DCIT, NEW DELHI vs. M/S GIVO LTD.,, DELHI

During the course of assessment proceedings, the assessee had produced books of account which have been test-checked. During the assessment proceedings, the ld. AO observed that the assessee had taken a foreign currency loan (ECB) of USD 3 million for three years towards working capital requirements, vide agreement dated 5.8.97. The agreement was entered into between KB & T Ltd. (earlier name of the assessee company) and Thakral Brothers Pte Ltd., Singapore(the copies of the said agreement and the RBI approval letter dated 1.7.97 in this regard are enclosed at pages 38 to 47 of the paper book). The ld. AO while making the disallowance of Rs.28,45,070/-, observed that the details filed by the assessee show that the assessee has basically claimed deduction for notional loss on account of foreign exchange fluctuation.

The ld. AO further observed that for allowance of the loss on account of foreign exchange fluctuation to be considered for deduction, the loss must actually be suffered in the relevant previous year and actual suffering would arise only at the time of remittances and not before.

The ld. AO relied upon the decisions of Indian Overseas Bank, reported in 246 ITR 206 (Mad.) and the Hon’ble Supreme Court decision in the case of Karam Chand Thapar and Bros (1969), disallowed the loss suffered on account of foreign exchange fluctuation amounting to Rs.28,45,070/- claimed by the assessee as revenue expenses.

Aggrieved by the order of the ld.AO, the assessee went in appeal before the ld.CIT(A).

3. Before the ld.CIT(A), the assessee argued that the said loan was disbursed to the assessee by the overseas party in foreign currency, during the previous year relevant to assessment year 1998-99, and also utilized fully by the assessee in the same year for the purpose for which it was taken. The assessee submitted that the devaluation losses were duly declared in the respective Profit & Loss Account of the relevant financial years and, the losses were claimed u/s 37(1) of the Act, in the respective assessment years which were accepted by the department in the assessments made u/s 143(3) for the assessment years 1998-99 and 1999-2000. The assessee also submitted that the said issue has been decided by the ITAT vide its order dated 29.5.2009 passed for assessment year 2000-01. The assessee also submitted that there has been no fresh foreign loan funds being received during the previous year under consideration to be deployed afresh. The assessee further submitted that the gain arising on ECB has been offered for taxation by the assessee which has been accepted by the AO for AY 2005-06. The ld.CIT(A) held as under:-

“…… Thus, the assessing officer cannot blow hot and cold at the same time by considering the gain as income on revenue account and not allowing the expense by considering the same on capital account. In view of the above facts, it is clear that the ECB loan was utilized for revenue purposes in the year of receipt as well as remain utilized for in working capital items as on 31/3/2006. Thus, the devaluation loss was in the nature of revenue loss since the ECB funds had been fully utilized for meeting the working capital requirements. Therefore, the same is fully allowable u/s 37(1) of the Act since all conditions laid down in that section were fully met. Reliance has been placed on the following judicial decisions:-

1. 1. CIT Vs Woodward Governor India (P) Ltd. (2007) 294 ITR 451 (Del). 2. Sutlej Cotton Mills Ltd. Vs CIT (1979) 116 ITR 1 (SC). 3. CIT Vs International Combustion (I) Pvt. Ltd. (1982) 137 ITR 184 (Cal.). 4. CIT Vs V.S. Dempo & Co. (P) Ltd. (1994) 206 ITR 291 (Bom). 5. CIT Vs IBM World Trade Corporation (1986) 161 ITR 673 (Bom.).

6. Oil & Natural Gas Corpn. Ltd. Vs DCIT (2002) 83 ITD 151 (Del.) (SB). I have considered the submissions of the appellant, the findings of the AO and the facts on record. Perusal of the facts on record show that the appellant is regularly following the mercantile basis of accounting and the treatment in the accounts of foreign exchange transactions is according to the Accounting Standards. As per the stated policy the revenue transactions in foreign 5 currency are generally recorded at the exchange rate prevailing at the time of transaction and the foreign currency assets and liabilities other than covered by forward exchange contract are restated into Rupees at the rate of exchange prevailing on the balance sheet date. The policy for accounting the foreign exchange fluctuation is consistent and is being followed from year to year. The Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India Ltd. 223 CTR 7 has been affirmed the decision of the Hon'ble Delhi High Court in the case of CIT Vs Woodward Governor Pvt. Ltd. 210 CTR (Delhi). The operative part affirmed is as under: "It is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables / payables and loans denominated in a foreign currency as well as sundry creditors are a monetary items which have to be valued at the closing rate under AS-ll. Under para 5, a transaction in a foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-ll deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under section 37(1), para 9 of AS-ll which deals with recognition of exchange differences, need to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or an expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A. Para 9 of AS-ll recognizes exchange differences as income or expense. In cases where, e.g. the rate of dollar rises vis-a-vis the Indian rupees, there is an expense during that period. The 6 important point to be noted is that AS-ll stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw material using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L a/c for the reporting period CIT Vs Woodward Governor India (Pvt.) Ltd & Others (2007) 210 CTR (Del) 354 "affirmed."

The Hon'ble ITAT Spl. Bench (Delhi) in the case of ONGC Ltd. Vs DCIT 83 ITD 151 Delhi has observed as under: "Before concluding we would like to point out that the assessee's claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year has been disallowed by the AO, inter alia, on the ground that this liability was contingent liability and the loss was notional one. The main ingredient of a contingent liability is that it depends upon hoping of certain event. We are of the considered opinion that in the case of assessee, the "event" i. e. the change in the value of foreign currency has already taken place in the current year. Therefore, the loss incurred by the assessee is a fate accompli and not a notional one." After careful consideration of the facts of the case and the decisions of the Hon'ble Supreme Court and ITAT Spl. Bench, Delhi discussed above the only conclusion which can be drawn is that the appellant's claim of loss on account of fluctuation in foreign currency rate is allowable. The appellant is regularly following the mercantile system of accounting and following the accounting standards. The losses claimed are on the revenue account a fact which has not been disputed even by the AO. In view of the above, the losses claimed by the appellant on account of foreign exchange fluctuation are an allowable expenditure.”

We do not find any infirmity in the order passed by the ld.CIT(A). We, therefore, dismiss this ground of appeal.

5. Coming to Ground No.2, during the course of assessment proceedings, the ld.AO observed that the assessee had paid customs duty for import of machinery in the year 1994-95 and transferred Rs.11,65,797/- as security deposit to the Customs Department in the said year. Since the assessment by the Customs Department was still pending, the unilateral action of the assessee in capitalizing the aforesaid amount was not found in accordance with the law by the ld. AO and, therefore, the depreciation claimed on the same in the earlier assessments was disallowed and added back to the income of the assessee. In the respect of instant assessment year, the assessee had submitted during the assessment proceedings that, the said amount has been included in the WDV of the plant and machinery and claimed depreciation on the same. The assessment has still not been finalized by the Customs Department. Accordingly, the ld. AO disallowed the depreciation claimed on the same by the assessee during the relevant year amounting to Rs.1,43,448/-.

Aggrieved by the order passed by the ld. AO, the assessee went in appeal before the ld.CIT(A).

During the appellate proceedings, the assessee submitted that the ld. AO has wrongly mentioned the addition at Rs.5,73,791/-, being the opening WDV instead of Rs.1,43,448/-, being the depreciation charged @ 25% of Rs.5,73,791/-. The assessee submitted that the Customs Rules have been changed since long and the requirement of paying provisional duty and a security deposit till final assessment is made, has been removed from the statute. The assessee submitted before the Ld.CIT(A) that, the current position under customs law is that the goods can only be moved, out after paying the assessed customs duty. Therefore, the issue is lying dormant with the said authorities who are not inclined to take it up since their revenue is more than adequately covered by the said security deposit. It was submitted by the assessee before the ld.CIT(A) that a personnel was specially deputed by the assessee to get the matter settled with the Customs Department, which did not serve any purpose.

Therefore, as a prudent businessman, it was decided not to spend any further cost in collecting the said refund and to right it off in the books.

I have considered the submissions of the appellant, the findings of the AO and the facts on record. Perusal of the facts on record show that the Hon'ble ITAT in the appellant's own case from A. Y. 2003-04 & 2004-05 on identical facts has decided the issue in favor of the appellant by making the following observations: "Para No.

The facts and circumstances remaining the same, respectfully following the order of the Hon'ble ITAT in the appellant's own case, this ground of appeal is allowed in favor of the appellant. The disallowance made by the AO is deleted.” 11

7. We do not find any infirmity with the findings of the ld.CIT(A), in following the order dated 29.5.2009 passed by the ITAT, for AY 2003- 04 and 2004-05, we hold that the issue stands covered. This ground of the Revenue, therefore, stands dismissed.

The order pronounced in the open court on 06.11.2015.