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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: Shri C.N. Prasad & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against order of the CIT(A)- 28, Mumbai dated 09-10-2017 and it pertains to AY 2013-14. The assessee has raised the following grounds of appeal:-
“ 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing the Appellant a deduction of INR 15,36,659 in respect of foreign exchange loss arising on account of restatement of liability. The Appellant prays that the foreign exchange loss of INR 15,36,659 be allowed.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in y " disallowing the entire membership fees of INR 7,88,926 and allowing a deduction of 10% of the membership fees each year over a period of 10 years.”
2 ITA 525/Mum/2018
The brief facts of the case are that the assessee is engaged in the business of advisory services, filed its return of income for AY 2013-14 on 27- 09-2013 declaring total income at Rs.70,27,104. The case was selected for scrutiny and the assessment has been completed u/s 143(3) of the I.T. Act, 1961 on 05-03-2016 determining total income at Rs.1,11,18,530 by making various additions including foreign exchange loss and disallowance of membership and subscription fees. While completing the assessment, the AO has disallowed foreign exchange loss on the ground that loss claimed by the assessee on account of re-statement of existing liability is a notional loss which is not crystallised during the year under consideration, therefore, the same cannot be allowed as deduction.
Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has submitted that when an existing liability in the books of account has been re-stated by taking into account closing rate of currency to adjust the difference is on account of revenue which can be allowed as deduction even though such liability has not been paid during the relevant period. The assessee has relied upon certain judicial precedents including the decision of Hon’ble Supreme Court in the case of Woodward Governors India Pvt Ltd vs CIT 312 ITR 540 (SC). The Ld.CIT(A), after considering submissions of the assessee and also on analysis of provisions of 3 ITA 525/Mum/2018 section 43A, which deals with special provisions consequential to change in rate of exchange of currency, held that loss related to foreign currency transactions remained unsettled at the end of the year or restated at the year end, cannot be considered as ascertained liability deductible u/s 37(1) of the Income-tax Act, 1961. The Ld.CIT(A) further observed that the issue is not even of an expense, but it is on receipt side, therefore, the claim of loss is being made was not a loss but a notional reduction in income which is being claimed as a deduction. Therefore, he opined that there is no error in the finding recorded by the AO while disallowing foreign exchange loss. Accordingly, the Ld.CIT(A) confirmed addition made by the AO. Aggrieved by the order of Ld.CIT(A), the assessee is in appeal before us.
The Ld.AR for the assessee submitted that the Ld.CIT(A) was erred in not considering the loss incurred on foreign currency when existing liability has been re-stated by taking into account rate difference at the end of year is on account of revenue, because the assessee has received advance advisory fees which has been adjusted against services rendered in the subsequent year.
Once the liability is on account of revenue, the same needs to be adjusted to the closing rate of currency, whether or not such liability has been paid during the relevant financial year. In this case, the assessee has re-stated its liability as on the date of balance-sheet by taking into account year-end rate which 4 ITA 525/Mum/2018 cannot be considered as unascertained liability merely because there is no payment or settlement of account for the year under consideration. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of Woodward Governors India Pvt Ltd vs CIT (supra). The Ld.AR has also relied upon the decision of Hon’ble Bombay High Court in the case of Vasantram Mehta & Co Ltd vs JCIT (2015) 62 taxman.com 102 (Bom).
The Ld.DR, on the other hand, strongly supported the order of the lower authorities.
We have heard both the parties, perused materials available on record and gone through the orders of authorities below. The assessee claims to have re-stated its existing liability towards advance advisory fees by taking into account year-end rate of foreign currency to make provision ofRs.15,36,659 towards foreign exchange loss. The AO disallowed foreign exchange loss claimed by the assessee on the ground that foreign exchange loss on the value of payments to be made has only been re-stated by the assessee as on 31-03- 2013 and, therefore, it is a notional loss which cannot be considered as ascertained liability on account of performance or for cancellation of contract to allow deduction. We find that the assessee has received advance advisory fees for rendering certain services to its clients on the future date. According to the assessee, the services have not been rendered during the year under 5 ITA 525/Mum/2018 consideration and the same have been rendered in the subsequent financial year. The assessee has re-stated its liability as on the balance-sheet date by taking into account year-end rate of currency and marked its liability to match with the rate of currency at the end of the year without there being any performance or cancellation of contract. Admittedly, the performance for services rendered during the next financial year. It is not a case of the assessee that the contract has been either performed or cancelled during the year. Unless transaction got crystallised either by performance and / or cancellation of contract, merely for re-statement of existing liability on account of advance received for advisory services, loss incurred on account of fluctuation in foreign exchange rate cannot be allowed as deduction.
Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Hon’ble Supreme Court in the case of Woodward Governors vs CIT (supra). We find that issue before the Hon’ble Supreme Court in the above case is when the liability is crystallised on account of performance and / or cancellation of contract, loss incurred on foreign exchange rate needs to be allowed as deduction even though payments for such liability has been made in subsequent period. The assessee also relied upon the decision of Hon’ble Bombay High Court in the case of Vasantram Mehta & Co Pvt Ltd vs JCIT (supra). We find that the Hon’ble Bombay High Court by following the 6 ITA 525/Mum/2018 decision of Hon’ble Supreme Court in the case of Woodward Governors vs CIT (supra) held that revenue loss is not be postponed to a future date when the transaction gets crystallised either by performance and / or cancellation of the contract. In this case, on perusal of facts, we find that the liability is not crystallised either by performance and / or cancellation of the contract. As per the assessee’s admission, it has re-stated its existing liability towards advance advisory fees receipts for which necessary services have been rendered in subsequent financial year which cannot be held that performance of a contract has been executed during the year under consideration. Therefore, we are of the considered view that the case laws relied upon by the assessee are not applicable. In this view of the matter and also considering facts of this case, we are of the considered view that the AO was right in disallowing foreign exchange loss incurred on re-statement of liability as on balance-sheet date.
The Ld.CIT(A), after considering relevant facts, has rightly confirmed addition made by the AO. Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the assessee.
The next issue that came up for our consideration is disallowance of membership fees amounting to Rs.7,88,926. The Ld.AR for the assessee submitted that he did not want to press ground. Hence, the same has been dismissed, as not pressed.
7 ITA 525/Mum/2018
In the result, appeal filed by the assessee is dismissed.
Order pronounced in the open court on 29 -03-2019.