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TMI Blog2016 (1) TMI 901X X X X Extracts X X X X X X X X Extracts X X X X ..... stified in confirming the disallowance of depreciation. The assessee has capitalized the security deposit by treating it at par with the customs duty. It has waited for 8 long years and when realized that follow up action with the customs department would be a futile exercise only then took a decision of capitalizing this amount on the value of the assets. In case in subsequent years assessee was able to get the amount the it will be offered for taxation or it will be brought to tax under sec. 41(1) of the Act. No prejudice is caused to the revenue if depreciation is allowed by permitting the assessee for capitalizing of this security deposit. - Decided against revenue - ITA No. 2887/Del/2013 - - - Dated:- 6-11-2015 - N. K. Saini, AM And Beena A Pillai, JM For the Appellants : Shri Vinod Bindal Shri Sanjeev Bindal, CAs For the Respondent : Shri T Vasanthan, Sr DR ORDER Per Beena A. Pillai, JM This appeal has been filed by the Revenue, arising from the order dated 15.02.2013 passed by the ld.CIT(A)-VIII, New Delhi for the assessment year 2006-07, on the following grounds:- 1. On the facts and circumstances of the case and in law, the ld.CIT(A) has err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses. Aggrieved by the order of the ld.AO, the assessee went in appeal before the ld.CIT(A). 3. Before the ld.CIT(A), the assessee argued that the said loan was disbursed to the assessee by the overseas party in foreign currency, during the previous year relevant to assessment year 1998-99, and also utilized fully by the assessee in the same year for the purpose for which it was taken. The assessee submitted that the devaluation losses were duly declared in the respective Profit Loss Account of the relevant financial years and, the losses were claimed u/s 37(1) of the Act, in the respective assessment years which were accepted by the department in the assessments made u/s 143(3) for the assessment years 1998-99 and 1999-2000. The assessee also submitted that the said issue has been decided by the ITAT vide its order dated 29.5.2009 passed for assessment year 2000-01. The assessee also submitted that there has been no fresh foreign loan funds being received during the previous year under consideration to be deployed afresh. The assessee further submitted that the gain arising on ECB has been offered for taxation by the assessee which has been accepted by the AO for AY 2005-06. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... denominated in a foreign currency as well as sundry creditors are a monetary items which have to be valued at the closing rate under AS-ll. Under para 5, a transaction in a foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-ll deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under section 37(1), para 9 of AS-ll which deals with recognition of exchange differences, need to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or an expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A. Para 9 of AS-ll recognizes exchange di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court in the case of Wood world Governor India Pvt. Ltd., reported in (2009) 312 ITR 254 (SC), wherein it has been held that increase in liability on revenue account due to foreign exchange fluctuation as per the exchange rate prevailing as on the last day of the financial year was neither notional or a contingent liability and the same, there was allowable as a deduction. We do not find any infirmity in the order passed by the ld.CIT(A). We, therefore, dismiss this ground of appeal. 5. Coming to Ground No.2, during the course of assessment proceedings, the ld.AO observed that the assessee had paid customs duty for import of machinery in the year 1994-95 and transferred ₹ 11,65,797/- as security deposit to the Customs Department in the said year. Since the assessment by the Customs Department was still pending, the unilateral action of the assessee in capitalizing the aforesaid amount was not found in accordance with the law by the ld. AO and, therefore, the depreciation claimed on the same in the earlier assessments was disallowed and added back to the income of the assessee. In the respect of instant assessment year, the assessee had submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentatives, we have gone through the records carefully and find that learned CIT(Appeals) has upheld the disallowance of depreciation on the ground that possibility of recovery of this amount cannot be ruled out. Learned First Appellate Authority has further observed that assessee has not waived off its rights over security deposit in favour of customs department. In our opinion, the Learned First Appellate Authority is not justified in confirming the disallowance of depreciation. The assessee has capitalized the security deposit by treating it at par with the customs duty. It has waited for 8 long years and when realized that follow up action with the customs department would be a futile exercise only then took a decision of capitalizing this amount n the value of the assets. In case in subsequent years assessee was able to get the amount the it will be offered for taxation or it will be brought to tax under sec. 41(1) of the Act. No prejudice is caused to the revenue if depreciation is allowed by permitting the assessee for capitalizing of this security deposit. In view of the above discussion, we allow both these grounds of appeal and direct the Assessing Officer to grant ..... 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