Double taxation barred on foreign exchange restatement and inventory provision reversal where year-wise adjustments were already reflected.

A further addition for notional foreign exchange gain or loss on external commercial borrowings was impermissible because the assessee consistently restated the foreign currency borrowing year by year under the applicable accounting framework, and the same exchange fluctuation effect had already been reflected in tax computations, so sustaining the addition would have caused double taxation. The addition for reversal of provision for slow moving inventory was also unsustainable because the provision had been taxed in the earlier year and the reversal merely neutralised that earlier charge without creating a fresh deductible expense. Revenue's appeals failed; the cross objections were not pressed and did not survive.

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Issues: (i) Whether the deletion of the addition arising from notional foreign exchange gain or loss on External Commercial Borrowings was justified. (ii) Whether the deletion of the addition arising from reversal of provision for slow moving inventory was justified.

Issue (i): Whether the deletion of the addition arising from notional foreign exchange gain or loss on External Commercial Borrowings was justified.

Analysis: The assessee consistently restated the outstanding foreign currency borrowing at year-end in accordance with the applicable accounting standards, and the related gain or loss had been reflected and adjusted on a year-to-year basis in the computation of income. The same exchange fluctuation effect had already been considered in earlier and later years, and the net impact, if the addition were sustained again, would result in taxation of the same amount twice. The treatment adopted by the assessee was found to be consistent and in line with the statutory and accounting framework governing such foreign exchange adjustments.

Conclusion: The deletion of the addition was upheld and the issue was decided in favour of the assessee.

Issue (ii): Whether the deletion of the addition arising from reversal of provision for slow moving inventory was justified.

Analysis: The provision for slow moving inventory had been made and taxed in the preceding year, and when the provision was reversed in the year under consideration the assessee reduced the corresponding amount in computing book profit. The adjustment was consistent with the yearly inventory valuation exercise and prevented the same amount from being taxed twice. The factual record showed that the reversal merely neutralised the earlier provision and did not create a fresh deductible expenditure.

Conclusion: The deletion of the addition was upheld and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeals failed, and the assessee's cross objections, having been not pressed, did not survive for adjudication.

Ratio Decidendi: Where a foreign exchange fluctuation adjustment or reversal of inventory provision has already been given effect to in the tax computation on a consistent year-wise basis, a further addition in the subsequent year is impermissible if it would lead to double taxation of the same amount.

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