DCIT (OSD) 8(2), MUMBAI V. HOTEL LEELAVENTURES LTD, MUMBAI

ITA 6170/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3240 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2016
• Appeal Filed By: Department
• Bench Allotted: H
• Next Hearing Date: 28-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 07-10-2014
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 115JB; 37(1); 10B; 32; 12; 154; 11; 15; 139

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL H , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN , JM ./ ITA NO. 6170 / MUM/20 1 4 ( / ASSESSMENT YEAR : 20 0 9 - 20 10 ) DCIT(OSD) - 8(2), MUMBAI - 20 VS. M/S HOTEL LEELAVENTURES LTD., THE LEELA KEMPINSKI, SAHAR ROAD, ANDHERI(EAST), MUMBAI - 400059 ./ ./ PAN/GIR NO. : A A AC H 3167 J ( / APPELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SH RI ABHISHEK SHARMA /AS SESSEE BY : SHRI PRAKASH JOTWANI / DATE OF HEARING : 28 /0 7 /2016 / DATE OF PRONOUNCEMENT / /201 6 / O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED B Y THE REVENUE AGAINST THE ORDER OF CIT(A), MUMBAI, FOR THE ASSESSMENT YEAR 20 0 9 - 2010 IN THE MATTER OF ORDER P ASS ED U/S. 15 4 , THEREBY ENHANCING THE BOOK PROFIT COMPUTED U/S.115JB OF I.T. ACT , WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE REVENUE : - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN UPHOLDING THE CLAIM OF THE ASSESSEE THAT THE AMORTISED AMOUNT OF EXCHANGE DIFFERENCES ARISING OUT OF FOREIGN CURRENCY BORROWINGS ARE NOT CONTINGENT LIABILITY AND SHOULD NOT FORM PART OF COMPUTATION OF BOOK PROFIT FOR THE PURPOSES OF S.115JB OF THE I.T.ACT, 1961 WITHOUT APPRECIATING THAT LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS CONTINGENT IN NATURE AND HENCE CANNOT BE TAKEN INTO ACCOUNT WHILE COMPUTING BOOK PR OFITS AS PER COMPANIES ACT. ITA NO. 6170 /1 4 2 2. BY PASSING ORDER U/S.15 4 THE AO ENHANCED BOOK PROFIT COMPUTED U/S. 115JB BY MAKING A DDITION ON ACCOUNT OF AMORTISED AMOUNT OF EXCHANGE DIFFERENCES ARISING OUT OF FOREIGN CURRENCY BORROWINGS. BY THE IMPUGNED ORDER, THE CIT(A ) DELETED THE SAME AFTER OBSERVING AS UNDER : - 1.3.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND CONTENTION OF THE LD. AR OF THE APPELLANT AND ALSO CAREFULLY GONE THROUGH THE FACTS AND EXPLANATION GIVEN BY THE LD. AR OF THE APPELLANT AS WELL AS THE LD. AO. THE LD. AO HAS MADE THE ADDITION TO THE BOOK PROFIT DETERMINED UNDER SECTION 115JB OF THE ACT, IN ORDER TO APPRECIATE THE NATURE OF THE ADDITION MADE IT IS WORTHWH ILE TO EXTRACT THE PROVISIONS OF SECTION 115JB OF THE ACT WHICH READS AS UNDER: - 115JB . (1) NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PRECISION OF THIS ACT, WHERE IN THE CASE OF AN ASSESSEE, BEING A COMPANY, THE INCOME - TAX, PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IN RESPECT OF ANY PREVIOUS YEAR RELEVANT TO THE ASSESSME NT YEAR COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2001, IS LESS THAN SEVEN AND ONE - HALF PER CENT OF ITS BOOK PROFIT, [SUCH BOOK PROFIT SHALL BE DEEMED TO BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE BY TH E ASSESSEE ON SUCH TOTAL INCOME SHALL BE T H E AMOUNT OF INCOME - TAX AT THE RATE OF SEVEN AND ONE - HALF PER CENT. (2) EVERY ASSESSEE, BEING A COMPANY, SHALL, FOR THE PURPOSES OF THIS SECTION, PRE P ARE ITS PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREV IOUS YEAR IN ACCORDANCE WITH THE PROVISIONS OF P ARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, 1956 (1 OF 1956): PROVIDED THAT WHILE PREPARING THE ANNUAL ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT, - (I) THE ACCOUNTING POLICIES; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING SUCH ACCOUN TS INCLUDING PROFIT AND LOSS ACCOUNTS, (III) THE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SHALL BE THE SAME AS HAVE BEEN ADOPTED FOR THE PURPOSE OF PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT AND LAID BEFORE THE COMPANY AT ITS ANNUAL GENERAL MEETING IN ACCORDANCE WITH THE PROVISIONS OF SECTION 210 OF THE COMPANIES ACT, 1956 (1 OF1956): PROVIDED FURTHER THAT WHERE THE COMPANY HAS ADOPTED OR ADOPTS THE FINANCIAL YEAR UNDER THE COMPANIES ACT, 1956 (1 OF 1956), WHICH IS DIF FERENT FROM THE PREVIOUS YEAR UNDER THIS ACT, - ITA NO. 6170 /1 4 3 (I) THE ACCOUNTING POLICIES; (II) THE ACCOUNTING STANDARDS ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT; (III) T HE METHOD AND RATES ADOPTED FOR CALCULATING THE DEPRECIATION, SH ALL CORRESPOND TO THE ACCOUNTING POLICIES, ACCOUNTING STANDARDS AND THE ACCOUNTING STANDARDS AND THE METHOD AND RATES FOR CALCULATING THE DEPRECIATION WHICH HAVE BEEN ADOPTED FOR PREPARING SUCH ACCOUNTS INCLUDING PROFIT AND LOSS ACCOUNT FOR SUCH FINANCIAL YEAR OR PART OF SUCH FINANCIAL YEAR FALLING WITHIN THE RELEVANT PREVIOUS YEAR. EXPLANATION. - FOR THE PURPOSES OF THIS SECTION, 'BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR PREPARED UNDER SUB - S ECTION (2), AS INCREASED BY - (A) THE AMOUNT OF INCOME - TAX PAID OR PAYABLE, AND THE PROVISION THEREFORE; OR (B) THE AMOUNTS CARRIED TO ANY RESERVES, BY WHATEVER NAME CALLED L[, OTHER THAN A RESERVE SPECIFIED UNDER SECTION 33ACL; OR (C) THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS MADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES; OR (D) THE AMOUNT BY WAY OF PROVISION FOR LOSSES OF SUBSIDIAR Y COMPANIES; OR (E) THE AMOUNT OR AMOUNTS OF DIVIDENDS PAID OR PROPOSED; OR (F ) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH SECTION 10 [(OTHER THAN THE PROVISIONS CONT AINED IN CLAUSE (23G) THEREOF] OR, SECTION 10 A OR SECTION 10B OR SECTION 11 OR SECTION 12 APPLY, IF ANY AMOUNT REFERRED TO IN CLAUSES (A) TO (J) IS DEBI TED TO THE PROFIT AND LOSS ACCOUNT, AND AS REDUCED BY - [(I) THE AMOUNT WITHDRAWN FROM ANY RESERVE OR PROVISION (EXCLUDING A RESERVE CREATED BEFORE THE 1ST DAY OF APRIL, 1997 OTHERWISE THAN BY WAY OF A DEBIT TO THE PROFIT AND LOSS ACCOUNT), IF TINY SUCH A MOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT: PROVIDED THAT WHERE THIS SECTION IS APPLICABLE TO AN ASSESSEE IN ANY PREVIOUS YEAR, THE AMOUNT WITHDRAWN FROM RESERVES CREATED OR PROVISIONS MADE IN A PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENC ING ON OR AFTER THE 1ST D AY OF APRIL, 1997 SHALL NOT BE REDUCED FROM THE BOOK PROFIT UNLESS THE BOOK PROFIT OF S UCH YEAR HAS BEEN INCREASED BY THOSE RESERVES OR PROVISIONS (OUT OF WHICH THE ITA NO. 6170 /1 4 4 SAID THIS EXPLANATION OR EXPLANATION BELOW THE SECOND PROVISO TO S ECTION 115JA, AS THE CASE MAY BE; OR] (II) THE AMOUNT OF INCOME TO WHICH ANY OF THE PROVISIONS OF SECTION 10 [(OTHER THAN THE PROVISIONS CONTAINED IN CLAUSE (23G) THEREO F )] OR SECTION 10A OR SECTION 10B OR SECTION 11 OR SECTION 12 APPLY, IF ANY SUCH AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT OR [(III) THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION, WHICHEVER IS LESS AS PER BOOKS OF ACCOUNT. EXPLANATION. - FOR THE PURPOSES OF THIS CLAUSE, - (A) THE LOSS SHALL NOT INCLUDE DEPRECIA TION; (B) THE PROVISIONS OF THIS CLAUSE SHALL NOT APPLY IF THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION IS NIL; OR] (IV) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC, COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OF SUB - SECTION (3) OR SUB - SECTION (3A), AS THE CASE MAY BE, OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR (V) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHE COMPUTED UNDER SUB - SECTION (3) OR SUB - SECTI ON (3A), AS THE CASE MAY BE, OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR (VI) THE AMOUNT OF PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHF COMPUTED UNDER SUB - SECTION (3) OF THAT SECTION, AND SUBJECT TO THE CONDITIONS SPECIFIED IN THAT SECTION; OR (VII) THE AMOUNT OF PROFITS OF SICK INDUSTRIAL COMPANY FOR THE ASSESSMENT YEAR COMMENCING ON AND FROM THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE SAID COMPANY HAS BECOME A SICK INDUSTRIAL COMPANY UNDER SUB - SECTION (1) OF SECTION 17 OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (1 OF 1986) AND ENDING WITH THE ASSESSMENT YEAR DURING WHICH THE ENTIRE NET WORTH OF SUCH COMPANY BECOMES EQUAL TO OR EXCEEDS THE ACCUMULATED LOSSES. EXPLANATION. - FOR THE PURPOSES OF THIS CLAUSE, 'NET WORTH' SHALL HAVE MEANING ASSIGNED TO IT IN CLAUSE (GA) OF SUB - SECTION (1) OF SECTION 3 OF THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 (1OFI986). (3) NOTHING CONTAINED IN SUB - SECTION (1) SHALL AFFE CT THE DETERMINATION OF THE AMOUNTS IN RELATION TO THE RELEVANT PREVIOUS YEAR TO BE CARRIED FORWARD TO THE SUBSEQUENT YEAR OR YEARS UNDER THE PROVISIONS OF SUB - SECTION (2) OF SECTION 32 OR SUB - SECTION (3) OF SECTION 32A OR CLAUSE (II) OF SUB - SECTION (1) OF SECTION 72 OR SECTION 73 OR S ECTION 74 OR SUB - SECTION (3) OF SECTION 74A. (4) EVEN COMPANY LA W WHICH THIS SECTION APPLIES, SHALL FURNISH A REPORT IN THE PRESCRIBED FORM FROM AN ACCOUNTANT AS DEFINED IN THE ITA NO. 6170 /1 4 5 EXPLANATION BELOW SUB-SECTION (2) OF SECTION 28 8, CERTIFYING THAT THE BOOK PROFIT HAS BEEN COMPUTED IN ACCORDANCE WITH THE PROVI SIONS OF THIS SECTION ALONG WITH THE RETURN OF INCOME FILED UNDER SUB - SEC TION (1) OF SECTION 139 OR ALONG WITH THE RETURN OF INCOME FURNISHED IN RESPONSE TO A NOTICE UNDER CLA USE (I) OF SUB - SECTION (1) OF SECTION 142. (5) SAVE AS OTHERWISE PROVIDED IN THIS SECTION, ALL OTHER PROVISIONS OF THIS ACT SHALL APPLY TO EVERY ASSESSEE, BEING A COMPANY, MENTIONED IN THIS SECTION.] [(6) THE PROVISIONS OF THIS SECTION SHALL NOT APPLY TO THE INCOME ACCRUED OR ARISING ON OR AFTER THE 1ST DAY OF APRIL, 2005 FROM ANY BUSINESS CARRIED ON, OR SERVICES RENDERED, BY AN ENTREPRENEUR OR A DEVELOPER, IN A UNIT OR SPECIAL ECONOMIC ZONE, AS THE CASE MAY BE.] 1.3.2 THE HON'BLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT (2002) 273 (SC), HELD THAT T HE ASSESSING OFFICER , WHILE COMPUTING THE BOOK PROFITS OF A COMPANY UNDER SECTION 115J OF THE INCOME TAX ACT, 1961, HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF ACCOUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AS HAVING BEEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. THE ASSESSING OFFICER, THEREAF T ER, HAS THE LIMITED POWER OF MAKING INCREASES AND REDUCTIONS AS PROVIDED FOR IN THE EXPLANATION TO SECTION 115J. THE ASSESSING OFFICER DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFITS SHOWN, IN THE PROFIT AND LOSS ACCOUNT EXCEPT TO THE EXTENT PROVIDED IN THE EXPLANATION. THE USE OF WORDS IN ACCORDANCE WITH THE PROVISIONS OF PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT IN SECTION 115J WAS MADE FOR THE LIMITED PURPOSE OF EMPOWERING THE ASSESSING OFFICER TO RELY UPON THE AUTHENTIC STATEMENT OF ACCOUNTS OF THE COMPANY. WHILE SO LOOKING INTO THE ACCOUNTS OF THE COMPANY, THE ASSESSING OFFICER HAS TO ACCEP T THE AUTHENTICITY OF THE ACCOUNTS WITH REFERENCE TO THE PROVISIONS OF THE COMPANIES ACT, WHICH OBLIGATE THE COMPANY TO MAINTAIN ITS ACCOUNTS IN A MA NN ER PROVIDED BY THAT ACT AND THE SAME TO BE SCRUTINISED AND CE RTIFIED BY STATUTORY AUDITORS AN D APPROVED B Y THE COMPANY IN GENERAL MEETING' AND THEREAFTER TO BE FILED BEFORE THE REGISTRAR OF COMPANIES WHO HAS A STATUTORY OBLIGATION ALSO TO EXAMINE AND BE SATISFIED THAT THE ACCOUNTS OF THE COMPANY ARE MAINTAINED IN ACCORDANCE WITH THE REQUIREMENTS OF THE COMPAN IES ACT. SUB - SECTION (LA) OF SECTION 115J DOES NOT EMPOWER THE ASSESSING OFFICER TO EMBARK UPON A FRESH ENQUIRY IN REGARD TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT OF THE COMPANY. 1.3.3 THE HON'BLE SUPREME COURT IN THE CASE OF C I T V. HCL COMNET SYSTEMS AND SERVICES LTD. REPORTED IN (2008) 305 ITR 409, RENDERED IN THE CONTEXT OF SECTION 115JA (WHOSE SUB - SECTION (4) IS AN ALOGOUS TO SUB - SECTION (5) OF SECTION 115JB), WHEREIN THE VIEWS EXPRESSED IN THE CASE ' OF APOLLO TYRES LTD. (2002) 255 ITR 273 WERE EXTE NSIVELY QUOTED, RELIED ON AND REITERATED. FROM THE ABOVE ITA NO. 6170 /1 4 6 APEX COURT DECISIONS, THE COURT LAID DOWN THE FOLLOWING PRINCIPLES WITH REGARD TO SECTION 115JB OF THE ACT: (I) THE ASSESSING OFFICER HAS TO ACCEPT THE AUTHENTICITY OF THE ACCOUNTS MAINTAINED BY TH E COMPANY IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, WHICH ARE CERTIFIED BY THE AUDITORS AND LAID BEFORE THE COMPANY AT THE ANNUAL GENERAL MEETING. (II) THE ASSESSING OFFICER CANNOT GO BEYOND THE NET PROFIT SHOWN IN THE PROFIT AND LOSS ACCOUNT PREPARED IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT, EXCEPT FOR THE ADJUSTMENTS PERMISSIBLE UNDER THE EXPLANATION . (I) THE ADJUSTMENTS REQUIRED TO BE MADE TO THE NET PROFIT AS PER SECTIO N 349 OF THE COMPANIES ACT ARE QUITE DIFFERENT FROM THE ADJUSTMENTS REQUIRED TO BE MADE AS PER THE EXPLANATION.' 1.3.4 PROVISIONS OF SECTION 11SJB ARE SELF - CONTAINED CODE AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF AJANTA PHARMA LTD. V. CIT - 9, MU MBAI (2010) 327 ITR 305(SC) WHILE LAYING THIS PROPOSITION, THE HON'BLE SUPREME COURT OBSERVED THAT IN RECENT TIMES, THE NUMBER OF ZERO - TAX COMPANIES AND COMPANIES PAYING MARGINAL TAX HAS GROWN, HENCE, VIDE THE FINANCE (NO.2) ACT, 1996, LEVY OF MINIMUM TAX ON COMPANIES HAVING 'BOOK PROFITS' STOOD INTRODUCED. THE - SCHEME ENVISAGED PAYMENT OF MINIMUM TAX BY DEEMING 30% OF THE BOOK PROFITS COMPUTED UNDER THE COMPANIES ACT, AS TAXABLE INCOME, IN A CASE WHERE THE TOTAL INCOME AS COMPUTED UNDER THE PROVISIONS OF TH E 1961 ACT, IS LESS THAN 30% OF THE BOOK PROFIT. THE WORD 'BOOK PROFIT' HAS BEEN DEFINED IN SECTION 115JA(2) READ WITH THE EXPLANATION THERETO TO MEAN THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT, AS INCREASED BY THE AMOUNT(S) MENTIONED IN CLAUSE S (A) TO (), AND AS REDUCED BY AMOUNT(S) COVERED BY CLAUSES (I) TO (IX) OF THE EXPLANATION. THESE MAY BE CALLED FOR THE SAKE OF BREVITY AS 'UPWARD AND DOWNWARD ADJUSTMENTS'. FROM' THE ABOVE IT IS CLEAR THAT SECTION 115JA IS A SELF - CONTAINED CODE AND WILL APPLY NOTWITHSTANDING ANY PROVISIONS IN THE 1961 ACT. IT WAS FURTHER HELD IF THE DICHOTOMY BETWEEN 'ELIGIBILITY' OF PROFIT AND 'DEDUCTIBILITY' OF PROFIT IS NOT KEPT IN MIND THEN SECTION 115JB WILL CEASE TO BE A SELF - CONTAINED CODE. 1.3.5 IN THE CASE OF R AIN COMMODITIES LTD. V. DY. CIT (2010) 131 TTJ 0514 (HYD. TRIB) 551, THE HYDERABAD SPECIAL BENCH OF TRIBUNAL HAS HELD THAT IN THE FOLLOWING TWO CONDITIONS, THE ASSESSING OFFICER CAN REWRITE THE PROFIT AND LOSS ACCOUNT, I.E., TO SAY THAT THE ASSESSING OFFIC ER SHOULD RECALCULATE THE NET PROFIT AND THEN FOLLOW THE ADJUSTMENTS OF THE MINIMUM ALTERNATE TAX AS USUAL: (1) IF IT IS DISCOVERED THAT THE PROFIT AND LOSS ACCOUNT IS NOT DRAWN UP IN ACCORDANCE - WITH PART IL AND PART III OF SCHEDULE VI TO THE COMPANIES ACT . HOWEVER, THE ASSESSING OFFICER CANNOT DISTURB THE NET PROFIT AS SHOWN BY THE ASSESSEE WHERE THERE ARE NO SUCH ALLEGATIONS, FRAUD OR MISREPRESENTATION BUT ONLY A DIFFERENCE OF ITA NO. 6170 /1 4 7 OPINION AS TO WHETHER A PARTICULAR AMOUNT SHOULD BE PROPERLY SHOWN IN THE PROFI T AND LOSS ACCOUNT OR IN THE BALANCE - SHEET. (2) IF ACCOUNTING POLICIES, ACCOUNTING STANDARDS ARE NOT ADOPTED FOR PREPARING SUCH ACCOUNTS AND METHOD, RATES OF DEPRECIATION WHICH HAVE BEEN INCORRECTLY ADOPTED FOR PREPARATION OF THE PROFIT AND LOSS ACCOUNT LA ID BEFORE THE ANNUAL GENERAL MEETING. EXCEPT FOR THE ABOVE TWO CASES, THE ASSESSING OFFICER HAS NO POWER TO ALTER THE NET PROFIT SHOWN BY THE COMPANIES FOR THE P URPOSE OF COMPUTING THE BOOK PROFIT. THUS IT IS CLEAR THAT UNDER THE MINIMUM ALTERNATE TAX , TH E ASSESSING OFFICER SHOULD TAKE THE NET PROFIT AS COMPUTED BY THE ASSESSEE AND THEN MAKE THE ADJUSTMEN T UNDER S ECTI ON 115J B OF THE ACT. IT IS COMMON THAT SOME COMPANIES FOLLOW AN ACCOUNTIN G YEAR UNDER THE COMPANIES ACT, 1956, WHICH IS DIFFERENT FROM THE FIN ANCIAL YEAR UNDER INCOME TAX ACT, 1961. 1.3.6 THE LD. AO HAS MADE THE ADDITION OF THE PROVISION CREATED UNDER THE EXPLANATION TO SECTION 115JB CLAUSE C WHICH STATES THAT BOOK PROFIT BE INCREASED BY THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS MADE FOR M EETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES, THEREFORE THE QUESTION WHICH AROSE FOR CONSIDERATION IS THE AMOUNT IN QUESTION BE CALLED AS UNASCERTAINED LIABILITY. I FIND THAT THERE ARE TWO REQUIREMENTS AMONG OTHERS IN COL. NO. 17 OF TAX AUDIT REP ORT. IN THE COL. NO. 17(A), AN AUDITOR HAS TO REPORT EXPENDITURE OF CAPITAL NATURE, IN THE COL. 17(K) HE HAS TO REPORT PARTICULARS OF ANY LIABILITY CONTINGENT IN NATURE. IN THE PRESENT CASE THE AUDITOR IN COL. NO. 17(A) REPORTED 'AMORTIZATION OF FOREIGN CU RRENCY LOAN RS. 10,47,08,044/ - ' AS CAPITAL EXPENDITURE WHEREAS IN COL. NO. 17(K) 'PROVISION FOR DERIVATIVE LOSS OF RS. 30,00,000/ - ' AS CONTINGENT LIABILITY. THEREFORE WHAT WAS REPORTED AS CONTINGENT WAS RS. 30,00,000/- ONLY AND NOT RS. 10,47,08,044/ - . THE REFORE, LD. AO HAS ERRED IN STATING THAT SUM OF RS. 10,47,08,04/ - WAS CONTINGENT LIABILITY WHILE PASSING THE ORDER U/ S 154 OF INCOME TAX ACT. FURTHER, THE APPELLANT IS CONSISTENTLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND REINSTATEMENT OF LIABILITY WAS MADE IN ACCORDANCE TO AS - 11. FURTHER, VIDE ORDER U/ S.143(3) DT. 30/11/2011 WHERE LD. AO HAS TAKEN COGNISANCE OF REVISED COMPUTATION OF INCOME OFFERING RS. 10,47,08,044/ - INCURRED ON ACCOUNT OF CAPITAL EXPENDITURE ON, AMORTIZATION OF FOREIGN CURRENCY M ONETARY ITEM TRANSLATION DIFFERENCE FOR TAXATION. HAVING HELD THAT IT IS A CAPITAL EXPENDITURE, CAN THIS BE SEPARATELY SUBJECTED TO ADDITION ON ACCOUNT OF UNASCERTAINED LIABILITY UNDER THE PROVISIONS OF SECTION 1I5JB. UNDER THE CLAUSE (C) ONLY ADJUSTMENT T HAT CAN BE MADE IS OF THE AMOUNT OR AMOUNTS SET ASIDE TO PROVISIONS MADE FOR MEETING LIABILITIES, OTHER THAN ASCERTAINED LIABILITIES, THE PRESENT LIABILITY OF FOREIGN EXCHANGE FLUCTUATION ARE NOT HELD TO BE UNASCERTAINED OR CONTINGENT BY VARIOUS COURT AND THE LAW IS WELL SETTLED IN THIS REGARD BY THE HON'BLE SUPREME COURT IN SEVERAL CASES. THE APEX COURT IN BHARAT EARTH MOVER'S CASE (2000) 245 ITR 428 (SC), WHILE PRONOUNCING PRINCIPLES REGARDING DIFFERENCE BETWEEN ACCRUED AND CONTINGENT LIABILITIES, ENUNCIA TED AS UNDER: ITA NO. 6170 /1 4 8 IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE RATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY . IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IS IN THE PRAESENTI THOUGH IT WILL BE DI SCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. 1.3.7 SIMILARLY, THE BOMBAY HIGH COURT IN ECHJAY FORGING (P) LTD.S CASE (2001) 166 CTR (BOM) 100, W HERE THE A SSESSEE HAD MADE A PROVISION FOR GRATUITY ON THE BASIS OF ACTUARIAL VALUATION, HAD HELD IT TO BE ~ ASCERTAINED LIABILITY. DELHI HIGH COURT IN VINITEC CORPORATION (P) LTD. S CASE(2005) 278 ITR 337 (DEL) WHILE ANALYZING WHETHER PROVISION FOR FUTURE LIABILITY UNDER WARRANTY WAS A CONTINGENT OR ASCERTAINED LIABILITY, HAD OBSERVED AS FOLLOWS: 11 THE RATIO DECIDENDI OF THE ABOVE CASES IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. IT IS NOT DISPUTED THAT THE WARRANTY CLAUSE IS PART OF THE SALE DOCUMEN T AND IMPOSES A LIABILITY UPON THE ASSESSEE TO DISCHARGE ITS OBLIGATIONS UNDER THAT CLAUSE FOR THE PERIOD OF WARRANTY. IT IS A LIABILITY WHICH IS CAPABLE OF BEING CONSTRUED IN DEFINITE TERMS WHICH HAS ARISEN IN THE ACCOUNTING YEAR. MAY BE ITS ACTUAL QUANTI FICATION AND DISCHARGE IS DEFERRED TO A FUTURE DATE. ONCE AN ASSESSEE IS MAINTAINING HIS ACCOUNTS ON THE MERCANTILE SYSTEM, A LIABILITY ACCRUED, THOUGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERC IAL PRACTICE AND ACCOUNTANCY. 1.3.8 IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD VS. CIT (2009) 314 ITR 62(SC), THE HON'BLE SUPREME COURT OBSERVED THAT A PROVISION IS A LIABILITY WHI CH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLI GATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED LIABILITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SETTLEMENT 6F WHICH IS EXPECTED TO R ESULT IN AN OUTFLOW FROM THE ENTERPRISE OF RESOURCES EMBODYING ECONOMIC BENEFITS. A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT. THE OBLIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF R ESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXISTING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRISE THAT IS RECOGNIZED AS PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITION THERE MUST BE NOT ONLY PRESENT OBLIGA TION BUT ALSO THE PROBABILITY OF AN OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE ARE A NUMBER OF OBLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR ITA NO. 6170 /1 4 9 CONTRACTS) THE PROBABILITIES THAT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMINED BY CO NSIDERING THE SAID OBLIGATIONS AS A WHOLE. IN THE INSTANT CASE, THE LIABILITY IS ASCERTAINABLE AND 'NOT AND NO GREATER SCIENCE IS REQUIRED TO COMPUTE THAT, THE AMOUNT OF LOAN IS KNOWN SO IS THE PREVAILING RATE OF THE CURRENCY AS ON THE DATE OF CLOSING OF T HE BALANCE SHEET, A SIMPLE MULTIPLICATION WOULD REVEAL THE OUTSTANDING PAYABLE AT THE END OF THE FINANCIAL YEAR. THEREFORE, THIS OUTSTANDING LIABILITY CANNOT BE TERMED AS UNASCERTAINABLE IN THE EYE OF LAW . 1.3.9 NOW THE NEXT QUESTION IS, IS THE LIABILITY CONTINGENT? THE .ISSUE CAME FOR THE CONSIDERATION OF MANY COURTS, THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD (2009) 312 ITR (SC) 254, THE HON'BLE SUPREME COURT HELD THAT THE QUANTUM OF ALLOWANCES PERMITTED TO BE DEDUC TED UNDER DIVERSE HEADS UNDER SS. 30 TO 43C FROM THE INCOME, PROFITS AND GAINS OF A BUSINESS WOULD DIFFER ACCORDING TO THE SYSTEM ADOPTED .. THIS IS MADE CLEAR BY DEFINING THE WORD 'PAID' IN S. 43(2), WHICH IS USED IN SEVERAL SS. 30 TO 43C, AS MEANING ACTU ALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING UPON THE BASIS ON WHICH PROFITS OR GAINS ARE COMPUTED UNDER S. 28/29. THAT IS WHY IN DECIDING THE QUESTION AS ~O WHETHER THE WORD 'EXPENDITURE' IN S. 37(1) INCLUDES THE WORD 'LOSS' ONE HAS TO READ S. 37(1) WITH S. 28, S. 29 AND S. 145(1). ONE MORE PRINCIPLE NEEDS TO BE KEPT IN MIND. ACCOUNTS REGULARLY MAINTAINED IN THE COURSE OF BUSINESS ARE TO BE TAKEN AS CORRECT UNLESS THERE ARE STRONG AND SUFFICIENT REASONS TO INDICATE THAT THEY ARE UNRELIABLE. THE 1961 ACT MAKES NO PROVISION WITH REGARD TO VALUATION OF STOCK. BUT THE ORDINARY PRINCIPLE OF COMMERCIAL ACCOUNTING REQUIRES THAT IN THE P&L A/ C THE VALUE OF THE STOCK - IN - TRADE AT THE BEGINNING AND AT THE END OF THE YEAR SHOULD BE ENTERED AT COST OR M ARKET PRICE, WHICHEVER IS THE LOWER. THIS IS HOW BUSINESS PROFITS ARISING DURING THE YEAR NEEDS TO BE COMPUTED. THIS IS ONE MORE REASON FOR GOING S. 37(1) WITH S. 145. UNDER S. 145(2), THE CENTRAL. GOVERNMENT IS EMPOWERED TO NOTIFY FROM TIME TO TIME THE ACC OUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. ACCORDINGLY. UNDER S. 209 OF THE COMPANIES ACT, MERCANTILE SYSTEM OF ACCOUNTING IS MADE MANDATORY FOR COMPANIES. IN OTHER WORDS, ACCOUNTING STANDARD WHICH IS C ONTINUOUSLY ADOPTED BY AN ASSESSEE CAN BE SUPERSEDED OR MODIFIED BY LEGISLATIVE INTERVENTION. HOWEVER, BUT FOR SUCH INTERVENTION OR IN CASES FALLING 'UNDER S. 145(3), THE METHOD OF ACCOUNTING UNDERTAKEN BY THE ASSESSEE CONTINUOUSLY IS SUPREME. IN THE PRESE NT BATCH OF CASES, THERE IS NO FINDING GIVEN BY THE AO ON THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE. EQUALLY, THERE IS NO FINDING GIVEN BY THE AO STATING THAT THE ASSESSEE HAS NOT COMPLIED WITH THE ACCOUNTING STANDARDS. FOR THE REASON S GIVEN HEREINABOVE, THE 'LOSS' SUFFERED BY THE ASSESSEE ON ACCOUNT OF THE EXCHANGE DIFFERENCE' AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE UNDER S. 37(1). 1.3.10 IN THE CASE OF CIT VS. WIPRO FINANCE LTD. 2010 - TIOL - 766 - HC - KAR - IT, THE AS SESSEE AVAILS LOAN IN FOREIGN CURRENCY AND ITA NO. 6170 /1 4 10 SUFFERS LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY RATE, CLAIMS THE SAME AS REVENUE EXPENDITURE. AO DISALLOWS THE SAME AND THE CIT(A) CONFIRMS THE ORDER. TRIBUNAL ALLOWS ASSESSEE'S APPEAL BY HOLDING THAT I T IS SETTLED LAW THAT THE LOSS ARISING OUT OF FLUCTUATION IN THE FOREIGN EXCHANGE RATE IS ALLOWABLE AS REVENUE EXPENDITURE. THE HON'BLE SUPREME COURT IN THE CASE OF ACIT VS. ELECON ENGINEERING COMPANY LTD REPORTED IN 322 ITR 20(SC) CONSIDERED THE IMPACT OF SEC. 43A BOTH BEFORE AMENDMENT AND AFTER AMENDMENT. THE COURT WAS IN FACT EXAMINING THE DEDUCTIBILITY OF ROLL OVER PREMIUM IN RESPECT OF FOREIGN EXCHANGE FORWARD CONTRACTS. THE COURT HAS HELD THAT WHEREVER THE FOREIGN EXCHANGE LOANS WERE AVAILED FOR SECUR ING CAPITAL ASSETS, THE DECREASE OR INCREASE WOULD AFFECT THE CAPITAL ASSET. IF THE FOREIGN EXCHANGE LOAN WAS ACQUIRED FOR WORKING CAPITAL OR OTHER REVENUE COMMITMENTS, THE FLUCTUATION EFFECT SHALL BE ADJUSTED IN REVENUE ACCOUNT. TILL THE AMENDMENT BROUGHT IN BY THE FINANCE ACT 2002, THIS ADJUSTMENT HAS TO BE MADE ON YEARLY BASIS EVALUATING THE POSITION ON THE LAST DAY OF THE CONCERNED PREVIOUS YEAR. BUT AFTER THE AMENDMENT, THE ADJUSTMENT SHALL BE MADE ON THE ACTUAL PAYMENT OR SETTLEMENT OF CONTRACTS AND D UES. THIS POSITION HAS BEEN MADE CLEAR BY THE HON'BLE COURT IN THE ABOVE CASE. THE HON'BLE COURT HAS FURTHER DELIBERATED UPON THE CAPITAL NATURE AND REVENUE NATURE OF SUCH ADJUSTMENTS ARISING OUT OF FOREIGN EXCHANGE FLUCTUATION. APART FROM THE ABOVE GENERA L PROPOSITION OF LAW, THE HON'BLE COURT FURTHER EXAMINED WHETHER THE ROLL OVER PREMIUM IN RESPECT OF FOREIGN EXCHANGE FORWARD CONTRACT IS ELIGIBLE FOR DEPRECIATION IN THE NATURE OF EXPENDITURE TO BE ADDED TO THE COST OF THE CAPITAL ASSET; OR TO BE DEBITED IN THE PROFIT AND LOSS ACCOUNT, IF IT IS IN THE REVENUE ACCOUNT. IF ROLL OVER PREMIUM ON FORWARD CONTRACT BY ITSELF IS HELD TO BE ADMISSIBLE AS A DEDUCTION OR ADJUSTMENT, THEN RRE IS NO DOUBT THAT THE LOSS ARISES OUT OF T H E FORWARD CONTRACTS WOULD BE VERY MUCH ENTITLED FOR DEDUCTION OR ADJUSTMENT IF IT IS A LOSS. 1.3.11 OIL & NATURAL GAS CORPORATION LTD. VS CLT (2010) 322 LTR 180(SC), THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKING, ENGAGED IN EXPLORATION AND PROSPECTING OIL. IT LARGELY DEPENDS ON FOREIGN LOA NS TO COVER ITS CAPITAL AND REVENUE EXPENSES. FLUCTUATION IN FOREIGN CURRENCY RATES RESULTS IN LOSS A ND ASSESSEE CLAIMS DEDUCTION U/ S 37(1) IN THE YEAR OF FLUCTUATION APART FROM ADJUSTING THE ACTUAL COST OF IMPORTED CAPITAL ASSETS ACQUIRED IN FOREIGN CURRE NCY ON ACCOUNT OF FLUCTUATION AT EACH BALANCE - SHEET DATE, PENDING ACTUAL PAYMENT OF THE VARIED LIABILITY. AO DISALLOWED THE CLAIM AND LD. CIT(A) GOES WITH THE AO ON THE ASSESSEE'S CLAIM FOR FOREIGN EXCHANGE LOSS IN REVENUE ACCOUNT BUT ACCEPTS THE ASSESSEE' S STAND RELATING TO CAPITAL ACCOUNT. TRIBUNAL DISAGREES WITH THE AO BUT HIGH COURT REVERSES THE TRIBUNAL'S ORDER - HELD, IN VIEW OF THE APEX COURT DECISION IN THE WOODWARD GOVERNOR CASE (SUPRA) AND THE FACT THAT THIS CASE PERTAINS TO THE PERIOD PRIOR TO TH E AMENDMENT IN SEC 43A, BOTH THE ISSUES WERE SETTLED I N FAVOUR OF THE ASSESSEE. 1.3.12 IN THE CASE OF DCIT VS. BANK OF BAHRAIN & KUWAIT (2010) 132 IT] (MUMBAI)(SB) 50S, THE HON'BLE SPECIAL BENCH IT AT, MUMBAI CONCLUDED THAT WHERE A FORWARD CONTRACT IS ENT ERED INTO BY THE ITA NO. 6170 /1 4 11 ASSESSEE TO BUY OR SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF THE ACCOUNTING PERIOD, LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF EVALUATION OF THE CONTRACT ON THE LAST DATE OF THE RELEVANT ACCOUNTING PERIOD I.E., BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT, IS ALLOWABLE AS DEDUCTION. IT WAS HELD THAT FORWARD FOREIGN EXCHANGE CONTRACT MEANS AN AGREEMENT TO EXCHANGE DIFFERENT CURRENCIES AT A FORWARD RATE. FORWARD RATE IS A SPECIFIED R ATE 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 LOSS ON ACCOUNT OF WIDE FL U CTUATION 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 FULFILL THE SAME ON THE DATE OF MATURITY AND SECONDLY, IT IS IN THE NATURE OF HEDGING CONTRACT BECAUSE IT IS A CONTRACT ENTERED INTO AGAINST POSSIBLE FINANCI AL LO SSES. THE BENCH APPLYING THE LAW LAID DOWN IN THE CASES OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (200~) 312 ITR '234 (SE) AND BHARAT EARTH MOVERS VS. CIT (2000) 245 ITR 428 (SC), FURTHER HELD THAT IT IS SETTLED PRINCIPLE THAT DEDUCTION IS ALLOWABLE UNDER THE IT ACT IN RESPECT OF THOSE LIABILITIES WHICH CRYSTALLISE DURING THE PREVIOUS YEAR. THEREFORE, THE CONCEPT OF CRYSTALLISATION OF LIABILITY UNDER IT ACT ASSUMES SIGNIF ICANCE YIS - A - VIS COMMERCIAL PRINCIPLES IN VOGUE. AS PER THE COMMERCIAL PRINCIPLES OF POLICY OF PRUDENCE, ALL ANTICIPATED LIABILITIES HAVE TO BE ACCOUNTED FOR BUT AS PER IT 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 OBLIGATI ON AND ONLY QUANTIFICATION CAN VARY DEPENDING UPON THE TERMS OF CONTRACT, THEN A LIABILITY IS SAID TO HAVE CRYSTALLISED ON THE BALANCE SHEET DATE. IT IS IN CONFORMITY WITH THE PRINCIPLES OF PRUDENCE ALSO. A CONTINGENT LIABILITY DEPENDS PURELY ON THE HAPPEN ING OR NOT HAPPENING OF AN EVENT WHEREAS IF AN EVENT HAS ALREADY TAKEN 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, T HEN, IT CANNOT BE SAID THAT IT IS IN THE NATURE OF CONTINGENT LIABILITY. IN CASE OF LOSS/ EXPENSE, IT IS THE CONCEPT OF REASONABLE CERTAINTY TO MEET AN EXI STING OBLIGATION WHICH COMES INTO PLAY WHICH IN LEGAL TERMINOLOGY IS SAID TO BE CRYSTALLISATION OF LI ABILITY. WHEN OUTFLOW OF ECONOMIC RESOURCES IN SETTLEMENT OF PRESENT OBLIGATION CAN BE ANTICIPATED WITH REASONABLE ACCURACY THEN IT IS TO BE RECOGNISED AS CRYSTALLISED LIABILITY. THE REVENUES MAIN CONTENTION THAT LIABILITY CAN ARISE ONLY WHEN THE CONTRACT MATURES IS COMPLETELY DIVORCED OF THE PRINCIPLES OF COMMERCIAL ACCOUNTIN G AND, THEREFORE, CANNOT BE ACCEPTED. BOTH LEGAL OBLIGATION AND COMMERCIAL PRINCIPLES HAVE TO BE TAKEN INTO CONSIDERATION FOR DECIDING SUCH ISSUES. ANTICIPATED LOSSES ON ACCOUNT OF EX ISTING OBLIGATION AS ON 31ST MARCH, DETERMINABLE WITH REASONABLE ACCURACY, BEING IN THE NATURE OF EXPENDITURE/ ACCRUED LIABILITY, HAVE TO BE TAKEN INTO ACCOUNT WHILE ITA NO. 6170 /1 4 12 PREPARING FINANCIAL STATEMENTS. IN VIEW OF THE FOREGOING, IT CAN BE CONCLUDED THAT IT IS N OT A CONTINGENT LIABILITY AND THUS CANNOT BE ADDED TO DETERMINE THE BOOK PROFIT AS CONTENDED BY THE LD. AO, ADDITION MADE ON THIS GROUND IS THUS DELETED. 3. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FOUND THAT AFTER CONSIDERING VARIOUS JUDICIAL PRONOUNCEMENT INCLUDING THE DECISION OF HON BLE SUPREME COURT, THE CIT(A) REAC H ED TO THE CONCLUSION THAT THE SAID LIABILITY IS NOT CONTINGENT. AS PER THE CIT(A) , A CONTINGENT LIABILITY DEPEND PURELY ON HAPPENING AND NOT HAPPENING OF THE EVENT , WHEREAS IF AN EVENT HAS ALREADY BEEN TAKEN PLACE, WHICH IN THE PRESENT CASE, IS O F 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 LIABILITY. AFTER APPLYING THE PROPOSITION OF LAW LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (SUPRA) AND BHARAT EARTH MOVERS (SUPRA) , CIT(A) RECORDED A FIND ING TO THE E F FE CT THAT IT WAS NOT A CONTINGENT LIABILITY . A CCORDINGLY WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE CIT(A) , WHICH IS A WELL REASONED ORDER . 4. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. O RDER PRONOUNCED IN THE OPEN C OURT ON THIS 24 AUGUST, 201 6 . SD/ - ( SANDEEP GOSAIN ) SD/ - ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 24 /08 /201 6 . . /PKM , . / PS ITA NO. 6170 /1 4 13 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE R ESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//