2017 (4) TMI 725 - AT - Income Tax

Tribunal upholds decision on forward booking loss & forex loss, emphasizing business interests.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of a forward booking loss treated as speculation loss, emphasizing that the ... Disallowance on account of forward booking loss treated as speculation loss - CIT-A allowed claim - Held that:- Even speculative transactions, as long as such transactions are incidental to the main business of the assessee, cannot result in the profits or losses from such transactions being treated separately as that of a speculation business and thus making them ineligible for being set off against normal business profits and losses. Nothing really, therefore, turns on a transaction being settled, otherwise than through delivery, as long as such a transaction has standalone character isolated from the main activities of business. For this short reason alone, the action of the Assessing Officer must be held to be unsustainable in law. In any event, there is a categorical finding by the CIT(A) that the transactions in question were integral to the business and that the loss on such transactions is admissible as deduction under section 37(1). There is a categorical finding by the CIT(A) that the transactions were entered into to safeguard legitimate business interests of the assessee in respect of its foreign exchange transactions. Having heard the rival contentions and having perused the material on record, we approve these well reasoned findings of the first appellate authority, and, for this reason also, decline to interfere in the matter. - Decided against revenue Addition on account of EEFC account on account of forex loss claimed by Assessee - CIT-A allowed claim - Held that:- As regards the amount of ₹ 87,12,768 all it represents is the difference in conversion rate, of US Dollars into Indian rupees, at the point of time when the EEFC account was originally credited vis-à-vis the point of time when subsequent debit entry, or vice versa, is made. As a matter of fact, these entries, truly speaking, do not even represent losses but merely deal with corrections in the conversion rate with respect to the amounts utilized from EEFC account. These corrections are to be taken into account in computing the correct profits and losses. Be that as it may, whether these losses are treated as losses or corrections, the effect is the same- i.e. accounting for foreign exchange at the right rates. Quite interestingly, similar entries resulting in gains have been accepted by the Assessing Officer. These entries are admittedly in accordance with the Accounting Standards which are binding on the assessee. The method of accounting has been consistently followed by the assessee, it is fair and reasonable, and, as a result of the losses so booked, the accounts of the assessee show true and fair picture of the transactions. It is also noted that similar approach, when it resulted in net gains in subsequent assessment years i.e. 2011-12 and 2012-13, was accepted by the revenue authorities. As the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assesse is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.- Decided against revenue Issues Involved:1. Deletion of disallowance of Rs. 4,20,000/- made on account of forward booking loss treated as speculation loss.2. Deletion of addition of Rs. 1,15,37,454/- made on account of EEFC account, on account of forex loss claimed by Assessee when these were proved to be not pertaining to import payable or export receivable.Issue-wise Detailed Analysis:1. Deletion of disallowance of Rs. 4,20,000/- made on account of forward booking loss treated as speculation loss:The Assessing Officer (AO) contested the order of the CIT(A) which deleted the disallowance of Rs. 4,20,000/- treated as speculation loss. The assessee had shown a forward booking loss from forward contracts for the sale of foreign exchange, which was claimed as a business loss. The AO argued that since the contract was settled otherwise than through delivery, it should be treated as speculative loss under Section 43(5) of the Income Tax Act. The CIT(A), however, held that these transactions were to guard against fluctuations in foreign exchange rates and were incidental to the business, thus deductible under Section 37(1). The Tribunal agreed with the CIT(A), noting that speculative transactions incidental to the main business cannot be treated separately as speculation business. The Tribunal emphasized that the transactions were integral to the business and aimed at safeguarding legitimate business interests in foreign exchange dealings. Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the AO's appeal on this ground.2. Deletion of addition of Rs. 1,15,37,454/- made on account of EEFC account, on account of forex loss claimed by Assessee when these were proved to be not pertaining to import payable or export receivable:The AO disallowed the forex loss claimed by the assessee on the grounds that these were not related to import payable or export receivable, thus treating them as capital in nature. The assessee maintained a US Dollar denominated EEFC account and recorded foreign exchange gains and losses based on the difference in conversion rates at different points in time. The AO argued that the amounts were not deductible under the Income Tax Act and treated the year-end balance adjustments as notional entries. The CIT(A) reversed the AO's decision, following the Supreme Court's ruling in the case of CIT Vs Woodward Governor India Pvt Ltd, which allows for the deduction of foreign exchange losses in computation of business profits. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's accounting method was consistent with the Accounting Standards and provided a true and fair view of the transactions. The Tribunal emphasized that anticipated losses, even if not crystallized, should be accounted for if they can be reasonably quantified. Therefore, the Tribunal dismissed the AO's appeal on this ground as well.General Grounds:Grounds 3 and 4 were general in nature and did not require specific adjudication.Conclusion:The appeal was dismissed in its entirety, with the Tribunal pronouncing the judgment in the open court on April 11, 2017.