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Income Tax Appellate Tribunal, DELHI BENCH “G” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI O.P. KANT
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER This is an appeal filed by the Revenue against the first appellate order deleting the addition of Rs.17,63,24,155/- made by the Assessing Officer on account of foreign exchange loss.
The brief facts leading to the above appeal are that the assessee filed its return of income declaring a loss of Rs.11,91,93,780/-. During the year under consideration the assessee has received advance against export from its overseas buyers, M/s Bunge S.A. in Japanese Yen and due to foreign exchange fluctuation there was a loss of Rs.17,63,24,155/- in the value of the advance as on 31st March, 2008. The AO disallowed the said loss. The 2 AO was also of the view that this loss is a notional loss and further mark to market losses are not allowed.
Aggrieved by the order of the AO, the assessee filed appeal before the learned CIT(A). The learned CIT(A) after examining the facts held that the AO was wrong in assuming that this is a currency swap transaction and the difference represents mark to market loss. The learned CIT(A) held that this loss is a loss on account of exchange rate fluctuation arising on account of trading advance and allowable under the provisions of the Income Tax Act and accordingly he deleted the disallowance made by the AO. 4. Aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us challenging the deletion of above addition by the learned CIT(A). 4.1 It was contended by the learned DR that assessee has not suffered any actual loss during the year under consideration. The assessee has received advance during the year and has made export in the subsequent year. Thus, this loss accounted for in the year under consideration is a notional loss and the AO was justified in disallowing the same. The learned DR submitted that AO has given detailed reasoning for disallowing this loss. He supported the order passed by the AO.
3 4.2 In reply, the learned AR supported the order passed by the learned CIT(A). It was submitted that the AO has not been able to appreciate the facts in the right perspective. The assessee company during the year got an order for the supply of soya bean meal and against this it received advance payment of Japanese Yen 299,36,04,642. These Japanese Yen came to the assessee’s bank account through proper banking channel and the same was credited to assessee’s bank account on 31st July, 2007 by applying the exchange rate of 34.11 as on that date. The net payment received against this advance was Rs.100,20,66,525/-. The advance so received from the foreign buyer was outstanding at the year end i.e. as on 31st March, 2008. This advance being a current liability outstanding as on 31st March, 2008, the same was converted at the applicable exchange rate in terms of Rule 115 of the Income Tax Rules as well as Accounting Standard AS-11 applicable to the assessee company. The exchange rate of Japanese Yen as on 31st March, 2008 was 40.03 as against 34.11 at the time when the payment was received. The difference on account of this exchange on the total advance worked out to Rs.17,63,24,155/- and the same was accounted for in the profit and loss account for the year ended 31.03.2008. This loss was accounted for in accordance with the provisions of the Income Tax Act and the accounting policy consistently being followed by the assessee and is 4 fully allowable and hence the learned CIT(A) was justified in deleting the addition on this account. It was further submitted by the learned AR that against the above advance the assessee has made export in the next financial year i.e. 2008-09 and the value of such export is at enhanced amount of Rs.118.90 Crores as against the export at original rate when the advance was received of Rs.100.20 Crores. The order was booked in Japanese Yen and the sale has also been booked in Japanese Yen. The learned AR also invited attention to the assessment order passed for the subsequent assessment year under section 143(3) whereby the AO has accepted the financial results. It was contended that in view of the above facts the contention of the AO of treating this loss as a derivative loss or mark to market loss is factually incorrect. The AO was wrong in considering this loss as mark to market loss on account of trading in derivatives by not appreciating the facts about bank guarantee correctly. The assessee company provided a bank guarantee to the buyer in order to ensure the security of the money advanced to it. It was submitted that this bank guarantee is the normal guarantee given to the buyer in case advance is received from a buyer for the due performance of the purchase contract. The learned AR invited attention to the guarantee issued by the Punjab National Bank whereby it has been clearly stated that this guarantee has been issued on behalf of the assessee in favour of M/s Bunge 5 S.A. for supply of soya been meal. It was submitted that this is a loss suffered by the assessee on account of the fluctuation in foreign exchange rate as on the date of the balance sheet and is fully allowable under the provisions of the Income Tax Act. Attention was also invited to Rule 115 of Income Tax Rules whereby all foreign exchange transactions are to be valued at the rate of exchange on the specified date and for the purpose of computing profit and gains of business and provision the specified date mean the last date of the year. The assessee having computed the loss in accordance with the Rule 115, the learned CIT(A) was justified in deleting the disallowance made by the AO. It was also submitted by the learned AR that even the new Income Tax and Disclosure Standards recently notified by the CBDT, mandates conversion of foreign exchange transaction on the closing day by applying the rate of exchange on the last date of the year. The learned AR further relied upon the following judgments in support of its contention:- i) CIT v. MarutiUdyog Ltd. [2010] 320 ITR 729 (SC) ii) Oil and Natural Gas Corporation Ltd. v. CIT [2010] 322 ITR 180 (SC) iii) DCIT v. Honeywell International (India) (P.) Ltd. [2009] 119 ITD 375 (Delhi) iv) ACIT v. Chettinad Cement Corporation Ltd. 140 TTJ 100 6 5. On going through the facts of the case we note that the issue is regarding loss on account of foreign exchange rate fluctuation in respect of trading advance received by the assessee company and outstanding at the closing day of the year. The assessee had received an advance of Japanese Yen 2993604642 on 31st July, 2007. The Punjab National Bank has converted the advance into Indian Rupees by applying exchange rate of 34.11 and credited the account Rs.100,20,66,525/- to the account of the assessee as per the bank advice placed at Paper Book Pg.
This advance was received in terms of the purchase contract for supply of 19056.500 MT of soya bean meal. Since this advance was outstanding as on 31st March, 2008, by the time the Japanese Yen has appreciated and the rate as on 31st March, 2008 was 40.03. Thus the liability of the assessee on account of the advance received of Japanese Yen 2993604642 had increased to Rs.117,74,50,200/- as on 31.3.2008. Since this was a liability on account of the advance received against export, the difference of Rs.17,63,24,155/- was the loss suffered by the assessee on account of this fluctuation. 5.1 As per Rule 115 of Income Tax Rules, foreign exchange transactions while computing profit and gains from business and profession are to be converted at the exchange rate prevalent on the last date of the year and the difference so arising on account of such conversion is to be taken into 7 consideration while computing profit and loss of the business or profession. As per the above facts it is evident that this transaction has been in the course of business. The advance is a trading advance against export. The export has been actually affected in the next year. The assessee was right in converting such advance by applying the exchange rate prevalent as on 31st March, 2008 and the loss arising consequent to such conversion has rightly been taken into consideration while computing its business income. 5.2 We have gone through the assessment order and we are in agreement with the contention of the learned AR that AO’s action in treating such loss to be on account of derivative is incorrect. In fact from the assessment order we note that the AO has not appreciated the transaction in the right perspective. The allegation of the AO that assessee entered into a currency swap with the bank for an instrument involving a swap of a liability of Japanese Yen vs. Rupees is against the facts on record. The observation made by the AO in the assessment order in this regard demonstrate the indulgence into surmises without considering the fact that this is an advance received against export and such export has been actually effected in the subsequent year. It is an undisputed fact that assessee has received the advance in Japanese Yen and Japanese Yen has got appreciated from 34.11 to 40.03 during the year. The assessee having received the advance and 8 having suffered the loss, the AO cannot sit over the judgment of the assessee to decide why the advance was received in Japanese Yen and why it was not received in Euro or Swiss Franc. 5.3 We are also in agreement with the contention of the learned AR that such transactions do not involve any element of derivatives as has been alleged by the AO. In this regard we are of the view that the AO has gone wrong in interpreting the bank guarantee issued by the bank on behalf of the assessee. This bank guarantee has been issued by the bank to provide security to the buyer in respect of the advance given for the product it wants to purchase from the assessee company. On going through the details mentioned in the bank guarantee, we note that there is no clause or terms in this bank guarantee which indicate that any kind of instrument has been created by the bank for treating the same as derivatives. In this regard we note that the observation of the learned CIT(A) is correct that the AO has gone on to elaborate the principle of derivatives from Pages 4 to 14 of the assessment order but the whole discussion is on theory of derivatives of mark to market losses. It is also evident from the facts on record that the AO has not disputed the advance received as trading advance towards supply of soya bean meal. It is also a fact that there were several other transactions in foreign exchange fluctuation account which has been treated similarly. The 9 assessee all along has treated this advance in accordance with Accounting Standards AS-11. This also has been followed in earlier assessment years as well as in subsequent assessment years.
5.4 As regards the contention of the learned DR that the corresponding purchase for this export are more than the value of the sale, we are of the view that this cannot be a consideration for disallowing the loss suffered on account of the foreign exchange fluctuation in the year under consideration. The assessee having followed the system of accounting regularly for accounting foreign exchange fluctuation in accordance with accepted method of accounting and the same have not been inconsistent with any provisions of the Income Tax Act any profit or loss arising on this account has to be taken into consideration and the same cannot be rejected. We are also in agreement with the contention of the learned AR that had it been a case where the assessee company would have advanced money in foreign currency, and in case such currency would have appreciated it would have to include such appreciation as part of the profit in the year under consideration irrespective of the fact that the goods for which such advances are made were not received in the year under consideration. By applying the same corollary the advance received by the assessee for supply of goods, any 10 difference arising on account of the exchange rate variation such difference will be part of the profit and loss account and the same has to be taken into consideration while computing income.
5.5 We are also of the opinion that the learned CIT(A) was justified in holding that the AO was not correct in picking one transaction and treating the same as derivative and disallowing the loss by considering the same as mark to market losses. From the order of the learned CIT(A) it is also evident that the Learned CIT(A) has also called for the assessment record and after verification has held that the accounting policy being followed by the assessee in this regard is consistent and in accordance with Accounting Standards AS-11.
In view of the above facts we see no reason to interfere with the order of the learned CIT(A) and accordingly we uphold the order of the learned CIT(A) and the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 20 .06.2016 Sd/- Sd/- ( O.P. KANT ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 20 /06/2016 Mohan Lal