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TMI Blog2025 (3) TMI 617X X X X Extracts X X X X X X X X Extracts X X X X ..... herein total income of Rs. 18,92,20,060/-. The said return in first instance without variation was summarily processed u/s 143(1) of the Act. Later on, by service of statutory notice u/s 143(2) of the Act, the case of the assessee was selected for scrutiny. After considering the assessee's submission, the resultant assessment in this case was completed by the Ld. AO u/s 143(3) of the Act wherein three bullet additions owning corresponding disallowances were made viz; (a) Rs. 2,25,000/- disallowance u/s 14A of the Act r.w.r. 8D2(iii) of Income Tax Rules, 1962 ['IT-Rules' hereinafter] (b) Rs. 37,27,447/- disallowance u/s 40(a) r.w.s. 195 of the Act for non-deduction of tax at source from sampling charges paid to Hongkong Party and (c) Rs. 1,14,11,643/- disallowance of forex fluctuation loss claimed in respect of closing balance of sale proceeds held in Exchange Earners Foreign Currency Account ['EEFC A/c' hereinafter] maintained with two IDBI banks and Bank of Maharashtra. 3. Aggrieved assessee filed an appeal before Ld. NFAC which was partly allowed by deleting the addition made on account of non-deduction of taxes on sum paid to Hongkong Party, however confirmed remaining twin add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld in EEFC a/cs are incurred & being a monetary item, is claimed as allowable business deduction u/s 37(1) of the Act. This claim of the assessee for deduction finds support in the decision of Hon'ble Apex Court rendered in the case of 'CIT Vs M/s Woodward Governor India Pvt Ltd.' [2009, 179 Taxman 326 (SC) & 312 ITR 254 (SC)]. 5. To brace the allowability of deduction the Ld. Mr Deshpande further submitted that, it must be noted that, there was no explicit provision in the Act for deductibility of exchange loss, until following settled position of law laid in 'M/s Woodward Governor India Pvt Ltd.' (supra), the legislature by Finance Act 2018 brought in a novel provision u/s 43AA of the Act. This newly inserted section provided for taxing the foreign exchange fluctuations which inter-alia provides that, all gains or losses arising on account change in foreign exchange rates are treated as incomes or losses. In relation to monetary items being cash and cash equivalents, receivables & payables etc., all gains arising upon conversion are treated as revenue income and conversely all losses are deductible as business revenue expenditure in accordance with income computation & disclosur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any loss on such account cannot be claimed to be revenue in nature. Moreover, such forex fluctuation loss on sale proceeds kept on EEFC a/cs represents a notional loss being contingent in nature. 8. The Ld. DR also drew our attention towards CBDT Circular No. 3/2010 dt 23/03/2010 which states that the notional loss/contingent loss which are worked out basing on the market closing date are not allowable losses. Therefore, the notional loss worked out by the assessee on account of foreign exchange fluctuations was correctly disallowed by the Ld. AO. The real loss or real profit/gain can arise only when such closing forex balances are actually converted into absolute INR without their alternate utilization for payment. Trusting the orders of tax authorities below in nutshell the Ld. DR cemented the action of disallowance of forex loss on twofold reasons that; (a) losses are purely notional in nature and (b) forex balance being a cash equivalents represents an item of capital therefore losses even if assumed to have arisen, are of capital nature, hence the resultant loss. 9. We have heard the rival party's submission and subject to rule 18 of ITAT-Rules, perused the material placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ICAI r.w.s. 145(2) of the Act. 11. It is well settled principle that, what follows for taxation is real income theory unless expressly provided otherwise in the law. The notional income like deemed annual value of a house property where assessee holds more than allowed number of units is brought to tax by expressed deeming fiction. Likewise, a notional expenditure in the form of depreciation is also allowed be charged to profits, but only by explicit provisions of law. Thus, in the absence of explicit provision of law, whenever a question as to the taxability of notional income or allowability of notional expenditure arises, what needs to be proved in common is 'accrual' thereof. If the notional income although following applicable AS is credited to P&L a/c but in reality, if not accrued to assessee at all, then such action of credit per-se does not change the very character of it to real for taxability, so is the notional expenditure. That is to say, any notional expenditure although recognised & debited to P&L a/c as per accounting method regularly employed or in compliance of applicable AS, unless such expenditure proved to have been incurred, the character in the absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized thus represents noting other than a circulating capital more precisely the working capital. On the other hand, the Revenue could hardly bring any deprecative evidence on records to dismantle the appellant's claim and these findings emerged in the course of physical hearing. 14. Having determined the character of balance held in EEFC a/c, now turning to deductibility of losses arising therefore. The issue of deductibility of fluctuation of forex loss arising out of trading transactions came for consideration before the Hon'ble jurisdictional High Court in 'CIT Vs Vinergy International Pvt. Ltd.' [2016, 96 CCH 154 MumHC] wherein their lordship following the decision of Apex Court rendered in 'Woodward Governor' (supra) upheld the adjudication of Ld. Co-ordinate bench in allowing deduction for forex fluctuation losses in relation to monetary items u/s 37(1) of the Act. 15. Subsequently an indistinguishable issue also came on board for reconsideration in 'Sociedade De Fomento Industrial Pvt Ltd' wherein the Ld. Co-ordinate bench deleted the disallowance of forex fluctuation loss in relation to sale proceeds which were already received by assessee and held in EEFC a/c, clearly ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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