The CIT (A) in a well-reasoned and well-discussed order has not committed any error in coming to a conclusion that the assessee was entitled to claim deduction on account of foreign exchange fluctuation loss. (Para 15)
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “C”: NEW DELHI
BEFORE SHRI D.R. SINGH, JM & SHRI DEEPAK R. SHAH, AM
I.T.A. No. 1359/Del/2007
Assessment Year: 2003-04
|DCIT, Circle 12 (1),|
M/s Honeywell International (India) Pvt. Ltd., 4th floor, Zone-B, Nirlac House, B-25, Qutab Institutional Area, New Delhi.
PAN/GIR No. AABCA 7954K
Appellant By: Shri M.P. Singh, Sr. DR
Respondent by: Shri Neeraj Kumar Jain, CA
O R D E R
PER D.R. SINGH, JM
The Revenue has filed this appeal against the order of the CIT (A), New Delhi, passed in Appeal No. 78/06-07 dated 21.12.2006 on the following effective ground: –
“On the facts and in the circumstances of the case and in law, the CIT (A) erred in deleting the disallowance of foreign exchange fluctuation loss of Rs. 80,68,000/-.”
2. Briefly, the facts relating to the issue involved in the ground of appeal are that the assessee had claimed foreign exchange loss of Rs. 80.68 lakhs on the basis of conversion of liability standing as on 31.03.2003. According to the AO, the foreign exchange liability is in the nature of provision created in accounts without actually incurring the same; hence, the AO disallowed the deduction in computation of the income chargeable to tax and added back the same to the declared income.
3. On appeal, the CIT (A) deleted the addition made by the AO by making following observations in the order: –
“In the accounts, an amount of Rs. 80,68,159/- has been debited by way of net foreign exchange loss. The adjustment in P&L ale is terms of the method of accounting for the impact of foreign exchange to the appellant’s accounts as per the policy mentioned in the notes to the account. The policy states foreign transactions are recorded at the exchange rate prevailing as on the date of the transaction. Exchange differences arising on the settlement of these transactions are dealt with in the P&L ale. All mandatory items denominated in foreign currency are translated at the year end rates and exchange differences arising on such transactions are also adjusted in the P&L ale. The original cost of fixed assets acquired through foreign currency liability, is adjusted so as to show the liabilities at the rate of exchange prevailing at the end of the year. The exchange differences arising on repayment of these liabilities are also adjusted in the carrying amount of the fixed assets.”
The finding of the AO that foreign exchange fluctuation of the appellant debited to the P&L ale is an unascertained provision is not in line with the judgments in the case of ONGC Ltd. V/s DCIT 83 ITD 151 (Del), Sutlej Cotton mills Ltd. V/s Cit 116 ITR (S.C), CIT v/s. BHEL 239 ITR 756 (Del), JCIT v/s. Mahgalam Timber Products 89 ITD 316 (Cuttack), Gillette India Ltd. v/s. JCIT 156 Taxman 236 (JP) and other citations brought on record by the appellant. In view of the decisions above and also the fact that the appellant has consistently followed the policy of considering the exchange difference arising on settlement of these transactions in the P&L a/c, in line with AS-11, there is no room to hold that the loss on account of foreign exchange fluctuation debited to the P&L a/c was an unascertained liability. The disallowance stands deleted.”
4. Before us, learned DR for the Revenue except placing reliance on the reasoning given in the order of the AO was neither able to controvert the factual observations made in the order of the CIT (A) nor was able to cite any case law wherein a view contrary to the view taken by the CIT (A) has been taken by either the Tribunal High Court or the Apex Court.
5. On the other hand, learned AR for the assessee reiterating the submission made before the CIT A) and placing reliance on the case law cited before him further relied upon the latest decision of jurisdictional High Court of Delhi in the case of CIT vs. Woodward Governor (I) (P) Ltd., 294 ITR 461 (Del) submitted that the CIT (A) has rightly come to a conclusion that the assessee was entitled to claim deduction on account of foreign exchange fluctuation loss.
6. We have considered the rival submissions of both the parties, perused the records and carefully gone through the orders of the tax
7. In Oil & Natural Gas Corporation Ltd. vs. DCIT,  261 ITR (AT) 1 (SB) (Del) : 83 ITD 151, the Special Bench of ITAT (Delhi) after taking cognizance of various principles enunciated in various judicial decisions formulated certain test questions for deciding the issue relating to the allowability of loss on account of fluctuation in foreign currency rate and thereafter concluded that loss arising on account of fluctuation in foreign exchange fluctuation rate was allowable as deduction by making following relevant observation:
“Before concluding, we would like to point out that the assessee;s claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year, has been disallowed by the AO, inter-alia, on the ground that this liability was a contingent liability and the loss was a notional one. The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessee, Tribunal he ‘event’ i.e. the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessee IS a fait accompli and not a notional one.”
8. In the case of DCIT vs. Maruti Udyog Ltd. (2006) 99 ITD 666 (Delhi ITAT) the Tribunal held that additional liability incurred by the assesseee on account of variation in foreign exchange rate was in an allowable trading liability where borrowed foreign currency was utilized to meet need of working capital. The above conclusion was drawn by the Tribunal following the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra) and also the principles laid down in the case of Bharat Heavy Electricals Ltd. (supra) decided by the Delhi High Court and the Apex Court in the case of Sutlej Cotton Mills Ltd. (supra) holding that the additional liability incurred by the assessee on account of variation in foreign exchange rate was an allowable trading liability where the foreign exchange loans have been utilized on revenue account. In the present case, it was the stand of the assessee that loan obtained in foreign currency was utilized to meet the working capital requirements. The AO had also impliedly accepted this stand of assessee as he proceeded only on that footing. The method of accounting adopted by the assessee was consistent. Therefore, the decision of the Special Bench of the Tribunal was squarely applicable to the present case. Accordingly, following the said decision, the order of CIT (A) was upheld on this issue.
9. In JCIT vs. Abbot Laboratories (I) Ltd., 100 ITD 343 (Mum) the Tribunal w bile considering the issue regarding disallowance of loss on account of fluctuation in foreign currency in respect of liability incurred on payment against the import of raw material decided the issue in favour of the assessee and against the revenue by observing as under:-
“We find that this issue is now covered in favour of the assessee by the decision of the Special Bench in the case of Oil and Natural Gas Commission, 261 ITR 1 (AT), wherein, it has been held that loss arising on account of fluctuation of foreign exchange rate was allowable as deduction when liability to pay was on revenue account. In the present case, the fluctuation loss was incurred in respect of liability towards payment of raw material and thus, the loss was on revenue account. Following the decision of the Special Bench, we do not find merit in the ground raised by the Revenue. The order of the learned CIT (Appeals) IS, therefore, upheld.”
10. In CIT vs. Bharat Heavy Electricals Ltd., 239 ITR 756 (Del), their Lordships were required to answer the question whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in upholding the deletion of the disallowance of Rs. 7,65,21,000/- on account of additional liability on the change of rupee-rouble parity ratio? The Delhi High Court came to the conclusion that additional liability on account of exchange rate fluctuation was an allowable deduction. The operative part of the judgment is reproduced below:
“Thus, the answer to the first question whether the additional liability which the assessee had incurred on account of change in the rupee-rouble parity ratio would necessarily depend on the answer to the question whether the additional liability pertains to the trading asset or capital asset ………………. In the present case, admittedly the initial liability arose on account of purchase of new material, a trading debt, and after it had arisen, nothing happened to divest it of the character of a trading debt, and after it had arisen, nothing happened to divest it of the character of a trading debt. In this view of the matter, applying the principles of law adumbrated in Sutlej Cotton Mills’ Case  116 ITR 1 (S.C.), we are of the opinion that the Tribunal came to the correct conclusion that the additional liability incurred by the assessee on the change of the rupee-rouble parity ratio was allowable as a trading liability.”
11. In Sutlej Cotton Mills Ltd. vs. CIT, 116 ITR 1 (Se), the assessee, a limited company, was having its head office in Calcutta, it had inter-alia, a Cotton Mill situated in West Pakistan where it carried on business of manufacturing and selling cotton fabrics. In the financial year ending 31st March, 1954, being the accounting year relevant to the assessment year 1954-55, the assessee made a large profit in this unit. This profit obviously accrued to the assessee in West Pakistan and this profit, which may, for the sake of convenience, be referred to as Pakistan profit, amounted to Rs. 1,68,97,232 in terms of Indian rupees. Since the assessee was taxed on actual basis, the sum of Rs. 1,68,97,232 representing the Pakistan profit was included in the total income of the assessee for the assessment year 1954-55, and the assessee was taxed accordingly after giving double taxation relief in accordance with the bilateral agreement between India and Pakistan. However, the remittances of this profit were made in subsequent years and due to appreciation of Indian rupee against Pakistani rupee, the assessee suffered a loss in the process of conversion and claimed a deduction against the loss. This claim was, however, rejected by the ITO. The assessee carried the matter in further appeal to the Tribunal but the Tribunal also sustained the disallowance of these losses and rejected the appeals. On a reference, the High Court took substantially the same view as the Tribunal and held that no loss sustained by the assessee on remittance of the amounts from West Pakistan and that in any event the loss could not be said to be a business loss, because it was not a loss arising in the course of business of the assessee but it was caused by devaluation which was an act of State.
The matter went up to the Supreme Court and the issue before the Hon’ble Supreme Court was “Whether the assessee’s claim for the exchange loss in respect of remittance of profit from Pakistan, was not allowable as a deduction.”
The Hon’ble Supreme Court remanded the matter to the Tribunal with a direction to dispose it off in accordance with the directions given by it and in the light of the law laid down in this judgment. The operative part of the judgment on this issue is given in the following words:
“The cause which occasions the loss would be immaterial, the loss, being in respect of a trading asset, would be a trading loss. Consequently, we find it impossible to agree with the High Court that since the loss in the present case arose on account of devaluation of the Pakistani rupee and the Act of devaluation was an Act of sovereign power extrinsic to the business, the loss could not be said to spring from the business of the assessee. Whether the loss suffered by the assesee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss bout not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital ………..Putting it differently, if the amount in foreign currency is utilized or intended to be utilized in the course business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss ……………where an assessee in the course of its trade engages in a trading transaction, such as purchase of goods abroad, which involves as a necessary incident of the transaction itself, the -purchase of currency of the foreign country concerned, then profit resulting from appreciation or loss resulting from depreciation of the foreign currency embarked in the transaction would prime facie be a trading profit or a trading loss
12. In Calcutta Co. Ltd. vs. CIT, 37 ITR 1 (BC), the Apex Court held that where the assessee was following mercantile system of account, expenditure accrued but not actually incurred during the relevant accounting year, was allowable.
13. In an unreported case of Eicher Good Earth I.T. Appeal NO. 7078 (Del) of 1992, the ITAT Delhi bench held that in mercantile system of accounting it was mandatory to translate the outstanding liability on the basis of fluctuation in foreign currency rate.
14. In a recent decision approving the decision in the case of oil and natural Gas Corporation Ltd. Vs. DCIT,  261 ITR (AT) 1 (Del) (SB), the Hon’ble jurisdictional High Court of delhi in the case of Commissioner of Income Tax vs. Woodward governot India P. Ltd.,  294 ITR 451 (Delhi) in the facts where fixed assets were purchased by way of import, payments for which were agreed to be made in foreign exchange on a deferred payment basis, the cost of the assets was shown in the accounts of the assessee on the basis of the exchange rate on the date of the filing of the bill of entry. The contention of the assessee was that the fluctuation in foreign exchange rates would go to increase or decrease the liability on revenue account. It would qualify as business expenditure allowable under section 37 of the Income-tax Act, 1961, despite the fact that the liability had not been discharged in the concerned previous year. The other contention was that if there was an increase in liability remaining to be discharged in respect of an outstanding liability at the beginning of the year, the losses suffered as a result of the increase in the value of foreign currency as compared to Indian currency would be a business loss eligible for deduction under section 28 of the Act. On appeal by the Revenue contending that increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last day of the financial year was notional and could not be allowed as a deduction:
Held, (i) that the liability arose out of contracts already conclude. The liability already stood accrued the minute the contract was entered into. The mere postponement of the payment to a different date could not extinguish the, liability and render it national or contingent. Even if the liability was discharged at a future date, it would nevertheless be a liability which was certain and not contingent. The main ingredient of a contingent liability was that it depended upon the happening of a certain event. The change in the value of foreign currency in relation to Indian currency by the assessee was a fait account and not a notional one. Therefore the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year was allowable as a deduction and was not notional or contingent. Bharat Earth Movers Ltd. vs. CIT  245 ITR 428 (SC) relied on.
(ii) That there was no .provision for the assessment of the actual cost at a stage subsequent to the date of acquisition of the asset. Depreciation had to be worked out therefore only on the basis of the actual cost at the time of acquisition to provide for subsequent revisions to the actual cost. In computing the capital gains arising to the assessee on the sale or transfer of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the installments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, would be added to the original actual cost of the asset. Section 43A secures that where there was a decrease in the rupee liability of the assessee in respect of assets acquired by him from abroad due to a change in the exchange value of the rupee, the original actual cost of the asset would be correspondingly reduced. The propitiations of section 43A apply in a case where an assessee has acquired any capital asset from abroad for the purpose of his business or profession, on credit or on deferred payment terms, or against a loan in foreign currency, and the whole or part of the cost of such asset or of the loan in foreign currency is outstanding as on the date on which there was a change in the rate of exchange of currency. In such a case where in consequence of the change in the rate of exchange of currency, there was an increase or reduction in the assessee’s liability as expressed in Indian currency for payment of the whole or a part of the cost of the assets or of the loan in foreign currency, the original actual cost to the assessee, of the machinery or plant or other capital asset, was required to be increased or, as the case may be, reduced, correspondingly. In capital account cases where the cost of asset had been either paid fully or in part prior to the fluctuation in the rate of foreign exchange, the cost of the asset would correspondingly be permitted to be reworked for purposes of repayment or depreciation or investment allowance, as the case may be, with reference to the rate prevailing on the last date of the financial year in which the fluctuation occurs.
(iii) That in determining whether there has in fact been accrual of liability or income, the accountancy standards prescribed by the Institute of Chartered Accountants of India had to be followed and applied.
(iv) That the amendment of section 43A with effect from April 1, 2003, was prospective. The effect of the amendment was plainly to negate the benefit that was extended to the assessee as a result of the interpretation placed on the provisions as they stood prior to the amendment. The amendment itself made it clear that it was with effect from April 1, 2003. This was further clarified by the Central Board of Direct Taxes Circular No.8 of 2002 ( 258 ITR (St.) 13) which in no uncertain terms stated that the amendment would take effect from April 1, 2003, .and would accordingly apply in relation to the assessment year 2003-04 and subsequent years.
15. In view of the ratio of decisions (supra) and the principles laid therein which fully apply to the issue under consideration before us, we are of the opinion that the CIT (A) in a well-reasoned and well-discussed order has not committed any error in coming to a conclusion that the assessee was entitled to claim deduction on account of foreign exchange fluctuation loss. Since, the order of CIT (A) is in conformity with the ratio of decisions (supra) and the principles laid therein, we do not find any illegality or infirmity in the well-reasoned order of CIT (A) in this regard and accordingly the same is upheld and ground of appeal taken by the revenue is rejected.
16. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the Court on 25th April, 2008.