Tribunal allows foreign exchange loss claim under Accounting Standard-11 -11

The Tribunal held that the authorities were not justified in disallowing the foreign exchange fluctuation loss claimed by the assessee. The assessee's policy of restating foreign currency payables at the closing rate was consistent with Accounting Standard-11 and judicial precedents. The appeal was allowed in favor of the assessee, and the disallowance of Rs. 12,41,11,179 was set aside.

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Issues Involved:
1. Disallowance of foreign exchange fluctuation loss of Rs. 12,41,11,179.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss:
The primary issue in this appeal is whether the authorities were justified in disallowing the foreign exchange fluctuation loss claimed by the assessee against its business income. The assessee claimed a foreign exchange fluctuation loss of Rs. 12,41,11,179 in the Profit & Loss account due to the restatement of foreign currency payables as per year-end rates in accordance with Accounting Standard-11 (AS-11). The Assessing Officer (AO) disallowed this loss, citing the assessee's failure to furnish evidence/details of the restatement and invoking CBDT Instruction No. 3/2010, which pertains to forex derivatives. The AO concluded that the loss was speculative under section 43(5) of the Act.

2. Nature of Business and Accounting Policy:
The assessee is engaged in the resale of Silicon Graphics products and provides IT-related services. The assessee's accounting policy involves the restatement of foreign currency monetary items (receivables/payables) at the closing exchange rate as per AS-11, with the resulting exchange differences accounted for as income or expense. This policy has been consistently followed, and any gains from such restatements were duly offered to tax.

3. Decision of AO:
The AO categorized the foreign exchange fluctuation loss as speculative based on CBDT Instruction No. 3/2010, despite the assessee not engaging in forex derivatives. The AO's decision was based on a misinterpretation of the assessee's business activities and the nature of the transactions.

4. Submissions Before CIT(A) and Decision:
The CIT(A) did not uphold the AO's view that the loss was speculative but confirmed the disallowance on the grounds that the loss was claimed on the entire amount of current liabilities rather than transactions of the current year. The assessee argued that the entire amount of current liabilities must be restated as per AS-11 and the Supreme Court's mandate in CIT vs. Woodward Governor India P. Ltd. and Oil & Natural Gas Corp. Ltd. The CIT(A) failed to appreciate that the entire outstanding liabilities should be reinstated at the closing rate to give a true and fair view of the accounts.

5. Tribunal's Findings:
The Tribunal found that the AO's observation about the lack of evidence/details was factually incorrect. The assessee had submitted item-wise details of the foreign exchange loss, which were acknowledged by both the AO and CIT(A). The Tribunal noted that the CIT(A) did not dispute the genuineness of the intercompany payables/receivables, which were accepted in past assessments and transfer pricing scrutiny. The Tribunal also highlighted that the assessee's claim was consistent with AS-11 and supported by Supreme Court decisions and ITAT rulings in the assessee's own cases for previous years.

6. Conclusion:
The Tribunal concluded that the authorities below were not justified in disallowing the foreign exchange fluctuation loss. The assessee's policy of restating foreign currency payables at the closing rate was in line with AS-11 and judicial precedents. The appeal was allowed in favor of the assessee, and the disallowance of Rs. 12,41,11,179 was set aside.

Final Order:
The appeal of the assessee is allowed, and the disallowance of foreign exchange fluctuation loss is deleted. The order was pronounced in the open court on 24.08.2016.

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