Tribunal upholds deletion of foreign exchange loss disallowance in tax assessment

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of a foreign exchange fluctuation loss amounting to Rs. 8,50,70,594. The Tribunal found the assessee's accounting treatment consistent and noted the reversal of the loss in the subsequent year, supporting the deletion of the disallowance. The revenue's appeal was dismissed, and the assessee's cross-objection was also dismissed.

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Issues Involved:
1. Disallowance of foreign exchange fluctuation loss by the Assessing Officer (AO).
2. Deletion of the disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Applicability of CBDT Instruction No. 3 of 2010.
4. Consistency in accounting treatment of foreign exchange losses and gains.
5. Reversal of the foreign exchange fluctuation loss in the subsequent assessment year.

Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss by the Assessing Officer (AO):

The AO disallowed the foreign exchange fluctuation loss of Rs. 8,50,70,594/- claimed by the assessee, considering it as a "notional loss" that had not crystallized during the year under consideration. The AO observed that the loss was contingent and merely a book entry as of the balance sheet date (31/03/2012), and thus, not allowable under the Income Tax Act, 1961.

2. Deletion of the Disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)]:

The CIT(A) deleted the disallowance after considering the reversal of the loss in the subsequent assessment year (2013-14). The CIT(A) noted that the assessee had claimed the foreign exchange fluctuation loss due to the reinstatement of outstanding balances of debtors and creditors as per Accounting Standard-11. The CIT(A) relied on the decision of the Hon'ble Bombay High Court in CIT v/s Vinergy International Private Limited, which held that such losses are not notional but actual trading liabilities.

3. Applicability of CBDT Instruction No. 3 of 2010:

The AO had relied on CBDT Instruction No. 3 of 2010, which pertains to foreign exchange derivative transactions. However, the CIT(A) and the Tribunal observed that this instruction was not applicable to the assessee's case, as the loss was on account of reinstatement of debtors and creditors and not derivative transactions. The Tribunal cited the Supreme Court's decision in Woodward Governor India (P) Ltd, which supports the allowance of such losses as revenue expenditure.

4. Consistency in Accounting Treatment of Foreign Exchange Losses and Gains:

The CIT(A) and the Tribunal emphasized that the assessee consistently followed the same method of accounting for recognizing foreign exchange losses and gains. The assessee had shown unrealized gains in subsequent years and reversed the loss entry in the following assessment year, demonstrating consistency and compliance with Accounting Standards.

5. Reversal of the Foreign Exchange Fluctuation Loss in the Subsequent Assessment Year:

The Tribunal noted that the assessee had reversed the entry of the unrealized loss of Rs. 8,50,70,594/- in the assessment year 2013-14, as evidenced by the ledger account submitted during the appellate proceedings. This reversal substantiated the CIT(A)'s decision to delete the disallowance, as the loss was effectively neutralized over the two years.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 8,50,70,594/- on account of foreign exchange fluctuation loss. The Tribunal found no infirmity in the CIT(A)'s findings, which were based on the consistent accounting treatment by the assessee and the reversal of the loss in the subsequent year. The appeal of the revenue was dismissed, and the cross-objection filed by the assessee was also dismissed as it was not pressed.

Order Pronounced:

The order was pronounced in the open court on 07-10-2020.

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