAL, NAMELY, WHETHER IN THE CASE OF GOVERNMENT SECURITIES, INTEREST ACCRUES ON DAY TO DAY BASIS OR ONLY ON THE COUPON DATES. THE TRIBUNAL HELD THAT INTEREST ACCRUES ONLY ON THE COUPON DATES AND NOT ON DAY TO DAY BASIS. IN COMING TO THIS CONCLUSION, THE TRIBUNAL PLACED RELIANCE ON THE JUDGMENT OF THE LAHORE HIGH COURT IN H AVELI SHAH SARDARILAL V CIT,PUNJAB, 4 ITR 297, THE FULL BENCH OF THE PATNA HIGH COURT IN RANJIT PRASAD SINGH V CIT, BIHAR & ORISSA (4 ITC 264) AND THE KARNATAKA HIGH COURT JUDGMENT IN ADDI CIT, MYSORE V. THE VIJAY BANK LTD., MANGALORE (1976) TAX LR 524. IT WAS ALSO NOTICED BY THE TRIBUNAL THAT THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE BEFORE TRIBUNAL IN THAT CASE WAS TOTALLY CONTRADICTORY TO THE CONTENTION ADVANCED BY THE REVENUE BEFORE THE KARNATAKA HIGH COURT IN THE CASE OF VIJAY BANK(SUPRA) BEFORE THE TRIBUNAL. THE DEPARTMENT HAD PLACED RELIANCE ON THE JUDGEMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT, 258 ITR 602 AND TAPARIA TOOLS LTD V. JCIT,269 ITR 102. THESE TWO JUDGMENTS HAVE BEE N CONSIDERED BY THE TRIBUNAL IN PARAGRAPHS 14 TO 17 OF THE ORDER CITED ABOVE AND IT WAS HELD THAT THESE JUDGEMENTS ARE NOT APPLICABLE TO THE FACTS OF UNION BANK'S CASE. IN PARAGRAPHS 20 AND 21, THE TRIBUNAL HAS ALSO CONSIDERED THE OBJECTION OF THE DEPARTME NT THAT THE ASSESSEE CANNOT CREDIT THE INTEREST ON GOVERNMENT SECURITIES IN THE PROFIT & LOSS ACCOUNT ON DAY TO DAY BASIS BUT CONTENDED THAT FOR PURPOSES OF INCOME TAX ONLY THE INTEREST THAT ACCRUED ON THE COUPON DATES CAN BE ASSESSED. THE TRIBUNAL NOTICED THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF ANOTHER BANK, NAMELY UNITED COMMERCIAL BANK, 240 /TR 355.1N THIS CASE, THE SUPREME COURT HAS REVERSED THE JUDGEMENT OF THE CALCUTTA HIGH COURT, WHICH HELD THAT THE ASSESSEE CANNOT PREPARE THE COMPUTATION O F ITS INCOME FOR INCOME TAX PURPOSES IN A MANNER DIFFERENT FROM THE METHOD UNDER WHICH IT KEEPS ACCOUNTS. APPLYING THIS JUDGMENT OF THE SUPREME COURT, THE TRIBUNAL HELD THAT UNION BANK OF INDIA CANNOT BE PREVENTED FROM URGING IN THE RETURN THAT THE INTERES T ON GOVT. SECURITIES ACCRUED ONLY ON THE SPECIFIED COUPON DATES NOTWITHSTANDING THAT CREDIT HAS BEEN TAKEN IN THE PROFIT & LOSS ACCOUNT FOR THE INTEREST ON DAY TO DAY BASIS. THUS, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE VIEW THAT THE INTEREST ACCRUES ONLY ON THE SPECIFIED COUPON DATES AND NOT ON DAY TO DAY BASIS. SINCE THE FACTS OF THE PRESENT ARE IDENTICAL, FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF UNION BANK OF INDIA (SUPRA), WE UPHOLD THE ACTION TAKEN BY THE CIT (APPEALS) AND DISMISS THE AP PEAL.' CONSISTENT WITH THE PRECEDENTS, WE DISMISS THIS GROUND OF THE REVENUE.' 12. WE FURTHER NOTE THAT IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2000 - 01 IN ITA NO.931/MUMBAI/2004 THIS TRIBUNAL DECIDED THE IDENTICAL ISSUE BY FOLLOWING THE DECISION OF THE SPECIAL BENCH IN THE CASE OF DCII (INTERNATIONAL TAXATION) VS. BANK OF BAHRAIN AND KUWAIT, (SUPRA) RESPECTFULLY, FOLLOWING THE ABOVE , GROUND NO. 1 FOR THE AY.S. 2005 - 06,06 - 07 IS DECIDED IN FAVOUR OF THE ASSESSEE AND GROUND NO.1 AY.08 - 09 IS DECIDED AGAIN ST THE AO . 4. NEXT COMMON GROUND OF APPEAL IS ABOUT DISALLOWANCE OF INTEREST AND OTHER EXPENDITURE U/S. 14A OF THE ACT (GROUND NO.2 AY.05 - 06 ,06 - 07AND GROUND NO.1 FOR AY.07 - 08 TO 09 - 10) . DURING THE ASSESSMENT PROCEEDINGS FOR THE AY.05 - 06,THE AO FOUND THA T THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.11.02 LACS, BEING INTEREST ON PSU BONDS EXEMPT U/S.10(15)(IV)(H), DEDUCTION OF RS.72.30 LACS U/S. 10(23)(G) AND DEDUCTI ON OF RS.80.80 LACS, BEING DIVIDEND RECEIVED FROM MUTUAL FUNDS AND EQUITY SHARES. HE ASKED THE A SSESSEE TO CLARIFY AS TO WHETHER EXEMPTION HAD BEEN CLAIMED ON GROSS OR NET BASIS. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE THE AO HELD THAT IT HAD CLAIMED DEDUCTION ON GROSS INCOME, THAT THE TREATMENT GIVEN TO THE INCOME BY IT WAS ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 10 ERRONEOUS, THAT THE DEDUCTI ON WAS AVAILABLE ON NET INCOME, THAT THE EXPENSES ATTRIBUTABLE TO EARNING GROSS INCOME WERE REQUIRED TO BE NETTED OFF, THAT THE BALANCE AMOUNT HAD TO BE ALLOWED AS INCOME NOT CHARGEABLE TO TAX AS PER PROVISIONS OF S.14A OF THE ACT. HE DIRECTED THE ASSESSEE TO FURNISH DETAILS OF INTEREST AND OTHER EXPENSE S ALLOCABLE TO TAX FREE INCOME.VIDE LETTER DATED 24.10.2007,THE ASSESSEE FURNISHED ITS REPLY .A FTER C ONSIDERING THE SAME, THE AO HELD THAT THE ASSESSEE HAD BEEN INVESTING IN TAX FREE BONDS AN D SECUR ITIES FROM A COMMON POOL, THAT THE FUNDS WERE MIXED OF BORROWED FUNDS AND OWN FUNDS, THAT IT HAD FAILED TO DISCHARGE ONUS, THAT IT WOULD BE REASONABLE TO CONCLUDE THAT ON INVESTMENT IN TAX FREE SECURITIES AND SHARES HAD GONE OUT FROM A COMMON POOL IN PROPOR TION TO THE BORROWED FUNDS AND THE OWN FUNDS, THE PR IMARY ONUS WAS ON THE ASSESSEE TO ESTABLISH THAT TAX - FREE INVESTMENT WAS MADE OUT OF OWN FUNDS NOT FROM T HE BORROWED FUNDS, THAT IT COULD NOT PRODUCE D ANY DOCUMENT IN THAT REGARD., THAT AVERAGE COST OF BOR ROWED FUNDS WORKED OUT TO 3.9 % , THAT THE RATIO BETWEEN OWN FUND AND BORROWED FUND WAS 5.70% AND 94.30%, THAT WHILE WORKING OUT THE RELATED INTEREST EXPENDITURE ONLY 94.30% OF THE BORROWED FUNDS WAS CONSIDERED . ACCORDINGLY THE AO WORKED OUT DISALLOWANCE AT RS.1.66 CRS. (5.39% OF 94.3% OF TOTAL INVESTMENT OF 32.82 CRORES). 4.1 AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE AGITATED BEFORE THE FAA STATING THAT THE INTEREST EXPENDITURE WAS A NOTIONAL DISALLOWANCE MADE BY AO BY ATTRIBUTING INTEREST EXPENDITUR E TO TAX FREE INVESTMENT WITHOUT PROVIDING ANY NEXUS BETWEEN THE FUNDS INVESTED IN TAX EXEM PT SECURITIES AND THE INTEREST BEARING LIABILITY, THAT IT HAD INTEREST FREE FUNDS OF MORE THAN RS.80, 000 LACS IN FORM OF SHARE CAPITAL AND RESERVES AS ON 31.3.05, THA T THE TAX FREE INVESTMENT WERE JUST 4.1% OF I NTEREST FREE FUNDS OF THE BANK. THE FAA REFERRED TO THE DECISION OF HON'BLE BOMBAY HIGH COURT DELIVERED IN THE C ASE OF GODREJ & BOYCE MFG., CO. LTD. HE HELD THAT DISALLOWANCE ON ACCOUNT OF INTEREST MADE BY AO WAS REASONABLE. TOWARDS THE OTHER EXPENSES HE CONFIRMED THE DISALLOWANCE MADE BY AO OF RS.3.28 LACS. 4.2 DURING THE CO URSE OF HEARING BEFORE US, THE AR CONTENTED THAT THE ASSESSEES OWN FUNDS EXCEEDED INVESTMENT IN TAX FREE INCOME SECURITIES, THAT MATTER WAS REM ITTED BACK TO THE AO FOR FRESH CONSIDERATION BY THE TRIBUNAL WHILE DECIDING THE APPEAL FOR ASSES SMENT YEAR 2001 - 02 AND 2004 - 05. THE AR RELIED UPON THE C ASES OF RELIANCE UTILITIES LTD. (31 3 ITR 340); GODREJ BOYCE & MFG.(328 ITR 82)AND HDFC. DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. 4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE WITH US. WE FIND THAT THE TRIBUNAL,VIDE ITS ORDER DATED 29/04/2011FOR AY.2004 - 05,HAS RESTORED BACK THE MATTER TO THE FILE OF THE AO. RESPECTFULLY,FOLL OWING THE ABOVE,THE ISSUE IS RESTORED BACK TO THE FILE OF THE AO FOR FRESH ADJUDICATION.HE WOULD AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. GROUND NO.2 FOR THE AY.2005 - 06,2006 - 07AND GROUND NO.1 FOR AY.2007 - 08 TO 2009 - 10 STAND ALLOWED IN F AVOUR OF THE ASSESSEE, IN PART. 5. GROUND NO.3 FOR AY.2005 - 06 AND 06 - 07, PERTAINS TO DISALLOWANCE OF LOSS ON UN - MATURED FOREIGN EXCHANGE CONTRACT. DURING THE ASSESSMENT PROCEEDINGS FOR THE AY.2005 - 06,THE AO FOUND THAT THE ASSESSEE HAD BOOKED RS. 23.10 LACS AS FORWARD LOSS, AS PER THE CHART FILED ALONG WITH THE LETTER DATED 23. 11. 2007. THE AO FOUND THAT THE ASSESSEE HAD INCURRED TOTAL LOSS ON FORWARD FOREIGN EXCHANGE CONTRACT TO THE TUNE OF RS.50.23 LACS AND HAD BOOKED TOTAL PROFIT OF RS.27.12 LACS. AFTER D ISCUSSING THE PRINCIPLES OF FOREIGN EXCHANGE TRANSACTIONS , THE AO HELD THAT THE NET EFFECT OF THE SALE AND PURCHASE DURING THE YEAR WOULD GIVE THE NET GAI N OR LOSS ON SUCH TRANSACTIONS, THAT THE ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 11 METHOD FOLLOWED BY THE ASSESSEE MIGHT BE FAIR ACCOUNTING PRINCI PLE TO ESTIMATE THE NET WORTH , THAT THE PRINCIPLES OF TAXATION REQUIRED THAT ACTUAL PROFIT OR LOSS HAD TO BE BROUGHT TO TAX, THAT A LOSS ACCRUING AT A F UTURE DATE WAS A PURE ESTIMATE, THAT SAME COULD N OT BE ALLOWED AS DEDUCTION U/S.37 OF THE ACT. THE AO REJE CTED THE CLAIM MADE BY THE ASSESSEE . 5.1 IN THE APPE LLATE PROCEEDINGS THE ASSESSEE ARGUED THAT THE UN - MATURED FORWARD EXCHANGE CONTRACT WERE REQUIRED TO BE REVALUED AS PER THE FEDAI GUIDELINES, THAT AT THE END OF THE YEAR THE RATES NOTIFIED BY FEDAI WERE APPLIED, THAT FOREIGN EXCHANGE LOSS CLAIMED BY THE ASSESSEE WAS ALLOWABLE AS DEDUCTION FROM THE BUSINESS INCOME, THAT THE AO TAXED THE GAINS BUT DISALLOWED THE LOSS. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND ASSESSMENT ORDER, THE FAA HELD THAT GA IN/LOSS ON FORWARD EXCHANGE CONTRACT WAS TAXABLE/ALLOWABLE ONLY ON SETTLEMENT /CANCELLATION OF CONTRACT AND NOT BEFORE IT AO SHOULD HAVE DISALLOWED ONLY 23.10 AND NOT GROSS LOSS OF RS.50.23 LACS ON FORWARD CONTRACTS WHICH REMAINED OUTSTANDING AT THE END OF THE YEAR. FOLLOWING THE ORDER OF THE PREDECESSORS F OR THE ASSESSMENT YEAR 2004 - 05, HE CONFIRMED THE DISALLOWANCE TO THE TUNE OF RS.23,10,466/ - .P ARTLY ALLOWING THE APPEAL OF TH E ASSESSEE , HE GAVE RELIEF TO THE ASSESSEE OF RS.27.12 LACS. 5.2 DURING THE CO URSE OF HEARING BEFORE US REPRESENTATIVES OF BOTH THE SIDES AGREED THAT THE ISSUE IS COVERED BY THE DECISION IN THE CASE BANK OF BAHRAIN(SUPRA) THAT WAS FOLLOWED BY THE TRIBUNAL. WE FIND THAT THE SPECIAL BENCH HAS DECIDED THE ISSUE AS UNDER: 42. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD OF THE CASE. THERE IS NO DISPUTE THAT IF THE DATE OF MATURITY OF THE CONTRACT FALLS WITHIN THE SAME FINANCIAL YEAR THEN THE DIFFERENCE BETWEEN THE EXCHANGE RATE AS PREVAILING ON THE BALANCE SHEET DAT E AND CONTRACTED RATE IS AN ALLOWABLE DEDUCTION. THE MOOT POINT FOR CONSIDERATION IS WHETHER KEEPING IN VIEW THE NATURE OF CONTRACT, CAN IT BE SAID THAT A LIABILITY ACCRUED ON 31ST MARCH IN RESPECT OF UNMATURED FORWARD FOREIGN EXCHANGE CONTRACT ON ACCOUNT OF FLUCTUATION IN RATE OF FOREIGN CURRENCY OR NOT. THEREFORE, IT IS NECESSARY TO FIRST EXAMINE THE NATURE OF CONTRACT ENTERED INTO BY THE ASSESSEE. FORWARD FOREIGN EXCHANGE CONTRACT MEANS AN AGREEMENT TO EXCHANGE DIFFERENT CURRENCIES AT A FORWARD RATE. FOR WARD RATE IS A SPECIFIED RATE FOR EXCHANGE OF CURRENCY AT A SPECIFIED DATE. THE ASSESSEE ENTERS INTO FORWARD CONTRACT WITH CLIENTS TO BUY OR SELL FOREIGN EXCHANGE AT AN AGREED PRICE AT A FUTURE DATE IN ORDER TO HEDGE AGAINST THE POSSIBLE FUTURE FINANCIAL L OSS ON ACCOUNT OF WIDE FLUCTUATION IN THE RATE OF FOREIGN CURRENCY. THUS, FIRSTLY, FORWARD FOREIGN EXCHANGE CONTRACT CREATES A CONTINUING BINDING OBLIGATION ON THE DATE OF CONTRACT AGAINST THE ASSESSEE TO FULFIL THE SAME ON THE DATE OF MATURITY AND SECONDL Y, IT IS IN THE NATURE OF HEDGING CONTRACT BECAUSE IT IS A CONTRACT ENTERED INTO AGAINST POSSIBLE FINANCIAL LOSSES. LET US TAKE A HYPOTHETICAL EXAMPLE. SUPPOSE 'X & CO.' IS ASSESSEE'S CLIENT. IT ENTERED INTO A CONTRACT WITH 'Y & CO.' ON 15 - 2 - 2010 FOR SUPPL Y OF GOODS AT $1,00,000, FOR WHICH PAYMENT WAS TO BE MADE AFTER THREE MONTHS ON 15 - 5 - 2010. SUPPOSE, ON THE DATE OF CONTRACT, THE VALUE OF DOLLAR VIS - A - VIS RUPEE WAS RS. 45. AFTER THREE MONTHS, 'X & CO.', KEEPING IN VIEW THE PREVAILING ECONOMIC CONDITIONS E TC., ANTICIPATED WIDE FLUCTUATION IN EXCHANGE RATE. THEREFORE, IT ENTERED INTO WITH ITS BANK (ASSESSEE) TO PURCHASE $1,00,000 ON 15 - 5 - 2010 AT SAY RS. 47. THUS, 'X & CO.' HAD HEDGED THE LOSS AT RS. 2 WHICH IT DISTRIBUTED OVER TWO PERIODS. HOWEVER, AS FAR AS THE ASSESSEE WAS CONCERNED, IT CAME TO KNOW OF ACTUAL LOSS/PROFIT ONLY ON 15 - 5 - 2010 AND NOT PRIOR TO THAT DATE. HOWEVER, AT THE SAME TIME, IT COULD ANTICIPATE THE LOSS ON 31ST MARCH WITH REASONABLE ACCURACY, KEEPING IN VIEW THE DAY - TO - DAY FLUCTUATION IN T HE FOREIGN CURRENCY RATES AND ALSO THAT AS PREVAILING ON 31ST MARCH. THE ASSESSEE - BANK, ACCORDINGLY, MAKES PROVISION IN ITS ACCOUNTS ON 31ST MARCH IN LINE WITH THE PRUDENT COMMERCIAL ACCOUNTING PRINCIPLES, WHICH REQUIRES THAT ALL ACCRUED LOSSES HAVE TO BE TAKEN INTO CONSIDERATION ON 31ST MARCH. HAVING CONSIDERED THE NATURE OF CONTRACT, WE WILL EXAMINE WHETHER ON ACCOUNT OF EXISTING OBLIGATION, A LIABILITY ACCRUES AS PER INCOME - TAX PROVISIONS ON 31ST MARCH OR NOT. IN ORDER TO FIND ANSWER TO THIS INTRICATE IS SUE, WE HAVE TO KEEP IN MIND CERTAIN SETTLED ACCOUNTING PROPOSITIONS WHICH HAVE RECEIVED JUDICIAL RECOGNITION. THEY CAN BRIEFLY BE SUMMED UP AS UNDER : ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 12 (I)THE INCOME IS TO BE ACCOUNTED FOR ONLY WHEN RIGHT TO RECEIVE THE SAME HAS ACCRUED IN FAVOUR OF A PE RSON THEREBY CREATING REALIZABLE DEBT IN HIS FAVOUR. A LEGALLY ENFORCEABLE RIGHT SHOULD HAVE ACCRUED IN FAVOUR OF ASSESSEE. (II)ALL THE ANTICIPATED LOSSES THOUGH NOT ASCERTAINABLE WITH PRECISE ACCURACY, WHICH HAVE ACCRUED ON THE DATE OF BALANCE SHEET, HAV E TO BE ACCOUNTED FOR AS PER PRUDENT ACCOUNTING POLICY. (III)STOCK - IN - TRADE IS VALUED AT THE END OF THE PREVIOUS YEAR IN ACCORDANCE WITH THE PRINCIPLE OF MATCHING IN ORDER TO FIND OUT TRUE PROFIT/LOSS ACCRUING TO THE ASSESSEE. (IV)THE METHOD OF ACCOUNTIN G CONSISTENTLY FOLLOWED BY THE ASSESSEE SHOULD NOT BE DISCARDED CASUALLY WITHOUT GIVING STRONG REASONS FOR THE SAME. MERELY BECAUSE THE ASSESSING OFFICER FEELS THAT OTHER METHOD OF ACCOUNTING WOULD BE BETTER, THE ASSESSEE'S METHOD OF ACCOUNTING CANNOT BE R EJECTED. 43. THE ASSESSEE'S CONTENTION IS THAT THIS CONTRACT HAS TO BE REVALUED IN ACCORDANCE WITH FEDAI GUIDELINES AS NOTIFIED BY RBI AND, THEREFORE, THE ASSESSEE HAD NO OPTION BUT TO DETERMINE THE PROFIT/LOSS IN REGARD TO UNMATURED FORWARD FOREIGN EXCHA NGE CONTRACTS IN ACCORDANCE WITH THE CURRENCY RATE PREVAILING ON 31ST MARCH. FURTHER, A BINDING OBLIGATION HAD ALSO ACCRUED AGAINST THE ASSESSEE. LD. CIT D.R. HAS RIGHTLY SUBMITTED THAT THIS TREATMENT IN BOOKS OF ACCOUNT PER SE DOES NOT GIVE RIGHT TO THE A SSESSEE TO CLAIM THE LOSS UNDER INCOME - TAX ACT. HOWEVER, LD. CIT D.R.'S CONTENTION NEEDS TO BE EXAMINED HAVING REGARD TO FUNDAMENTAL COMMERCIAL PRINCIPLES WHICH HAVE RECEIVED JUDICIAL RECOGNITION. IT IS SETTLED PRINCIPLE THAT DEDUCTION IS ALLOWABLE UNDER T HE INCOME - TAX ACT IN RESPECT OF THOSE LIABILITIES WHICH CRYSTALISE DURING THE PREVIOUS YEAR. THEREFORE, THE CONCEPT OF CRYSTALISATION OF LIABILITY UNDER INCOME - TAX ACT ASSUMES SIGNIFICANCE VIS - A - VIS COMMERCIAL PRINCIPLES IN VOGUE. AS PER THE COMMERCIAL PRI NCIPLES OF POLICY OF PRUDENCE, ALL ANTICIPATED LIABILITIES HAVE TO BE ACCOUNTED FOR BUT AS PER INCOME - TAX ACT, ONLY THAT LIABILITY WILL BE ALLOWED WHICH HAS ACTUALLY ACCRUED. AS A MATTER OF FACT, COURTS HAVE TIME AND AGAIN GIVEN DUE WEIGHTAGE TO COMMERCIAL PRINCIPLES IN DECIDING SUCH ISSUES. HOWEVER, THOSE ANTICIPATED LIABILITIES ARE NOT ALLOWABLE WHICH ARE CONTINGENT IN NATURE BUT, IF AN ANTICIPATED LIABILITY IS COUPLED WITH PRESENT OBLIGATION AND ONLY QUANTIFICATION CAN VARY DEPENDING UPON THE TERMS OF CO NTRACT, THEN A LIABILITY IS SAID TO HAVE CRYSTALISED ON THE BALANCE SHEET DATE. IT IS IN CONFORMITY WITH THE PRINCIPLES OF PRUDENCE ALSO. A CONTINGENT LIABILITY DEPENDS PURELY ON THE HAPPENING OR NOT HAPPENING OF AN EVENT WHEREAS IF AN EVENT HAS ALREADY TA KEN PLACE, WHICH, IN THE PRESENT CASE, IS OF ENTERING INTO THE CONTRACT AND UNDERTAKING OF OBLIGATION TO MEET THE LIABILITY, AND ONLY CONSEQUENTIAL EFFECT OF THE SAME IS TO BE DETERMINED, THEN, IT CANNOT BE SAID THAT IT IS IN THE NATURE OF CONTINGENT LIABI LITY. 43.1 WE HAVE TO BEAR IN MIND THAT THE ISSUES RELATING TO ACCRUAL OF INCOME CANNOT BE DECIDED ON THE SAME FOOTING AND CONSIDERATIONS ON WHICH THE ISSUES RELATING TO LOSS/EXPENSE IS TO BE DECIDED. IN CASE OF LOSS/EXPENSE, IT IS THE CONCEPT OF REASONAB LE CERTAINTY TO MEET AN EXISTING OBLIGATION WHICH COMES INTO PLAY WHICH IN LEGAL TERMINOLOGY IS SAID TO BE 'CRYSTALISATION OF LIABILITY'. WHEN OUTFLOW OF ECONOMIC RESOURCES IN SETTLEMENT OF PRESENT OBLIGATION CAN BE ANTICIPATED WITH REASONABLE ACCURACY THE N IT IS TO BE RECOGNIZED AS CRYSTALISED LIABILITY. THIS IS IN CONSONANCE WITH THE PRINCIPLE OF PRUDENCE AS CONSIDERED BY THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR OF INDIA (P.) LTD. (SUPRA). THE REVENUE'S MAIN CONTENTION IS THAT LIABILITY CAN ARISE ONLY WHEN THE CONTRACT MATURES. THIS PLEA, IN OUR HUMBLE OPINION, IS COMPLETELY DIVORCE OF THE PRINCIPLES OF COMMERCIAL ACCOUNTING AND, THEREFORE, CANNOT BE ACCEPTED. BOTH LEGAL OBLIGATION AND COMMERCIAL PRINCIPLES HAVE TO BE TAKEN INTO CONSIDERA TION FOR DECIDING SUCH ISSUES. 44. FROM THE ABOVE DISCUSSION, IT IS EVIDENT THAT THE ANTICIPATED LOSSES ON ACCOUNT OF EXISTING OBLIGATION AS ON 31ST MARCH, DETERMINABLE WITH REASONABLE ACCURACY, BEING IN THE NATURE OF EXPENDITURE/ACCRUED LIABILITY, HAVE T O BE TAKEN INTO ACCOUNT WHILE PREPARING FINANCIAL STATEMENTS. 45. ONE MORE ASPECT WHICH NEEDS TO BE DISCUSSED WITH REFERENCE TO COMMERCIAL ACCOUNTING PRINCIPLES IS WITH REFERENCE TO THE ARGUMENTS OF LD. CIT D.R. THAT NO TRANSACTION HAS BEEN RECORDED IN TH E BOOKS OF ACCOUNT BEFORE THE DATE OF MATURITY OF CONTRACT AND, THEREFORE, THERE IS NO QUESTION OF ANY LIABILITY ACCRUING ON 31ST MARCH. THE ELEMENTS OF FINANCIAL STATEMENT CAN BE BROADLY DIVIDED INTO FOLLOWING FIVE GROUPS, VIZ.; ASSETS, LIABILITIES, EQUIT Y, INCOME/GAINS AND EXPENSES/LOSS. THESE ITEMS ARE RECOGNIZED IN A FINANCIAL STATEMENT IF BOTH THE FOLLOWING CRITERIA ARE MET : ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 13 (A)FUTURE ECONOMIC BENEFIT WILL BE THERE FROM THE SAID EVENTS, (B)THE EVENT CAN BE MEASURED IN MONETARY TERMS. IN THE PRESENT CASE, THE ASSESSING OFFICER HIMSELF HAS OBSERVED IN THE ASSESSMENT ORDER THAT AT THE TIME OF ENTERING INTO THE CONTRACT, THE ASSESSEE HAS RECORDED THE INCOME/LOSS ON THE BASIS OF DIFFERENCE BETWEEN THE CONTRACTED RATE AND THE SPOT RATE. THUS, TO SAY THAT THE CONTRACT WAS INCAPABLE OF BEING RECOGNIZED IN THE BOOKS OF ACCOUNT, IS NOT CORRECT. THE ASSESSEE RECORDED ONLY THE NET EFFECT OF THE TRANSACTION AND NOT THE ENTIRE TRANSACTION. WHETHER THE DEDUCTION IS ALLOWABLE OR NOT, THEREFORE, CANNOT BE GUIDED BY T HIS FACTOR. 46. WITH REGARD TO OBSERVATIONS OF THE ASSESSING OFFICER REGARDING METHOD OF ACCOUNTING, WE MAY OBSERVE THAT IT IS WELL - SETTLED LAW THAT A METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE CANNOT BE DISREGARDED UNLESS ASSESSING OFFICER I S OF THE OPINION THAT PROFITS ARE NOT CORRECTLY DEDUCTIBLE FROM SUCH METHOD OF ACCOUNTING AS PER THE PROVISIONS OF SECTION 145(3) OF THE ACT. THE ASSESSING OFFICER CANNOT REJECT THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE MERELY ON THE GROUND THAT A BETTER METHOD OF ACCOUNTING COULD BE THE ALTERNATE ONE. HOWEVER, IN THE PRESENT CASE, THOUGH OBSERVATIONS HAVE BEEN MADE BY THE ASSESSING OFFICER TO THIS EFFECT BUT ACTUAL DISALLOWANCE HAS BEEN MADE BY TREATING THE IMPUGNED AMOUNT AS CONTINGENT LIABILITY 4 7. NOW, WE WILL CONSIDER THE ISSUE WITH REFERENCE TO ACCOUNTING STANDARD - 11 (AS - 11). THE HON'BLE SUPREME COURT IN THE CASE OF CHELLAPALI SUGAR MILLS LTD. V. CIT [1975] 98 ITR 16 7 AND THE HON'BLE DELHI HIGH COURT IN THE CAS E OF WOODWARD GOVERNOR OF INDIA (P.) LTD. (SUPRA) OBSERVED THAT THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA REQUIRED THAT ACCOUNTING POLICIES MUST BE GOVERNED BY THE PRINCIPLE OF PRUDENCE. ACCOUNTING STANDARDS ARE PRE PARED BY ICAI KEEPING IN VIEW OF THE PRINCIPLE OF PRUDENCE AND THIS PRINCIPLE HAS RECEIVED JUDICIAL RECOGNITION. IN OTHER WORDS, PROVISIONS SHOULD BE MADE FOR LOAN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRES ENTS ONLY THE BASIC ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATION. THE ACCOUNTING STANDARD ISSUED BY ICAI WHICH ARE MANDATORY FOR PREPARATION OF FINANCIAL STATEMENTS AND HAVE TO BE FOLLOWED INASMUCH AS THE DEVIATION FROM THE SAME IS TO BE REPORTED IN THE AUDIT REPORT. SECTION 145(2) GIVES POWER TO THE CENTRAL GOVERNMENT TO NOTIFY THE ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEE OR IN RESPECT OF ANY CLASS OF INCOME. 48. THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR OF INDIA (P. ) LTD. (SUPRA) HAS OBSERVED AT PAGE 265 PARA 17 THAT THE CENTRAL GOVERNMENT HAS MADE AS - 11 MANDATORY. THEREFORE, COMPLIANCE WITH THIS HAS TO BE MADE. 49. WE FIND THAT IN AS - 11 IN PARAS 9 TO 12, IT HAS BEEN OBSERVED AS UNDER: '9. EXCHANGE DIFFERENCES ARIS ING ON FOREIGN CURRENCY TRANSACTIONS SHOULD BE RECOGNIZED AS INCOME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE, EXCEPT AS STATED IN PARAS 10 AND 11 BELOW. 10. EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIR ING FIXED ASSETS, WHICH ARE CARRIED IN TERMS OF HISTORICAL COST, SHOULD BE ADJUSTED IN THE CARRYING AMOUNT OF THE FIXED ASSETS. THE CARRYING AMOUNT OF SUCH FIXED ASSETS SHOULD, TO THE EXTENT NOT ALREADY SO ADJUSTED OR OTHERWISE ACCOUNTED FOR, ALSO BE ADJUS TED TO ACCOUNT FOR ANY INCREASE OR DECREASE IN THE LIABILITY OF THE ENTERPRISE, AS EXPRESSED IN THE REPORTING CURRENCY BY APPLYING THE CLOSING RATE, FOR MAKING PAYMENT TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSETS OR FOR REPAYMENT OF THE WHOLE OR A PART OF THE MONIES BORROWED BY THE ENTERPRISE FROM ANY PERSON, DIRECTLY OR INDIRECTLY, IN FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THOSE ASSETS. 11. THE CARRYING AMOUNT OF FIXED ASSETS WHICH ARE CARRIED IN TERMS OF REVALUED AMOUNTS SHOU LD ALSO BE ADJUSTED IN THE MANNER DESCRIBED IN PARA 10 ABOVE. HOWEVER, SUCH ADJUSTMENT SHOULD NOT RESULT IN THE NET BOOK VALUE OF A CLASS OF REVALUED FIXED ASSETS EXCEEDING THE RECOVERABLE AMOUNT OF ASSETS OF THAT CLASS, THE REMAINING AMOUNT OF THE INCREAS E IN LIABILITY, IF ANY, BEING DEBITED TO THE REVALUATION RESERVE, OR TO THE PROFIT AND LOSS STATEMENT IN THE EVENT OF INADEQUACY OR ABSENCE OF THE REVALUATION RESERVE. 12. AN EXCHANGE DIFFERENCE RESULTS WHEN THERE IS A CHANGE IN THE EXCHANGE RATE BETWEEN THE TRANSACTION DATE AND THE DATE OF SETTLEMENT OF ANY MONETARY ITEMS ARISING FROM A FOREIGN CURRENCY TRANSACTION. WHEN THE TRANSACTION IS SETTLED WITHIN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE ENTIRE ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 14 EXCHANGE DIFFERENCE ARISES IN THAT PERIOD. HOWEVER, WHEN THE TRANSACTION IS NOT SETTLED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD.' [EMPHASIS SUPPLIED] 50. THEREFORE, THIS ACCOUNTING STANDARD MANDATES TH AT IN A SITUATION LIKE IN THE PRESENT CASE, SINCE THE TRANSACTION IS NOT SETTLED IN THE SAME ACCOUNTING PERIOD, THE EFFECT OF EXCHANGE DIFFERENCE HAS TO BE RECORDED ON 31ST MARCH. LD. CIT D.R. HAS RIGHTLY POINTED OUT THAT THE EXPENSES REQUIRED TO BE CHARGE D AGAINST REVENUE AS PER ACCOUNTING STANDARD DO NOT IPSO FACTO IMPLY THAT THE SAME ARE ALWAYS DEDUCTIBLE FOR INCOME - TAX PURPOSES BUT AT THE SAME TIME, ITS RELEVANCE DOES NOT, IN ANY MANNER, GETS MITIGATED. THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR OF INDIA (P.) LTD. (SUPRA) WITH REFERENCE TO WORKING CAPITAL LOAN, WHICH WAS ALSO REPAYABLE AFTER THE END OF ACCOUNTING PERIOD, HAS HELD THAT LOSS OCCURRED TO THE ASSESSEE, ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE, AS ON THE DATE OF THE BALANCE SHEET, IS AN ITEM OF EXPENDITURE UNDER SECTION 28(I) OF THE INCOME - TAX ACT. HON'BLE SUPREME COURT OBSERVES AS UNDER : 'UNDER SECTION 28(I), ONE NEEDS TO DECIDE THE PROFITS AND GAINS OF ANY BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE DURIN G THE PREVIOUS YEAR. THEREFORE, ONE HAS TO TAKE INTO ACCOUNT STOCK - IN - TRADE FOR DETERMINATION OF PROFITS. THE 1961 ACT MAKES NO PROVISION WITH REGARD TO VALUATION OF STOCK. BUT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE PROFIT AND LOSS ACCOUNT THE VALUE OF THE STOCK - IN - TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. THIS IS HOW BUSINESS PROFITS ARISING DURING THE YEAR NEED TO BE COMPUTED. THIS IS ONE MORE REASON F OR READING SECTION 37(1) WITH SECTION 145. FOR VALUING THE CLOSING STOCK AT THE END OF A PARTICULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELEVANT. THIS IS BECAUSE PROFITS/LOSS IS EMBEDDED IN THE CLOSING STOCK. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE THEORY UNDERLYING THE RULE THAT CLOSINGS STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS THE LOWER. AS PROFITS FOR INCOME - TAX PURPOSES ARE TO BE COMPUTED IN ACCORDANCE WITH ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS SUCH PRINCIPLES STAND SUPERSEDED OR MODIFIED BY LEGISLATIVE ENAC TMENTS, UNREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF THE ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOUNT IN A CONTINUING BUSINESS ARE NOT BROUGHT TO THE CHARGE AS A MATTER OF PRACTICE, THOUGH , AS STATED ABOVE, LOSS DUE TO FALL IN THE PRICE BELOW COST IS ALLOWED EVEN THOUGH SUCH LOSS HAS NOT BEEN REALIZED ACTUALLY.' LD. CIT D.R.'S SUBMISSION IS THAT THIS DECISION IS WITH REFERENCE TO MONETARY ITEMS AS REFERRED TO IN AS - 11 AND SINCE FORWARD FOR EIGN EXCHANGE CONTRACTS DO NOT COME WITHIN THE MONETARY ITEMS, THEREFORE, THE SAID DECISION CANNOT BE APPLIED. HOWEVER, WE HAVE ALREADY DISCUSSED IN THE CONCEPT OF RECOGNITION OF VARIOUS EVENTS IN FINANCIAL STATEMENTS AND HAVE NOTED THAT THE ASSESSEE, IN F ACT, HAS RECORDED NET EFFECT IN ITS PROFIT AND LOSS ACCOUNT. THEREFORE, ON THIS COUNT, THE DEPARTMENT'S PLEA CANNOT BE ACCEPTED. THUS, IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF CHELLAPALI SUGAR LTD. (SUPRA), AND ALSO IN VIEW OF DECISION O F THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR OF INDIA (P.) LTD. (SUPRA), ASSESSEE'S PLEA DESERVES TO BE ACCEPTED. 51. NOW, COMING TO THE OBJECTION OF LD. CIT D.R. WITH REFERENCE TO VARIOUS DECISIONS RELIED UPON BY LD. COUNSEL FOR THE ASSES SEE ON THE GROUND THAT IN THE SAID DECISIONS, THE ISSUE WAS RELATING TO STOCK - IN - TRADE BUT IN THE PRESENT CASE, THERE IS NO STOCK - IN - TRADE. ADMITTEDLY, THE ASSESSEE HAS NOT SHOWN ANY CLOSING STOCK OF UNMATURED FORWARD FOREIGN EXCHANGE CONTRACTS AS ON BALAN CE SHEET DATE AND HAS ONLY BOOKED THE PROFIT AND LOSS IN THAT REGARD. THERE IS NO DISPUTE THAT THE FOREIGN EXCHANGE CURRENCY HELD BY THE ASSESSEE - BANK IS ITS STOCK - IN - TRADE AND AS IS EVIDENT FROM THE HYPOTHETICAL EXAMPLE CONSIDERED EARLIER, THE ASSESSEE HA D ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS IN ORDER TO PROTECT ITS INTEREST AGAINST THE WIDE FLUCTUATION IN THE FOREIGN CURRENCY ITSELF. THEREFORE, THIS CONTRACT WAS INCIDENTAL TO ASSESSEE'S HOLDING OF THE FOREIGN CURRENCY AS CURRENT ASSET. THEREFOR E, IN SUBSTANCE, IT CANNOT BE SAID THAT THE FORWARD CONTRACT HAD NO TRAPPINGS OF THE STOCK - IN - TRADE. LD. COUNSEL HAS RIGHTLY RELIED UPON THE DECISION OF THE KOLKATA ITAT (SB) IN THE CASE OF SHREE CAPITAL SERVICES LTD. (SUPRA) IN THIS REGARD AND, THEREFORE, ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 15 THE VARIOUS DECISIONS RELIED UPON BY LD. COUNSEL FOR THE ASSESSEE AS DISCUSSED IN HIS SUBMISSIONS ARE APPLICABLE TO THE FACTS OF THE CASE. 52. NOW COMING TO THE ARGUMENT OF LD. CIT (DR) WITH REFERENCE TO THE DECISION IN THE CASE OF INDIAN OVERSEAS BANK ( SUPRA), WE FIND THAT THE SAID DECISION WAS RENDERED WITH REFERENCE TO TAXING OF NOTIONAL PROFITS AND NOT WITH REFERENCE TO ANTICIPATED LOSSES, AS IS THE CASE BEFORE US. THE DEPARTMENT IS TRYING TO DRAW ANALOGY FROM THE SAID DECISION BUT THE SAID DECISION C ANNOT BE APPLIED AS THE CONSIDERATIONS ARE ENTIRELY DIFFERENT IN REGARD TO THE ISSUE RELATING TO NOTIONAL PROFITS VIS - A - VIS ANTICIPATED LOSSES. PROFITS ARE CONSIDERED ONLY WHEN ACTUAL DEBT IS CREATED IN FAVOUR OF ASSESSEE BUT IN CASE OF ANTICIPATED LOSSES, IF AN EXISTING BINDING OBLIGATION, THOUGH DISCHARGEABLE AT A FUTURE DATE, IS DETERMINABLE WITH REASONABLE CERTAINTY, THEN THE SAME IS ALLOWABLE. 53. LD. CIT D.R. HAS ALSO HEAVILY RELIED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. KAMANI METALS & ALLOYS LTD. (SUPRA). THIS DECISION, IN OUR OPINION, IS OF LITTLE HELP TO THE DEPARTMENT INASMUCH AS THE SAME HAS BEEN RENDERED WITH REFERENCE TO CONTRACT FOR PURCHASE OF RAW MATERIAL. THE CONTRACTED PRICE WAS MORE THAN THE MARKET PRICE A S THE PRICE WENT DOWN AND THE MATERIAL HAD NOT BEEN RECEIVED AT THE END OF THE ACCOUNTING YEAR. UNDER THESE FACTS, THE HON'BLE HIGH COURT HELD THAT NOTIONAL LOSS CLAIMED BY THE ASSESSEE ON THE BALANCE SHEET DATE WAS NOT ALLOWABLE BECAUSE THERE WAS MERELY T HE CONTRACT TO PURCHASE THE MATERIAL AT A FUTURE DATE. NEITHER ANY PAYMENT WAS MADE BY THE ASSESSEE NOR ANY MATERIAL WAS RECEIVED. THIS CASE, IN OUR OPINION, CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE AS IN THE PRESENT CASE, WE ARE CONCERNED ABOUT THE ANTICIPATED LOSS BOOKED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE RATE FLUCTUATION AS ON BALANCE SHEET DATE, WHICH WAS IN ACCORDANCE WITH RBI GUIDELINES AS WELL AS IN ACCORDANCE WITH AS - 11. MOREOVER, A BINDING OBLIGATION AROSE THE MINUTE THE CONTR ACT WAS ENTERED INTO. HOWEVER, NOW THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA) COVERS THE ISSUE ON ACCOUNT OF VARIATION IN FOREIGN EXCHANGE RATE WITH REFERENCE TO CURRENT ASSETS. THE FACTS IN THE CASE OF KAMANI METALS & ALLOYS LTD. (SUPRA) ARE MORE AKIN TO SUCH A SITUATION WHERE THE ASSESSEE HAS SIMPLY ORDERED FOR PURCHASE OF MATERIAL AT A PARTICULAR RATE BUT THE MATERIAL HAS NOT BEEN SUPPLIED BY THE SELLER BY THE END OF THE ACCOUNTING PERIOD. NO LIABIL ITY IS ACCOUNTED FOR IN RESPECT OF SUCH ORDERED GOODS BECAUSE THE BASIC ELEMENTS OF CONTRACT HAVE NOT BEEN FULFILLED.IN THE PRESENT CASE, WE HAVE ALREADY OBSERVED THAT THE FORWARD CONTRACT IS INCIDENTAL TO THE FOREIGN CURRENCY HELD BY THE ASSESSEE AS STOCK - IN - TRADE AND, THEREFORE, THE DECISION IN THE CASE OF KAMANI METALS & ALLOYS LTD. (SUPRA) IS CLEARLY DISTINGUISHABLE ON FACTS. 54. LD. CIT D.R. HAS ALSO RELIED ON THE DECISION IN THE CASE OF EVEREADY INDUSTRIES INDIA LTD. (SUPRA). THE VIEW EXPRESSED IN TH E SAID DECISION ALSO CANNOT BE UPHELD IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA). THE FACTS IN THE CASE OF INDIAN MOLASSES CO. (P.) LTD. (SUPRA) ARE ENTIRELY DIFFERENT. THE SAID DECISION PR OCEEDED ON THE PREMISE THAT TILL THE DATE OF RETIREMENT OF MANAGING DIRECTOR, THE ASSESSEE - COMPANY ITSELF HAD DOMINION OVER THE SUM PAID THROUGH TRUSTEES AND INSURANCE SOCIETY AND THERE WAS NO IRRECOVERABLE LIABILITY CREATED. THUS, THE IMPUGNED AMOUNTS WER E TREATED AS PART OF PROFITS SET APART TO MEET A CONTINGENCY BY THE ASSESSEE WITHOUT ANY CORRESPONDING LIABILITY BEING THERE AS THE LIABILITY WAS ONLY CONTINGENT IN NATURE. THERE CANNOT BE ANY QUARREL WITH THE PROPOSITION THAT THE LIABILITY IN PRAESENTI IS AN ALLOWABLE DEDUCTION BUT A LIABILITY IN FUTURO, WHICH FOR THE TIME BEING IS ONLY CONTINGENT, IS NOT ALLOWABLE. AS ALREADY POINTED OUT THIS PRINCIPLE IS TO BE APPLIED KEEPING IN VIEW THE PRINCIPLES OF PRUDENCE AND APPLICABLE ACCOUNTING STANDARDS. IN OUR OPINION, THE COMPLETE ANSWER HAS BEEN GIVEN LONG BACK BY THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LTD. (SUPRA), WHEREIN, IT WAS HELD THAT THE PROVISION MADE BY THE ASSESSEE FOR MEETING THE LIABILITY INCURRED BY IT UNDER THE LEAVE ENCASH MENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES OF THE COMPANY WAS ENTITLED TO DEDUCTION OUT OF THE GROSS RECEIPTS OF THE ACCOUNTING YEAR IN WHICH THE PROVISIONS WERE MADE. AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE.' [EMPHASIS SUPPLIED] 57. AT THE END WE MAY FURTHER OBSERVE THAT WHEN PROFITS ARE BEING TAXED BY THE DEPARTMENT IN RESPECT OF SUCH UNMATURED FORWARD FOREIGN EXCHANGE CONTRACTS THEN THERE WAS NO REASON TO DISALLOW THE LOSS AS CLA IMED BY ASSESSEE IN RESPECT OF SAME CONTRACTS ON THE SAME FOOTING. IN THIS REGARD, WE MAY REFER TO THE ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 16 DETAILS FURNISHED BY ASSESSEE VIDE THEIR LETTER DATED 5 - 8 - 2010 TO ESTABLISH THAT THE DEPARTMENT HAS ASSESSED THE BANK IN RESPECT OF THE PROFIT SHOWN BY T HE BANK ON RESTATEMENT OF OUTSTANDING FORWARD FOREIGN EXCHANGE CONTRACTS FOR ASSESSMENT YEARS 2002 - 03 AND 2003 - 04. THERE IS NO DISPUTE ON THIS COUNT AND, THEREFORE, WE REFRAIN FROM REFERRING THE DETAILS. 58. IN VIEW OF THE ABOVE DISCUSSION, WE ALLOW THE A SSESSEE'S APPEAL FOR THE FOLLOWING REASONS : (I)A BINDING OBLIGATION ACCRUED AGAINST THE ASSESSEE THE MINUTE IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. (II)A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE CANNOT BE DISREGARDED ONLY ON THE GROUND THAT A BETTER METHOD COULD BE ADOPTED. (III)THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH 3 1. (IV)A LIABILITY IS SAID TO HAVE CRYSTALISED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REASONABLE CERTAINTY. THE CONSIDERATIONS FOR ACCOUNTING THE INCOME ARE ENTIRELY ON DIFFERENT FOOTING. (V)AS PER AS - 11, WHEN THE TRANSA CTION IS NOT SETTLED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD. (VI)THE FORWARD FOREIGN EXCHANGE CONTRACTS HAVE ALL THE TRAPPINGS OF STOCK - IN - TRADE. (VII)IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P. LTD., THE ASSESSEE'S CLAIM IS ALLOWABLE. (VIII)IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. 59. WE, ACCORDINGLY , HOLD THAT WHERE A FORWARD CONTRACT IS ENTERED INTO BY THE ASSESSEE TO SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD, THE LOSS IS INCURRED TO THE ASSESSEE ON ACCOUNT OF EVALUATION OF THE CO NTRACT ON THE LAST DATE OF THE ACCOUNTING PERIOD, I.E., BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT. RESPECTFULLY, FOLLOW ING THE ABOVE WE DECIDE GROUND GROUND NO.3 FOR AY.2005 - 06 AND 06 - 07, FILED BY THE ASSESSEE , IN ITS FAVOUR . 6. NEXT COMMON GROUN D ( GROUND - 4 FOR AY. 05 - 06, G ROUND - 3 FOR AY.08 - 09 AND GROUND - 1 FOR AY. 02 - 03) IS ABOUT DISALLOWANCE OF AMORTI S ATION OF INVESTMENTS CLASSIFI ED UNDER HELD TO MATURITY (HTM) CATEGORY. THE AO ,WHILE COMPLETING THE ASSESSMENT PROCEEDINGS,FOR THE AY.2005 - 06 FOUND THAT THE ASSESSEE HAD CLAIMED DEPRECIATION ON HTM SECURITIES OF RS.15.67 CR. HE DIRECTED IT TO EXPLAIN AS TO WHY THE PROVISION SHOULD NOT BE DISALLOWED. VIDE ITS LETTER DATED10.12.2007 THE ASSESSEE SUBMITTED THAT SINCE ITS INCEPTION AND UPTO FY 1999 - 2000 IT HAD HELD ALL ITS INVESTMENTS AS CURRENT INVESTMENTS AND MARKED THEM TO MARKET AS PER THE ERSTWHILE REQUIREMENTS OF THE RBI, THAT IN THE YEAR 2000 - 01 THE RBI ISSUED GUIDELINES GIVING FRESH NORMS FOR CLASSIFICATION AND VALUATION OF INVESTMENTS, THAT AS PER T HE NEW GUIDELINES THE INVESTMENTS WE RE TO BE HELD IN 3 CATEGORIES I.E.HTM,AFS AND HFT, THAT DUE TO STIPULATION AND RULES FRAMED BY THE RBI, IT HAD CLASSIFIED ITS INVESTMENT INTEREST TO VARIOUS CATEGORIES. THE AO AFTER CONSIDERING THE REPLY OF THE ASSESSEE HELD THAT HTM WERE LONG - TERM INVESTMENTS, THAT THEY WERE NOT I N THE NATURE OF STOCK IN - TRADE, THAT ANY DIMINUTION THEREOF WAS IN THE NATURE OF PROVISION, THAT THE CLAIM OF TH E ASSESSEE WAS NOT ACCEPTABLE. ACCORDINGLY, THE AMORTI SATION OF HTM INVESTMENT, AMOU NTING TO RS.15,67, 83, 664/ - , WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE . 6.1 IN THE APPELLATE PROCEEDINGS THE FAA HELD THAT THE INVESTMENT UNDER THE HEAD HTM WERE LONG - TERM INVESTMENT, THAT SAME WOULD NOT MARKED TO MARKET, THAT DIMINUTION IN VALUE WAS NOT ALLOWABLE AS PER PROVISIONS OF S.37 OF THE ACT. ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 17 6.2 BEFORE US, THE AR AND DR AGREED THAT THE ISSUE NOW STANDS SETTLED BY THE DECISION OF THE TRIBUNAL DELIVERED IN THE CASE OF BANK OF RAJASTHAN(2011 - TIOL - 35 - ITAT,MUM).A REFERENCE WAS MADE TO THE CBDT INSTRUCTION NO.17 DATED 26/11/2008. IT WAS ALSO AGREED THAT THE FAA HAD FOLLOWE D THE DECISION OF THE TRIBUNAL, WHILE DECIDING THE APPEAL FOR ASSESSMENT YEAR 2008 - 09 AND THE AO HAD AGITATED THE ISSUE BEFORE THE TRIBUNAL . 6.3 WE HAVE HEARD THE RIV AL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT IN THE CASE OF BANK OF RAJASTHAN (SUPRA), THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE.WHILE ADJUDICATING THE APPEAL FOR THE AY.2008 - 09 THE FAA HAD FOLLOWED THAT ORDER AND ALLOWED THE APPEAL FILED BY THE ASSESSEE.IT IS ALSO FOUND THAT SIMILAR ISSUE HAD ARISEN IN THE CASE OF HDFC BANK LTD. (ITA/6939/MUM/201)AND THE TRIBUNAL HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE.FOLLOWING THE ORDERS OF THE BANK OF RAJASTHAN AND HDFC BANK(SUPRA)G ROUND - 4 FOR AY.05 - 06,GROUND - 3 FOR AY.08 - 09 AND GROUND - 1 FOR AY. 02 - 03 ARE DECIDED IN FAVOUR OF THE ASSESSEE. 7. NEXT COMMON GROUND OF APPEAL(GROUND - 4,AY.06 - 07,GROUND - 3,AY.07 - 08 AND AY.08 - 09) DEALS WITH DISALLOWANCE OF SOFTWARE EXPENSES . DURING THE ASSESS MENT PROCEEDING FOR THE AY. 2007 - 08 , THE AO HELD THAT COMPUTER SOFTWARE WAS CAPITAL EXPENDITURE AND HENCE SAME COULD NOT BE ALLOWED AS REVENUE EXPENDITURE. HOWEVER, HE ALLOWED DEPRECIATION ON IT , AS PER THE RULES. 7.1 IN THE APPELLATE PROCEED INGS, THE FAA HELD THAT THE ASSESSEE HAD NOT BEEN ABLE TO JUSTIFY THE NATURE OF EXPENDITURE AS REV EXPENDITURE THAT THE AO RIGHTLY TREATED THE DISPUTED AMOUNT OF RS.35.91 LACS AS CAPITAL EXPENDITURE. 7.2 BEFORE US, THE AR ARGUED THAT IMPUGNED SOFTWARE EXPENDITURE WAS BASICA LLY LICENSE FEE PAID FOR USE OF SOFTWARE FOR A SPECIFIED PERIOD FOR OR DURING THE YEAR UNDER CONSIDERATION, THAT THE OWNERSHIP OF THE SOFTWARE WAS WITH THE VENDOR AND NOT WITH BANK, THAT THE BANK HAD ONLY THE RIGHT TO USE THE SOFT WARE, THAT SOFTWARE WAS M ERELY FACILITATING THE OPERATIONS OF THE ASSESSEE , THAT NO BENEFIT OF ENDURING NATURE ACCRUED TO THE COMPANY. HE REFERRED TO DECISION OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL DELIVERED IN THE CASE OF AMWAY ENTERPRISES (111 ITD 112) AND RAYCHEM RPG LTD. (346 ITR 138) AND REFERRED TO PG. NO.5 - 18 OF THE PAPER BOOK. DR SUPPORTED THE ORDER OF THE FAA. 7.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT ISSUE OF ALLOWING THE SOFTWARE EXPENSES HAS BE DECIDED IN LIGHT OF THE ABOVE REFERRED TWO JUDGMENTS I.E. AMWAY ENTERPRISES (SUPRA)AND RAYCHEM RPG LTD.(SUPRA).THEREFORE,IN THE INTEREST OF JUSTICE WE ARE REMITTING BACK THE MATTER TO THE FILE OF THE AO FOR FRESH ADJUDICATION,WHO WILL DECIDE THE ISSUE AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AND AFTER CONSIDERING THE ABOVE MENTIONED TWO JUDGMENTS.ABOVE GROUNDS OF APPEAL ARE PARTLY ALLOWED IN FAVOUR OF THE ASSESSEE . 8. ONE MORE COMMON GROUND (G.2 FOR THE AY.S.2007 - 08 TO 2009 - 10)DEALS WITH REJECTION OF EX EMPTION U/S.10( 38) OF THE ACT IN RESPECT OF LONG TERM CAPITAL GAIN ON SALE OF SHARES HELD AS INVESTMENT. DURING THE ASSESSMENT PROCEEDINGS FOR THE AY.2007 - 08,THE AO HELD THAT THE ASSESSEE WAS IN BANKING BUSINESS, THAT ALL SECURITIES WERE STOCK - IN - TRADE THAT PROFIT OR GAIN ARISING IN SALE OF INVENTORY WAS BUSINESS PROFIT. DURING THE APPELLATE PROCEEDINGS THE FAA HELD THAT PREMIUM ON AMORTIZATION OF HTM SECURITY WAS ALLOWED AS DEDUCTION, THAT ALL THE INVESTMENTS WERE STOCK - IN - TRADE,THAT PROFIT ON SALE OF SHARES WAS TAXABLE AS BUSINESS INCOME. ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 18 8.1. BEFORE US,THE AR STATED THAT INDUSIND ENTERPRISES AND FINANCE LTD. (IEFL) WAS A SEPARATE ENTITY, THAT THE ASSESSEE HAD PURCHASED SHARE OF THAT COMPANY, THAT W.E.F. 1.4.2002 IEFL MERGED WITH THE ASSESSEE,THAT IT H ELD THE SHARES OF IEFL AS INVESTMENT, THAT ACCOUNTING POLICY IN CASE OF VALUATION OF SHARES WAS AVAILABLE TO THE AO AND THE FAA.HE REFERRED TO CBDT CIRCULAR NO.4/ 2007 DT.15.6.2007. IT WAS ALSO ARGUED THAT AMORTISATION OF PREMIUM IN RESPECT OF HTM SECURIT IES WAS AS PER RBI GUIDELINES,THAT THE INVESTMENTS WERE NOT COVERED BY BANKING REGULATIONS, THAT IN THE ASSESSMENT YEAR2009 - 10 THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE IN APPELLATE PROCEEDINGS. HE REFERRED TO THE CASE OF GOPAL PUROHIT(336ITR287) AN D SURESH P. SHAH (356ITR 104). 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT BECAUSE OF AMALGAMATION OF IEFL WITH THE ASSESSEE IT WAS IN POSSESSION OF THE SHARES OF THAT COMPANY THAT WERE SOLD DURING THE YEAR UNDE R APPEAL,THAT THE ASSESSEE WAS SHOWING THE SHARES AS INVESTMENTS AND WAS NOT TREATING THEM AS STOCK IN TRADE.AS PER THE SETTLED LAW AN ASSESEE CAN HAVE PORTFOLIOS FOR THE SHARES I.E.AN ASSESSEE CAN BE AN INVESTOR AND A BUSINESSMAN AS FAR AS HOLDING OF SHAR ES IS CONCERNED.THE HONBLE BOMBAY HIGH COURT HAS RECONGINSED THE SAID PRINCIPLE.CONSIDERING THE PECULIAR CIRCUMSTANCES IF THE ASSESSEE WAS TREATING SHARES OF AMALGAMATED COMPANY AS INVESTMENT THEN IT CANNOT BE HELD THAT SAME WERE PART OF ITS BUSINESS ASSE TS.AS THE SHARES WERE SOLD AFTER A STIPULATED PERIOD ,SO THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S.10(38)OF THE ACT.REVERSING THE ORDER OF THE FAA,WE DECIDE GROUND NO.2 FOR ALL THE THREE AY.S.IN FAVOUR OF THE ASSESSEE. ITA NO.1244/MUM/2013 (AY 09 - 1 0): 9. DISALLOWANCE OF EXPENDITURE ON ESOP IS THE SUBJECT MATTER OF GROUND NO.4)FOR THE YEAR UNDER APPEAL. DURING THE ASSESSMENT PROCEEDINGS THE AO HELD THAT THE ASSESSEE HAD NOT INCURRED THE EXPENDITURE FOR ISSUING ESOPS, THAT IT WAS AN UNASCERTAINABLE ITEM OF EXPENDITURE, THAT IT DEPENDED UPON THE OPTION TO BE EXERCISED BY THE EMPLOYEES AT A FUTURE DATE. IN THE APPELLATE PROCEEDINGS THE FAA UPHELD THE ORDER OF THE AO. 9.1 B EFORE US,THE AR ARGUED THAT SHARE UNDER ESOP WERE ISSUED TO THE EMPLOYEE AT BELOW MARKE T PRICE TO RETAIN THEM IN CO. , THAT IT WAS A FORM OF COMPENSATION FOR SERVICES RENDERED , THAT SEBI HAD DIRECTED THE LISTED COMPANIES TO ACCOUNT FOR THE COMPENSATION COST AS EXPENDITURE, THAT ESP AMORTIZATION COST WAS CHARGED TO THE P&L A/C. UNDER THE MAT CHING COST AND REVENUE PRINCIPLES AS WELL AS FUNDAMENTAL ACCOUNTING CONCEPT OF PRUDENCE, THAT BOTH THE ABOVE CONCEPTS WERE FOLLOWED AS PER MANDATORY ACCOUNTING STANDARD - 1, THAT THERE WAS NO BENEFIT OF ENDURING NATURE, THAT IT WAS CLEARLY A REV ENUE EXPENDITU RE BEING EMPLOYEE COMPENSATION COST, THAT IT WAS AN ASCERTAINED LIABILITY THAT WAS CREATED DURING THE YEAR AND QUANTIFIED DURING THE DATE OF GRANT, THAT IN THE HANDS OF EMPLOYEES ESOP BENEFITS WAS TAXED AS PERQUISITE.DR SUPPORTED THE ORDER OF FAA. 9.2. WE H AVE HEARD THE RIVAL SUBMISSIONS. WE ARE OF THE OPINION THAT THE ISSUE NEEDS FURTHER VERIFICATION ABOUT THE TERMS AND CONDITIONS OF ESOP ISSUE BY THE ASSESSEE .THEREFORE, IN THE INT EREST OF JUSTICE THE MATTER IS RESTORED BACK TO THE FI LE OF AO FOR FRESH AD JUDICATION, WHO WOULD AFFORD A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE .GR. NO.4 IS DECIDED IN F A V OUR OF THE ASSESSEE , IN PART. ITA NO.553/MUM/2011 - AY 02 - 03 AND ITA NO.2839/MUM/2011 (AY 02 - 03): ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 19 10. BEFORE US, IT WAS STATED THAT THE 2 ND APPEAL IN ITA NO.2839/MUM/2011 WAS A PENALTY APPEAL WHEREAS THE FIRST APPEAL WAS QUANTUM APPEAL. 10.1 REPRESENTATIVES OF BOTH THE SIDES AGREED THAT THE IDENTICAL ISSUE OF LEVYING PENALTY U/S. 271(1)(C) OF THE ACT HAD ARISEN BEFORE THE TRIBUNAL WHEN IT HAD DECIDED THE A PPEAL FOR THE AY 2001 - 02 (ITA NO.3023/MUM/2006).WE WOULD LIKE TO REPRODUCE THE RELEVANT PORTION OF THE ORDER AND SAME READS AS UNDER : 2.THE SOLITARY ISSUE PERTAINS TO LEVY OF PENALTY OF RS. 2,27,90,773/ - U/S 271(1)(C) AND SUSTAINED BY THE CIT(A). THE BAS IC AND BRIEF FACTS ARE THAT THE ASSESSEE IS A BANK, WHOSE ONE OF THE BUSINESSES IS LEASING OF ASSETS. THE ASSESSEE HAD BEEN CLAIMING DEPRECIATION ON THE ASSETS LEASED BY IT FOR A NUMBER OF YEARS. THE DEPARTMENT CONSISTENTLY WAS OF THE VIEW THAT THE DEPRECI ATION WAS NOT ALLOWABLE. AS MENTIONED IN THE ASSESSMENT ORDER, 'THE CLAIM OF DEPRECIATION ON ASSETS LEASED UPTO AY 1999 - 2000 HAS BEEN DISALLOWED BY MAKING DETAILED DISCUSSION IN ASSESSMENT ORDER PASSED UPTO 1999 - 2000. THEREFORE, THE CLAIM OF DEPRECIATION O N THESE ASSETS WHICH HAVE BEEN LEASED PRIOR TO THE PRESENT ASSESSMENT YEAR IS DISALLOWED, RELYING ON THE DISCUSSION HELD IN EARLIER ASSESSMENTS'. 4 . ON THIS BASIS, THE AO ADDED BACK THE AMOUNT OF RS. 2,27,90,773/ - , WHICH WAS SUSTAINED BY THE CIT(A) AND, BEFOR E THE ITAT, THE ISSUE WAS NOT PRESSED IN QUANTUM PROCEEDINGS. 5 . IN THE INSTANT PROCEEDINGS THE AR PLACED BEFORE US THE HISTORY OF THE CASE, AS TO HOW THE ISSUE HAS BEEN DEALT WITH BY THE VARIOUS AUTHORITIES AND ITAT FROM ASSESSMENT YEAR 1995 - 96 TO ASSESSMENT YEAR 2004 - 05 THE TRIBUNAL REPRODUCED THE CHART SUBMITTED BY THE ASSESSEE WHEREIN DETAILS OF THE TRANSACTIONS AND THE RESULT OF THE PENALTY PROCEEDINGS FROM AY 95 - 96 W ERE GIVEN. IT FURTHER HELD 6. THE AR FURTHER CLARIFIED THAT THE REVENUE HAD IMPOSED PE NALTY IN THE SUBSEQUENT YEAR AS WELL, ON THE CLAIM OF DEPRECIATION, PERTAINING TO ASSETS LEASED IN PRECEDING YEARS. IT WAS POINTED OUT THAT, IN THE SUBSEQUENT YEAR, THE PENALTY HAS BEEN DELETED BY THE ITAT, THOUGH, IT WAS PRIMARILY DONE, TAKING THE VIEW TH AT THE ISSUE WAS DEBATABLE. AS PER THE UNDISPUTED HISTORY UPTO ASSESSMENT YEAR 1999 - 2000, THE ISSUE HAS SEEN THE QUIETUS. IN ANY CASE, THE ISSUE/FACTS INVOLVED IN THE CURRENT YEAR AS WELL AS IN THE ASSESSMENT YEAR 2001 - 02, ARE IDENTICAL AND SINCE THE ISSUE IS DEBATABLE, PENALTY SHOULD BE DELETED. THE AR FURTHER POINTED OUT THAT ASSESSEE'S OWN CASE ON THE SAME ISSUE HAS BEEN ADMITTED BY THE HON'BLE BOMBAY HIGH COURT IN ITA NO. 760/2012, ORDER DATED 05.03.2013, WHEREIN THE FOLLOWING QUESTION HAD BEEN RAISED, THE ORDER OF THE HON'BLE BOMBAY HIGH COURT, IS AS UNDER, 'P. C: - HEARD. 2ADMIT ON THE FOLLOWING SUBSTANTIAL QUESTIONS OF LAW: - WHETHER ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL'S CONCLUSION THAT THE LEASE AGREEMENT DATED 04.0 9.1997 IS A FINANCE LEASE CAN BE UPHELD BOTH IN FACT AND IN LAW? WHETHER ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL'S FINDING THAT THE APPELLANT WAS NOT ENTITLED TO DEPRECIATION UNDER SECTION 32 OF THE ACT IS SUSTAINABLE? WHE THER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL IS RIGHT IN HOLDING THAT IN A FINANCE LEASE THE LESSEE IS THE OWNER OF THE LEASED ASSET AND NOT THE LESSOR AND HENCE ONLY THE LESSEE IS ENTITLED TO DEPRECIATION UNDER SECTION 3 2 OF THE ACT'? THE AR, BESIDES BRINGING INTO OUR NOTICE, THE ASSESSEE'S OWN CASE HAVING BEEN ADMITTED IN APPEAL U/S 260A BY THE HON 7 BLE BOMBAY HIGH COURT, CITED A NUMBER OF DECISIONS, WHICH ARE PERTAINING TO THE ISSUE IN QUESTION AND CANCELLATION OF PENALT Y. THE AR, THEREFORE, PLEADED THAT THE PENALTY SHOULD BE DELETED. THE DR PLACED RELIANCE ON THE ORDERS OF THE REVENUE AUTHORITIES. WE HAVE HEARD THE ARGUMENTS AND HAVE ALSO PERUSED THE VARIOUS STATEMENTS AND ORDERS ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 20 OF THE COORDINATE BENCH OF THE ITAT IN AS SESSEE'S OWN CASE AND ALSO THE ORDER OF HON'BLE BOMBAY HIGH COURT, ADMITTING THE APPEAL U/S 260A ON THE ISSUE, I.E. WHETHER DEPRECIATION IS COMPUTABLE AND ALLOWABLE ON LEASED ASSETS. THIS ISSUE HAD BEEN THE BONE OF CONTENTION, WHICH APPARENTLY HAS TWIN SID ES. THE ISSUE UNDOUBTEDLY, IS DEBATABLE AND SINCE, THE ISSUE BEING SEIZED WITH THE HON'BLE BOMBAY HIGH COURT, THE DECISION OF THE COORDINATE BENCH GATHERS MUCH RELEVANCE WHERE IT WAS HELD IN ITA NO. 4040/MUM/2007 (COPY ATTACHED) AT PAGE 5 PARA 11, '... IN SO FAR AS DEPRECIATION CLAIM IS CONCERNED, WE FIND THAT IT IS A LEGAL CLAIM MADE BY THE ASSESSEE AND EVEN THE SAME CLAIM WAS MADE IN THE EARLIER YEARS. THE CITA) GAVE A FINDING THAT THE ASSESSEE NEITHER CONCEALED ITS INCOME NOR FURNISHED INACCURATE PARTICU LARS OF INCOME AND THE CLAIM IS CONTINUOUS ONE,' 10 . AS MENTIONED EARLIER, THE ISSUE HAS BEEN DEALT WITH IN THE CASES CITED BEFORE US, ONE OF THE CASE, WHERE BOTH OF US WERE PARTY, I.E. IN THE CASE OF DCB LTD VS DCIT, ITA NO. 3006/MUM/2001 AND CONNECTED APPEAL S HAD HELD THAT, '... AFTER HAVING EXAMINED ALL THE TRANSACTIONS WHICH HAVE BEEN IMPUGNED BEFORE US, WE ARE OF THE OPINION THAT THE ASSESSEE IS ENTITLED FOR THE CLAIM OF DEPRECIATION..... AND ALSO PLACED RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COUR T IN THE CASE OF ICDS LTD. VS CIT, REPORTED IN 350 ITR 527 (SC). 11 . AS HELD BY THE COORDINATE BENCH IN ASSESSMENT YEAR 2001 - 02, THIS IS NEITHER THE CASE OF INACCURATE PARTICULARS OF INCOME OR CONCEALMENT OF INCOME. WE ARE OF THE OPINION, THAT PENALTY IN THESE CIRCUMSTANCES IS NOT EXIGIBLE. WE THEREFORE REVERSE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO CANCEL THE PENALTY. 12 . TAKING INTO CONSIDERATION THE ENTIRE SCENARIO, WE ARE OF THE CONSIDERED OPINION THAT THE BASIC ISSUE IS IN FAVOUR OF THE ASSESSEE AND CONS IDERING THAT PENALTY IS NOT EXIGIBLE. 13 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. RESPECTFULLY FOLLOWING THE ABOVE , WE REVERSE THE ORDER OF THE FAA AND DELETE THE PENALTY LEVIED U/S. 271(1)(C) OF THE ACT. 11. AS FAR AS THE ISSUE OF DISAL LOWANCE OF AMORTIZATION OF SECURITIES TO THE TUNE OF RS.2.83 CRORES, IN RELATION TO PORTFOLIO INV ESTMENT HELD UNDER HTM CATEGORY(ITA NO.553/MUM/2011) WE WANT TO MENTION THAT THE ISSUE HAS EXTENSIVELY DELIBERATED UPON IN EARLIER PART OF OUR ORDER (PARA NO. 6 TO 6.3). RESPECTFULLY, FOLLOWING THE ABOVE THE SOLITARY GROUND RAISED IN THE APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE . APPEAL BY THE AO.S: ITA/8318/MUM/2010 & OTHERS : 12 . F IRST COMMON GROUND OF APPEAL,FILED BY AO, IS WITH REGARD TO DEDUCTION ALLOWED BY TH E FAA U/ S .36 (1)(VII) ( A) OF THE ACT, FOR PROVISIONS OF BAD DEBT . THE AMOUNT INVOLVED FOR THE AY.2005 - 06 IS RS. 15.76 CR ORES . DURING THE ASSESSMENT PROCEEDINGS , THE AO FOUND THAT THE ASSESSEE HAD FURNISHED DETAILS OF PROVISIONS AND CONTINGENCIES AMO U NTING TO RS .1,91,08,73,208/ - , T HAT IT INCLUDED BAD DEBTS FOR WHICH 100% SPECIFIC PROVISION WAS MADE BEFORE ADJUSTING THE BALANCE AVAILABLE IN PROVISION MADE U/S. 36(1)(VII)(A) IN THE PREVI OUS Y EA R AS ON 31.3.2005, THAT THE NET AMOUNT CLAIMED U/S. 36(2) OF THE ACT, AM OUNTING TO RS.118.01 CR ORES WAS DEBITED BELOW THE LINE IN THE P&L A/C. , THAT AN AM OUN T OF RS. 38.28 CR ORES WAS DEBITED TO P&L A/C. H E DIRECTED THE ASSESSEE TO RECONCILE THE CLAIM MADE BY IT. VIDE ITS LETTER D ATED 0 8.10. 20 07, THE ASSESSEE, FILED AN EXPLANATION I N THAT REGARD. THE A O REFERRED TO PROV ISIONS TO SEC.36(2), 36(1)(VII) AND HELD THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.147.41 CR ORES U/S. 36(2), HAT IT HAD CLAIMED DEDUCTION U/S. 36(1)(VII) TO THE TUNE OF RS.16.87 CR ORES , BEING 7.5% OF PROFIT . AFTER C ONSIDERING T HE MATERIAL AVAILABLE ON RECORD, THE AO HELD THAT THE ASSESSEE VERY WELL KNEW THAT ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 21 THOSE ASSETS WERE CAPABLE OF RECO VERY , THAT ITS ACTION OF WRITING OFF BAD DE B TS WITHOUT ASSIGNING REASON WAS NOT TENABLE, THAT THE RECOVERIES OF BAD DEBT DURING F Y 2006 TO THE TUNE OF RS. 8.74 CR ORES COULD NOT BE ALLOWED AS BAD DEBTS , THAT THE RECOVERY OF RS. 8.467 CR ORES WOULD NOT BE TAXABLE IN SUBSEQUENT ASSESSMENT YEAR. 1 2 .1 AGGRIEVED BY THE ORDER OF THE AO, ASSESSEE PREFERRED AN APPEAL BEFORE THE FAA. BEFORE HI M IT WAS ARGUED THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S. 36(1)(VII)(A) AT RS. 16.86 CR ORES (7.5% OF BUSINESS INCOME BEFORE ALLOWING THE DEDUCTION, AS PER THE RETURN FILED), THAT THE AO COMPUTED THE DEDUCTION AT RS. 18.90CR ORES (7.5% OF ASSESSED BUSINESS IN COME AFTER CONSIDERING DISALLOW - ANCES/ ADDITIONS MADE), THAT THE AO HAD RESTRICTED THE DEDUCTION TO RS.1.10 CR ORES , BEING THE PRUDENTIAL PROV ISION MADE IN THE BOOKS FOR FY 2004 - 05 , THAT THE AO HAD NOT QUESTIONED THE CALCULATION AND OTHERWISE DEDUCTION OF RS. 1 6.86 CR ORES , THAT THE ONLY REASON FOR DISALLOWANCE WAS THAT THE ASSESSEE HAD NOT MADE ADEQUATE PROVISIONS IN THE BOOKS OF ACCOUNT, THAT IT HAD REVERSED THE PROVISIONS OF EARLIER YEARS AND HAD CREATED FRESH PROV ISIONS , THAT IT HAD CLAIMED DED UCTION OF RS. 8 .72 CR ORES FOR THE ASSESSMENT YEAR 20 04 - 05, THAT SAME WAS ALLOWED BY THE THEN FAA, THAT THE FAA HAD ALLOWED DED UCTION U/S. 36(1)(VII)(A) IN ASSESSMENT YEAR 20 04 - 05, THAT ON ACCOUNT OF VARIOUS DISALLOWANCES/ADDITIONS IN THE ASSESSME N T PROCEEDINGS, INCOME FROM BUSINESS HAD BEEN REVISED, THAT ACCORDINGLY DEDUCTION U/S. 36(VII)(A) WOULD HAVE TO BE REVISED AS IT WAS LINKED WITH BUSINESS INCOME. AFTER CONSIDERING THE SUBMISSION OF ASSESSEE AND THE ASSESSMENT ORDER THE FAA HELD THAT S ECTION 36( 1)(VII) WAS INTRODU CED IN 1986, THAT DURING THE YEAR UNDER CONSIDERATION THE DEDUCTION WAS ALLOWABLE AT 7.5% OF TOTAL INCOME BEFORE COMPUTING DEDUCTION UNDER THIS CLAUSE AND CHAPTER VIA, THAT THE DEDUCTION WAS SUBJECT TO CORRESPONDING PROV ISIONS IN THE BOOKS, THAT THE ASSESS EE HAD CLAIMED DED UCTION @ 7.5% OF INCOME FROM BUSINESS BEFORE ALLOWING DED UCTION AND ADDED BACK THE DED UCTION CLAIMED U/S. 36(1)(VII) ( A) IN AY. 20 04 - 05, THAT THE NON - PERFORMING ASSETS WERE CLASSIFIED BY THE RBI GUIDELINES , THAT THE ASSESSEE HAD MADE PROV IS ION OF RS.28.63 CR ORES FOR THE F INANCIAL Y EAR UNDER CONSIDERATION , THAT THE TOTAL CUMULATIVE PROV ISION AS ON LAST DATE WAS STATED TO BE RS. 26.26 CR ORES IN THE BALANCE SHEET, THAT THE AO HAD MADE PRUDENTIAL PROV ISION OF RS. ONE CR ORES IN THE BOOKS AND DED UC TION RESTRICTED TO THE SAID AM OUN T. HE FURTHER HELD THAT PROV ISION WAS MADE NECESSARILY, THAT SUCH A PROV ISION HAD TO BE MADE IN RESPECT OF LOAN AND ADVANCES AT THE END OF THE Y EA R , THAT DOUBTFUL DEBTS AT THE BEGINNING AND END OF THE Y EA R WERE BOUND TO CHA NGE , THAT DED UCTIO N U/S. 36(1)(VII)(A) WAS ROLLING DED UCTION WHICH MEANT THAT IN THE 1 ST Y EA R THE PROV ISION WAS ALLOWED AS DED UCTIO N, THAT IN THE 2 ND Y EA R ALLOWANCE HAD TO BE ADDED BACK IN COMP UTATION OF INCOME AND AGAIN DEDU CTIO N HAD TO BE CLAIMED ON Y EA R END PROV ISION , THAT THE ASSESSEE HAD CREATED FRESH P ROV ISION OF RS. 28.63 CR ORES, T HAT THE PROV ISION OF DOUBTFUL DEBTS EXISTING IN THE BOOKS ON 31.3.2005 WAS RS. 76.23 CR ORES AND MORE THAN THE DED UCTIO N CLAIMED, THAT DED UCTIO N UNDER THE SECTION WAS ALLOWA BLE TO THE EXTENT OF 7.5% OF BUSINESS INCOME AFTER TAKING INTO CONSIDERATION . HE DIRE C TED THE AO TO ALLOW DEDUCTION @7. 5 % OF REVISED BUSINESS INCOME. 1 2.2 . BEFORE US,THE AR STATED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF PROVISION OF BAD AND DOUBTFUL DEBT S @ OF 7.5% OF INCOME FROM BUSINESS BEFORE ALLOWING DEDUCTION. THAT IT HAD REVERSED PROVISIONS OF EARLIER YEARS AND HAD CREATED FRESH PROVISION FOR THE YEAR UNDER APPEAL IN THE BOOKS OF ACCOUNT , THAT PROVISION FOR NON - PERFORMING ASSETS WAS MADE AT RS.28.6 3 CRORES, THAT ASSESSEE COMPANY HAD CLAIMED DEDUCTION OF RS.8.72 CR. FOR THE AY 2004 - 05, THAT THE FAA HAD ALLOWED THE CLAIM MADE BY THE ASSESSEE, THAT THE DEDUCTION WAS ADDED BACK TO THE TOTAL TAXABLE INCOME IN 2005 - 06, THAT THE FRESH DEDUCTION OF RS.16. 86 CRORES WAS CLAIMED FOR THE YEAR UNDER ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 22 CONSIDERATION, THAT THE AO HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE WHILE ADJUDICATING THE ISSUE IN AY 2004 - 05, THAT THE ORDER OF THE FAA FOR AY 2004 - 05 WAS NOT CHALLENGED BEFORE THE TRIBUNAL .HE REFERRED TO PG.NO.160 OF THE PAPER BOOK. 1 2 . 3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE AO HAD GIVEN A RELIEF OF RS.1.10CRORES,BUT IT IS NOT CLEAR AS TO HOW HE HAD ARRIVED AT THE SAID FIGURE. IT IS FOUND THAT THE AO HAD I GNORED THE TOTAL PROVISION FOR BAD AND DOUBTFUL DEBTS AND HAD CONSIDERED ONLY PRUDENTIAL PROVISIONS. WE ARE OF THE OPINION THAT THE APPROACH OF THE AO WAS AGAINST THE MANDATE OF THE PROVISIONS OF S.36(1)(VII)(A) OF THE ACT. HERE IT IS PERTINENT TO NOTE THA T THE FAA HAD ALLOWED THE APPEAL OF THE ASSESSEE FOR THE EARLIER YEAR ON THE SAME ISSUE AND THE AO HAD NOT AGITATED THE MATTER BEFORE THE TRIBUNAL.WE FIND THAT WHILE DECIDING THE APPEAL FILED BY THE AO FOR THE AY.2000 - 01( ITA/931/2004,DATED 14.01.2011 ), THE TRIBUNAL HAS DECIDED THE IDENTICAL ISSUE AS UNDER: 9. SO FAR AS GROUND NO.4 IS CONCERNED, LEARNED REPRESENTATIVES FAIRLY ACCEPT THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE ITAT MURNBAI IN THE CASE OF OMAN INTERNATIONAL BANK, SAOG V. DCIT, 92 LTD 76 (MUM), WHEREIN, IT WAS HELD AS FOLLOWS: 5. WE CONSIDER IT USEFUL TO REPRODUCE THE RELEVANT LEGAL PROVISIONS BEFORE PROCEEDING TO ADDRESS OURSELVES TO THE CORE ISSUE IN THIS APPEAL. THE RELEVANT PROVISIONS ARE AS FOLLOWS: SEC.36 (1) - THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN S. 28 - (VII)SUBJECT TO THE PROVISIONS OF SUB - S. (2), THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN O FF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR: PROVIDED THAT IN THE CASE OF AN ASSESSEE TO WHICH CL. (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO ANY SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHICH S UCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE; (VIIA)(B) IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY - (A) [NOT RELEVANT FOR OUR PURPOSES] (B) A BANK, BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA, AN AMOUNT NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI - A); 6 . ON A CAREFUL ANALYSIS OF THESE PROVISIONS, IT IS IMMED IATELY CLEAR THAT THE DEDUCTION S. 36(1) (VII), SO FAR AS A FOREIGN BANK IS CONCERNED, IS ONLY SUPPLEMENTAL IN NATURE INASMUCH AS IT COMES TO THE PLAY ONLY WHEN, AND IS ADMISSIBLE TO THE EXTENT, THE PROVISION FOR BAD AND DOUBTFUL DEBTS ALLOWED UNDER S. 36( 1)(VIIA)(B) FALLS SHORT OF THE ACTUAL BAD DEBTS WRITTEN OFF AS IRRECOVERABLE. LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, CONTENDS THAT THE EXPRESSION USED IN SUB - S. 36(1)(VII) BEING 'THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALAN CE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE', IT IS NOT MATERIAL AS TO WHAT WAS THE ACTUAL DEDUCTION UNDER S. 36(1)(VIIA) ALLOWED BY THE REVENUE, BUT AS LONG AS THE BAD DEBT IS LESS THAN THE TOTAL CREDIT BALANCE IN THE PRO VISION ACCOUNT, DEDUCTION UNDER S. 36(1)(VII) CANNOT BE ALLOWED IN RESPECT OF THE SAME. THIS OBJECTION, IN OUR CONSIDERED VIEW, IS FALLACIOUS INASMUCH AS THE REFERENCE IS FOR 'CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER TH AT CI. [36(1)(VIIA)J', AND, THEREFORE, ONLY SUCH PROVISION CAN BE TAKEN INTO ACCOUNT AS IS ADMISSIBLE UNDER S. 36(1)(VIIA). CLAUSES (VII) AND (VIIA) ARE TWO INDEPENDENT CLAUSES OF S. 36(1) AND AS PER THE SCHEME OF THE ACT, IN OUR CONSIDERED VIEW, THE DEDUC TION UNDER S. 36(1)(VII) IS SUPPLEMENTAL IN NATURE AND IT, THEREFORE, COMES TO THE PLAY TO THE EXTENT DEDUCTION ALREADY ALLOWED UNDER S. 36(1)(VIIA) FALLS SHORT OF THE ACTUAL BAD DEBTS. IT IS, THEREFORE, AT THE FIRST SIGHT QUITE LOGICAL TO ASSERT THAT DEDU CTION UNDER S. 36(1)(VII) SHOULD ONLY BE ALLOWED TO THE EXTENT ACTUAL BAD DEBTS UNRECOVERABLE AND WRITTEN OFF FALL SHORT OF DEDUCTIONS ALLOWABLE UNDER S. 36(1)(VIIA)(B) BUT THEN THERE HAS TO BE A MECHANISM TO ENABLE SUCH A COMPUTATION. THE DEDUCTION UNDER S. 36(L) (VIIA)(B) IS IN THE NATURE OF ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 23 AN AD HOC DEDUCTION AND OBVIOUSLY WITHOUT ANY REGARD TO THE ACTUAL LOSS SUFFERED BY THE ASSESSEE - BANK ON ACCOUNT OF BAD DEBTS. AS THIS DEDUCTION IS IN THE NATURE OF A TAXABLE BUSINESS INCOME BASED DEDUCTION ', THIS DE DUCTION CAN ONLY BE QUANTIFIED AFTER COMPUTING THE TAXABLE BUSINESS INCOME OF THE ASSESSEE, THOUGH BEFORE MAKING ANY DEDUCTION UNDER S. 36(1)(VIIA)(B) ITSELF.THIS PROCESS OF DETERMINING THE TAXABLE BUSINESS PROFITS NECESSARILY TAKES INTO ACCOUNT ALL OTHER DEDUCTIONS UNDER S. 36, INCLUDING, INTER ALIA, DEDUCTION ADMISSIBLE UNDER S. 36(1) (VII). IN OTHER WORDS, DEDUCTION UNDER S. 36(1)(VII) IS REQUIRED TO BE COMPUTED AND ALLOWED BEFORE COMPUTATION OF DEDUCTION OF S. 36(1)(VIIA). CONSIDERING THE ABOVE DISCUSS ION,W E ARE OF THE OPINION THAT THE FAA HAD RIGHTLY INCLUDED TOTAL PROVISION FOR BAD AND DOUBTFUL DEBTS WHILE CLAIMING THE PROVISION FOR DOUBTFUL DEBTS. IN OUR OPINION THE ORDER DOES NOT SUFFER FROM ANY LEGAL INFIR MITY. THEREFORE, CONFIRMING HIS ORDER GROUND NO.1 FOR THE AYS 2005 - 06 AND 2006 - 07 ARE DECIDED AGAINST THE AO. 1 3 . NEXT GROUND OF APPEAL IS ABOUT DELETION OF ADDITION ON ACCOUNT OF BAD DEBTS A MOUNTING TO RS.15.76 CR ORES U/S. 36(1)(VII)(A) OF THE ACT. D URING THE ASSESSMENT PROCEEDING, THE AO HELD THAT BAD DENTS TO THE EXTENT OF RECOVERIES SHOULD N OT BE ALLOWED, THAT THE ASSESSEE WAS AWARE OF SUCH RECOVERIES AT THE TIME OF FINALI S ATION OF ACCOUNTS AND FILING OF THE RETURN. 1 3 .1 IN THE APPELLATE PROCEEDINGS THE FAA HELD THAT THE ASSESSEE HAD WRITTEN BAD D EBTS THAT THE CONDITIONS STIPULATED U/S. 36(2) WERE COMPLIED . 1 3 .2 BEFORE US, THE DR R ELIED UPON THE ORDER OF THE AO. AR CONTENDED THAT BAD DEBTS WERE CLAIMED AS PER THE PROV ISION OF S.36(1)(VII) R.W.S. 36(2) OF THE ACT, THAT DEBTS WERE WRITTEN OFF IN THE ACC OUNT BY CREDITING TO THE PARTYS ACCOUNT AND DEBITED IN THE P&L A/C., THAT ALL THE CONDITIONS LAID DOWN U/S.36(1)(VII) WERE FULFILLED, T HAT RECOVERIES OF THE SUBSEQUENT Y EA R WERE CREDITED TO P&L ACCOUNT AND OFFER ED FOR TAXA TIO N IN ASSESSMENT YEAR, THAT AO C OU LD NOT GO INTO RECOVERABILITY OF THE DEBT, THE ASSESSEE HAD NOT TO PROVE WHAT STEPS WERE TAKEN BY IT TO RECOVER THE AM OUN T . REF E RE NCE WAS MADE TO THE CASE OF TRF LTD. (323 ITR 397) DELIVERED BY THE HON'BLE SUPREME COURT . IT WAS ALSO ARGUED THAT THE T RIBUNAL , WHILE DE C IDING T HE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 20 04 - 5 HAD DECIDED THE ISSUE IN F AVOUR OF THE ASSESSEE . 1 3 . 3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE BEFORE US. WE FIND THAT WHILE ADJUDICATING THE AP PEAL FOR 2004 - 05 (SUPRA),THE TRIBUNAL HAD DECIDED THE ISSUE OF BAD DEBTS AS UNDER : - 6 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. WE FIND THAT THE VERY DECISION OF THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF OMAN INTERNATIONAL BANK SAOG (SUPRA) WHICH IS RELIED UPON BY THE ASSESSEE AND BY THE LEARNED CIT(A) HAS SINCE BEEN APPROVED BY THE HON'BLE BOMBAY HIGH COURT REPORTED IN (2009) 313 ITR 128 (BORN.) AND IN THE CASE OF STAR (BOMBAY) PVT. LTD. (UNREPORTED). WE HAVE ALSO NOTED THAT THERE IS NO DISPUTE THAT THE PROVISIONS OF BAD DEBT HAS BEEN MADE IN ACCORDANCE WITH THE BINDING GUIDELINES OF RESERVE BANK OF INDIA AND, THEREFORE, IT CANNOT BE S AID THAT IT LACKED BONAFIDES. IN THIS VIEW OF THE MATTER, AND RESPECTFULLY FOLLOWING THE DECISIONS OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF OMAN INTERNATIONAL BANK SAOG (SUPRA) AND STAR (BOMBAY) P. LTD. (SUPRA), WE UPHOLD THE ORDER OF THE LEARNED CIT (A) AND DECLINE TO INTERFERE IN THE MATTER. RESPECTFULLY,FOLLOWING THE ORDER OF THE TRIBUNAL FOR THE EARLIER YEAR AND CONSIDERING THE DECISION OF HON'BLE SUPREME COURT DELIVERED IN THE CASE OF TRF LTD. (SUPRA), GROUND NO.2 RAISED BY THE AO FOR ALL THE THR EE AY.S.STANDS DISMISSED. ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 24 1 4 . GROUND NO.4 PERTAINS TO DELETION OF ADDITION MADE ON ACCOUNT OF PROPORTIONATE COST OF SWAP DEALS (GROUND OF APPEAL NO. 4 OF AY.2005 - 06 AND 2006 - 07 AND G.2 OF AY . 08 - 09). DURING THE ASSESSMENT PROCEEDING FOR THE AY 20 05 - 06, THE AO HELD THAT PROPORTIONATE EXPENDITURE (PREMIUMS) OF SWAP DEALS MATURING BEYOND THE BALANCE SHEET DATE WERE NOT ALLOWABLE.THE FAA,IN THE APPELLATE PROCEEDING FOLLOWING THE ORDER FOR THE AY.2004 - 05 ALLOWED THE APPEAL FILED BY THE ASSESSEE. 1 4 .1 BEFORE US,DR SUPPORTED THE ORDER OF ASSESSING OFFICER. THE AR ARGUED THAT THE PREMIUM PAID ON SWAP DEALS WAS TREATED AS PERIOD COST,THAT PREMIUM PERTAINING TO THE PERIOD AFTER BALANCE SHEET WAS TREATED AS PRE - PAID BY THE ASSESSEE, THAT THE COST INCURRED WAS CLAIMED A S DEDUCTION, THAT FAA IN THE ASSESSMENT YEAR 2004 - 05 HAD DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, THAT THE AO DID NOT FILE APPEAL AGAINST THE SAID ORDER, THAT THE TRIBUNAL HAD IN THE ASSESSMENT YEAR 2002 - 03 REMITTED THE MATTER TO AO FOR VERIFICATION. 1 4 .2 WE HAVE CONSIDERED THE MATERIAL AVAILABLE WITH US. WE FIND THAT THE TRIBUNAL IN THE ASSESSMENT YEAR 2002 - 03, IN ASSESSEES OWN CASE HAS HELD AS UNDER : - 6. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES ON THIS ISSUE AND ALSO PERUSED THE RELEVANT MAT ERIAL AVAILABLE ON RECORD. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THERE IS NO DISPUTE THAT ONLY THE PROPORTIONATE SWAP COST RELATABLE TO THE PERIOD FALLING IN THE YEAR UNDER CONSIDERATION IS ALLOWABLE TO THE ASSESSEE AS HELD BY THE A.O. HE HAS SUBMITTED THAT THE AMOUNT OF SWAP COST CLAIMED BY THE ASSESSEE AT RS. 2,04,28,235/ - WAS ACTUALLY SUCH PROPORTIONATE COST AS WORKED OUT BY THE ASSESSEE WHICH THE A.O. MISTOOK AS THE TOTAL COST. HE HAS SUBMITTED THAT THE LD. CIT(A), HOWEVER, FOUND THE SAME TO BE ONLY THE PROPORTIONATE COST ON THE BASIS OF THE WORKING FURNISHED BY THE ASSESSEE AND ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE ON THIS ISSUE. THE ID. D.R. HAS SUBMITTED THAT THIS WORKING FURNISHED BY THE ASSESSEE BEFORE THE LD. CIT(A) WAS ACCEPT ED BY THE LATER WITHOUT GIVING ANY OPPORTUNITY TO THE A.O. TO VERIFY THE SAME. THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY SUBMITTED THAT THE ASSESSEE HAS NO OBJECTION IF THE MATTER IS REMANDED TO THE A.O. FOR THE PURPOSE OF THIS VERIFICATION. ACCORDINGLY, WE SET ASIDE THE IMPUGNED ORDER OF THE ID. CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE A.O. FOR DECIDING THE SAME AFRESH AFTER VERIFYING THE WORKING OF PROPORTIONATE COST MADE BY THE ASSESSEE. GROUND NO. 2 OF REVENUE'S APPEAL IS ACCORDI NGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSE. RESPECTFULLY, FOLLOWING THE ABOVE REFERRED ORDER OF THE TRIBUNAL WE RESTORE THE MATTER TO THE FILE O F AO FOR VERIFICATION PURPOSES. THE GROUND IS ALLOWED IN FAVOUR OF AO IN PART. 1 5 . THE LAST COMMON GROUND (G ROUND NO.1 FOR AY 2007 - 08 AND AY 2008 - 09) IS ABOUT ALLOWANCE OF INTEREST ACCRUED ON SECURITIES BUT NOT FALLING DUE FOR PAYMENT. DURING THE ASSESSMENT PROCEEDINGS , FOR THE AY. 2007 - 08, THE AO HELD THAT INTEREST ACCRUED BUT NOT DUE WAS TAXABLE AS PER ACCRUA L METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. IN THE APPELLATE PROCEEDINGS THE FAA DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE DELIVERED FOR AY 2000 - 01. 1 5 .1 BEFORE US,R EPRESENTATIVES OF BO TH THE SIDES AGREED THAT THE ISSUE IS DIRECTLY LINKED WITH THE GROUNDS RAISED BY THE ASSESSEE IN THE EARLIER YEARS. WE FIND THAT WHILE DECIDING THE APPEAL , FILED BY THE ASSESSEE FOR AY .S. 2005 - 06 AND 20 06 - 07, WE HAVE DECIDED THE ISSUE IN ITS FAVOUR , IN THE EARLIER PART OF OUR ORDER.THEREFORE, UPHOLDING THE ORDER OF THE FAA FOR THESE TWO AY. S ., WE DECIDE THE COMMON GROUND OF APPEAL AGAINST THE AO. ITA /MUM/8318/2010 - (AY 05 - 06) : 16 . NOW, WE WOULD TAKE THE GROUNDS OF APPEAL FOR ONLY ONE PARTICULAR ASSESSMENT YEAR . FIRST AMONG THEM IS DELETION ON ADDITION ON ACCOUNT OF GAIN ON FORWARD EXCHANGE CONTRACTS (GR.NO.3). ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 25 WE FIND THAT WHILE DECIDING THE APPEAL FILED BY THE ASSESSEE ABOUT FORWARD EXCHANGE CONTRACT WE HAVE FOLLOWED ORDER OF THE TRIBUNAL DELIVERED IN CASE OF AS SESSEE FOR THE AY. 2001 - 02 WHEREIN THE IDENTICAL ISSUE WAS DECIDED. RESPECTFULLY , FOLLOWING THE SAME GROUND NO.3 RAISED BY AO, FOR THE YEAR UNDER APPEAL IS DECIDED AGAINST HIM. 1 7 . ALLOWANCE OF SOFTWARE EXPENSES AS REVENUE EXPENDITURE IS THE SUBJECT MATTER O F FIFTH GROUND OF APPEAL FOR THE AY. 2005 - 06.DURING THE ASSESSMENT PROCEEDING , THE AO HELD THAT COMPUTER SOFTWARE WAS CAPITAL EXPENDITURE, THAT SAME HAD TO BE DISALLOWED AND DEPRECIATION HAD TO BE ALLOWED AS PER RULES. THE FAA DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND HELD THAT THOSE WERE RECURRING USER LICENSE FEE PAID FOR USING THE SOFTWARE DURING THE YEAR AND DID NOT GIVE ANY ENDURING BENEFIT TO THE ASSESSEE. BEFORE US THE DR SUPPORTED THE ORDER OF THE AO. THE AR STATED THAT THE IMPUGNED SOFTWARE EX PENDITURE WAS BASICALLY LICENSE FEE PAID FOR USE OF SOFTWARE FOR A SPECIFIED PERIOD OR FOR DURING THE YEAR UNDER CONSIDERATION, THAT THE OWNERSHIP OF THE SOFTWARE WAS WITH THE VENDOR AND NOT THE ASSESSEE, THAT IT HAD ONLY RIGHT TO USE THE SOFTWARE. HE RELI ED UPON THE ORDER OF AMWAY ENTERPRISES (SUPRA). 17 .1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US WE FIND THAT GROUND NO.4 FOR 2006 - 07 AND GROUND NO.3 FOR 2007 - 08 AND 2008 - 09 OF THE ASSESSEES A PPEAL DEAL WITH THE SAME ISSUE. WE HAV E RESTORED BACK THE MATTER TO THE FILE OF AO FOR FRESH ADJUDICATION WHILE DECIDING IDENTICAL ISSUE IN EARLIER PARAGRAPHS OF THE ORDER. FOLLOWING THE SAME, GROUND NO.4 IS DECIDED IN FAVOUR OF THE AO, IN PART. 1 8 . LAST GROUND OF APPEAL FOR THE ASSESSMENT YEA R 2006 - 07 IS ABOUT EXEMPTION ALLOWED U/S. 10(38) IN RESPECT OF SALE OF SHARES BEING LONG TERM CAPITAL GAIN .WHILE DECIDING THE COMMON GROUNDS OF APPEAL , RAISED BY THE ASSESSEE , WE HAVE ALLOWED THE APPEAL FILED BY IT IN THE EARLIER PART OF OUR ORDER FOR THE A SSESSMENT YEARS 2007 - 08, 2008 - 09 AND 2009 - 10. FOLLOWING THE SAME LAST GROUND OF APPEAL , RAISED BY THE AO IS DECIDED AGAINST HIM. AS A RESULT, APPEALS FILED BY THE ASSESSEE AND AO.S.STAND PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH JUNE,2015. 17 TH , 2015 SD/ - SD/ - ( /I P BANSAL) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / M UMBAI, /DATE: 17 .06.2015 . . . JV. SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ ITA/553/MUM/2011 &OTHERS - AY.02 - 03&OTHERS INDUSIND 26 //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.