TaxTMI 
TaxTMI 
2020 (11) TMI 366
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....ced that assessee has claimed foreign exchange fluctuation loss amounting to Rs. 8,63,86,195/-. On further, verification of the detail filed, the Assessing Officer observed that these losses was inclusive of notional losses of Rs. 8,50,70,594/-. On verification of the detail filed, the Assessing Officer was of the view that such loses was contingent in nature as has not been crystallized during the year under consideration, therefore, claim of amount of Rs. 8,50,70,594/- was disallowed and added to the total income of the assessee. 4. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the impugned disallowance after taking into consideration the reversal factor made during the assessment year 2013-14 by the assessee. The relevant decision of ld. CIT(A) is reproduced as under:- "4.5. I have carefully considered the Assessment Order and submission filed by the Appellant. It is observed that the Appellant has claimed foreign exchange fluctuation loss amounting to Rs. 8,63,86,195/-. It is further observed that out of total loss incurred, Rs. 8,50,70,594/- pertains to reinstatement of outstanding balance of debtors and creditors due to fluctuation in fore....
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....e Appellant contended that it is not necessary that the expenditure covers only that amount which goes out from the pocket of the person but includes any expenditure including loss incurred during the course of business and profession. For the same, reliance was placed on the decision of Woodward Governor India (P) Ltd [2009] 179 Taxman 326 (SC). The Appellant has also relied on the decision of Hon'ble Ahmedabad IT AT in case of Deputy Commissioner of Income-tax, Circle 2 (1) -(1), Ahmedabad v. E/itecore Technologies (P.) Limited IT Appeal Nos. 197 AND 508 wherein it is held that said Instruction cannot overwrite decision of Hon'ble Supreme Court in the case of Woodward Governor (supra) 4.6. On careful consideration of the entire facts, it is observed that during the course of assessment proceedings, vide letter dated 18/03/2016 the Appellant has submitted the Foreign exchange fluctuation loss is on account of reinstatement of outstanding balances of debtors and creditors. Due to difference in the exchange rate as on 31/03/2012 the debtors and creditor balances were reinstated as per the rates prevailing on the balance sheet date. The loss arising on such conversion was c....
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....ear under consideration was not an ascertained liability, but a contingent liability and, consequently, it had to be added back to the total income of the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order. On second appeal, the Tribunal, while relying on its earlier decision in the assessee's own case for the earlier years, held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year had to be allowed. The said decision of the Tribunal was upheld by the High Court. On revenue's appeal to the Supreme Court: HELD- There was no dispute that in the previous years, whenever the dollar rate stood reduced, the department had taxed the gains which accrued to the assessee on the basis of accrual and it was only in the year in question when the dollar rate stood increased resulting in a loss, that the department had disallowed the deduction/debit. That fact was important. It indicated the double standard adopted by the department. [Para 10] The word 'expenditure' is not defined in the Act. The word 'expenditure' is, therefore, required to be understoo....
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....r. This is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1). with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last 'date is relevant, because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year's account in a continuing business are not brought to the charge as a matter of practice, though loss due to fall in the price below cost is allowed even though such....
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.... the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Section 145(1) enacts that for the purpose of sections 28 and 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, section 145(1) was attracted to the facts of the instant case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it was actually disbursed. Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the Assessing Officer would come to the conclusion for reasons to be given that the system do not reflect true and correct profits. In the instant case, there was no finding given by the Assessing Officer on the correctness of the accounting standard followed by the assessee. [Para 16] AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. In case of the revenue items falling under section 3....
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....ead 'profits and gains of business". In sections 30 to 36, the expression 'expenses incurred' as well as 'allowances and depreciation' have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, the Parliament has used the expression 'any expenditure' in section 37 to cover both. Therefore, the expression 'expenditure' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a loss', even though said amount has not gone out from the pocket of the assessee. [Para 13"] It is observed that the Appellant has provided for marked to market loss pertaining to trading transaction as on 31st March, 2012 and such entry was reversed on 1st April, 2012. The Appellant has submitted the ledger account of foreign exchange loss/gain for AY 2013-14 wherein above reversal entry is apparent. The Appellant has shown exchange difference income (net) for Rs. 58,15,877/- in AY 2013-14 which is after considering above reversal entry of Rs. 8,50,70,595/- being income which is netted off against actual realized gain/loss for said Assessment Year and further marked to market loss/....