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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: Shri Rajpal Yadav & Shri Amarjit Singh
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH (Virtual Court) Before: Shri Rajpal Yadav, Vice President And Shri Amarjit Singh, Accountant Member ITA No. 1847/Ahd/2018 Assessment Year 2012-13
Dy. CIT, Circle-1(1)(1), Awn Agro Pvt. Ltd, A Wing, Room No. 309, Fortune House, 3rd Floor, Pratyakhash Vs Near Navrangpura Kar Bhavan, Ambawadi, Railway Crossing, Ahmedabad-380015 Ahmedabad PAN: AAJCA3256G (Respondent) (Appellant)
CO No. 76/Ahd/2019 (In ITA No. 1847/Ahd/2018) Assessment Year 2012-13
Awn Agro Pvt. Ltd, Dy. CIT, Circle- Fortune House, 1(1)(1), Near Navrangpura Vs A Wing, Room No. 309, 3rd Floor, Railway Crossing, Ahmedabad Pratyakhash Kar (Appellant) Bhavan, Ambawadi, Ahmedabad-380015 PAN: AAJCA3256G
Revenue by: Shri O.P. Sharma, CIT-D.R. Assessee by: Shri Vartik R. Choksi, A.R.
Date of hearing : 09-09-2020 Date of pronouncement : 07-10-2020 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
I.T.A No. 1847/Ahd/2018 & C.O. No. 76/Ahd/2019 A.Y. 2012-13 Page No 2 DCIT vs. Awn Agro Pvt. Ltd.
This revenue’s appeal and assessee’s cross objection for A.Y. 2012-13, arise from order of the CIT(A)-1, Ahmedabad dated 28-06-2018, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The solitary ground of appeal of the revenue is against the decision of ld. CIT(A) in deleting the addition of Rs. 8,50,70,594/- made on account of disallowance of foreign exchange fluctuation loss.
The brief fact of the case is return of income declaring income of Rs. (- )81,56,56,631/- was filed on 23rd November, 2012. The case was subject to scrutiny assessment and notice u/s. 143(2) was issued on 1st August, 2014. During the course of assessment, the Assessing Officer noticed that assessee has claimed foreign exchange fluctuation loss amounting to Rs. 8,63,86,195/-. On further, verification of the detail filed, the Assessing Officer observed that these losses was inclusive of notional losses of Rs. 8,50,70,594/-. On verification of the detail filed, the Assessing Officer was of the view that such loses was contingent in nature as has not been crystallized during the year under consideration, therefore, claim of amount of Rs. 8,50,70,594/- was disallowed and added to the total income of the assessee.
The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the impugned disallowance after taking into consideration the reversal factor made during the assessment year 2013-14 by the assessee. The relevant decision of ld. CIT(A) is reproduced as under:- “4.5. I have carefully considered the Assessment Order and submission filed by the Appellant. It is observed that the Appellant has claimed foreign exchange fluctuation loss amounting to Rs.8,63,86,195/-. It is further observed that out of total loss incurred, Rs.8,50,70,594/- pertains to reinstatement of outstanding balance of debtors and creditors due to fluctuation in foreign exchange rate as on 31.03.2012.The Assessing Officer has observed that Loss on account of reinstatement or cut off rate is a notional loss. Further, he observed that Foreign exchange fluctuation loss of Rs.8,50,70,594/-was merely a book entry as on date of finalization of Balance
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Sheet on 31/03/2012 and [thus, the same is not allowable. The Assessing Officer has further observed that the loss of Rs.8,50,70,594/- is not on the basis of foreign exchange rate prevailing on the date of making the actual payment / receipt and loss quantified on account of foreign Exchange Rate as on 31.03.2012 actually not settled by the appellant. The Assessing Officer has relied upon Instruction No. 3 of 2010 dated 23/03/2010 of CBDT and treated such loss as notional losses. On the other hand the Appellant has argued that it has incurred unrealized loss of Rs.8,50,70,594/- as a result of reinstatement of outstanding balance of debtors and creditors due to fluctuation in foreign exchange rate as on 31.03.2012. The said loss has been incurred during the course of appellant's business of manufacturing and trading of castor oil or import of chemicals and export of Castor oil & itsby products and accordingly, such loss being on account of trading liability is charged to profit and loss account and the same is allowable expenditure. The said facts were submitted by Appellant during the course of assessment proceedings which is not disputed by AO. Further, the Appellant has argued that the Assessing Officer has relied on the Instruction No.03/2010 dated 23/03/2010 of CBDT which is not relevant in the present factual matrix of the case as the said instruction is related to foreign exchange derivatives transactions. It is further reiterated that the loss disallowed by the Assessing Officer does not pertain to foreign exchange derivative instruments but is on account of outstanding balances of debtors and creditors as on 31/03/2012and in accordance with Accounting Standard-11 issued by the Institute of Chartered Accountants. To support its contention the appellant placed reliance on decision of Hon'ble Bombay High Court decision in the case of CIT V/s Vinergy International Private Limited [Tax Appeal No. 376 of 2014], dated 11th August, 2016. Further, the Appellant has also argued that the circulars are binding on Assessing Officer and not on the Appellant. Further, the Appellant contended that it is not necessary that the expenditure covers only that amount which goes out from the pocket of the person but includes any expenditure including loss incurred during the course of business and profession. For the same, reliance was placed on the decision of Woodward Governor India (P) Ltd [2009] 179 Taxman 326 (SC). The Appellant has also relied on the decision of Hon'ble Ahmedabad IT AT in case of Deputy Commissioner of Income-tax, Circle 2 (1) -(1), Ahmedabad v. E/itecore Technologies (P.) Limited IT Appeal Nos. 197 AND 508 wherein it is held that said Instruction cannot overwrite decision of Hon'ble Supreme Court in the case of Woodward Governor (supra) 4.6. On careful consideration of the entire facts, it is observed that during the course of assessment proceedings, vide letter dated 18/03/2016 the Appellant has submitted the Foreign exchange fluctuation loss is on account of reinstatement of outstanding balances of debtors and creditors. Due to difference in the exchange rate as on 31/03/2012 the debtors and creditor balances were reinstated as per the rates prevailing on the balance sheet date. The loss arising on such conversion was claimed while filing Return of Income as the same relates to the business of the appellant. Such submission was also reproduced by Assessing Officer on page 8 of Assessment Order and AO has not rebutted such contention of Appellant that foreign exchange fluctuation loss is on account of reinstatement of revenue transactions and same is not related to capital transaction. Further, it is observed that Instruction No. 03/2010 issued by CBDT dated 23/03/2010 relied by Assessing Officer refers to disallowance of loss arising on account of foreign exchange derivative transactions whereas in the case of Appellant, the said loss was on account of reinstatement of debtors and creditors on balance sheet date and such loss is accounted or claimed in accordance with Accounting Standard-11 issued by the Institute of Chartered Accountants. Reliance is placed on decision of Hon'ble Bombay High Court decision in the case of CIT v/s Vinergy International Private Limited [Tax Appeal No. 376 of 2014], dated 11th August, 2016 wherein the Court has held as under: In the present facts, we find that the loss was not on account of derivatives but are in fact losses and gains in foreign exchange relating to the purchase and sales transactions i.e. creditors and debtors outstanding as on 31st March, 2010. Therefore, the Instruction no.3 of 2010 issued by CBDT would have no application to the facts of the present case. In fact, the issue arising herein would be covered by the principles laid down by the Apex Court in Woodward Governor India (P) Limited (supra).
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Accordingly, as the impugned order of Tribunal followed by the decision of the Apex Court in Woodward Governor India (P) Limited (supra) which governs the issue, the question as proposed does not give rise to any substantial question of law. Thus, not entertained." . 4.7. It is observed that claim of Appellant is allowable revenue expenditure and not notional loss is also supported by decision of Hon'ble Supreme Court in case of Governor India (P.) Ltd [2009] 179 TAXMAN 326 wherein it is held as under: "FACTS-1 The assessee-company had debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items, on the last date of the accounting year. The Assessing Officer held that the liability as on the last date of the previous year under consideration was not an ascertained liability, but a contingent liability and, consequently, it had to be added back to the total income of the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order. On second appeal, the Tribunal, while relying on its earlier decision in the assessee's own case for the earlier years, held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year had to be allowed. The said decision of the Tribunal was upheld by the High Court. On revenue's appeal to the Supreme Court: HELD- There was no dispute that in the previous years, whenever the dollar rate stood reduced, the department had taxed the gains which accrued to the assessee on the basis of accrual and it was only in the year in question when the dollar rate stood increased resulting in a loss, that the department had disallowed the deduction/debit. That fact was important. It indicated the double standard adopted by the department. [Para 10] 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' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from the pocket of the assessee. [Para 13] . The provisions of section 145 recognise the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under sections 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word 'paid' in sect/on 43(2), which is used in several sections from sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis of which profits or gains are computed under section 28/29. That is why, in deciding the question, as to whether the word 'expenditure' in section 37(1) includes the word 'loss', one has to read section 37(1) with sections 28, 29 and 145(1). Accounts regularly maintained in the course of business are to be taken as correct, unless there are_strotig and sufficient reasons to indicate that they are unreliable. Under section 28/7), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take intQ__account stock- in-trade for ^determination of profits. The Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account, the value of the stock-in-trade at the beqinninq and at the end of the year should be entered at cost _or_jnarket price, whichever is lower. This
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is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1). with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last 'date is relevant, because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year's account in a continuing business are not brought to the charge as a matter of practice, though loss due to fall in the price below cost is allowed even though such loss has not been realized actually. The said system of commercial accounting can be superseded or modified by legislative enactment. Under section 145(2), the Central Government is empowered to notify from time-to-time the Accounting Standards to be followed by any class of the assessees or in respect of any class of income. Accordingly, under section 209 of the Companies Act, mercantile system of accounting has been made mandatory for companies, in other words, Accounting Standard, which is continuously adopted by an assessee, can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the instant case, there was no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there was no finding given by the Assessing Officer stating that the assessee had not complied with the Accounting Standards. [Para 14] Therefore, in the instant case, the 'loss' suffered by the assessee on account of the exchange difference as on the date of the balance sheet was an item of expenditure under section 37(1). [Para 15] Thus, it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of Recounting. It is well- established that on general principles of commercial accounting, in the profit and loss account, the value of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower - the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it is not possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word 'profit' implies comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Section 145(1) enacts that for the purpose of sections 28 and 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, section 145(1) was attracted to the facts of the instant case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it was actually disbursed. Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the Assessing Officer would come to the conclusion for reasons to be given that the system do not reflect true and correct profits. In the instant case, there was no finding given by the Assessing Officer on the correctness of the accounting standard followed by the assessee. [Para 16]
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AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. In case of the revenue items falling under section 37(1), para 9 of AS-11, which deals with recognition of exchange differences, needs to be considered. Under this para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-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 profit and loss account for the reporting period. [Para 18] In conclusion, it may be stated that in order to find out if an expenditure is deductible, the following factors 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 brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the hooks both in respect of losses and gains as per nationally accepted Accounting Standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reduce the incidence of taxation. "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' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a loss', even though said amount has not gone out from the pocket of the assessee. [Para 13"] It is observed that the Appellant has provided for marked to market loss pertaining to trading transaction as on 31st March, 2012 and such entry was reversed on 1st April, 2012. The Appellant has submitted the ledger account of foreign exchange loss/gain for AY 2013-14 wherein above reversal entry is apparent. The Appellant has shown exchange difference income (net) for Rs.58,15,877/- in AY 2013-14 which is after considering above reversal entry of Rs.8,50,70,595/- being income which is netted off against actual realized gain/loss for said Assessment Year and further marked to market loss/gain for subsequent Assessment Year. These facts also prove that Appellant has already offered income of Rs.8.51 crore in subsequent Assessment Year and effectively no additional loss has been claimed by Appellant over a period of two years. The AO while passing the Assessment Order for AY 2013-14 on 7th December, 2016 has accepted above transaction. It is also observed that in AY-2014-15, Appellant has shown unrealized gain of Rs.60,54,418/- as income which also proves that Appellant is consistent in its accounting treatment which means that whenever marked-to-market loss, same is claimed a revenue expenditure and when there is a gain such amount is offered to tax. This accounting treatment is consistent with the decision of Hon'ble Supreme Court discussed herein above. 4.8. With regard to reliance of AO on CBDT Instruction, it is already held that such CBDT Instruction does not apply to transactions carried out by Appellant. It is also observed that such
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Instruction has been dealt with by Hon'ble Ahmedabad IT AT in the case of Deputy Commissioner of Income-tax, Circle 2 (1) (1), Ahmedabad v. Elltecore Technologies (P.) Limited IT Appeal Nos. 197 AND 508 (AMD.) of 2016 dated 31/03/2017 where it is held as under: "It is with some amount of anguish that we have taken note of the fact that the CIT(A) was so much overawed with the CBDT instruction no. 3 (supra), on the subject that rather than even dealing with a Supreme Court judgment cited before him, he simply followed the CBDT instructions. It is only elementary that the CBDT instructions do not bind the appellate authorities and the appellate authorities are, therefore, required to take their independent calls in accordance with the law and binding judicial precedents. That has not been done. Be that as it may, in the case of Woodward Governor (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon'ble Supreme Court." The above decision is further confirmed by Hon'ble Gujarat High court in Tax Appeal No 139 of 2018 dated 20/02/2018 in the case of Elitecore Technologies Private Limited. It is observed that Hon'ble Ahmedabad ITAT in above referred case has held that Instruction cannot override decision of Hon'ble Supreme Court and when Appellant is consistently following same method of accounting for recognizing income/loss of marked-to-market, such loss cannot be disallowed treating it as notional loss. As held in preceding paras, Appellant has been consistently following same method of accounting and had recognized marked-to-market gain in subsequent Assessment Year. The Hon'ble Delhi High Court in the case of Munjal Showa Limited V/s DCIT (WPC 1707/2014 and CM No. 3569/2014, dated 22nd February, 2016) has held that in CBDT Instruction No. 3 of 2010 cannot override the existing decision of Supreme Court/ High Court. Considering the facts discussed above and relying upon the judicial pronouncements, the addition made by Assessing Officer for Rs.8,50,70,594/- is deleted. This ground of appeal is allowed.”
During the course of appellate proceedings before us, the ld. Departmental Representative could not controvert the submission of the ld. counsel that claim of such expenses was reversed by the assessee itself during assessment year 2013-14 on the basis of which the ld. CIT(A) has deleted the impugned addition.
Heard both the sides and perused the material on record. During the course of appellate proceedings before the ld. CIT(A), the assessee has submitted ledger account of the foreign exchange loss for assessment year 2013-14 demonstrating that there was reversal of the entry pertaining to unrealized loss of Rs. 8,50,70,594/-. Therefore, we do not find any infirmity in the above elaborated finding of ld. CIT(A) in deleting the impugned addition on the basis of reversal entry of Rs. 8,50,70,595/- made in the assessment year 2013-14. Therefore, this ground of appeal of the revenue is dismissed.
Cross Objection No. 76/Ahd/2019 filed by assessee
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During the course of appellate proceedings before us, the ld. counsel has not pressed the cross objection, therefore, the same stands dismissed.
In the result, the appeal of the revenue and the cross objection of the assessee both are dismissed. Order pronounced in the open court on 07-10-2020
Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) VICE PRESIDENT ACCOUNTANT MEMBER Ahmedabad : Dated 07/10/2020 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.
By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद