MILTONS P.LTD,MUMBAI vs. ASST CIT CIR 6(3), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद"य लेखा लेखा सद"य सद"य राजे"" सद"य राजे"" राजे"" केकेकेके अनुसार राजे"" अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order dated 27/02/2015 of the CIT (A)-13,Mumbai, the assessee has filed the present appeal.Assessee-company,engaged in the business of manufacturing and exporting of ready-to-wear garments,filed its return of income on 20/09/2009,declaring Loss of Rs.3.98 crores.The Assessing Officer (AO) completed the assessment on 23.12.2011 u/s.143 (3) of the Act,determining its income at Rs. (-)1.27 crores.During the course of hearing before us, the Authorized Representative (AR) of the assessee stated that Ground No.2 to 4 should be treated as not pressed.Hence,same stand dismissed. 2.Effective ground of appeal is about disallowance of foreign exchange loss of Rs.2.20 crores.During the assessment proceedings,the AO found that the assessee had debited an amount of Rs.2,20,94,804/- towards foreign exchange loss i.e. exchange loss due to ECB loan, that the assessee had shown the loss as outstanding as on 31.3.2009.He observed that the assessee had merely booked foreign exchange loss, that it was only notional loss, that no transaction was carried out with the party who had advanced the loan, that the liability had not been repaid during the year under appeal, that assessee had reduced the tax liability in its books of account, though no actual transaction had taken place.He issued a show cause notice to the assessee asking it as to why the foreign exchange loss should not be disallowed. After considering the submissions of the assessee,dated 21.12.201,the AO held that the foreign exchange loss had been shown in the books on a notional basis, that it had paid the difference due to foreign exchange fluctuation, that liability arising out of foreign exchange 2307/M/15(09-10)- Milton’s Pvt.Ltd.

fluctuation was a contingent liability that same had not crystallized during the year.Finally, he made an addition of Rs.2.20 crores to the total income of the assessee. 3.Aggrieved by the order of the AO, assessee preferred an appeal before the First Appellate Authority (FAA).Before him,it was argued that loan was taken for the purpose of working capital of the company,that it was utilised for production of readymade garments, that in the notes forming part of accounts it was mentioned that loan was taken for working capital and that gain/losses were to be taken to the P&L account, that as on 1.4.2008 outstanding loan was USD 22,49,980 (Rs.9.10 crores), that assessee was following the method mentioned in the AS-II with regard to foreign exchange gains/loss, that on 31.3.2009 the closing balance was USD 11.31 crores,that the difference of Rs.2.20 crores was debited to the P&L account, that it was not a contingent liability, that in earlier years method of accounting adopted by the assessee was accepted by the department.The assessee relied upon the case of Woodward Governor India Pvt.Ltd.(312ITR254);Oil and Natural Gas Corpn. Ltd.(322ITR 180); Moto - rola India Pvt.Ltd.(112taxmann.com136). After considering the submission of the assessee and the assessment order,the FAA held that there was no actual foreign exchange transaction during the year, that the impugned transaction in nature of foreign currency loan had taken place few years back, that no payments were made by the assessee during the year under appeal,that no actual transaction had taken place nor any payment was made, referring to the case laws referred to by assessee the FAA held that the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. (312ITR254); Oil and Natural Gas Corpn. (supra), have dealt with Section 43A w.e.f. 1.4.2003, that as per amended provisions payment was a pre-condition for allowance of any expenditure, that under the unamended Section 43A actual payment was not a condition for making necessary adjustment in carrying cost of the fixed assets acquired in foreign currency, that loan transaction was capital in nature, that the loss was incidental to capital transaction and was not allowble .Finally, he upheld the order of the AO.

4.During the course of hearing before us,the AR argued that the assessee was following mercantile system of accounting,that loss suffered by it due to foreign exchange loss was debited to P&L account,that in the earlier years foreign exchange gains were offered for taxation and the AO had taxed the same accordingly,that provisions of Section 43A did not deal with the foreign exchange loss, that the same pertained to acquisition of capital asset in foreign currency.The Departmental Representative(DR)supported the order of the FAA.

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5.We have heard the rival submissions and perused the material before us. We find that the assessee had taken external commercial borrowing /loans(ECB) of USD 20 lakhs in the earlier year for the purpose of working capital requirement,that it computed foreign exchange loss of Rs.2.20 crores on the basis of opening balanace and closing balance as on first and last day of the year under consideration, that the AO and the FAA held that loss claimed by the assessee was notional/contingent. We find that the assessee is following the mandate of Accounting Standard issued by the ICAI,that in the earlier AY.s from 2003-04 to 2008-09 the foreign exchange gains were offered by it for taxation, that the AO had taxed such gains in those years,that in the AY.s 2001-02, 2002-03 it had suffered loss on account of fluctuation of exchange rate.We are of the opinion,that if the AO had taxed the foreign exchange gains in the earlier years then he should not make a disallowance of foreign exchange loss suffered by it on account of fluctuation. In those years also the assessee was following AS-11 and it had not received any money from the persons who had advanced loans.In other words, it was only a notional income in those years also by the logic advanced by the AO for that year.The AO cannot apply different standard for same kind of transactions.Taxation jurisprudence does not approve to approbate and to reprobate by either of the parties i.e. AO and the assessee.The FAA has not mentioned a single word about the taxing of foreign exchange gains by the AO during the earlier years,while passing orders u/s.143(3)of the Act. As far as Section 43A is concerned, it deals with machinery purchased in for exchange and its actual cost.In the case before us, the issue is of working capital and not of purchase of plant and machinery.Therefore, we are of the opinion that the AO and the FAA was not justified in treating the liability as contingent or notional.In the case of Oil and Natural Gas Corpn. (supra) the Hon'ble Supreme Court has held that the loss claimed by the appellant on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet was allowable as expenditure u/s.37(1)of the Act. Respectfully following the above judgment,we decide the effective Ground of appeal in favour of the assessee. As a result, appeal filed by the assessee stands allowed. फलतः िनधा"रती अिधकारी "ारा दािखल क" गई अपील मंजूर क" जाती है. Order pronounced in the open court on 07th March, 2017. आदेश क" घोषणा खुले "यायालय म" "दनांक 07 माच", 2017 को क" गई । (राम लाल नेगी / Ram Lal Negi) (राजे"" / Rajendra) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; "दनांक/Dated : 07.03.2017. Jv.Sr.PS. 3 2307/M/15(09-10)- Milton’s Pvt.Ltd.