TaxTMI 
TaxTMI 
2024 (11) TMI 237
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....he same will be applicable to all other assessment years as well. ITA 1363/CHNY/2023 - AY 2008-09: 2. The revenue has raised the following grounds of appeal: "1. The order of the ld. CIT(A) is opposed to law and facts of the case. 2. The ld. CIT(A) erred in deleting the disallowance of Provision for Forex loss amounting to Rs,4,09,91,273/- 2.1 The ld. CIT(A) has erred in stating that the loss is allowable as per the Hon'ble Supreme Court decision in the case of CIT vs. Woodward Governor India (P) Ltd. 312 ITR 254 without appreciating that the said decision is not applicable to the facts of the instant case as the assessee has only a provision for forex loss which has not been computed on scientific basis. 2.2 The ld. CIT(A) has failed to appreciate that in terms of the CBDT Instruction No.03/2010, Marked to Market losses where there is no actual settlement cannot be allowed and in the instance case, the assessee has only made a journal entry at the year end and as such the said provision made by the assessee is not allowable business loss. 3. The ld. CIT(A) has erred in deleting the disallowance on account of Forex loss on Forward contract amounting to Rs. 1,10,81,2....
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....his case, the original assessment was completed u/s 143(3) on 19,10.2012 and the proceedings for re-assessment was initiated by issue of notice u/s 148 on 19.03.2015. One of the main reasons recorded by the Assessing Officer is that "At the time of making year end provision, the opening balance of the provisions made in the earlier years, its withdrawal / utilization during the current year, the closing balance in the current year have not been disclosed. No foreign exchange gain/loss reserve/ provisions the balance sheet. Thus, it is clear that only restatement in respect of the outstanding at the yearend are only made year after year by debit the P&L account, without any adjustments in the subsequent year(s). In view of the above, the assessee's claim of forex loss, both at the time of remittances through banks and for the provisions made in the year end restatements is not in order." 10.2 It is seen that the two additions made in the assessment order under challenge in this appeal are inter-connected: i) Disallowance of provision tor forex loss of Rs. 4.09.91,273/- and ii) disallowance of forex loss on forward Contract of Rs. 1,10,81,279/-. These amounts were shown toget....
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....fied in purchases 2,81,77,287 Classified in purchases Balance 1,10,81,279 Classified under exchange fluctuation and disallowed (by the AO) 10.7 In other words, the total amount of exchange loss of Rs. 8,02,72,552/- in Sch.23 of the P&L a/c and the balance Rs. 2,81,77,287 is shown as part of purchases of Rs. 1087,79,3 7,8417/-. 10.8 In respect of the exchange loss on forward contracts, the assessee submitted that sometimes due to fund constraints, the company may in a position to honour the vendor payments and under such circumstances if the same is under forward cover, the company will have to cancel the forward Contracts and rebook the same. This difference as a result of cancellation (Gain/loss) is also booked in Forex loss or gain on settlement. 10.9 The assessee also submitted that these are purely commercial transaction based on underlying purchase invoices and with a genuine intention to cover exchange risks and not speculative as suggested in the Assessment Order. 10.9 The assessee has also stated that exchange loss booked in the next year represent only the difference between the year-end provision and actual remittance rate which also Confirms the fact tha....
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....recognises exchange differences as income or expense. In cases where, e.g., the rate of dolla rises vis-à-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS- 11 stipulates effect of changes in exchange rate Vis-à-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period 10.11 In the Concluding part of the decision, the Hon'ble Supreme Court has observed that 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile System, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and file brings into credit what is due, immedia....
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....ears which are on different footing as per materials on record. 10.14 On perusal of the assessment order, it is seen that no such material has been brought on record for this assessment year. As mentioned, the Assessing Officer has also not brought out any contrary facts in relation to the consistency in the claim of gain/loss on foreign exchange as laid down by the Hon'ble Supreme Court in the case of Woodward Governor (supra). 10.15 Therefore, applying the decision of the Hon'ble Supreme Court in case of CIT vs Woodward Governor India P Ltd (supra), I delete the additions made on account of i) disallowance of provision for forex loss of Rs. 4,09,9 1,273/- ii) disallowance of forex loss on forward contract of Rs. 1,10,81,279/-." Aggrieved by the order of the Ld.CIT(A), the revenue preferred an appeal before us. 5. The Ld.DR relying on the order of the AO, stated that the Ld.CIT(A) has erred in deleting the additions of provision for foreign exchange fluctuations of Rs. 4,09,91,273/- and loss on forward contract of Rs. 1,10,81,279/- made by the AO in the reassessment order, though the expenditure are in the nature of contingent and the provision is made on the basis o....
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....ce B, detailing the financial transactions associated with the purchase FY 2007-08 116-123 16 Copy of a forward cover booking for a corporation Bank, dated 22.11.2007 securing future currency exchange rates. 124-125 17 Copy of the invoice for the import order of MV Genco Muse Invoice, detailing the financial transactions associated with the purchase FY 2007-08 126-141 18 Copy of a Forward Cover CORPN Booking 2 dated 22-11-2007, securing future currency exchange rates. 142 19 Copy of the invoice for the import order of MV Santana Invoice, detailing the financial transactions associated with the purchase FY 2007-08 143-162 20 Copy of the Forward Cover CORPN booking dated 17-07-2007 detailing the financial transactions associated with the purchase and sales FY 2007-08 163 21 Copy of the Ledger account for year-end provisions related to exchange rate fluctuations for the Chennai branch. 164 22 Copy of the Ledger account for year-end provisions related to exchange rate fluctuations for the Mumbai branch. 165 23 Copy of the Foreign exchange Fluctuation ledger account documenting currency exchange transactions and adjustments for the Chennai branch ....
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....nted with respect to foreign currency fluctuation is not to be treated as speculative transaction and therefore, the provisions of section 43(5) of the Act cannot be made applicable to the assessee. 1. The actual settlement of the contract takes place on actual delivery of the currency for which the contract has been entered into and is of not the nature where settlement of a transaction takes place otherwise than on account of actual delivery. 2. The method of treatment adopted by the assessee is in line with the requirements of AS-11 which require profit or loss arising on account of the forward contracts the maturity period of which does not fall within the same accounting period to be recognized in the profit and loss account. 6.4 Foreign exchange forward contracts are not 'commodities' and hence, are outside the scope of section 43(5) of the Act: The term "commodity" has not been defined under the Act. The Forward Contracts (Regulation) Act, 1952 ('FCRA') defines 'goods' as "every kind of movable property other than actionable claims, money and securities." Since the provisions of section 43(5) of the Act apply only to transactions in 'commod....
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.... 43(5) of the Act. 6.7 Judicial precedents supporting that loss on forward contracts entered into in the course of the business of the Assessee are allowable as expenditure: The Ld.AR further took the support of decision of the Hon'ble Supreme Court of India in the case of Commissioner of Income-tax, Delhi v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326 (SC) held that: "The word 'expenditure' is not defined in the Act. The word 'expenditure' is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business, should be allowed in computing the income chargeable under the head '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....
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....should be allowed as a deduction in computing the total income of the assessee. 7. We have heard the rival contentions, perused the materials available on record and gone through the orders of the lower authorities. The AO had reopened the assessee's case u/s.147 for the reason that the income of the assessee has escaped assessment and the AO passed the order U/s.143(3) r.w.s. 147 of the Act, by disallowing the provision for foreign exchange fluctuations of Rs. 4,09,91,273/- and loss on forward contract of Rs. 1,10,81,279/-. The Ld.CIT(A) on perusal of the submissions made by the assessee, materials available on record and relying on the decision of the Hon'ble Apex court in the case of CIT vs. Woodward Governor India (P.) Ltd (Supra) deleted the both the disallowances made by the AO. We note that the assessee is a private limited company has maintained books of accounts on mercantile basis as prescribed under the Companies Act. Further, the assessee followed the Accounting Standard 11 - The Effects of Changes in Foreign Exchange Rates and accordingly the provision has been made towards foreign exchange gain or loss (PB page No.29) and claimed as expenditure in Schedule 23 of the ....
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....cases where, e.g., the rate of dolla rises vis-à-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS- 11 stipulates effect of changes in exchange rate Vis-à-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period 10.11In the Concluding part of the decision, the Hon'ble Supreme Court has observed that 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile System, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and file brings into credit what is due, immediately it becomes due and before it is actually received; (ii)....
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.... both the provision for foreign exchange fluctuations of Rs. 4,09,91,273/- and loss on forward contract of Rs. 1,10,81,279/- are allowable as expenditure in the impugned year and hence we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue. 9. In the result the appeal of the Revenue is dismissed. 10. ITA Nos.: 1364, 1365 & 1366/Chny/2023 for the A.Y. 2011-12, 2012-13 & 2013-14: The Common grounds raised by the assessee in all the above three appeals are as under: 1. For that the Order of the Learned Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case. 2. For that the Learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of provision for loss on account of foreign exchange fluctuation on forward contracts amounting to Rs. 14,62,02,308/-. 3. For that the Learned Commissioner of Income Tax (Appeals) and Assessing Officer erred in invoking the provisions of section 43(5) of the Act by holding that the forward contracts fall under the term 'Commodities' and thereby grossly erred in treating the transaction as speculative transaction without appreciating the facts and circumstances o....
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....AYs. Further, it is submitted that the AO, having considered the findings of the search had completed the search assessments u/s 143(3) r.w.s 153A of the Act for AY 2010-11 to AY 2017-18, which are also subject matter of appeals before this Hon'ble Tribunal. 4. Based on the above facts, it is submitted that the CIT(A) ought not have formed his opinion based on the subsequent events without appreciating the fact that the present appeals were emanating from the Original Assessments completed u/s 143(3) / 147 of the Act. 5. Considering the facts and circumstances of the case, it is most humbly prayed before Your Authority to direct the Assessing Officer to delete the disallowance of Provision for Foreign exchange loss and loss on Forward contract." 14. We have heard the rival contentions, perused the materials available on record and gone through the orders of lower authorities. The same issue is adjudicated in favour of the assessee on merits by dismissing the appeal of the revenue for the assessment year 2008-09 (supra). Since, the facts and issues in these appeals are identical and there is no change in the facts and circumstances therefore, following the rule of consistency, ....