2019 (9) TMI 399 - AT - Income Tax

Addition on account of foreign exchange loss u/s 37(1) - loss claimed on account of reinstatement of advances received from customers - AO was of the view that the amount as claimed as the advance was no longer payable by the assessee to DOW, also no supply of the goods by the assessee to DOW against such advance - HELD THAT - Authorities below has taken contradictory stand meaning thereby the Revenue on one hand has accepted the liability shown by the assessee as discussed above and on the other hand the forex losses in relation to such trading liability was not allowed as deduction. Once the Revenue has accepted trading liability shown by the assessee, then the Revenue cannot make the disallowance of the corresponding loss in relation to such advance being a trading asset. Assessee has been showing such advance in its accounts since beginning which was accepted till the immediate preceding assessment year. As such we note that there was no change in the facts and circumstances of the case in the year under consideration, therefore in our considered view the assessee is entitled for the deduction of such forex loss on account of principles of consistency. It is because till the immediate preceding assessment year the Revenue has accepted all the losses and gains qua to the impugned advance shown by the assessee. Assessee is entitled for the deduction on the basis of principle of consistency. Assessee in the subsequent assessment year has offered the amount of trading advance as income including the effect of forex losses and gain. This fact has not been doubted and disputed by the authorities below. Addition on account of such loss in the year under consideration will lead to the double addition to the income of the assessee which is contrary to the provisions of law. Assessee is entitled for deduction on account of forex loss in relation to such trade advance. See CIT VERSUS M/S WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT - assessee is entitled for the forex loss in the given facts and circumstance as it is arising in the course of its business. - Decided in favour of assessee.

2009 (4) TMI 4 - SC

Issues Involved:
1. Disallowance of ?2,01,70,542 foreign exchange loss by the AO.
2. Validity of the jurisdiction of CIT to revise the order under section 263 of the Income Tax Act, 1961.
3. Whether the foreign exchange loss related to advances from Dow Chemicals Pacific Limited should be allowed as a business expenditure.
4. Consistency in the treatment of foreign exchange gains/losses in previous assessment years.
5. Treatment of the advance received from Dow as a liability or revenue.

Issue-wise Detailed Analysis:

1. Disallowance of ?2,01,70,542 Foreign Exchange Loss:
The assessee, a company engaged in manufacturing specialty chemicals, claimed a foreign exchange loss of ?2,74,18,861 in its profit and loss account for the year under consideration. Out of this, ?2,52,58,516 was claimed on account of reinstatement of advances received from customers, primarily from Dow Chemicals Pacific Limited (DOW). The AO disallowed the claim of foreign exchange loss amounting to ?2,52,58,516 under section 37(1) of the Act, contending that the amount was not payable to DOW and treated the advance as non-liability. The CIT(A) partly confirmed the AO's addition, disallowing the loss related to advances from DOW amounting to ?2,01,70,542.

2. Validity of Jurisdiction of CIT to Revise the Order Under Section 263:
The assessee argued that the CIT(A) erred in confirming the disallowance based on the incorrect perception that the ITAT upheld the CIT's direction to revise the order under section 263. The ITAT was only adjudicating on the validity of the jurisdiction of CIT to revise the order under section 263 in respect of the order passed by the AO under section 143(3).

3. Foreign Exchange Loss Related to Advances from Dow Chemicals Pacific Limited:
The assessee entered into long-term contracts with DOW for the supply of products and received an advance of USD 15,00,000 in pursuance of an agreement dated 8-6-2009. The assessee consistently accounted for foreign exchange gains/losses on receivables/payables in foreign currency as per AS-11 issued by ICAI. The AO contended that the advance was waived off by DOW and could not be treated as a liability, thus disallowing the foreign exchange loss. The CIT(A) observed that the advance received was for the sale of goods and no liability existed to repay DOW as of 31-03-2009.

4. Consistency in Treatment of Foreign Exchange Gains/Losses:
The assessee argued that it consistently showed the advance in its books since the P.Y. 2000-01, which was accepted by the Revenue. The assessee also offered the amount of trading advance as income, including the effect of forex losses and gains, in the subsequent assessment year. The ITAT noted that the Revenue accepted the liability shown by the assessee in the balance sheet as of 31st March 2009, and therefore, the corresponding forex loss should also be allowed as a deduction based on the principle of consistency.

5. Treatment of Advance from Dow as Liability or Revenue:
The assessee contended that the advance was treated as revenue in nature and claimed the effect of foreign exchange gain/loss on it. The CIT(A) held that the advance was on account of the sale of goods and not a liability to repay DOW. The ITAT, however, found that the advance was consistently shown as a liability and the corresponding forex losses were accepted by the Revenue in previous years. The ITAT held that any addition on account of such loss in the year under consideration would lead to double addition to the income, which is contrary to the provisions of law.

Conclusion:
The ITAT concluded that the assessee is entitled to the deduction of forex loss in relation to the trade advance from DOW. The ITAT reversed the order of the CIT(A) and directed the AO to delete the addition made. The appeal of the assessee was allowed, recognizing the forex loss as a legitimate business expenditure under the principles of consistency and in accordance with AS-11 and the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor India (Pvt) Ltd.

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