DCIT, NEW DELHI vs. M/S. MENARINI RAUNAQ PHARMA LTD., NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER : The appellant Dy. Commissioner of Income Tax, New Delhi (hereinafter referred to as 'the revenue') by filing the aforesaid appeal, sought to set aside the impugned order dated 12/02/2014 passed by Ld. Commissioner of Income Tax(Appeals)-IX, New Delhi qua the Assessment Year 2005-06 on the grounds inter alia that :

5. That the grounds of appeal

are without prejudice to each other.

6. That the appellant craves leave to add, alter, amend or forgo any ground(s) of the appeal raised above at the time of the hearing.”

2. Briefly stated that facts necessary for adjudication of the controversy at hand are : Assessee is into the business of manufacturing of medicines having licensing agreement and trading of Pharmaceutical product. AO noticed that the assessee has reduced sales during the year under assessment by showing sales return of the amount of Rs. 6,11,59,512/-. Declining the contention raised by the assessee that reduced sales is on account of medicine not sold and having been returned back reached the conclusion that the assessee has tried to reduce the sales by not making corresponding addition in the closing stock and thereby made an addition of Rs. 6,11,59,512/-.

3. Assessee also debited amount of sale tax on sales return amounting to Rs. 40,88,589/- to the P & L Account which has also been added to the taxable income of the assessee by the AO on the ground that the same shall be allowed as reduction in the year goods are sold of. AO also made addition of Rs. 66,55,166/- debited by the assessee to the P & L Account on account of foreign exchange loss by the treating the sum as notional loss.

4. Assessee carried the matter before the Ld. CIT(A) by way of filing the appeal who has deleted addition by partly allowing the appeal.

Feeling aggrieved the revenue has come up before the Tribunal.

It is the case of the assessee that sales executives in order to earn the incentives have shown fictitious sales which came to the notice of the company when receivables has piled up and the assessee has not received any payment. Alleged fictitious sales were noticed for the period of April, 2004 to July 2004. Then the assessee has recovered goods worth Rs. 6,11,59,512/- lying with the transporters.

However, during the appellate proceeding the Ld. CIT(A) called the remand report.

Ld. CIT(A) deleted the addition of Rs. 40,88,589/- made by the AO on account of sale tax return. In the remand report AO stated that since the sale have actually not been made the liability of sale tax and the claim of same is not allowable. However, it is the case of the assessee that at the time of making the sale the assessee has debited the account of party with value of sales and sale tax, thus, the assessee has made payment of sales tax to the Government. However, when the goods were recovered by the assessee, the sales tax paid by the assessee was never recovered and the assessee has written of the amount of sales tax as bad debt. When the factum of sales return has been proved in favour of the assessee and payment of sale tax by the assessee on the said fictitious sales is not disputed, the Ld. CIT(A) has rightly allowed the sale tax paid on sales return as business loss. So we find no illegality or perversity in the findings returned by Ld. CIT(A), hence, ground no. 2 is determined against the assessee.

AO disallowed foreign exchange fluctuation loss of Rs. 66,55,166/- on the ground that the loss on exchange loss is only notional loss and is not a real loss. However, Ld. CIT(A) deleted the addition by Ld. CIT(A) by relying upon decision rendered by Hon’ble Supreme Court of India in case cited as CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC). It is case of the assessee that it had taken a foreign currency loan of EUR 1,500,000 during FY 2002-03 and other loan of EUR 700,000 during FY 2003-04 from its parent Berlin Chemie AG, Germany for working capital requirement and the foreign exchange loss is on account of reinstatement of revenue items at the balance sheet date.

When the factum of availing of the aforesaid loan is not disputed by the revenue then why the loss on account of exchange differences on revenue items arising on foreign currency transactions has to be treated as income / expenses during the year under consideration. So, Ld. CIT(A) has rightly deleted the addition on account of foreign exchange loss by following the decision rendered by Hon’ble Supreme Court in CIT vs. Woodward Governor India Pvt. Ltd. case. So, ground no. 3 is determined against the revenue. Ground no. 4, 5 and 6 are general in nature, hence, need no 11. specific findings.

Order pronounced in open court on this 28th February, 2019.