AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1465
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....hat payment on account of foreign exchange ought to be added to the actual cost of purchase of diamonds and closing stock revalued accordingly, 3 Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting addition on account of sale of wastage and scrap value of Rs. 1,01,11,946/- without appreciating the fact that such scrap is valuable and used in various industries 4 The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. The appellant prays that the order of the CIT (A) on the above grounds be set aside and that of the Assessing Officer be restored." Ground No.1 3. Ground No.1 is in relation to the claim of mark to market' loss on account of revaluation of creditors at the end of the year due to foreign exchange fluctuation. The Assessing Officer (hereinafter referred to as the AO) in his assessment order noted that assessee has debited an amount of Rs. 8,23,15,161/- to the Profit and Loss Account on account of foreign exchange loss and out of the said loss, an amount of Rs. 4,03,05,856/- was incurred due to revaluation of creditors outstanding at the year-end towards the i....
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....ection 43A by the AO in the instant case is irrelevant for the reason that section 43A contemplates recomputation of the cost of the assets for the purpose of (a) depreciation u/s 32(1) and section 43(1), (b) capital assets used in scientific research u/s 35(1) (iv) and (C) regarding patent rights or copy rights u/s 35A. Therefore, the stocks purchased by the appellant through imports being trading assets, provisions of section 43A do not apply to the present case. In view of the above discussion and further relying upon the decision of the Hon'ble Supreme Court in the case of Woodward Governer, I am of the considered opinion that the loss of Rs. 4,03,05,856/- arising on revaluation of creditors at the year-end exchange rate is allowable u/s 37(1) of the Act and accordingly, I hereby delete the disallowance made by the AO Appellant succeeds on this issue." 5. We have gone through the above findings given by the Ld. CIT(A). The Ld. CIT(A) has rightly relied upon the decision of the Hon'ble Supreme Court in the case of 'CIT v. Woodward Governor India (P.) Ltd.' (2009) 179 Taxman 326, wherein, while dealing with the question as to whether the additional liability arising on....
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....he exchange rate between the reporting currency and the foreign currency at the date of the transaction. It further states that at each Balance Sheet date, foreign currency monetary items should be reported using the closing rate and non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of transaction. In other words, the revaluation of creditors or debtors or the loss incurred on the actual payment is not to be considered for the purpose of reporting the non-monetary items, like closing stock. Secondly, the foreign exchange loss incurred is not an item of cost, and rather it is a revenue outflow or an expenditure provided by prudence depending on the date of payment or the Balance Sheet date and therefore, it cannot be added to the cost of the inventory even under the AS-2. Even for a moment it is accepted that the increase in foreign exchange rate would yield a higher value of the unsold stocks, still it would amount that it would go to add to the realizable value and not to the cost of the said stocks. Thus, considering the principle that as a matter of prudence stocks are valued ....
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....ence in foreign exchange fluctuation at the time of receipt and at the time of repayment of the loan partly benefits the lender for the loss of interest in respect of rate. At the time of purchase of the inventory, if the item has been purchased from a foreign country then the amount is payable in foreign exchange. If the payment is deferred and the liability increases in Indian rupees then such liability can not to be termed to have increased the cost of the material. The learned Madras High Court in the case of Asher Textiles Ltd. v. C1T had an occasion to consider the meaning of the cost price. The learned High Court held that the cost price means the original cost price. In this case, the cost price for a particular item was Rs. 500 and market price at the end of the year was Rs. 300. The stock was valued at the end of the year at Rs. 300 as market price was low. In the subsequent year, the market price at the end of the year was Rs. 400. The assessee argued that the cost price at the end of the year was Rs. 300. The assessee argued that cost price of the item in the opening stock was Rs. 300 and therefore the same should be adopted as cost price in the subsequent year for valu....
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....ue is accordingly decided in favour of the assessee. Ground No.3 11. The AO, noted that assessee had reported 34% yield of finished goods on cutting and polishing of rough diamonds. That in the this process of cutting and polishing diamonds, certain wastage/scrap arises which is highly valuable and is normally used in making watches, gold rings / bangles and other jewellery. The AO observed that the assessee has not offered any income to tax on such scrap/wastage generated in the manufacturing process and accordingly, estimated the income thereof being 5% of the purchase value of rough diamonds, resulting in an addition of Rs. 1,01,11,946/-. Being aggrieved by the order of the AO, the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A), however, deleted the said addition observing as under: "5.4 As regards the estimated addition made towards the sale of scrap, I note that there is no material brought on record by the AO to show that appellant was in possession of any such scrap / wastage and has received monies on sale of the same. It is pertinent to note that no evidence whatsoever was found in this direction at the time of survey u/s. 133A of the Act co....