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TMI Blog2005 (10) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... s to re-examine the issue in the light of his observations. 5. In all the three grounds the main issue is that the learned CIT has erred in invoking s. 263 against the orders of AO dt. 26th Feb., 1999 and 31st Jan., 2000 for asst. yrs. 1996-97 and 1997-98 respectively. The brief facts of this case are that the assessments for the asst. yrs. 1996-97 and 1997-98 were completed under s. 143(3) on a total loss of Rs. 4,40,72,086 for asst. yr. 1996-97 and 1,75,89,123 for asst. yr. 1997-98 (computed under s. 115JA). For both the assessment years the assessee-company had claimed foreign exchange fluctuation loss in P L a/c as under: Asst. yr. 1996-97 - Rs. 140.18 lakhs (out of this Rs. 39.75 lakhs were on account of accrual basis which stood paid and adjusted in asst. yr. 1997-98) Asst. yr. 1997-98 - Rs. 8.78 lakhs (This stood paid in asst. yr. 1998-99) 6. The assessee was claiming foreign exchange fluctuation loss from year to year on the basis of exchange rates at the beginning of the year and at the end of the year on the liability outstanding. No disallowances had been made for the two assessment years. 7. The assessee during the asst. yrs. 1996-97 and 1997-98 had purchased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue in this case is when liability provided on the purchase of raw material in foreign currency and the same is outstanding as at the end of the year, whether a notional loss calculated in terms of foreign exchange fluctuation as at the end of the year on the liability outstanding as at the end of the year if it differs from the liability provided on the date on which the purchase was made or the liability was incurred, can be allowed as a deduction in the P L a/c. The learned Authorised Representative has relied upon the decision in the case of CIT vs. Martin Harris (P) Ltd. (1985) 49 CTR (Cal) 34 : (1985) 154 ITR 460 (Cal) where the facts of the case are as under: 12. During the asst. yr. 1968-69, the British pound sterling was devalued vis-a-vis the Indian rupee. The assessee at that time had been manufacturing goods under licence from a foreign company in London, who were supplying to the assessee on credit major part of the materials needed for the manufacture. The price of such materials was, however, payable by the assessee, who was maintaining accounts on mercantile system, in pound sterling. The ITO found that as a result of the devaluation, the liability of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for the Revenue placed reliance on the decision of the Supreme Court in Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC). In that case, the Supreme Court held: 'Where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.' Since the Supreme Court felt that no finding appeared to have been given by the Tribunal as to whether the amounts in question were held by the assessee in West Pakistan on capital account or revenue account and whether they were part of fixed capital or of circulating capital embarked and adventured in the business in West Pakistan, the case was remanded to the Tribunal. In our opinion, this decision is of no assistance in determining the question referred to us. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is assessed at Rs. 250." 14. Also the decision in the case of CIT vs. International Combustion (I) (P) Ltd. (1982) 29 CTR (Cal) 35 : (1982) 137 ITR 184 (Cal) relevant pp. 189 and 190 where it was held: "The cases on which the counsel for the Revenue has relied upon are all cases of loans or deposits which were not trade debts at all. In the present case, the liability arose on account of purchase of goods and remained a trading liability subsequently. Nothing has happened after the liability arose to divest it of the character of a trading debt and convert it into a loan. In fact the finding of the Tribunal is that it continued as a trading debt in the assessment year in question in this case. The argument that it ceased to be a debt and it was really a loan or deposit given by the sellers to the assessee-company is not borne out by the facts found by the Tribunal. The Supreme Court pointed out in the case of Bombay Steam Navigation Co. (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC), that 'any agreement to pay the balance of consideration due by the purchaser does not in truth give rise to a loan. A loan of money undoubtedly results in a debt, but every debt does not involve a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. The Accounting Standard-11 (AS-11) on "accounting for the effects of changes in foreign exchange rates" issued by the Institute of Chartered Accountants of India, which carne into effect in respect of the accounting periods commencing on or after 1st April, 1987, provides that if the result of conversion at the closing rate is a net loss, the long earned liabilities should be restated and loss should be charged in the P L a/c. However, deferral of the liability over the remaining term of the liability is not permitted if such losses are likely to recur. Thus, the claim made by the assessee was according to the accepted accounting standards. The ONGC was a wholly owned Government of India undertaking. Admitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther on the decision of the Tribunal Jaipur Bench vide ITA No. 944/Jp/1993 dt. 9th March, 2000 for the asst. yr. 1990-91 in the assessee's own case where it was held: "Neither the devaluation of the liability is based on any agreement, nor any debt note and we are of the opinion that it is an existing liability but the same cannot be quantified. Under the circumstances, we are in full agreement with CIT(A) that same should be allowed when the amount is actually discharged at the prevailing rate of foreign exchange. Accordingly, we declined to interfere on this account." 18. On the other hand the learned Authorised Representative has further relied upon the decision of the Tribunal Jaipur Bench vide ITA Nos. 1441/Jp/1996 and 1682/Jp/1996 in assessee's own case for asst. yr 1991-92 where it was held at para 19 of the order as under: "Having regard to the case laws, relied upon by the learned Authorised Representative, we hold that losses on account of fluctuation in rate of foreign exchange is revenue loss and is allowable at the end of each year. The AO is directed to verify the rate of foreign exchange and allow the relief accordingly." Having considered all the judgments c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss of revenue, or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue unless the view taken by the ITO is unsustainable in law." b. CIT vs. Mehsana District Co-operative Milk Producers Union Ltd. (2003) 184 CTR (Guj) 608 : (2003) 263 ITR 645 (Guj) Where it has been held that "the provisions of s. 263(1) of the IT Act, 1961, cannot be invoked to correct each and every type of mistake or error committed by the AO, and it is only when the order is erroneous that the section will be attracted. The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the AO. When two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the ITO is unsustainable in law. The powers of the CIT under sub-s. (1) of s. 263 extend to such matters as have not been considered and decided in appeal. The revisional powers under s. 263 do not extend to matters on which the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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