2012 (10) TMI 172 - AT - Income Tax

Tax Tribunal Allows Deduction for Foreign Exchange Loss & Clarifies Treatment of Dividends Refundable

The assessee, a non-banking finance company, successfully claimed a deduction for the loss on exchange of Sri Lankan Rupees as a current asset. The ... Loss on exchange - sale of shares - capital or revenue - - Held that:- considering the order passed in Reliance Energy Limited. Versus DCIT, Special Range - 30, Mumbai [2005 (12) TMI 211 - ITAT BOMBAY-H ] the loss on foreign currency cannot said to have connection whatsoever with capital loss - loss suffered by the assessee on account of exchange difference as on the date of balance sheet is an item of expenditure allowable under section 37(1) of the Act. It is not notional and as per AS-11, if the accounts are maintained on mercantile basis the loss is allowable. - in favour of assessee. Income u/s 115JB - increased by being loss on exchange - Held that:- As the loss claimed by the assessee on diminution of foreign exchange is not notional loss and cannot be termed to be a provision, therefore, this ground of the assessee is also allowed. Excess dividend recovered by the assessee during the year which was not refunded to rightful owners - Income u/s 115JB increased by such amount - Held that:- it is only when there is a right to receive income, income can be said to have accrued. Without legally enforceable right there can be no accrual of income, thus as assessee has no lawful right to the receipt in question nor has it claimed such a right in such circumstances, the receipt will not assume the character of income in the hands of the assessee - decided in favour of assessee. Issues Involved:1. Loss on exchange - Rs 2,21,000/-2. Income under Section 115JB - increased by Rs.2,21,000/- being loss on exchange3. Income under Section 115JB - increased by Rs.2,83,000/- being dividend refundable to the purchasersDetailed Analysis:1. Loss on Exchange - Rs 2,21,000/-:The assessee, a non-banking finance company, claimed a deduction of Rs.2,21,000/- due to the depreciation of Sri Lankan Rupees held as a current asset. The shares in question were sold, and the proceeds were kept in a blocked account in Sri Lanka. The assessee argued that the loss on foreign exchange should be allowed as it follows the mercantile system of accounting and as per Accounting Standard -11 (AS-11), such losses are recorded in the Profit & Loss Account. The AO disallowed the claim, stating the loss was not crystallized, while the CIT(A) held that the amount in the Sri Lankan bank was a capital asset, not a circulating capital. However, the Tribunal found that the sale proceeds had changed character from investment to circulating capital. Relying on precedents like CIT v. Woodward Governor India P. Ltd., ONGC v DCIT, and Reliance Energy Ltd. Vs. DCIT, the Tribunal concluded that the loss on foreign exchange as of the balance sheet date is an allowable expenditure under section 37(1) of the Act. Thus, Ground No.1 was allowed.2. Income under Section 115JB - Increased by Rs.2,21,000/- Being Loss on Exchange:Following the decision in Ground No.1, the Tribunal held that the loss claimed by the assessee on the diminution of foreign exchange is not notional and cannot be termed a provision. Consequently, this ground was also allowed.3. Income under Section 115JB - Increased by Rs.2,83,000/- Being Dividend Refundable to the Purchasers:The assessee received dividends on shares sold in earlier years but not yet transferred to the purchasers' names. The assessee credited these dividends to a sundry creditor account, treating them as current liabilities. If unclaimed for five years, the dividends were credited to miscellaneous income and offered to tax. The Department considered this an unascertained liability. However, the Tribunal referred to its earlier decision for A.Y 2006-07, where it was held that such receipts are not income as the assessee holds them in trust for the rightful owners. The Tribunal reiterated that without a legal right to the sum, it cannot be considered income. The method of accounting adopted by the assessee was deemed reasonable and consistently accepted by the revenue. Thus, Ground No.3 was allowed.Conclusion:The appeal of the assessee was allowed in favor of the assessee for all grounds.