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2016 (9) TMI 303 - AT - Income TaxDisallowance on account of foreign exchange fluctuation loss - Held that - 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 2006 (12) TMI 175 - ITAT DELHI-C and (2006 (10) TMI 184 - ITAT DELHI-D ) respectively. The special Bench of ITAT, Delhi also in the case of Oil & Natural Gas Corpn. Ltd. vs. DY. CIT (2002 (8) TMI 802 - ITAT DELHI) 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. In the assessment year 2013-14, the department itself has accepted foreign exchange fluctuation loss under identical circumstances. 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 ld. 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 in favour of assessee
Issues Involved:
1. Disallowance of foreign exchange fluctuation loss of ?12,41,11,179. Issue-Wise Detailed Analysis: 1. Disallowance of Foreign Exchange Fluctuation Loss: The primary issue in this appeal is whether the authorities were justified in disallowing the foreign exchange fluctuation loss claimed by the assessee against its business income. The assessee claimed a foreign exchange fluctuation loss of ?12,41,11,179 in the Profit & Loss account due to the restatement of foreign currency payables as per year-end rates in accordance with Accounting Standard-11 (AS-11). The Assessing Officer (AO) disallowed this loss, citing the assessee's failure to furnish evidence/details of the restatement and invoking CBDT Instruction No. 3/2010, which pertains to forex derivatives. The AO concluded that the loss was speculative under section 43(5) of the Act. 2. Nature of Business and Accounting Policy: The assessee is engaged in the resale of Silicon Graphics products and provides IT-related services. The assessee's accounting policy involves the restatement of foreign currency monetary items (receivables/payables) at the closing exchange rate as per AS-11, with the resulting exchange differences accounted for as income or expense. This policy has been consistently followed, and any gains from such restatements were duly offered to tax. 3. Decision of AO: The AO categorized the foreign exchange fluctuation loss as speculative based on CBDT Instruction No. 3/2010, despite the assessee not engaging in forex derivatives. The AO's decision was based on a misinterpretation of the assessee's business activities and the nature of the transactions. 4. Submissions Before CIT(A) and Decision: The CIT(A) did not uphold the AO's view that the loss was speculative but confirmed the disallowance on the grounds that the loss was claimed on the entire amount of current liabilities rather than transactions of the current year. The assessee argued that the entire amount of current liabilities must be restated as per AS-11 and the Supreme Court's mandate in CIT vs. Woodward Governor India P. Ltd. and Oil & Natural Gas Corp. Ltd. The CIT(A) failed to appreciate that the entire outstanding liabilities should be reinstated at the closing rate to give a true and fair view of the accounts. 5. Tribunal's Findings: The Tribunal found that the AO's observation about the lack of evidence/details was factually incorrect. The assessee had submitted item-wise details of the foreign exchange loss, which were acknowledged by both the AO and CIT(A). The Tribunal noted that the CIT(A) did not dispute the genuineness of the intercompany payables/receivables, which were accepted in past assessments and transfer pricing scrutiny. The Tribunal also highlighted that the assessee's claim was consistent with AS-11 and supported by Supreme Court decisions and ITAT rulings in the assessee's own cases for previous years. 6. Conclusion: The Tribunal concluded that the authorities below were not justified in disallowing the foreign exchange fluctuation loss. The assessee's policy of restating foreign currency payables at the closing rate was in line with AS-11 and judicial precedents. The appeal was allowed in favor of the assessee, and the disallowance of ?12,41,11,179 was set aside. Final Order: The appeal of the assessee is allowed, and the disallowance of foreign exchange fluctuation loss is deleted. The order was pronounced in the open court on 24.08.2016.
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