DCIT, CIR-12, KOLKATA, KOLKATA vs. M/S USHA MARTIN TELEMATICS LTD., KOLKATA

Brief facts of the case are that during the course of the assessment proceedings, the AO required the assessee to explain as to why the addition of the gain on account of fluctuation in the rate of foreign exchange of Rs.5,84,16,000/- be treated as revenue receipt and added back as the total income of the assessee. The assessee submitted that the foreign exchange gain appearing in the financial statement of the assessee is in respect of Usha Martin Telematics Ltd., AY 2007-08 restatement of interest free loan of US $ 50000000 taken from Asian Telecommunications Investment (Mauritius) Limited (ATIML). According to the assessee, the said loan was utilized for making strategic investment. The assessee submitted before the AO that in terms of Accounting Standard AS11 at the end of every year, the assessee were required to convert the original amount of the said foreign currency loan of US$ 5,00,00,000 into Rupees at the exchange rate prevailing at the year end and in case of adverse fluctuation in exchange rate resulting in the increase in the loan amount in Rupees, the assessee was required to increase the Rupee value of the loan in its books of accounts and debit such difference on account of exchange difference to its profit and loss account. Conversely, in case of favourable exchange rate fluctuation resulting in reduction of the amount of the loan in Rupees, the assessee was required to reduce the Rupee value of the loan in its books of accounts and credit the exchange difference to its profit and loss account. It was also brought to the notice of the AO that such increase or decrease in the rupee value of the loan at the year end due to exchange rate fluctuation was entirely notional and did not represent any real loss or gain. The assessee contended that this exercise has to be complied by the assessee as required by AS 11 issued by the Institute of Chartered Accountants of India and as per the prescription of the Central Govt. by the companies (Accounting Standard) Rules, 2006 for the purpose of section 2(11) of the Companies Act, 1956. It was contended that even though while complying with AS11 the increase or decrease in the loan amount takes place in the books of account and debiting and crediting its P&L Account because of the exchange difference while computing its taxable income, the assessee did not treat such exchange difference as expenditure or income. Therefore, the assessee submitted that the notional exchange gain of Rs.5,84,16,000/- credited in book profit and loan account was in respect of the said loan obtained and because of the statutory requirement it was done so. However, there was no real income but it was fully notional. However, the AO did not accept the assessee’s contention and was pleased to treat the said amount as gain on the revenue account and made the addition. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to allow the appeal of assessee and directed to delete the said amount. Aggrieved the revenue is before us.

We have heard rival submissions and gone through facts and circumstances of the case. We note that a similar issue arose in the case of the assessee in AY 2004-05. In that AY also the AO made an addition of Rs.13,90,00,000/- on account of foreign exchange gain. In appeal for that assessment year, the Ld. CIT(A) was pleased to direct deletion of the addition taking note that it was only notional gain and no real income accrued. The revenue challenged the decision before the Tribunal in wherein the Tribunal reversed the order of the Ld. CIT(A) by making certain observation as under:

We note that the amount in question is the same borrowed amount in AY 2004-05 and the facts of AY 2004-05 are permeating in this relevant assessment year 2007-08. Since the facts are the same and there is no change in law, we respectfully following the order of the Coordinate Bench in assessee’s own case find merit in the contention of the revenue and since the utilisation of borrowings are held to be on revenue account, the resultant exchange gain or loss at the end of the year due to restatement of foreign currency loan would automatically take the character of revenue receipt or the expenditure, as the case may be. The Ld. AR fairly conceded that the decision of the Tribunal in assessee’s own case for AY 2004-05 was against the assessee and he could not point out as to whether there is any Usha Martin Telematics Ltd., AY 2007-08 change of facts or law which can persuade as to take a different view. Therefore, we allow the appeal of the revenue by following the order of the Tribunal in AY 2004-05.

In the result, appeal of revenue is allowed.