PRINCEWATERHOUSECOOPERS PVT. LTD.,KOLKATA vs. JCIT (OSD-CIT-I), KOLKATA, KOLKATA

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-XX, Kolkata dated 27.02.2014. Assessment was framed by JCIT(OSD), CIT-1 Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 29.12.2011 for assessment year 2008-09.

In this appeal various grounds have been raised out of which grounds No. 2 and 3 are not pressed, therefore same are dismissed as not pressed. Ground No. 4 is of general nature and does not require separate adjudication. The other ground is as under:- “1(a) That on the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)], erred in confirming the disallowance of foreign exchange loss of Rs.8,46,64,000/- 1(b) That the Ld. CIT(A) erred by confirming the disallowance of foreign exchange loss amounting to Rs.8,46,64,000/- arising out of restatement of its foreign currency hedging contracts as notional, without appreciating the fact that such loss was recognized on accrual basis and measured as per well accepted accounting policy, being consistently followed by the appellant. 1(c). That the Ld. CIT(A) failed to appreciate that such foreign exchange loss arising out of re-stat of year-end balance is allowable under section 37(1) read with section 145 of the Income Tax Act 1961 (“Act”) 1(d) That the action of the Ld. CIT(A) is in defiance of settled principles laid down by the Apex Court.”

Only issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the order of Assessing Officer by sustaining the disallowance of ₹8,46,64,000/- on account of foreign exchange loss due to fluctuation.

Briefly, the facts of the case are that assessee in the present case is a Private Limited Company and is engaged in consultancy business. The assessee in its computation of income has claimed loss of ₹8,46,64,000/- on account of foreign exchange fluctuation. The impugned aforesaid loss was representing the fees receivable in foreign currency. During the course of assessment proceedings, AO observed that fees receivable in foreign exchange have been duly hedged by way of taking forward contract. Therefore, such loss claimed by assessee is a notional loss and contingent in nature. Accordingly, AO treated the same as notional loss after having A.Y 2008-09 Pricewaterhousecoopers Pvt. Ltd. Vs. JCIT(OSD-CIT-I), Kol. Page 3 reliance on CBDT instruction No. 3 of 2010 dated and added the same to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that it has been following mercantile system of accounting on regular basis and accordingly the impugned loss was recognized in its books of account which is deductable u/s. 37(1) of the Act. The assessee further submitted that the impugned loss was recognized in the books of account in pursuance of provision of Accounting Standard-11 issued by the Institute of Chartered Accountant of India. As per AS-11, it is compulsory to give effect to the foreign currency transactions as per the foreign exchange rates as on the balance-sheet date. The assessee alternatively submitted before Ld. CIT(A) if such loss is not allowable on accrual basis then the effect of such loss arising in subsequent year on maturity of contracts should be allowed. However, Ld. CIT(A) confirmed the order of AO by observing as under:- “4- Ground no. (i)(a) to (i)(c) relate to contention of the appellant against disallowance of Rs.8,46,64,000/- which was claimed by the appellant towards loss on foreign exchange. The fact of the case is that there was a loss of Rs.8,46,64,000/- to the appellant in respect of loss of foreign exchange. The appellant had entered into foreign currency derivatives with the objective of hedging its foreign currency exposures. On going through the various agreements undertaken by the appellant with the banks for hedging its foreign exchange exposure, the banks certified the net mark to market loss of Rs.846,64 laksh. Since, the loss was a notional loss as no sale of goods/settlement of contract had been taken place. Being notional loss/contingent liability, the AO disallowed the ape’s claim. Though the appellant claimed that the loss was claimed as per their system of accounting consistently was being followed by them and the loss was certified by the banks, the loss arose due to fall in the price below its cost. After going through the facts and circumstances of the case, I find that the liability was yet to be ascertained, the claim / certificate from the bank was on notional basis and not on ascertained/actual basis. Therefore, being contingent / notional liability, the AO was justified to disallow the claim of the appellant. However, the alternative plea of the appellant is that the loss should be allowed I the year of conclusion of the liability or in the year of maturity. I find merit in the alternative submission. Therefore, the AO is directed to allow the loss in the year in which the same becomes ascertained.”

We have heard rival contentions of both the parties and perused the materials available on record. The assessee-company had debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items, on the last date of the accounting year. The Assessing Officer held that the liability as on the last date of the previous year under consideration was not an ascertained liability, but a contingent liability and, consequently, it had to be added back to the total income of the assessee. On appeal, the Commissioner (Appeals) confirmed the order AO. The facts in the instant case are undisputed that that the instant loss is arising in respect to the forward contracts which had not expired on the last day of the accounting year. It is also not disputed that the assessee is following mercantile system of accounting which requires to account for all the A.Y 2008-09 Pricewaterhousecoopers Pvt. Ltd. Vs. JCIT(OSD-CIT-I), Kol. Page 5 expenses in the profit and loss account on accrual basis. Accordingly, the assessee has claimed the losses on the basis of mercantile system of accounting. Thus, in our considered view the assessee is very much eligible for the deduction of the impugned loss. In this connection, we find support and guidance from the judgment of the Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd. (Supra) wherein it was held as under:-

In the result, assessee’s appeal stands allowed.