2018 (11) TMI 319 - AT - Income Tax

Loss arising on revaluation of foreign exchange outstanding - allowable deduction - the said loss has not been routed through the books of account - year of assessment - Held that - Assessee cannot be debarred from claiming a sum as deduction only for the reason that the assessee has failed to debit liabilities in its books of account. Unrealized loss due to foreign exchange fluctuation relating to trading assets and liabilities as on the last date of accounting year is allowable as deduction. See KEDARNATH JUTE MANUFACTURING COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX (CENTRAL), CALCUTTA 1971 (8) TMI 10 - SUPREME COURT and CIT VERSUS M/S WOODWARD GOVERNOR INDIA P. LTD. & M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT CIT(A) has relied upon the books of accounts of the succeeding year i.e. pertaining to A.Y. 2010-11, wherein the assessee has claimed to have accounted for this loss and after setting off this loss it has disclosed net profit of ₹ 301.55 lakhs as foreign exchange fluctuation gains. We noticed that these materials were not confronted to the Assessing Officer. Since the loss of ₹ 489.66 lakhs is held to be allowable in AY 2009-10, the same is liable to be disallowed in AY 2010- 11. Otherwise, it will lead to double deduction of same amount, which is not permitted under the Act. We notice that the Ld CIT(A) has not examined this aspect. Hence, for the limited purpose of examining these aspects, we restore this issue to the file of the Assessing Officer. The impugned claim of the assessee is to be allowed in the year under consideration. Since the details of entries passed in the year relevant to the AY 2010-11 need to be verified by the AO, we have restored this issue to the file of the AO for the limited purpose as stated in the earlier paragraph. - Decided against revenue

Summary

Issues:
Allowability of loss on revaluation of foreign exchange outstanding as deduction.

Analysis:
The appeal pertains to the allowability of a loss of ?489.66 lakhs on the revaluation of foreign exchange outstanding as a deduction for the assessment year 2009-10. The Assessing Officer disallowed the claim as the loss was not accounted for in the books of account, contrary to Accounting Standard-11 and CBDT instruction No. 3 of 2010. However, the CIT(A) allowed the claim, citing the decision in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT and Woodward Governor India Pvt. Ltd., where it was held that such losses are allowable deductions even if not accounted for in the books. The CIT(A) noted that the loss was disclosed in the annual accounts and accounted for in the succeeding year, resulting in a net profit. The Revenue challenged this decision.

The ITAT agreed with the CIT(A) and held that the loss of ?489.66 lakhs is allowable as a deduction. The ITAT relied on the decisions in the cases of Kedarnath Jute Manufacturing Co. Ltd. and Woodward Governor India Pvt. Ltd., emphasizing that unrealized losses due to foreign exchange fluctuations are deductible. Additionally, the ITAT referenced a decision by the Bombay High Court in a similar case. However, the ITAT observed that the CIT(A) did not consider that the loss was accounted for in the succeeding year, leading to a potential double deduction. To address this, the issue was remanded to the Assessing Officer for further examination, directing the assessee to provide necessary information.

In conclusion, the ITAT dismissed the Revenue's appeal and upheld the allowability of the loss on revaluation of foreign exchange outstanding as a deduction for the assessment year 2009-10. The issue regarding the potential double deduction was referred back to the Assessing Officer for verification.