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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–1, Baroda [CIT(A) in short] vide appeal no.CAB-1/64/2015-16 dated 09/03/2017 arising in the assessment order passed under s.143(3) r.w.s.263 of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 19/03/2015 relevant to Assessment Year (AY) 2009-10.
The assessee has raised the following grounds of appeal:- Your appellant being aggrieved by the order dated 9 March 2017 passed by the learned Commissioner of Income Tax (Appeals)-1, Baroda, [‘CIT(A)’] prefers an appeal against the same on the following grounds, which are without prejudice to each other:
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10
- 2 - 1. The learned CIT(A) grossly erred in law and on facts in confirming disallowance of Rs.2,01,70,542 made by learned AO on the basis of incorrect perception that Hon’ble ITAT has upheld the direction of CIT while Hon’ble ITAT was only adjudicating on the validity of the jurisdiction of CIT to revise the order, under section 263 of the Income-tax Act, 1961 (‘the Act’) in respect of the order passed by the learned AO under section 143(3) of the Act. 2. The learned CIT(A) erred in law and facts in confirming disallowance of the foreign exchange loss of Rs.2,01,70,542 suffered by the appellant and debited to profit & loss account. It is submitted that the same being business expenditure should be allowed to be deducted. 2.1 The learned CIT(A) failed to appreciate that the amount of foreign exchange loss in connection with outstanding liability of USD 15,00,000 towards Dow Chemicals Pacific Limited (‘Dow’) was only Rs.1,73,70,000 instead of Rs.2,50,58,516 and Rs.2,01,70,542 disallowed by the learned AO and upheld by the learned CIT(A), respectively. 2.2. The learned CIT(A) and the learned AO erred in law and on facts in not considering the detailed submission/written-submissions and documents furnished by the appellant. 3. The learned CIT(A) also erred in law and facts in holding that the learned AO's observation was correct that the advance received was Dow was never a liability and was primarily a consideration for all the signatories of agreement to waive their claim on Dow. 3.1. The learned Assessing Officer as well as learned CIT(A) failed to appreciate that such liability continued from earlier assessment years and every foreign exchange fluctuation gain in that respect was offered to tax by the appellant in the assessment years whenever there was such gains due to favourable foreign exchange fluctuation. Similarly, foreign exchange loses also in respect of the very same liability were allowed as deduction in the earlier years wherever such loss arose due to adverse exchange fluctuation in respect of very same liability. Under the circumstances even on ground of rule of consistency such loss should have been allowed to the assessment proceedings. It is submitted to be so held now. 3.2. The learned AO as well as learned CIT(A) failed to appreciate that liability was already considered as genuine liability from the earlier assessment years when such liability arose and in the year under
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 3 - consideration, what the appellant was claiming was only the incremental loss due to adverse foreign e4xchange fluctuation in respect of the same. It is submitted that it be so held now. 4. Without prejudice to any of the earlier grounds, the learned CIT(A) erred in not granting direction to delete the remission of such outstanding liability from the income of assessment year 2010-11 in which such remission was offered by the appellant as income. It is submitted that it be so held now and if such disallowance is confirmed appropriate direction be given to delete the remission offered to tax in assessment year 2010-11. The Appellant craves leave to add to add/or to alter, amend, rescind, modify the grounds herein above or produce documents before or at the time of hearing of this appeal.
The interconnected issue raised by the assessee is that the Ld. CIT (A) erred in partly confirming the addition made by the AO amounting to Rs. 2,01,70,542/- on account of foreign exchange loss.
The facts of the case are that the assessee is a Limited Company and engaged in the business of manufacturing of specialty chemicals. The assessee during the year under consideration claimed foreign exchange loss for a sum of Rs. 2,74,18,861/- in its profit and loss account.
2.1. Out of the aforesaid foreign exchange loss, a loss amounting to Rs. 2,52,58,516/- was claimed on account of reinstatement of advances received from customers.
2.2. The assessee further submitted that major foreign exchange loss was attributable on the advances received from Dow Chemicals Pacific
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 4 - Limited (In short DOW). As per the assessee, the impugned advance represents concerning the long term contracts entered with DOW for the supply of the products.
2.3. The assessee also claimed that it had accounted foreign exchange gains/losses on account of receivables/payables in foreign currency on a regular basis (i.e., consistently year after year) to give the effect of change in the foreign exchange rate as provided in AS-11 issued by the ICAI which is mandatory under the Companies Act, 1956.
2.4. The assessee also relied upon the opinion of Expert Advisory Committee of the ICAI on the issue of reinstatement of the closing balance on account of advances in foreign currency to be adjusted at the yearend against the future export of the goods.
2.5. The assessee also claimed that the advances above from DOW had been written back including the effect of foreign exchange loss and the same was offered to tax in F.Y.2009-10 corresponding to Assessment Year 2010-11. The assessee in support of its claim filed the copy of the Return of Income along with relevant extracts of Profit & Loss account for the F.Y. 2009-10 (A.Y.2010-11).
2.6. However, the AO was of the view that the amount as claimed as the advance was no longer payable by the assessee to DOW. There was also no supply of the goods by the assessee to DOW against such advance. As such the amount of the advance was waived off by DOW and therefore
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 5 - such advance cannot be treated as a liability. Accordingly, the AO disallowed the claim of foreign exchange loss amounting to Rs. 2,52,58,516/- u/s 37(1) of the Act and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal before the Ld. CIT (A).
The assessee before the Ld. CIT (A) reiterated the submission as made before the AO. However, the assessee further submitted that prior to the agreement (dated 8-6-2000) for the receipt of such advance it had purchased the Crude Piperazine Amine Mix from Dow and sold Piperazine Anhydrous to it. These commercial arrangements were governed by the Memorandum of Understanding (In short MOU) dated 17-02-1999. However, due to financial distress, it was unable to fulfill the conditions of MOU. Therefore it entered into an agreement to continue the business with DOW and received an advance for a sum of USD 15,00,000/- only in pursuance to the agreement dated 8-6-2009. The assessee in support of its claim filed the copy of the agreement with DOW.
3.1. The assessee further submitted that subsequently Dow discontinued its Ethyl Amines Business. Accordingly, Dow did not enter into any commercial trading arrangement with it. As such the assessee was in dilemma whether the said advance could be forfeited and recognized as revenue under the given situation. But it did not do so. Therefore it claimed the foreign exchange gain/loss on the said advances
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 6 - in accordance with Accounting Standard 11 as issued by ICAI and notified by the Central Government.
3.2. The assessee also submitted that the above amount was shown as advance in its books consistently from the P.Y. 2000-01 till the F.Y.2009-10 corresponding to AY 2010-11 when it had been recognized as income and offered the said advances/ forex gain/loss to tax as income.
3.3. However, the Ld. CIT (A) observed that the assessee received advance amounting to Rs. USD 15,00,000/- from Dow to supply the Piperazine Anhydrous. However, all the transaction for the supply had been completed up to 30-06-2001. Thus the advance received of USD 15,00,000/- was on account of sale of goods and therefore there was no liability to repay the same to Dow.
3.4. The Ld. CIT (A) in view of the above noted that there was no liability existing to repay to Dow as on 31-03-2009 and therefore assessee is not eligible to claim the foreign exchange fluctuation loss in its books of account on such advances of Dow.
3.5. The Ld. CIT (A) further observed that the forex loss claimed by the assessee on the said sum was limited to Rs. 2,01,70,542/- only and balance amount was related to other contracts. The Ld. CIT (A) accordingly confirmed the order of the AO and disallowed only the loss
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 7 - related to the advances received from Dow amounting to Rs. 2,01,70,542.00 only.
Being aggrieved by order of the Ld. CIT (A), the assessee is in appeal before us.
The Ld. AR before us filed a paper book running from pages 1 to 298 and submitted that the assessee entered into a long term contracts with a company namely DOW for the supply of the products. The assessee was already doing commercial transaction. Accordingly the DOW provided advances of USD 15,00,000/- to the assessee to continue the contracts. The assessee accordingly treated the said advances as revenue in nature and claimed effect of foreign exchange gain/loss on it.
4.1. The Ld. AR for the assessee in support of his claim drew our attention on pages 92 to 109 of the PB where the copy of the agreement was placed. 4.2. The Ld. AR for the assessee also claimed that it was booking consistently foreign exchange gains/losses since beginning (i.e. F.Y. 2000-01) on the said advances and the same was accepted by the Revenue.
4.3. The Ld. AR also filed the financial statements to justify that the assessee has recognized the income and offered to tax the aforesaid advances including the effect of foreign exchange fluctuation.
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 8 - 5. The Ld. DR on the contrary before us submitted that the advances shown by the assessee was not refundable. Therefore the forex loss in relation to such advance cannot be allowed as deduction. The Ld. DR vehemently supported the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the instant case is that the assessee has claimed to have received trade advances of ₹15 million from M/s DOW in the FY 2000-01 against the supply of the goods. But the assessee failed to make the supply of the goods as M/s Dow discontinued its business in the said activity/products. However the assessee in its books of accounts has shown such advances as trading liability till the year under consideration since the year in which it was obtained. As the liability was payable in foreign currency, therefore the assessee was reinstating such amount of liability every year in its balance sheet as per the conversion rate prevailing during the relevant period. Accordingly the assessee in the year consideration has shown a loss on account of fluctuation in the foreign currency in relation to such trading liability which was claimed as revenue expenses. However, the AO was of the view that such trading liability was not payable to M/s DOW and therefore the foreign currency loan in relation to such advance cannot be allowed as deduction. Accordingly the AO made the disallowance of such foreign currency fluctuation loss which was subsequently confirmed by the learned CIT (A).
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 9 - 6.1. On perusal of the balance sheet filed by the assessee as on 31st March 2009, we note that the liability of $15 million claimed as advance, was reflecting therein which was not disturbed by the authorities below. Thus the question arises whether the assessee can claim the deduction on account of fluctuation in the foreign currency loss in relation to such advances which has been accepted by the Revenue. In this regard, we note that the authorities below has taken contradictory stand meaning thereby the Revenue on one hand has accepted the liability shown by the assessee as discussed above and on the other hand the forex losses in relation to such trading liability was not allowed as deduction. In our considered view once the Revenue has accepted trading liability shown by the assessee, then the Revenue cannot make the disallowance of the corresponding loss in relation to such advance being a trading asset.
6.2. In addition to the above, we also note that the assessee has been showing such advance in its accounts since beginning which was accepted till the immediate preceding assessment year. As such we note that there was no change in the facts and circumstances of the case in the year under consideration, therefore in our considered view the assessee is entitled for the deduction of such forex loss on account of principles of consistency. It is because till the immediate preceding assessment year the Revenue has accepted all the losses and gains qua to the impugned advance shown by the assessee. Therefore we are of the view that the assessee is entitled for the deduction on the basis of principle of consistency.
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10 - 10 - 6.3 We further note that, the assessee in the subsequent assessment year has offered the amount of trading advance as income including the effect of forex losses and gain. This fact has not been doubted and disputed by the authorities below. Therefore we are of the view that any addition on account of such loss in the year under consideration will lead to the double addition to the income of the assessee which is contrary to the provisions of law.
6.4. In view of the above, we hold that the assessee is entitled for deduction on account of forex loss in relation to such trade advance. In this regard we find support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT Vs. Woodward Governor India (Pvt) Ltd. reported in 312 ITR 254 wherein it was held as under: 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.
6.5. In view of the above, there remains no ambiguity that the assessee is entitled for the forex loss in the given facts and circumstance as it is arising in the course of its business. Therefore we reverse the order of the
ITA No.1414/Ahd/2017 Diamines & Chemicals Ltd. vs. ITO Asst.Year – 2009-10
- 11 - learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
This Order pronounced in Open Court on 14/05/2019
Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 14/05/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Vadodara �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 02.5.2019 (word processed by Hon’ble AM in his computer by dragon) 2. Date on which the typed draft is placed before the Dictating Member.. 02.5.2019 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….14.5.19 7. Date on which the file goes to the Bench Clerk…………………14.5.19 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………