2017 (1) TMI 1822 - AT - Income Tax

Nature of loss - Foreign Fluctuation loss - contracts which remained unsettled and unexpired till the end of the relevant Financial Year - notional loss OR actual loss - AO treated it as notional loss and not actual loss on the ground that forward contract in respect of impugned loss were outstanding as on 31/03/2009 and remained unsettled and therefore loss was not crystallized as on 31/03/2009 - CIT(A) accepted the claim of the assessee - HELD THAT - No error in the conclusion by CIT(A) as placing the reliance upon the decision of CIT vs. Woodward Governor India (P) Ltd. 2007 (4) TMI 118 - DELHI HIGH COURT which clinches the issue. Gains on the similar transactions were returned in the earlier AY 2007-08 which has been merrily accepted by the Revenue. Therefore, the Department ought not to have taken a different stand in similar circumstances in the subsequent year. While mark to market (MTM) refers to losses computed as on a particular date with reference to prevailing Exchange rates in respect of contracts that have not matured and are open contracts, such loss are required to be taken cognizance of. We concur with the view of the CIT(A) that the loss incurred is a real loss and not mere a notional loss of provisional nature. In the ultimate analysis there is no revenue effect and only concerns the timing of taxation of loss/profit. Accordingly, we decline to interfere with the order of the CIT(A). Addition of interest expenses - advance to certain parties for raw-material - as per AO business expediency for such advances have not been established and treated the advance given by the assessee as non-business purpose and invoked the provisions of section 36(1)(iii) - CIT(A) deleted the addition - HELD THAT - We do not find any infirmity in the action of the CIT(A) in deleting the disallowance of interest. With the assistance of the Ld.AR, we note that the interest-free own funds is far more in excess vis- -vis interest-free advance. In these facts, it is difficult to draw presumption adverse to the assessee. We therefore decline to interfere with the order of the CIT(A) in respect of ground No.2 as well. Accordingly, the appeal of the Revenue is dismissed. Delayed Employees Contribution to PF/ESIC - CIT(A) allowed claim of assessee - HELD THAT - We take a note of the fact that the payment on account of Employees Contribution to PF has been actually made before the due date of filing of the albeit with some delay. CIT(A) after taking note of the legislative amendment and judicial pronouncements on the issue accepted the plea of the assessee and reversed the disallowance made by the AO correctly. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Foreign Exchange Fluctuation Loss.
2. Addition of interest expenses.
3. Addition on account of employees' contribution to Provident Fund/ESIC.

Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss:
The Revenue challenged the deletion of a disallowance of Rs. 36,51,099/- made on account of Foreign Exchange Fluctuation loss, arguing it was a notional loss and not crystallized as the forward contracts were outstanding and unsettled as of 31/03/2009. The CIT(A) allowed the claim, relying on the Supreme Court's decision in CIT vs. Woodward Governor India (P) Ltd., stating that the loss was recognized as per Accounting Standard-11 (AS-11) and was an ascertained, accrued, and quantified loss.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had consistently applied the same accounting principles and that similar gains were accepted by the Revenue in prior years. The Tribunal concluded that the loss was real and not merely notional, affirming that the Department should not take a different stand in similar circumstances in subsequent years.

2. Addition of Interest Expenses:
The AO added Rs. 42,79,397/- to the assessee's income, asserting that advances given to certain parties were not for business purposes and invoking section 36(1)(iii) of the Act. The CIT(A) reversed this addition, noting that the assessee had sufficient interest-free funds to cover the advances.

The Tribunal confirmed the CIT(A)'s decision, highlighting that the interest-free funds at the assessee's disposal were significantly higher than the interest-free advances, thus negating the AO's presumption. The Tribunal found no justification for the disallowance and dismissed the Revenue's appeal on this ground.

3. Addition on Account of Employees' Contribution to Provident Fund/ESIC:
The AO added Rs. 12,71,143/- for delayed payment of employees' contributions to PF/ESIC. The CIT(A) deleted this addition, observing that the payments were made before the due date of filing the return, aligning with judicial pronouncements and legislative amendments.

The Tribunal upheld the CIT(A)'s decision, noting that the payments were indeed made before the due date of filing the return, and thus, the disallowance was unwarranted. The Tribunal dismissed the Revenue's appeal on this ground as well.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both AY 2009-10 and AY 2010-11, affirming the CIT(A)'s decisions on all grounds. The Cross Objections filed by the assessee were rendered infructuous and dismissed accordingly. The Tribunal's order emphasized the consistency in accounting practices and the application of judicial precedents in resolving the issues.