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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the Order dated 02.08.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in for the AY 2011-12.
2.0 All the grounds of the appeal are related to the disallowance of ₹1,65,31,232/- relating to foreign exchange loss. The assessee filed
ITA No.2997/Mds/2016 :- 2 -: return of income declaring total income of ₹14,78,460/- and the assessment was completed u/s.143(3) r/w Sec.92CA of Income Tax Act (in short ‘the Act’), on total income of ₹1,80,09,692/- the Assessing Officer (hereinafter referred to as ‘AO’) disallowed the foreign exchange loss stating that the provision for loss/gain created on account of re- statement of liability is not allowable business loss. The assesse went on appeal before the Learned Commissioner of Income Tax (Appeals)
(hereinafter referred to as ‘Ld.CIT(A)’) and the Ld.CIT(A) confirmed the addition made by the AO. For the sake of convienience the relevant paragraph of the Ld.CIT(A) in Para Nos.8 & 9 are extracted hereunder:
In the case of the appellant which is in the business of manufacturing and assembling of gear motors and gear boxes. The forex loss claimed is on account of ECB and restatement of the gain or loss at the end of theyear in terms of the plea that it is in compliance of Accounting Standard (AS-11). It is the appellant’s case that it has been reversing the provision created both on revenue field as well as capital field made in the preceding previous year, on the beginning of the relevant previous year. That it has either incurred forex loss or earned forex gain as the case may be, due to restatement of the foreign currency liability /current asset in the earlier years and claimed the forex loss or expenditure or offered it as income as the case may be during those years consistently.
Be that as it may, the borrowing therefore would be in the nature of a non-integral foreign operation in view of the aforesaid. The appellant could have mobilized its own funds or availed such funds from any other source. Having held such the loss or gains from the change in currency rate has to be credited to a reserve account and would only be eligible for deduction as an expense on settlement thereof. Such has been the view held by the ITAT Hyderabad Bench in M/s.M+W Zander (S) Pte Ltd v. ADIT in order dated 03.08.2012. On the facts of that case, it was found that the loan obtained by the branch which was independently conducting its business activities from the Head Office was a non-integral foreign operation. The fluctuation in the rate of exchange cannot have its integral operation. The entire transaction is non-integral in nature and hence the same is to be treated as per Para 24 of AS-11. The fluctuations in the rate of exchange on the quantum of loan would not affect the day to day working or the profit of given year. It would affect only on re-payment at the time of settlement. Hence, the gain or loss is to be accumulated in the reserve account until the date of settlement whereupon it can be credited or debited in the P & L a/c. The Hon’ble Tribunal while adjudicating in the matter had also taken into consideration the reliance placed by the assessee on the ratios of CIT v. Dempo & Co. P Ltd 206 ITR 291 (Bom.) and CIT v. Woodward Governor India P Ltd 312 ITR 254). Hence, the loss claimed is to be carried forward in the foreign currency translation reserve account and squared up at the time of settlement. It would suffice to say that the claim made by the appellant cannot be allowed till the time of settlement and accordingly the disallowance made by the AO is confirmed. This ground of appeal is dismissed.
ITA No.2997/Mds/2016 :- 3 -:
3.0 Aggrieved by the order of the Ld.CIT(A) the assessee filed appeal before us. The Learned Authorized Representative (hereinafter referred to as ‘Ld.AR’) appearing for the assessee argued that both the Ld.CIT(A) and the AO miss-understood the foreign exchange loss incurred by the assesse. The lower authorities were of the opinion that the re-instatement of foreign exchange loss was due to the External Commercial Borrowings (in short ‘ECB’) but the assessee has never availed the ECB loan in the past and in the previous year relevant o the AY under consideration. The case law relied on the by the Ld.CIT(A) relating to Hon’ble ITAT Hyderabad Bench in M/s.M+W Zander(s) (P) Ltd., Vs. ADIT in has no application in this case. The assessee is regularly restated the foreign currency asset or liability and admitting the income or loss in the relevant AY as per the system of account followed by the assesse. The assesse has admitted net gain of ₹4,40,75,896/- due to reinstatement of foreign exchange. According to the Ld.AR, the loss claimed by the assesse in re-instatement of foreign exchange was as per the account standard-11 and consistently followed and allowable deduction. On the other hand, the Learned Departmental Representative (hereinafter referred to as ‘Ld.DR’) argued that the submissions made by the Ld.AR are not emanating from the orders of the lower authorities. The assesse stated that the assessee has not taken the ECB loan and regularly admitting the income or loss on foreign currency asset or liability in the return of income. These facts need further verification and the case should be go back to the AO for further verification.
ITA No.2997/Mds/2016 :- 4 -:
4.0 We heard the rival submissions and perused the material placed on record.
The Ld.CIT(A) dismissed the appeal on the premise that the assessee had incurred foreign exchange loss on account of ECB loan and applied the decision of Co-ordinate Bench of ITAT Hyderabad in and held that the claim made by the Appellant cannot be allowed till the time of settlement of the ECB loan. As per the financial statement submitted by the assessee, there was no ECB loan in the balance sheet which fact was not controverted by the Ld.DR. As per the trading and P&L A/c, the assesse has debited foreign exchange loss of ₹4.77 lakhs and a sum of Rs. to ₹1,65,31,250/- was the disallowance made by AO. In the paper book, the assessee has furnished the ledger copies of Foreign currency (gain/loss) for the period from 2008 to 2013 showing the loss or gain on reinstatement of foreign exchange and there was no ECB loan. The details furnished by the assesse and the facts regarding the re-statement of foreign exchange loss required further verification at the end of the file of the AO. Therefore, we set-aside the orders of the lower authorities and remit the matter back to the AO to examine the issue afresh in the light of the discussion made in this order and decide afresh on merits.
ITA No.2997/Mds/2016 :- 5 -:
5.0 In the result, the appeal of the assesse is allowed for statistical purposes.