ACIT, CHENNAI vs. M/S. NICHIAS INDUSTRIAL PRODUCTS PVT. LTD., SRIPERAMBUDUR

आदेश /O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

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“1. The order of the CIT(A) is contrary to the law and facts and circumstances of the case.

2. The CIT(A) erred in deleting the disallowance of Rs. 1,38,44,368/- on forex loss on loans made by the AO. 2.1 The CIT(A) erred in not appreciating the findings of the AO that the assessee utilized foreign loan for purchase of capital goods, and hence forex loss on loans is a capital loss and not loss on trade, hence it is not an allowable revenue expenditure in the P&L account. 2.2 Having regard to the Hon’ble Madras High Court’s decision in the case of Tube Investments of India Ltd vs JCIT (2014) 45 taxmann.com 78, Hon’ble Punjab and Haryana High Court’s decision in the case of Atlas Cycle Industries Ltd. v CIT [2004] 270 ITR 108 (P & H) and ITAT Mumbai A Special Bench’s decision in the case of Poysha Industrial Co. Ltd., vs ITO (1983) 4 ITD 41(Bom)

:-3-: ITA No. 2754/Mds/2016 (SB), wherein it is held assessee utilised foreign loan for purchase of capital equipment, and hence the loss incurred on said loan due to fluctuation in foreign exchange rate was to be regarded as capital in nature which could not be allowed as deduction, the CIT(A) ought to have upheld the disallowance on forex loss on loans made by the AO. 2.3 The CIT(A) failed to appreciate that the assessee has not produced any supporting material on its claim that the entire forex loss has been a result of trading activity and working capital repayment of the assessee before the AO and hence the same is treated as capital loss by the AO.

3. The CIT(A) erred in allowing the claim on provision for forex lsoses amounting to Rs. 7,63,502/-. 3.1 The CIT(A) failed to appreciate the fact that provision for losses created on foreign exchange contracts as on Balance Sheet dated does not constitute an ascertained liability and thus, deduction could not be allowed in respect of same as business loss as held by the ITAT, Bangalore ‘B’ Bench in the case of Shankara Infrastructure Materials Ltd. vs ACIT (2015) 53 taxmann.com 429 4. The CIT(A) erred in deleting the disallowance of Rs. 19,35,662/- with regard to wrong posting of entries made by the AO. 4.1 The CIT(A) erred in allowing the contention of the assessee that forex loss on loans of Rs. 19,35,662/- have been wrongly debited to Exchange Gain/Losses (imports) and hence the same is allowable as revenue expenditure. 4.2 Having regard to the Hon’ble High Court decisions and Hon’ble Tribunal decisions referred in ground no. 2.2, the CIT(A) ought to have upheld the disallowance of Rs. 19,35,662/- on forex loss on loans made by the AO.

5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer restored.”

:-4-: ITA No. 2754/Mds/2016 to provisional profit made on 31-03-2011 i.e. FY 2010-11 (AY 2011-12). This provisional profit entry is reversed in the beginning of FY 2011-12. The relevant ledger entries were produced before the learned CIT{A) and accepted as genuine entry. The Revenue has not understood the entries relating to Rs. 19,35,662. The assessee maintains separate ledger account relating to (a) Profit/Loss of Forex on Trade (imports and exports) and (b)

Profit / Loss relating to Foreign Currency Loan Transactions. However, the appellant has not appreciated the fact that both these losses are actual losses and not provisional losses. The only error of the assessee with respect to Rs. 19,35,662 was Forex losses on Loans was wrongly debited to Forex Losses on Trade (Imports). But the fact remains that this amount of Rs. 19,35,662 is a genuine actual revenue loss which has been actually incurred by the assessee.

The complete details of the break up of Rs. 19,35,662 together with the relevant pages of the Bank Statement were shown the learned CIT(A), discussed by him in detail in the appellate order. In the enclosed typeset, a statement of actual and Notional Exchange Loss on Forex Loans is given in Pages 95 and 96. Out of this, the items marked 124,121 total to Actual Loss of Rs. 19,35,662 for which evidences in the form of (a) Bank Debit Advice (b)

Relevant Bank Statement Page (c) Book Entry passed in the books of the assessee are enclosed in nutshell, the assesse has four ledger accounts relating to Profit / Loss on Foreign Exchange. The break up of all the four

:-5-: ITA No. 2754/Mds/2016 kinds of Profit/Losses are enclosed in the statements herewith. The summarized position is Actual Profit / Loss on Forex (Trade) (-) 75,70,776 Actual Profit / Loss on Forex (Loans) (-) 1,54,85,150 Notional Profit / Loss on Forex (Trade) 12,81,816 Notional Profit / Loss on Forex (Loans) (-) 2,89,011 (-) 2,20,63,121 Opening Balance of Notional Profit Written Back (-) 7,63,502 Error in Accounting Admitted (-) 6,960 Total value shown in profit & loss statement (-) 2,28,33,583 The AR drawn our attention to the audited financial statements of the assessee enclosed in Pages 127 to 139. Schedule 21 in Page No. 133 shows the Forex Losses accounted by the Assessee, totalling to Rs. 2,28,33,583. The notional profit of Rs. 9,92,805 (1281816 - 289011) has been earned, but actually incurred loss on forex is Rs. 2,30,55,926. Therefore the question of any notional loss being disallowed does not arise. The full statement showing actual losses as well as proof of the same in the form of Bank Statements/ Bank Advices and entries in the Books of Accounts of the assessee are enclosed in the typeset and submitted that the CIT(A) has on proper appreciation allowed the appeal and the same may be upheld.

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5. We heard the rival contentions. The Assessing Officer holds that the forex loss on loan account has been wrongly debited to forex trade loss and claimed as deduction, on the other hand, the assessee contends that the entire forex loss has been a result of trading activity and working capital re- payment. In support of its contention, the assessee is relying on the bank sanction statement. With regard to the other addition, the assessee pleads that it has maintained two ledger accounts for foreign exchange trade losses and foreign exchange losses on loan separately and by an error the former account was debited instead of the latter account, though both the accounts are only relating to foreign exchange loses actually incurred and they were separated for accounting reasons i.e., till the financial year 2010-11 under the old Schedule-VI of the Companies Act, 1956, the profits/losses on foreign exchange were grouped together under one heading for disclosure in the profit and loss account. The amendments of Schedule-VI mandated that foreign exchange transactions on trade account and loan accounts should be disclosed separately from the financial year 2011-12. These errors in posting of entries into the ledger accounts occurred while separating the accounts into two parts as per the new Schedule –VI. Thus, the issues essentially involve verification of facts with reference to the accounts and other materials. In the facts and circumstances, we deem it fit to set aside the order of the CIT(A) and remit the issues back to the AO for fresh examination and passing a due

:-7-: ITA No. 2754/Mds/2016 order in accordance with law, after affording adequate opportunity to the assessee. The Revenue’s appeal is treated as allowed for statistical purposes.

Order pronounced on Wednesday, the 27th day of December, 2017 at Chennai.