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TMI Blog2016 (8) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... ivatives from Pages 4 to 14 of the assessment order but the whole discussion is on theory of derivatives of mark to market losses. It is also evident from the facts on record that the AO has not disputed the advance received as trading advance towards supply of soya bean meal. It is also a fact that there were several other transactions in foreign exchange fluctuation account which has been treated similarly. The assessee all along has treated this advance in accordance with Accounting Standards AS-11. This also has been followed in earlier assessment years as well as in subsequent assessment years. As regards the contention of the learned DR that the corresponding purchase for this export are more than the value of the sale, we are of the view that this cannot be a consideration for disallowing the loss suffered on account of the foreign exchange fluctuation in the year under consideration. The assessee having followed the system of accounting regularly for accounting foreign exchange fluctuation in accordance with accepted method of accounting and the same have not been inconsistent with any provisions of the Income Tax Act any profit or loss arising on this account has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the AO. 4.2 In reply, the learned AR supported the order passed by the learned CIT(A). It was submitted that the AO has not been able to appreciate the facts in the right perspective. The assessee company during the year got an order for the supply of soya bean meal and against this it received advance payment of Japanese Yen 299,36,04,642. These Japanese Yen came to the assessee s bank account through proper banking channel and the same was credited to assessee s bank account on 31st July, 2007 by applying the exchange rate of 34.11 as on that date. The net payment received against this advance was ₹ 100,20,66,525/-. The advance so received from the foreign buyer was outstanding at the year end i.e. as on 31st March, 2008. This advance being a current liability outstanding as on 31st March, 2008, the same was converted at the applicable exchange rate in terms of Rule 115 of the Income Tax Rules as well as Accounting Standard AS-11 applicable to the assessee company. The exchange rate of Japanese Yen as on 31st March, 2008 was 40.03 as against 34.11 at the time when the payment was received. The difference on account of this exchange on the total advance wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Rule 115, the learned CIT(A) was justified in deleting the disallowance made by the AO. It was also submitted by the learned AR that even the new Income Tax and Disclosure Standards recently notified by the CBDT, mandates conversion of foreign exchange transaction on the closing day by applying the rate of exchange on the last date of the year. The learned AR further relied upon the following judgments in support of its contention:- i) CIT v. MarutiUdyog Ltd. [2010] 320 ITR 729 (SC) ii) Oil and Natural Gas Corporation Ltd. v. CIT [2010] 322 ITR 180 (SC) iii) DCIT v. Honeywell International (India) (P.) Ltd. [2009] 119 ITD 375 (Delhi) iv) ACIT v. Chettinad Cement Corporation Ltd. 140 TTJ 100 5. On going through the facts of the case we note that the issue is regarding loss on account of foreign exchange rate fluctuation in respect of trading advance received by the assessee company and outstanding at the closing day of the year. The assessee had received an advance of Japanese Yen 2993604642 on 31st July, 2007. The Punjab National Bank has converted the advance into Indian Rupees by applying exchange rate of 34.11 and credited the account ₹ 100,20,66,525/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year. The assessee having received the advance and having suffered the loss, the AO cannot sit over the judgment of the assessee to decide why the advance was received in Japanese Yen and why it was not received in Euro or Swiss Franc. 5.3 We are also in agreement with the contention of the learned AR that such transactions do not involve any element of derivatives as has been alleged by the AO. In this regard we are of the view that the AO has gone wrong in interpreting the bank guarantee issued by the bank on behalf of the assessee. This bank guarantee has been issued by the bank to provide security to the buyer in respect of the advance given for the product it wants to purchase from the assessee company. On going through the details mentioned in the bank guarantee, we note that there is no clause or terms in this bank guarantee which indicate that any kind of instrument has been created by the bank for treating the same as derivatives. In this regard we note that the observation of the learned CIT(A) is correct that the AO has gone on to elaborate the principle of derivatives from Pages 4 to 14 of the assessment order but the whole discussion is on theory of derivatives ..... X X X X Extracts X X X X X X X X Extracts X X X X
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