Fall in net profit rate due to dollar rate fluctuation (currency fluctuations): additions to income deleted in Indo Colchem case by Ahmedabad ITAT
Recently, in DCIT vs. Indo Colchem Ltd. [ITA Nos. 1902 & 2492/Ahd/2014 A.Y. 2009-10 & 2011-12, decided on 07. 3.2018], briefly, in ITA No. 1902/Ahd/2014, ground of appeal taken by Revenue was the CIT(A) has erred in law and on facts in deleting the addition of Rs.2,24,64,664/- made on account of low net profit, without properly appreciating the facts of the case and the material brought on record.
In this case, return of income declaring income of Rs. 1,14,00,998/- was filed on 30th September, 2009. Subsequently, the case was selected under scrutiny by issuing of notice under section 143(2) of the IT Act, 1961 on 28th September, 2010. The assessee company was engaged in the business of manufacturing of dies and dies intermediates and trading in chemicals. During the course of assessment proceedings, the Assessing Officer(AO) has noticed that assessee has shown gross profits of Rs 1,96,24,039/- @ 2.85% on sale of Rs. 68,92,45,395/-. In the immediate preceding year, the assessee had shown net profit of Rs. 2,45,92,180/- @ 4.03% on sale of Rs. 61,04,02,990/-. On scrutiny, the AO had observed that assessee had included gain and loss from foreign exchange fluctuation in computing the profit of the business. However, he was of the opinion that gain and loss of foreign exchange was income from other sources, therefore, she has re-calculated the net profit for the year under consideration after excluding gain from foreign exchange fluctuation as the calculation made by the AO was as under:-
|A.Y. 2009-10||A.Y. 2008-09|
|Net Profit||Rs. 1,96,24,039/-||Rs. 2,45,92,180/-|
|Less: Gain from Foreign Exchange Fluctuation||Rs.61,39,020/-|
|Add: Loss from Foreign Exchange Fluctuation||Rs.7,5 1,667/-|
|Actual business Net profit||Rs.61,39,020/-||Rs.2,53,43,847/-|
|Net profit ratio||0.89%||4.15%|
In view of the above, the AO observed that the net profit of the assessee for the year under consideration was reduced by 3.26% on comparing to preceding A.Y. 2008-09. Consequently, the AO took the net profit for the year under consideration at 4.15% and made addition of Rs. 22464664/- to the total income of the assessee.
During the course of appellate proceedings before ITAT, departmental representative supported the order of AO. On the other hand, the Counsel furnished paper book containing detailed submission made before CIT(A), accounts of exchange rate fluctuation, month-wise rate of US dollar, audited accounts etc. He had contended that reason for fall in the net profit of the assessee during the year under consideration was due to exchange rate variation as the US dollar price in terms of rupees were not favorable.
The Members of ITAT, Ahmedabad observed that there was mistake in the calculation of the net profit by the AO. The AO had reduced the gain from foreign exchange fluctuation of Rs. 61,39,020/- from the net profit shown by the assessee during the year. In fact, there was loss from foreign exchange fluctuation and the same were claimed as expenditure by the assessee in the profit and loss accounts. The AO had erred in reducing the loss on account of foreign exchange fluctuation. It was clear from the findings of the CIT(A) that after correcting the error made by the AO, the net profit rate was almost comparable to the preceding year. In view of these facts, there was error in the estimation of net profit by the AO. Therefore, ITAT held that CIT(A) had correctly deleted the addition wrongly framed by the AO.
In ITA No. 2492/Ahd/2014, ground was taken by Revenue that the CIT(A) has erred in law and on facts in deleting the addition of Rs. 36,73,466/- made on account of low net profit, without properly appreciating the facts of the case and the material brought on record.
In this case, return of income declaring income of Rs. 2,53,52,715/- was filed on 29th September, 2011 Subsequently, the case was selected under scrutiny by issuing of notice under section 143(2) of the Act on 14th September, 2012. On scrutiny, the AO had noticed that the gross profit of the assessee had increased from 12.49 to 12.67%. However, the net profit had fallen from 4.01% to 3.41%. The assessee had explained that the fall in net profit was because of increase in foreign cost by way of increase in exchange rate variation which resulted in fall in the net profit during the year under consideration. The AO had not accepted the explanation of the assessee by stating that assessee had not explained the same with quantitative data, therefore, the AO had assessed the net profit of the assessee at 4.01% as against 3.41% shown by the assessee and made addition to the amount Rs. 36,73,466/-.
On appeal before ITAT, the learned Members perused the material on record carefully. They observed that it was undisputed fact that during the year under consideration there was loss of Rs.13.60 lacs due to foreign exchange rate variation whereas in the earlier year there was an income of Rs. 50.89 lacs because of foreign exchange fluctuation. The above facts demonstrate that the reason for fall in the net profit during the year was on account of incurring foreign exchange loss during the year compared to tremendous profit earned in the earlier year on account of foreign exchange fluctuations. The ITAT Members held that we are inclined with the findings of the CIT(A).