Assessee could not be debarred from claiming a foreign exchange loss as per Accounting Standard-11 as deduction only for the reason that it had failed to debit liabilities in its books of account.
FULL TEXT OF THE ITAT MUMBAI JUDGMENT
The appeal filed by the Revenue is directed against the order dated 1.12.2016 passed by the learned CIT(A)-12, Mumbai and it relates to A.Y. 2009- 10.
2. The Revenue is aggrieved by the decision of the learned CIT(A) in holding that loss of ` 489.66 lakhs arising on revaluation of foreign exchange outstanding as at the year end is allowable as deduction even though the said loss has not been routed through the books of account.
3. We have heard the parties and perused the record. The assessee is engaged in the business of manufacture and export of fabrics and made ups. It is also engaged in the business of advertising and publicity. During the year under consideration, the assessee claimed loss of Rs. 489.66 lakhs relating to revaluation of foreign exchange assets and liabilities as at the year end. Technically it is called “mark to market loss”. The Assessing Officer noticed that the assessee has not accounted for this loss in the books of account which is in violation of requirements of Accounting Standard-11 issued by the Institute of Chartered Accountant of India. Further the CBDT, in its instruction No. 3 of 2010, has taken the view that mark to market loss is notional loss. Hence, the Assessing Officer disallowed the above said claim of the assessee.
4. The learned CIT(A) took the view that the assessee could claim loss even if it is not accounted for its books of account as per the decision rendered by Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Limited Vs. CIT (82 ITR 363). The learned CIT(A) noticed that the assessee has disclosed the loss in its annual accounts in the “Notes forming part of the Accounts-Schedule-16”. The learned CIT(A) followed the decision rendered by Hon’ble Supreme Court in the case of Woodward Governor India Ltd. (2009) 312 ITR 254, wherein Hon’ble Apex Court has taken the view that unrealized loss due to foreign exchange fluctuations on the last date of accounting year arising in respect of trading assets and liabilities is allowable as deduction. The learned CIT(A) further noticed that the assessee has accounted for this loss in the succeeding accounting year. After setting off above said loss, the assessee also declared profit of Rs. 301.55 lakhs in the succeeding year. Accordingly, the learned CIT(A) directed the Assessing Officer to delete the disallowance of Rs. 489.66 lakhs made by the Assessing Officer. Aggrieved, the Revenue has filed this appeal before us.
5. Having heard the rival contentions, we are of the view that the learned CIT(A) is justified in directed the Assessing Officer to allow loss of Rs. 489.66 lakhs, as the decision rendered the learned CIT(A) is supported by the decisions rendered by Hon’ble Supreme Court in the cases of Kedarnath Jute Manufacturing Co. Ltd. (supra) and Woodward Governor India Pvt. Ltd. (supra). In the first case, it was held that the assessee cannot be debarred from claiming a sum as deduction only for the reason that the assessee has failed to debit liabilities in its books of account. In the second case, it was held that unrealized loss due to foreign exchange fluctuation relating to trading assets and liabilities as on the last date of accounting year is allowable as deduction. We further noticed that the learned CIT(A) has placed reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. D. Chetan & Co., wherein also an identical issue was decided in favour of the assessee.
6. However, we noticed that the learned CIT(A) has also relied upon the books of accounts of the succeeding year i.e. pertaining to A.Y. 2010-11, wherein the assessee has claimed to have accounted for this loss and after setting off this loss it has disclosed net profit of Rs. 301.55 lakhs as foreign exchange fluctuation gains. We noticed that these materials were not confronted to the Assessing Officer. Since the loss of Rs.489.66 lakhs is held to be allowable in AY 2009-10, the same is liable to be disallowed in AY 2010- Otherwise, it will lead to double deduction of same amount, which is not permitted under the Act. We notice that the Ld CIT(A) has not examined this aspect. Hence, for the limited purpose of examining these aspects, we restore this issue to the file of the Assessing Officer. The assessee is directed to furnish all information and explanations that may be called for by the Assessing Officer in this regard.
7. In view of the foregoing discussions, the impugned claim of the assessee is to be allowed in the year under consideration. Since the details of entries passed in the year relevant to the AY 2010-11 need to be verified by the AO, we have restored this issue to the file of the AO for the limited purpose as stated in the earlier paragraph.
8. In the result, appeal filed by the Revenue is treated as dismissed.