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TMI Blog2019 (7) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961 is illegal and bad in law. 2. the learned CIT has erred in law and on facts in holding that the order passed by the Assessing Officer was erroneous and prejudicial to the interests of the revenue. 3. The learned CIT has erred in law and on facts in setting aside the assessment order by observing that there is undervaluation of closing stock as foreign exchange fluctuation cost should have been added to the cost of closing stock which needs verification." 3. Briefly stated facts are that the assessee is engaged in the business of export, manufacturing and trading in rough and polished diamonds. The assessee filed its return of income on 27.09.2016, declaring total income at Rs. 1,24,30,750/- for the AY 2012-13. The original assessment was completed under section 143(3) of the Act vide order dated 12.02.2015 accepting the returned income. According to PCIT, on perusal of case records, he noticed that the amount of Rs. 77,88,482/- being an exchange difference on import had been debited and an amount of Rs. 89,27,734/- being an amount as exchange difference on export, and profit and loss account has been credited. According to him, the purchase of rough diamonds in the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t true, correct and fair profit of the business. In view of the same when there is actual payment on account of foreign exchange whether for import (purchase) or export (sales), the difference on this account ought to be added to the purchase and sale values cost of purchase of diamond and closing stock should be revalued accordingly. opening balance 01/04/2011' show exchange difference of (-) 21,36,233.00 but which Seems to be included in the total of that chart. 4.2 Since this negative figure in the import chart indicate a higher outgo in foreign exchange, the import value of purchases goes up. This in turn means that any stock remaining from such purchases has to be valued at the actual price paid for said imported purchase during the previous year. As to which of these purchases remain as closing stock has to be indicated by assessee. Consequently, on all these accounts the assessment order is erroneous in so Qir it is prejudicial to the interest of Revenue." 4. Aggrieved, assessee came in appeal before Tribunal. Before us, the learned Counsel for the assessee argued that the valuation of rough diamonds and polished diamonds are done in the following manner (a) Rou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exchange rate difference will be added to the valuation of stock. 7. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has followed the closing stock of roughed diamonds at cost. The assessee also valued the closing stock of polished diamonds at estimated cost or reasonable value whichever is lower. The assessee following this method consistently. For this, we are noted from the Judgment of Hon'ble Supreme Court in the case of Woodward Governor India P. Ltd (supra), wherein it is clearly held that wherever there is a profit on account of exchange rate difference, the same will be considered as income and wherever there is a loss on account of exchange rate difference the same will be claimed as loss. Hon'ble Supreme Court has considered this issue in Para 18 and 19 as under: - "18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting period. 19. A company imports raw material worth US $ 250,000 on 15-1-2002 when the exchange rate was Rs. 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15-4-2002 when the exchange rate is Rs. 49 per US $. However, on the balance sheet date, 31-3-2002, the rate of exchange is Rs. 50 per US $. In such a case, in terms of AS-11, the effect of the exchange difference has to be taken into P&L account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e., Rs. 50 at 31-3-2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of Rs. 4 (50-46) per US $ is to be shown as an exchange loss in the P&L account and is not to be adjusted against the cost of raw materials." 8. We noted that from the above and came to conclusion that the loss on account of foreign exchange fluctuation is recognized in terms of AS-11. The said accounting standard clearly states that a foreign currency transaction should be recorded on initial recognition in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency ..... X X X X Extracts X X X X X X X X Extracts X X X X
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