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TMI Blog2022 (4) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... nal return of income was filed by the assessee on 26.11.2014 declaring total loss of Rs.(-)177,98,05,980/-. Notice under Section 143(2) read with Section 129 of the Income Tax Act, 1961 and notice under Section 142(1) of the Act along with questionnaire was issued on 08.06.2016. The assessee filed details before the Assessing Officer. The Assessing Officer made disallowance under Section 14A read with Rule 8D amounting to Rs. 9,66,764/- and also made disallowance of SWAP Contract Loss amounting to Rs. 6,46,83,102/-. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 5. The Ld. A.R. submitted that this issue was decided by the Ahmedabad Tribunal in the case of Adani Enterprise Limited vs. ACIT being ITA Nos.1840/Ahd/2012, 3321/Ahd/2014 & 2305/Ahd/2015, for Assessment Years 2008-09, 2009-10 & 2010-11 respectively, order passed on 12.02.2019 in assessee's favour. 6. The Ld. D.R. relied upon the assessment order and the order of the CIT(A). 7. We have heard both the parties and perused all the relevant materials available on record. During the course of hearing, the Ld. A.R. pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in making addition of Rs. 34,35,000/- to the total income of assessee on account of provision for forward contract payable. During the course of assessment proceedings, assessee submitted that account of forward contract was reflected in the books of accounts as per MTM certificate of ABN Amro Bank. Assessee is required to record forward contract transactions as per Accounting Standard 11 of ICAI & the same provides that forward contracts remaining outstanding at the end of financial year should be recorded at closing rate prevailing at the end of the year i.e. 31st March. This treatment is in line with the accrual method of accounting as profits/ losses pertaining to the year under consideration are required to be reported in P & L A/c & therefore, fluctuation in exchange rate is required to be taken into consideration. However, contention of assessing officer to treat the same as unascertained liability is completely incorrect in as much as entry is passed on the basis of actual closing rate prevailing at the end of financial year as per MTM certificate issued by ABN Amro Bank. During the course of assessment proceedings, assessee filed copy of MTM certificate and copy of forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account in respect of the difference amount cannot be said to be in the nature of notional/unascertained liability as said entry is passed on the basis of actual exchange rate prevailing at the end of the year. The fluctuation in exchange rate has material bearing on the P & L A/c & as forward contract has been entered into during the year under consideration, losses/gain relating to the fluctuation in exchange rate pertaining to said forward contract should also be considered in P & L A/c for the year under consideration. It is also further seen that in the immediately succeeding year when forward contract has been cancelled, assessee has recognised expense/loss only in respect of the balance amount i.e. in respect of the amount in excess of the provision made during the year under consideration. Now, if any disallowance is made for the year under consideration, in that case corresponding deduction is required to be allowed in the subsequent year. However, there is no justifiable reason in doing such an exercise as treatment given by assessee in the books of accounts is in line with the accrual system of accounting and the same does not result into provision for any unasc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not deductible in computation of business income. On the facts of the present case, however, not only anticipated losses have been claimed as deduction but anticipated profits have been offered to tax. The gains have been offered to tax on the basis of assessee's following mandatory accounting standards, and on the basis of same accounting standards losses on forward contracts have been recognized too. The claim of deduction of Rs. 22.15 crores represents the difference between total foreign exchange loss of Rs. 50.11 crores as at the year end date and foreign exchange gains of Rs. 27.95 crore as at the year end date. What has been done by the Assessing Officer to take into account gains on such contracts but ignore the cases in which losses are computed in respect of the forward contracts. It is against this approach that the assessee had raised the grievance. 7. In the case of Woodward Governor India (P.) Ltd. (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon'ble Supreme Court and there was similar inconsistency in treatment to losses and gains on the forward contracts. Their Lordships, dealing with this issue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e(s) in this batch of civil appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under s. 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard ("AS"). 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 held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under s. 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department. 11. The dispute in this batch of civil appeals centers around the year(s) in which deduction would be admissible for the increased liability under s. 37(1). 12. We quote hereinbelow s. 28(i), s. 29, s. 37(1) and s. 145 of the 1961 Act, which read as follows : "Sec. 28. Profits and gains of business or profession-The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession", - (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year." "Sec. 29. Income from profits and gains of business or profession, how computed-The income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43D." "Sec. 37. General-(1) Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "Profits and gains of business". In ss. 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" has also been used. For example, depreciation and allowances are dealt with in s. 32. Therefore, Parliament has used the expression "any expenditure" in s. 37 to cover both. Therefore, the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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