DCIT, CIRCLE - 8(1), KOLKATA, KOLKATA vs. M/S. GUJARAT NRE COKE LTD., KOLKATA

Lastly comes the third issue of disallowance of foreign exchange loss amounting to ₹74,39,71,483/-. The CIT(A)’s detailed discussion qua this last issue reads as under:- “4. I have carefully considered the action of the Ld.AO as well as the various submissions and arguments made by the appellant company. I have also carefully examined the Paper Book bearing reference to the various issues placed for DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 3 attention by the Ld. A.R for the appellant in his submissions. From the factual matrix, it emerges that the Ld. A.O. observed that the assessee-company had booked foreign exchange loss of Rs.14,26,54,748/- on repayment of foreign currency loans and Rs.60,13,16,734/- under the head exception items, aggregating to Rs.74,39,71,483/-. When required to explain during the scrutiny proceedings, it was submitted by the appellant that the exceptional items were pertaining to unusual diminution in the value of rupee as against the US Dollar during the year, that the closing value of Packing Credit Facility (PCFC) and External Commercial Borrowings (ECB) had been restated at the rate prevailing as on the last of the A.Y. as per AS-11 and sec.43A does not permit the capitalization of this loss and that the net loss of Rs.51,77,406/- was on revenue account. Reliance was placed in the case of CIT vs. Woodward Governor India Pvt. Ltd. [312 ITR 254 (SC)]. The appellant has also submitted that further, on receipt of the draft order u/s.144C(1)/ 143(3) dated 31.03.2016, the assessee filed a petition u/s. 154 of the, Act dated. 08.04.2016 pointing out that notional capital loss of Rs.74,39,71,483/- on account of revaluation of outstanding foreign currency loans has been erroneously disallowed, inasmuch as loss on repayment/revaluation of foreign currency loans was to the tune of Rs.14,26,54,748, comprising of realized loss on repayment of foreign currency loans of Rs. 11,34,84,999/- and unrealized loss on revaluation of outstanding foreign currency loans as on 31.03.2012 of Rs.2,91,69,750/-, it was contended by the appellant that an erroneous figure by an excess of Rs.71,48,01,733/- [Rs.74,39,71,483 – Rs.2,91,69,750] has been considered in the draft order. However, as has been submitted by the appellant, while passing the final assessment order, the Ld. AO did not consider the said 154 petition, and alleged that the assessee could not substantiate the business expediency for loss of Rs.51,77,406/- on premature cancellation of Forward Exchange Contracts. The Learned. AO also did not accept the assessee’s explanation with respect to notional loss on closing value of PCFC & ECB. The Ld. AO has held that the foreign exchange fluctuation loss being a notional loss not incurred in the normal course of business was not on revenue account and hence not allowable u/s 37(1) of the Act. The Ld. AO thus disallowed foreign exchange fluctuation loss amounting to Rs.74,39,71,483/- u/s. 37(1) of the Act and added back the same to the assessee’s total income. On examination of the contentions made by the Ld. AR for the appellant, I find myself in agreement with the contentions of the appellant that the Learned. AO has made a mistake in considering the figure of PCFC and ECB revaluation loss to be Rs.74,39,71,483/- rather than Rs.29169.750/- as is obvious from the list of breakup of foreign loss as submitted by the appellant. It is also quite obvious that the Ld. AO has not said anything in the matter of foreix losses incurred by the assessee-appellant on account of import of cooking coal and export of metcoke, major components contributing to Forex loss / gain. As has been brought to notice in the succeeding year AY 2013-14, the Ld AO has allowed foreign exchange loss of Rs.45,11,62,855/- being the actual foreign exchange loss incurred on account of import of cooking coal and export of metcoke to be allowable u/s. 37(1) of the Income Tax act, 1961. In the matter of the Revaluation / cancellation of contracts after examination of the details submitted by the appellant, I find that the Ld AO has disallowed the loss on specious grounds that there was no binding urgency on the assessee to cancel the contracts prematurely. The Ld. AO has said that the business expediency was not emanating from such cancellation. However, I find that the matter has been explained by the appellant that it has entered into a number of forward contracts in foreign currency in the normal course of its business of import and export of goods to hedge against fluctuation in exchange rates, and that however, due to insufficient funds to pay to the Bank for import of goods as on the date of maturity of the contact, it had to cancel ta few contracts during the year. It was explained that due to cancellation of these contracts, the Bank debited/credited the account of the assessee with the exchange (loss)/gains. Therefore, I find myself DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 4 in agreement with the appellant that the exchange loss on cancellation of foreign exchange contracts was actual loss suffered by the assessee. The matter has also been elucidated and substantiated by the as in the sample copy of the Bank Advice for cancellation of the contract and other supporting documents at page 1-3 of the paper book. I am inclined to accept the contention that these were real losses on account of cancellation of the contracts was debited to the account of the assessee, as such the same was a actual loss suffer by the assessee. The assessee is able to establish a proximate nexus of the losses with the business and the matte, in my considered view is covered by the view of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT (2007) 288 ITR 1 (SC). The losses are, in my considered view to be examined from the point of view of the assessee, as it is seen that these are regular losses / gains coming to the assessee year on year as it ins in the business of import and export of items, and it is a regular importer of cooking coal and exporter of metcoke. Further courts have held that such losses are business losses when there is failure of an assessee to execute certain export contracts for which it has to incur losses, as it is quite a normal practice to hedge against losses by booking foreign exchange in the forward market with banks. I also find that the claim of the assessee that the loss of Rs.1,37,89,339/- on account of revaluation of forward contracts as at the end of the reporting period would be covered by the case of the Hon'ble Apex Court in CIT vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 0254 (SC) wherein it was held that loss due to foreign exchange fluctuation in foreign currency transactions has to be considered on the last date of accounting year and it is deductible u/s 37(1) of the Act. The Hon'ble Court has clarified that 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 P&L account for the reporting period".

5. It is also observed that as has been brought top notice and relied upon by the appellant -company, the said matter is also covered in favor of the assessee by the order of the Hon'ble Jurisdictional ITAT-"C" - Bench in in the case of Neptune exports Ltd. In their order dated 29.03.2011, the Hon'ble ITAT, relying on the decision of the Hon'ble Apex court in CIT Vs Woodward Governor India Ltd. have observed as follows: "As regarding disallowance on account of foreign exchange fluctuation loss as well as profit on conversion of foreign currency keeping in view of the fact that the Hon'ble Apex Court cited supra has held that "loss suffered by the assessee in respect of the revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable u/s 37(1) in the year of accrual." Since the view taken by the Id. CIT(A) is in conformity with the decision of the Hon'ble Apex Court we find no infirmity in the orders of the Id. CIT(A) and we confirm the same and dismiss the appeal of the Revenue." In view of these rulings, I hold that the Ld AO was not justified in making the addition of Rs.51,77,406/- on account of cancellation and / or revaluation of contracts, and I find that the amount would be deductible u/s 37(1) of the Income Tax Act.

Overall, in summary, from the factual and legal matrix that emerges, I hold that the Ld AO was incorrect in finding that the loss claimed by the assessee was notional loss or a capital loss. The action of the Ld.AO being, in disallowing the foreign exchange losses, in my considered observation unjustified, I find that the appellant- company is deserving of relief. The Ld. AO is directed accordingly, and these grounds of appeal 7 to 9 stands allowed.”

We have heard rival contentions. We find no merit in Revenue’s instant last grievance as well. We make it clear that there is no dispute on facts so far as all the corresponding items of the impugned foreign exchange loss are concerned. The Revenue’s twin arguments, inter alia, are that Assessing Officer had rightly declined the impugned foreign exchange loss on the ground that neither there was any business exigency involved in cancellation of the assessee’s forward contracts involving net loss of ₹51,77,406/- nor the sum of DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 7 ₹74,39,71,483/- on account of revaluation; PCFC and ECB i.e. pre-shipment in foreign currency and external commercial borrowings; respectively could be taken as revenue items u/s 37(1) being notional capital loss(es). We see no reason to accept either of Revenue’s twin arguments. Hon'ble apex court’s decision in S.A Builders Ltd. vs. Commissioner of Income Tax (2007) 288 ITR 1 (SC) has settled the law that the department cannot claim itself to be put in arm cheker of the businessman or the board of directors to decide as to in what manner a particular business is to be run. We wish to clarify here in view of the facts of the case that apart from the questioning the business expediency element qua former sum of ₹51,77,406/-, the Revenue has nowhere disputed genuineness of the forward contracts cancellation. We notice that the taxpayer has also placed on record its bank advice regarding cancellation of forward contracts, accounting standards AS-11 prescribed by the ICAI stipulating that effect of exchange rate different in instances involving unsettled or unsecured transactions of foreign exchange during the relevant accounting period have to be recorded in the books. Case law i.e. DCIT vs. Bank of Bahrain and Kuwait (2010) 132 TTJ 050 (SB) and Woodword Governor (supra) also holds that such losses are allowable u/s 37(1) of the Act. We hold in this factual backdrop that the CIT(A) has rightly deleted the impugned former loss figure disallowance of ₹51,77,406/-.

Next comes the latter aspect of repayment / revaluation of foreign currency “PCFC” loan of ₹291,69,750/-. This latter aspect appears no more res integra between the parties since the assessee’s very head from assessment year(s) 2007-08 onwards stand assessed as business income during the course of assessments itself. There is no justification for adopting a different approvals in the impugned assessment year merely because the figures involved herein are in negative. We thus see no reason to express our agreement with Revenue inconsistent stands.