|CORAM:||I. C. Sudhir (JM), L. P. Sahu (AM)|
|CATCH WORDS:||capital vs. revenue expenditure, deductibility, foreign exchange loss|
|DATE:||August 24, 2016 (Date of pronouncement)|
|DATE:||September 2, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 37(1): Foreign exchange fluctuation loss arising consequent to restatement of current liabilities as per the year end rates in accordance with Accounting Standard-11 (AS-11) is allowable as a deduction|
The Tribunal had to consider whether foreign exchange fluctuation loss arising consequent to restatement of current liabilities as per the year end rates in accordance with the requirements of Accounting Standard-11 is allowable as a deduction. HELD by the Tribunal:
(i) The outstanding inter-company payables/receivables arising as a result of transactions with the parent entity are as per audited accounts of the current year and past years and the assessments for all the past years had been done u/s. 143(3) wherein the inter-company payables are not found bogus or non-genuine. A perusal of assessment order further reveals that the AO has not given concrete findings on the explanation of assessee that Instruction No. 3 of 2010 issued by CBDT is applicable only where there is trading in forex derivatives, which situation does not exist in the instant case, as the AO herself has mentioned the nature of appellant’s business as that of Information Technology line, i.e., IT related purchase/sales or services. Therefore, the conclusion of the AO derived on the basis of CBDT Instruction No. 3 of 2010 in the above circumstances is not fit to be supported that the foreign exchange fluctuation loss is a speculative loss.
(ii) The CIT(A) confirmed the disallowance on altogether different count that the assessee has claimed foreign exchange fluctuation loss on the entire amount of current liabilities and not on the transactions pertaining to the current year. In this context, it is notable that as required by AS-11 and as also held by Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 312 ITR 254 and Oil and Natural Gas Corporation Ltd. 322 ITR 180, the entire amount of current liabilities outstanding as at the balance sheet date was to be reinstated by the assessee, which has been done by assessee in the instant case.
(iii) The accounting standard-11 provides that at each balance sheet date the outstanding foreign currency monetary items should be reported using the closing rates. It clarifies that that when the transaction is not settled in the same accounting period in which it had occurred then in all the intervening period till the transaction is settled, the exchange differences have to be duly accounted for. Moreover, the issue in dispute stands decided in the decisions of ITAT Delhi Benches in assessee’s own cases for A.Y. 1999-2000 and 2001- 02 in favour of the assessee, as reported in (2007) TTJ 1153 and (2006) 105 TTJ 591 respectively. The special Bench of ITAT, Delhi also in the case of Oil & Natural Gas Corpn. Ltd. vs. DY. CIT (2002) 77 TTJ (Del.)(SB) 387 has held that the loss cannot be called notional since the fall in the exchange rate has already taken place in the accounting year. The Special Bench has also referred to the Accounting Standards-11 where it has been provided that the long-term liabilities should be restated and the loss should be charged to the Profit and Loss account of each year. In view of these principles of law, the finding of the ld. CIT(A) that the assessee has claimed foreign exchange fluctuation loss on the entire amount of current liabilities and not on the transactions of the current year, in our opinion, does not stand on sound footings and is liable to be set aside.
(iv) In the assessment year 2013-14, the department itself has accepted foreign exchange fluctuation loss under identical circumstances vide assessment order u/s. 143(3) dated 30.03.2016. Not only this, the assessee has been following a consistent policy on re-statement of foreign currency payables and whenever there is a gain the same is duly offered to tax as also noted by CIT(A) in a chart at page 31 of the impugned order wherein the gains arising consequent to conversion at closing exchange rate have been duly offered to tax by the assessee. Therefore, the ld. Authorities below are not justified to take different view in the instant year. In view of these discussions, we do not find any justification to support the orders of the authorities below. Accordingly, the appeal of the assessee is found to have merit and deserves to be allowed.