TaxTMI 
TaxTMI 
2016 (8) TMI 454
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....ceived advance against export from its overseas buyers, M/s Bunge S.A. in Japanese Yen and due to foreign exchange fluctuation there was a loss of Rs. 17,63,24,155/- in the value of the advance as on 31st March, 2008. The AO disallowed the said loss. The AO was also of the view that this loss is a notional loss and further mark to market losses are not allowed. 3. Aggrieved by the order of the AO, the assessee filed appeal before the learned CIT(A). The learned CIT(A) after examining the facts held that the AO was wrong in assuming that this is a currency swap transaction and the difference represents mark to market loss. The learned CIT(A) held that this loss is a loss on account of exchange rate fluctuation arising on account of trading ....
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....ng a current liability outstanding as on 31st March, 2008, the same was converted at the applicable exchange rate in terms of Rule 115 of the Income Tax Rules as well as Accounting Standard AS-11 applicable to the assessee company. The exchange rate of Japanese Yen as on 31st March, 2008 was 40.03 as against 34.11 at the time when the payment was received. The difference on account of this exchange on the total advance worked out to Rs. 17,63,24,155/- and the same was accounted for in the profit and loss account for the year ended 31.03.2008. This loss was accounted for in accordance with the provisions of the Income Tax Act and the accounting policy consistently being followed by the assessee and is fully allowable and hence the learned CI....
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....as submitted that this is a loss suffered by the assessee on account of the fluctuation in foreign exchange rate as on the date of the balance sheet and is fully allowable under the provisions of the Income Tax Act. Attention was also invited to Rule 115 of Income Tax Rules whereby all foreign exchange transactions are to be valued at the rate of exchange on the specified date and for the purpose of computing profit and gains of business and provision the specified date mean the last date of the year. The assessee having computed the loss in accordance with the Rule 115, the learned CIT(A) was justified in deleting the disallowance made by the AO. It was also submitted by the learned AR that even the new Income Tax and Disclosure Standards ....
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.... was a liability on account of the advance received against export, the difference of Rs. 17,63,24,155/- was the loss suffered by the assessee on account of this fluctuation. 5.1 As per Rule 115 of Income Tax Rules, foreign exchange transactions while computing profit and gains from business and profession are to be converted at the exchange rate prevalent on the last date of the year and the difference so arising on account of such conversion is to be taken into consideration while computing profit and loss of the business or profession. As per the above facts it is evident that this transaction has been in the course of business. The advance is a trading advance against export. The export has been actually affected in the next year. The ....
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....erivatives as has been alleged by the AO. In this regard we are of the view that the AO has gone wrong in interpreting the bank guarantee issued by the bank on behalf of the assessee. This bank guarantee has been issued by the bank to provide security to the buyer in respect of the advance given for the product it wants to purchase from the assessee company. On going through the details mentioned in the bank guarantee, we note that there is no clause or terms in this bank guarantee which indicate that any kind of instrument has been created by the bank for treating the same as derivatives. In this regard we note that the observation of the learned CIT(A) is correct that the AO has gone on to elaborate the principle of derivatives from Pages....