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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order dated 22.03.2016 of ld. CIT(A)-20, New Delhi for the assessment year 2008-09 on the following grounds : 1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eyes of law and on facts.
2(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the order of the AO rejecting the contention of the assessee that reopening the assessment under Section 147 of the Act, without complying with the statutory conditions and the procedure prescribed under the law, is bad and liable to be quashed.
(ii). On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the order of the AO rejecting the contention of the assessee that the reason recorded for reopening of the assessment are bad in law, and as such the reopening of the assessment is illegal and liable to be quashed.
3(i) On the facts and circumstances of the case, the reassessment proceedings initiated by the AO and upheld by the learned CIT(A) are bad in the eyes of law, as the reasons recorded for the issue of notice under Section 148 are based merely on change of opinion.
(ii) On the facts and circumstances of the case, the learned CIT(A) has erred in law and on facts in upholding the reassessment proceedings, despite the fact that there has been no omission on the part of the assessee in disclosing fully and truly all material facts necessary for the assessment.
4. On the facts and circumstances of the case, learned CIT(A) has erred, both on facts and in law in upholding the reassessment order, despite the fact that in the absence of issuance of notice under section 143(2) of the Act, the reassessment proceedings should be held as void ab initio and the reassessment order ought to have been quashed.
5. (i) On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law in confirming the disallowance of foreign exchange loss of Rs.480.31 lacs.
(ii) That the learned CIT(A) has erred, both on facts and in law in confirming the above disallowance made by the AO by invoking the provisions of section 43A despite the fact that the said section is not applicable to the facts in assessee’s case.
6. On the facts and circumstances of the case, the learned CIT(A) has further erred, both on facts and in law, in confirming the above addition by referring to the provisions of section 36 of the Act, despite the fact that the bad debts having been allowed by the AO, and the exchange rate fluctuation being a part of the bad debts, the same could not have been disallowed.
Ground No. 1 is general in nature and by way of ground Nos. 2 to 4, the assessee has challenged the validity of proceeding initiated without proper assumption of jurisdiction u/s. 147, on the premise of (i) reassessment order having been passed without following the statutory conditions of section 147; (ii) the reasons recorded being bad in law; (iii) re-assessment having been made on change of opinion without pointing out the failure of assessee to disclose fully and truly all material facts necessary for assessee and (iv) absence of issuance of notice u/s. 143(2) before completing the assessment. During the course of hearing, the ld. counsel for the assessee did not make any arguments on the aforesaid legal aspects of the case, as challenged in the grounds of appeal. We, therefore, do not find any merits in above grounds Nos. 2 to 4 of appeal.
3. Adverting to the merit of addition, we find that the assessee has challenged the confirmation of disallowance of foreign exchange loss of Rs.480.31 lacs. In this respect the ld. counsel for the assessee has filed a written synopsis which reads as under : Merit 20. During the year under consideration, assessee had written off debtors to the tune of Rs. 4,417.08 lakhs which included Rs. 4,110.43 lakhs on account of foreign sundry debtors of Libyan and Iraqi projects. The Government of Libya and Iraq were customers of the assessee company and the income earned on account of these projects had been booked in the past years and already offered to tax.
The amount of Rs. 4110.43 lakhs was due from such sundry debtors but could not be recovered due to war and due to the US sanctions, accordingly, the same were written off on 31.03.2008 after obtaining approval of the Board of Directors. The foreign currency loss of Rs. 480.31 lakhs arose because of revaluation of the sundry debtors which were written off on 31.03.2008. The revaluation was made in accordance with AS-11 which the assessee has been consistently following.
Ld. AO made the addition alleging that the foreign currency fluctuation loss suffered by the assessee merely on revaluation and not due to actual transaction is not admissible as deduction. This has been discussed in para 6.3 page 6 of the assessment order.
Aggrieved by the order of Id. AO, assessee preferred an appeal before Id. CIT(A). However, the appeal of the assessee was dismissed.
In this regard, it is submitted that a similar addition was made u/s 147 in the immediately preceding year i.e. AY 2007-08 in the case of the assessee. The said addition was deleted by the Hon’ble ITAT vide its order dated 31.10.2017 in ITA No 4846/Del/2014. Relevant extract of the judgment is as under:
“10. In respect of foreign exchange fluctuation loss, the assessee has debited ? 4235.48 lacs as a foreign exchange fluctuation loss on year to year basis as per accounting policy followed by the corporation. The foreign exchange losses were in respect of foreign construction projects undertaken by the assessee which were recoverable from the customers at the year end as on 31.03.2007. This amount which was to be received in foreign currency is required to be reinstated in Indian Currency as on the date of balance sheet in terms of accounting standard issued by ICAI. Therefore, there was loss on the balance sheet which has been debited by the assessee into profit and loss account. These aspects were examined by the Assessing Officer during the course of original assessment proceedings u/s. 143(3). The assessee had furnished its reply in terms of questionnaire at sl. No. 28 dated 18.09.2009. The assessee had submitted reply which is placed at paper book page 80 to 82 along with Annexure-17. All the details were filed by the assessee in the reassessment proceedings as well as before the Id. CIT(A). In the original assessment proceedings, this issue has already been examined by the Assessing Officer. Therefore, the same should not be disallowed again on reassessment proceedings. The assessee has been adopting same method of accounting with respect to foreign exchange fluctuation gain/losses and this method was accepted by the Assessing Officer in the original assessment proceedings and therefore, the Id. Assessing Officer was not justified to change its view on the nature of accounting on the same set of facts and circumstances of the case in the reassessment proceedings. There is no adverse finding from the Revenue side about the correctness or completeness of the accounts of the assessee. The profits and gains of business are admittedly computed in accordance with the generally accepted accounting practice and guidelines notified. The assessee had inter alia applied AS 11 dealing with effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS 11 enjoins reporting of monetary items denominated in foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should be recognized in the profit and loss account for the reporting period. Similarly, CBDT notification on Income Computation and Disclosure Standards also, inter alia, deals with recognition of exchange differences. The notification also sets out that the exchange difference arising on foreign currency transactions have to be recognized as income or business expenses in the period in which they arise subject to exception as set out in Section 43A of the Act or Rule 115 of the Income-tax Rules, 1962, as the case may be. In view of the various provisions of the Companies Act and the IT Act, it was mandatory to draw accounts as per AS-11. Thus, the loss recognized on account of foreign exchange fluctuation as per notified AS 11 is an accrued and subsisting liability and not merely a contingent or a hypothetical liability. We accordingly observe that the AO is not justified to disallow the foreign exchange fluctuation loss in the instant case. As a result, the appeal of the assessee deserves to be partly allowed.”
Further, it is not the case of Id. AO or Id. CIT(A) that the foreign exchange loss is on account of purchase of capital asset. The Id. AO as well as Id. CIT(A) has accepted that the transaction pertains to sale operations and is on account of revaluation of debtors. Accordingly, section 43A is also not invoked. In fact, Id. CIT(A) has clearly held at para 6.3.2 page 17 of its order u/s 250 that section 43A of the Act is not applicable, accordingly, no addition can be made on such count.
Further, Id. CIT(A) has sustained the addition u/s 36(2) of the Act. Ld. CIT(A) has stated that the amount to be written off as bad debt has to be first taken into account in computing the income of the assessee of that previous year or any earlier previous years and only then the same can be claimed as bad debt.
Thereafter, Id. CIT(A) held that the amount taken into account while computing the income of relevant previous years is the amount written off as bad debt to the tune of Rs. 4110.43 lakhs minus the exchange rate fluctuations. Thereafter, Id. CIT(A) held that the impact of exchange rate fluctuation included in 4110.43 lakhs should be subtracted and disallowed u/s 36(2) of the Act. This has been discussed at para 6.3.3 at page no. 20 of its order.
In this regard, it is submitted that Id. CIT(A) erred in invoking the provision section 36(2) of the Act and in holding that the income is not offered to tax before. Your honor, the exchange loss booked on account of revaluation of debtors naturally reduced the carrying value of the debtors and did not increase the same. Accordingly, the revalued debtors to the tune of Rs. 4110.43 lakhs which were written off were already offered to tax before.
Had the assessee not recognized for the fluctuation loss in accordance with AS-11, the total debtors that would have been written off would be the original carrying value of Rs. 4,590.74 lakhs (4,110.43 lakhs + 480.31 lakhs) which is the amount that has been offered to tax.
Further, it is not out of place to mention that even in a case where there is a fluctuation gain which leads to the increase in carrying value of debtor, the entire amount would still be eligible to be claimed as bad debts as the fluctuation gain is also offered to tax and accordingly the any deduction claimed on account of bad debt in respect of the increased carrying value is not hit by section 36(2) of the Act.
24. In view of the above, it is prayed before your honor that the addition made be deleted since the same is bad both on law and on facts.”
On the other hand, the ld. DR relied on the orders of the authorities below and urged for their sustenance.
We have considered the rival submissions and have gone through the entire material on record and we find that the issue under consideration is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench in the case of assessee itself for immediately preceding Assessment year 2007-08 dated 31.10.2017 in ITA No 4846/Del/2014. The relevant portion of which is quoted by the ld. AR in his written submissions. Since there is no change in the facts and circumstances, respectfully following the above decision of co- ordinate Bench, we are not inclined in support the conclusion reached by the ld. CIT(A) on this score. Accordingly, the impugned addition deserves to be deleted.
The appeal of the assessee, therefore, deserves to be allowed on merits of addition.
In the result, the appeal is allowed.
Order pronounced in the open court on 30th April, 2019.