2020 (1) TMI 1146 - HC - Income Tax

Disallowance of provision for import exchange difference incurred on unexpired contracts at the end of accounting period - AO disallowed the claim of provision on the ground that deduction for the provision relating to the import of goods on account of exchange fluctuation is available only on the actual payment as per the provisions of Section 43A and secondly, such provision on account of currency fluctuation is representing the unascertained liabilities which is not allowable as deduction under Section 37(1) - ITAT deleted the addition - HELD THAT - Tribunal concurring with the order passed by the CIT(Appeals) held that there was no long term loan liability, and the fixed assets were of negligible value, and therefore, the provisions of Section 43A of the Act cannot be applied in the present facts and circumstances as it deals with the capital account transaction. The Tribunal following the decision of the Supreme Court in CIT vs. Woodward Governor India Private Ltd 2009 (4) TMI 4 - SUPREME COURT held that the trading liability arising on account of currency fluctuation is ascertained liability, and therefore, it is eligible for deduction. In view of the findings of fact arrived at by both the authorities, there is no infirmity in the impugned order passed by the Tribunal which is based upon the facts emerging from the record as well as the application of the decision of the Supreme Court of India in the aforesaid case. No question of law

Summary

Issues:
1. Interpretation of provisions of Section 43A of the Income Tax Act, 1961 regarding provision for foreign exchange difference.
2. Allowability of provision for unascertained liabilities under Section 37(1) of the Act.
3. Application of principles of consistency in allowing deductions for provision for currency fluctuation.

Analysis:
1. The Tax Appeal involved a dispute regarding the provision for foreign exchange difference claimed by the assessee, a private limited company engaged in imports, exports, and manufacturing of gemstones. The Assessing Officer disallowed the provision, citing Section 43A of the Act, which allows deduction for exchange fluctuation only on actual payment. The Tribunal, however, upheld the deletion of the addition by the CIT(Appeals), stating that Section 43A does not apply as the provision was for revenue transactions, not capital account transactions.

2. The controversy also revolved around whether the provision for currency fluctuation represented unascertained liabilities. The Tribunal held that the provision created by the assessee for current liabilities in foreign currency at the end of the financial year was based on prevailing rates and thus not unascertained liabilities. Referring to the Supreme Court's decision in CIT vs. Woodward Governor India Private Ltd, the Tribunal concluded that the trading liability arising from currency fluctuation is an ascertained liability eligible for deduction under Section 37(1) of the Act.

3. The Tribunal further noted the assessee's consistent adjustment of accounts for currency fluctuation, accepted by the Revenue in previous years. Applying principles of consistency, the Tribunal held that the assessee was entitled to the deduction for the provision. The Tribunal dismissed the Revenue's appeal, emphasizing that the findings were based on facts and the application of relevant legal precedents, including the Supreme Court's decision.

In conclusion, the Tribunal upheld the order of the CIT(Appeals) and dismissed the Revenue's appeal, finding no substantial question of law arising from the impugned order. The judgment emphasized the application of legal provisions, factual findings, and adherence to judicial precedents in determining the allowability of the provision for currency fluctuation by the assessee.