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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER and 2548/Bang/2018 Assessment years : 2012-13 and 2013-14 Income-tax Officer, Vs. M/s. Levis Strauss (India) Pvt. Ltd., Ward – 4(1)(1), Raheja Plaza, 4th Floor, 2nd Floor, BMTC Depot Building, Commissariat Road, 6th Block, Koramangala, Bengaluru – 560 025. Bengaluru – 560 095. PAN : AAACL 3092 Q APPELLANT RESPONDENT Revenue by : Smt. R. Premi, JCIT-DR(ITAT)(Bengaluru) Assessee by : Smt. Shreya Loyalka, CA Date of hearing : 10.10.2019 Date of Pronouncement : 16.10.2019 O R D E R Per N. V. Vasudevan, Vice President: These two appeals are directed against 2 orders of CIT(A)-4, Bengaluru, dated 27.06.2018, relating to Assessment Years 2012-13 and 2013-14.
The issue that arises for consideration in both these appeals is as to whether the CIT(A) was justified in directing the AO to allow the claim for deduction on account of foreign exchange fluctuation loss as a result of restatement of the Assessee’s liability as on the last date of the previous year, without there being an actual payment or settlement.
As far as for Assessment Year 2012-13 is concerned, the department has filed a letter seeking to withdraw the aforesaid appeal for the reason that the tax effect in the aforesaid appeal is lesser than Rs.50,00,000/- and therefore such appeals are not maintainable in view of the CBDT’s Circular No.17/2018 dated 08.08.2019. Consequently, ITA No.2548/Bang/2018 is dismissed.
As far as 2547/Bang/2018 for Assessment Year 2013-14 is concerned, the grounds of appeal raised by the Revenue reads as follows:-
The Order of the Ld. CIT (A)-4, Bangalore, in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case.
2. Whether the Ld. CIT(A) is right in allowing the appeal of the assessee by allowing the foreign exchange loss u/s 37(1) despite the fact that the assessee follows mercantile system of accounting and the loss claimed by the assessee has not been crystallised in the year under consideration and unrealised loss forms a contingent liability which is not an allowable expenditure as per the provisions of the Income Tax Act. 3. Whether the Ld. CIT(A) is right in considering this loss as an ascertained liability u/s 37(1) simply because they have to be provided for the accounting as per the Accounting Standards. 4. the Ld. CIT(A) ought to have appreciated the fact that the AO has rightly disallowed foreign exchange loss u/s 37 being in nature of contingent and notional by relying on the decision of Hon'ble Supreme Court in the case of M/s Sanjeev Woolen Mills vs. CIT 279 ITR 434. 5. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of CIT(A) is so far as it relates to the above grounds may be reversed and that of Assessing officer may be restored. 6. The appellant craves the right to add, alter, amend and / or delete any of the grounds that may be urged.
The assessee is a company engaged in the business of manufacturing / marketing and distribution of apparels under the brand of Levis Strauss & Co., USA. During the previous year, the assessee incurred foreign exchange losses pertaining to Revenue items in relation to intercompany payables/receivables. The assessee in this regard claimed deduction of a sum of Rs.4,64,12,201/- on account of loss due to adverse foreign exchange fluctuation. The AO noticed that out of the aforesaid foreign exchange claimed by the assessee, a sum of Rs.3,22,63,323/- was foreign exchange gain / loss not on account of actual settlement or payment but on account of reinstatement of the payables and receivables as on the last date of the previous year and in accordance with Accounting Standard-11 (AS11) of Institute of Chartered Accountants of India (ICAI). The breakup of the amount on account of reinstatement of foreign exchange gain / loss as on the last date of the relevant previous year is as follows:-
Amount Particulars (Rs.) Revaluation of forex receivables (such as trade debtors, service 65,30,770 Revaluation of forex payables (such as trade creditors etc.) 2.71,59,296 Revaluation of forex bank balances (5,82.433) Revaluation of other forex receivables/ payables (such as other (8,44,310) Total 3,22,63,323
According to the AO, the aforesaid loss was an unrealized loss based on the market rate as on the reporting date (i.e., last date of the relevant previous year) and was therefore a notional loss and cannot be allowed as a deduction. The AO referred to the decision of the Hon’ble SC in the case of Sanjeev Woolen Mills Ltd., Vs. CIT 279 ITR 434 (SC) wherein the Hon’ble Supreme Court held that notional income cannot be charged to tax and also notional expenditure or notional loss cannot be claimed as a deduction. The AO was also of the view that on the date of actual payment of settlement, there may not be a loss. The AO also referred to CBDT’s instruction No.17/2008 dated 26.11.2008 wherein the CBDT laid down that under section 37 of the Income Tax Act, 1961 (‘Act’), only accrued or ascertained liability is an admissible deduction. A contingent liability cannot constitute a deductible expenditure. For all the above reasons, the AO refused to allow the deduction claimed by the assessee.
On appeal by the assessee, the CIT(A) allowed the deduction claimed by the assessee for the following reasons:-
“5.3. I have carefully considered the AO's observations and above arguments of the Appellant, the issue is accordingly adjudicated as under:-
It is apparent that the Appellant follows the mercantile system of accounting. During the year, the Appellant has stated) shown unrealised foreign exchange loss of Rs. 3,22,63,323 on restatement of outstanding trade payables and receivables in foreign currency (such as import of goods, services and export of services etc.) which is claimed to be in the normal course of business of the Appellant. A break up of such unrealised foreign exchange loss was submitted by the Appellant in the Annexure-I to the written submission dated 28.12.2017. This indicates that there is no loss on account of derivative transaction being recorded by the Appellant, as contemplated by the AO. Further, these outstanding trade receivables and payables have been restated at the balance sheet date as per the requirement of Accounting Standard - 11 and is statedly an ascertained liability allowable u/s. 37(1) of the Act. This view has also been upheld by the Hon'ble Supreme Court in the case of CIT-vs-Woodward Governor (2009) 312 ITR 254 (SC)and Karnataka High Court in the case of CIT -vs- Motorola India (P.) Ltd. (2011) 200 Taxman 179. Therefore, foreign exchange loss incurred on account of restatement of trade receivables and payables as on the date of balance sheet is prima-facie allowable to the Company. Considering the facts & circumstances of the present case and judicial position on the subject, the disallowance of foreign exchange loss is deleted. The assessee's grounds of appeal are therefore allowed.”
8. Aggrieved by the order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal. The learned DR placed reliance on the order of the AO. The learned Counsel for the assessee reiterated its submissions made before the CIT(A) and relied on the order of the CIT(A).
9. We have given careful consideration to the rival submissions. We find that the foreign exchange loss claimed by the assessee was on account of reinstatement of the liability of the assessee as on the last date of the previous year. It is no doubt true that there has been no actual payment and at the time of ultimate settlement, there may not be a loss also. Nevertheless, AS – 11 of ICAI requires such liability also to be reflected in the financial statements. The Hon’ble Supreme Court considered all these aspects in the case of CIT(A) Vs. Woodward Governor (2009) 312 ITR (P.) Ltd. (2011) 200 Taxman 179. The first aspect examined by the Hon’ble Supreme Court was as to whether the additional liability due to exchange rate fluctuation was a liability. The Hon’ble Supreme Court held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. The Court explained that the word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29 and that Sec. 37(1) has to be read with ss. 28, 29 and 145(1). Therefore, loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Court explained that under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11. An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange. Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period.
10. In the present case, there is no dispute that the outstanding liability was in respect of trade receivables and payables and therefore loss would be on revenue account. In such circumstances, we are of the view that the CIT(A) was justified in allowing the claim made by the assessee. We find no grounds to interfere in the order of the CIT(A). Accordingly, appeal by the Revenue is dismissed.
In the result, both the appeals by the Revenue are dismissed.
Order pronounced in the open court on this 16th day of October, 2019.