2016 (5) TMI 616 - AT - Income Tax

Addition made on account of foreign exchange loss - Held that - No reason to interfere with the impugned order passed by the CIT(A) as he has rightly held that loss on account of fluctuation in foreign exchange rate on account of advances received from customers on account of sale realization is related to the revenue account only. The transactions made by the assessee in foreign currency have been accounted for in accordance with AS-11 issued by ICAI and therefore the loss on account of foreign exchange fluctuations is relatable to revenue account only. In this view of the matter, we find no reason to interfere in the orders passed by the CIT(A) and therefore dismiss these grounds of appeal raised by revenue. See Woodword India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT - Decided in favour of assessee

Issues:
1. Appeal against the order of Commissioner of Income Tax (Appeals) allowing the appeal filed by the assessee regarding foreign exchange loss.
2. Whether advances received from overseas customers for sister concerns constitute a business loss.
3. Treatment of fluctuation of foreign exchange as an item of expenditure.
4. Utilization of foreign currency in business operations.

Analysis:

Issue 1:
The Appellate Tribunal heard the appeal by the revenue against the CIT(A)'s decision to delete the addition made on account of foreign exchange loss. The Tribunal considered the submissions made by both parties and analyzed the orders passed by lower authorities. The CIT(A) directed the Assessing Officer to delete the addition based on the nature of the loss being on the revenue account, in accordance with the judgment of the Honorable Supreme Court. The Tribunal upheld the CIT(A)'s decision, stating that the loss on account of fluctuation in foreign exchange rate related to revenue account only.

Issue 2:
The contention regarding advances received from overseas customers was also addressed. The revenue argued that the advances were used for the assessee's sister concerns and not for the assessee's business purposes, hence not allowable under section 37(1) of the Income Tax Act. However, the Tribunal found that the transactions made by the appellant in foreign currency were accounted for as per AS-11 issued by ICAI, and the loss on account of foreign exchange fluctuations was related to the revenue account, leading to the deletion of the addition.

Issue 3:
Regarding the treatment of fluctuation of foreign exchange as an item of expenditure, the Tribunal observed that the loss on account of exchange fluctuation arose from advances received from customers against sale realization, and thus, was considered a revenue loss. The Tribunal referred to the judgment of the Honorable Supreme Court and directed the AO to delete the addition related to the fluctuation of foreign exchange.

Issue 4:
The utilization of foreign currency in business operations was also scrutinized. The Tribunal examined whether the losses arising from the depreciation of foreign currency were intended to be utilized for the business. It was concluded that the loss on account of foreign exchange fluctuations was related to the revenue account, as per the principles laid down by the Supreme Court, resulting in the deletion of the addition made by the AO.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the addition related to the fluctuation of foreign exchange, considering it as a revenue loss. The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed the grounds of appeal raised by the revenue.

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