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Facts
The assessee claimed a foreign exchange fluctuation loss of Rs.1,19,56,753/- in AY 2014-15 related to imports made in AYs 2010-11 and 2011-12. The PCIT initiated revision proceedings under Section 263, noting no business activity and questioning the claim as the payments were outstanding due to an ongoing DRI enquiry.
Held
The Tribunal held that the assessee's consistent method of accounting under the mercantile system justified recording the foreign exchange loss. Despite the claim appearing notional, the accounting standard mandates recording such fluctuations. Therefore, the loss claimed by the assessee was justified.
Key Issues
Whether the foreign exchange fluctuation loss claimed by the assessee is allowable when the payment for imports is pending due to a DRI inquiry and the assessee follows the mercantile system of accounting.
Sections Cited
143(3), 263, 143
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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
(Assessment Year: 2014-15) Donyi Polo Timbers Pvt. Ltd., vs. ITO, Ward 7(4), D-3, B-1, Basement Central Market, Delhi. Prashant Vihar, New Delhi – 110 085. (PAN :AABCD4162C) (APPELLANT) (RESPONDENT) ASSESSEE BY : Ms. Mansi Jain, CA Ms. Sakshi Rustagi, Advocate REVENUE BY : Shri Rajesh Kumar Dhanesta, Sr. DR Date of Hearing : 23.06.2025 Date of Order : 22.09.2025 ORDER
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
The assessee has filed appeal against the order of the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)”, for short] dated 10.01.2024 for the Assessment Year 2014-15 2. Brief facts of the case are, original assessment under section 143(3) of the Income-tax Act, 1961 was passed on 27.09.2016. The abovesaid order was reviewed by the ld. PCIT-3, New Delhi. It was noticed that the assessee had debited exchange fluctuation loss of Rs.1,19,56,753/- in its Profit & Loss Account but there is no business activity conducted by the assessee during the AY 2014-15 as well as in AY 2013-14. It was also observed that during the original assessment proceedings, assessee submitted that the sundry creditors were outstanding in respect of goods imported by the assessee during the preceding FY but no purchase was made during FY 2012-13 and 2013-14. In view of the above facts, the matter was remanded to the AO.
During revision proceedings, it was observed that there were no outstanding in respect of goods imported by the assessee, however assessee has claimed foreign exchange loss of Rs.1,19,56,753/- without doing any business transaction. Accordingly, order passed u/s 143(3) is found to be erroneous so far as it is prejudicial to the interest of the Revenue and accordingly notice u/s 263 of the Act. In response, assessee has submitted that it has imported goods during FY 2009-10 in respect of which the amount was payable as on 31.03.2014 on which the exchange loss was claimed and submitted the following information :-
Sl.No. Particulars Amount (Rs.) 1. Benchmark Resources Limited 7,48,80,075/- RM, 601-2, Wai Fund Plaza, 664 Nathan Rd., Mongkok, Kowloon, Hong Kong China 2. Mini Wood Traders Limited 31,24,440/- Flat C, 13/F, 55, Tong Mei Road, Tai Kok Tsui, Kowloon, Hong Kong 4. Based on the above outstanding, out of the total purchases, assessee calculated exchange rate difference and debited the same in the books of account as under:- Sl. Particulars Amount Amount in No. in USD INR 1 Benchmark Resources Limited RM, 601-2, Wai Fund Plaza, 664 Nathan Rd., Mongkok, Kowloon, Hong Kong China Opening Balance as on 01.04.2013 759065.38 33920651 @ Rs.44.687 Add : Difference in Foreign Exchange 11578751 Closing Balance as on 31.03.2014 759065.38 45479402 @ Rs.59.914 2. Mini Wood Traders Limited Flat C, 13/F, 55, Tong Mei Road, Tai Kok Tsui, Kowloon, Hong Kong Opening Balance as on 01.04.20213 26231.84 1173678 @ Rs.44.74 Add : Difference in Foreign Exchange 398002 Closing Balance as on 31.03.2014 26231.84 1571680 @ Rs.59.914 3. Grand Total of Sundry Creditors as on 785297.22 35094329 31.03.2013 (as per audited Balance Sheet) 4. Grand Total of Sundry Creditors as on 785297.22 47051081 31.03.2014 (as per audited Balance sheet) 5. Foreign Exchange Difference 11956753
Based on the above table, ld. PCIT observed that the above claim of foreign exchange loss is not an allowable expenses or loss particularly when the input remittances are itself not fully explained by the assessee, also it was not an actual loss. Therefore, assessee was to explain complete details of working of loss of exchange rate of fluctuation, submitted the sundry creditors. It was observed that the loss on exchange rate claimed by the assessee appears to be notional loss as not made in actual payments. In response, assessee submitted as under :- “6. In response to the above notice, assessee company submitted reply dated 16.12.2019 which was perused and it was found as per assessee's submission that the company imported goods from the Hong Kong based companies M/s. Benchmark Resources Limited and M/s. Mini Wood Traders Limited in respect of which it has to make payment of US $ 785297.22 to these overseas companies. However, as per material available in record, due to some enquiry initiated by Department of Revenue intelligence (DRI) the bank of the assessee company did not permit foreign remittances. Since, the above said payment of outstanding was not made, assessee has made calculation of difference in foreign exchange rate in Dollar term as shown in the table above and accordingly, it debited an amount of Rs.1,19,56,753/- in its P&L account as loss on foreign currency fluctuation. Upon analysis of the details filed by the assessee, it is noted that the said liability on account of which the assessee company has calculated is doubtful in view of the enquiry proceedings of DRI in the case and its outcome is not ascertainable. Secondly, assessee company has to make accounting of the above foreign exchange loss or exchange gain on regular basis, which assessee has not followed as it is seen that in some year it has claimed loss and in some year it has shown gain and in some year no loss or gain has been shown by the assessee as per ITR filed by the assessee company. Further, the amount of exchange rate calculated as on 31.03.2014 is also found incorrect as the value of I US Dollar as on 31.03.2013 was Rs.54.285 but the assessee has shown this as Rs. 44.687/-, Similarly the value of 1 US Dollar as on 31.03.2014 was Rs.59,685/-. If at all any foreign exchange loss needs to be allowed to the assessee company, it will come to Rs.44,60,488/- only against the claimed loss of Rs.1,19,56,753/-. Thus, prima facie the foreign exchange loss claimed by the assessee during the year itself is found to be incorrect.”
After considering the above submissions, ld. PCIT observed that the said liability on account of which assessee company has calculated is doubtful in DRI in the case and its outcome is not ascertainable. Further assessee company has to make accounting of the above foreign exchange loss or gain on regular basis which assessee has not followed as it is seen in some years, it is claimed as loss and in some years it has shown gain. Thus prima facie, foreign exchange loss claimed by the assessee during the year itself is found to be incorrect. It was also observed that the claim of loss was an actual loss but a notional loss as no payment of outstanding amount is made during the year, also the said outstanding payment is difference is disputed and where any payment made to the parties from whom imports were made is doubtful as no clearance could be obtained by the assessee from DRI or RBI or information from other agencies for making these payments till date. Based on the above observation, ld. PCIT rejected the claim of the assessee.
Against the above findings, the impugned assessment order was passed by making an addition of Rs.1,19,56,753/- u/s 143 r.w.s. 263 of the Act.
Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed the grounds of appeal as well as filed detailed submissions. Ld. CIT (A) after considering the detailed submissions of the assessee sustained the addition. “iv. The Appellant assessee company has contended that, the original bills for import are with Department of Revenue Intelligence (DRI) as some enquiry is going on pending. Due to this reason the company has not been able to remit payments for these bills as according to RBI Guidelines authorized dealers are permitted to remit amount only on furnishing of original bills. The Appellant company has taken up the matter with the Corporation Bank who is authorized dealer for foreign remittances, but no payment was made for want of original Bills in spite of various requests made by company to the DRI and the Bank. This Appellate authority does not find any weightage Appellant Assessee company for the following reasons mentioned hereinafter: a. The Appellant Assessee company has not shown or submitted any roof or document relating to the enquiry being conducted by the agency DRI or the stage of the inquiry. b. The Appellant Assessee company has not provided the date of seizure of original Bills by the said agency i.e. DRI, in order to substantiate its claim that, it could not get any time to pay-off these bills of import as import related payments are to be made not later than six months, as per the RBI guidelines. c. The Appellant assessee company has not given any proof or document in support of its claim that, the exchange /related copy of the Bill of Entry of these imports have been seized by the DRI. d. The Appellant assessee company have not provided any documents or proofs related to stand of the overseas supplier regarding non-payment of nearly eight lakh Dollors/USD for nearly 5 years. The action of DRI on these bills and non-payment of these import bills for nearly 5 years are serious facts and the presence of dubious Bills or transactions cannot be denied and the Appellant assessee company has grossly failed to substantiate its contentions with proper proofs and documents as mentioned in point -(a) to (d) above. v. The Assessing officer is correct in saying in point no.-(6) of the Assessment Order that, if at all any foreign exchange loss needs to be allowed to the Assessee company it will come to Rs.44,60,488/- and not Rs 1,19,56,7531- (the details are given above at point no.-[ii)). Stating this the Assessing officer has not even allowed Rs. 46,60,488/- and has disallowed the full exchange loss claimed by the company amounting to Rs.1,19,56,753/-. However, this stand and contention of the Assessing Officer is found valid and correct by this Appellate authority, in the light of various facts of the case stated above and issues discussed at point no.-(i) to (iv) above. Considering the above facts and discussions, this Appellate authority upholds the decision of the Assessing Officer in disallowing the foreign exchange loss claimed by the Appellant assessee company amounting to Rs.1,19,56,753/-. The ground of appeal of the assessee is not accepted.”
Aggrieved assessee is in appeal before us raising following grounds of appeal :-
1. On the facts and circumstances of the case, the order passed by the National Faceless Appeal Centre (NFAC) is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, NFAC has erred, both of facts and in law, in confirming the addition of Rs.1,19,56,753/- made by the Ld. Assessing Officer disallowing the foreign exchange loss claimed by the assessee. 3. (i) On the facts and circumstances of the case, NFAC has erred, both of facts and in law, in confirming the addition rejecting the explanation and evidence brought on record by the assessee. (ii) That the addition has been confirmed despite the assessee bringing on record all evidences and explanation to prove the purchase transaction to be genuine. (iii) On the facts and circumstances of the case, the addition has been confirmed despite the assessee maintaining the books of accounts on accrual basis complying with the Accounting Standards prescribed under the Companies Act.
On the facts and circumstances of the case, NFAC has erred, both of facts and in law, in confirming the addition on account of foreign exchange loss stating that the liability to pay was not confirmed ignoring the fact that the non-payment of liability was on account of reasons beyond the control of the assessee.
5. On the facts and circumstances of the case, NFAC has erred, both of facts and in law, in confirming the addition stating that the US Dollar rates adopted by the assessee were not proper rejecting the evidences brought on record by the assessee.”
10. At the time of hearing, ld. AR submitted that assessee has purchased certain machineries from vendors of Hongkong, China in AYs 2010-11 and 2011-12. She submitted that due to some issue with the DRI, the assessee was not able to make the payment during this year. She submitted that since assessee was carrying the liability in its books of account as per the ICAI accounting standard, assessee has to record outstanding amount as per the existing exchange rate. Therefore, the assessee has duly followed the accounting standard and recorded the outstanding amount in Indian currency as per the current exchange rate. Any loss or gain in respect of foreign fluctuation are being booked in the respective assessment year in the past. Further she brought to our notice that ld. CIT(A) has observed that assessee has not followed the accounting standard. She objected to the same and brought to our notice page 118 of the paper book which is the RBI Guidelines as per which the various dealers/banks may permit settlement of import dues delayed due to disputes, financial difficulties etc., interest in respect to delayed payments, usance bills or overdue interest for a period of less than three years from the date of shipment may be permitted in terms of directions contained relating to interest on import bills and prayed that the assessee has followed the accounting standards and claimed the loss. The foreign outstanding has to be recorded at present rate at the end of each year.
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record. We observe that the assessee has purchased certain machinery from Benchmark Reserves Ltd. and Miniwood Traders Ltd., the outstanding amount of US$ 759065.38 and US$ 26231.84 respectively. These imports were purchased during AYs 2010-11 and 2011-12 as per the books of account available on record. Although these payments are still pending due to some issue with DRI and it is a fact on record that assessee is carrying abovesaid liability in the books of account. Since assessee is carrying its books of account on the basis of mercantile system and as per the method of accounting followed by the assessee, foreign currency transactions are recorded by applying the exchange rate prevalent at the end of the year. Any income or expenses on account of exchange differences either on settlement or on transaction outstanding at the end of the year is recognized in Profit & Loss account as per the above accounting standard. Assessee recognized the foreign exchange liability at the end of the financial year at the prevailing market rate as on the end of each year. Since there is no operation carried on by the assessee in the recent past, the abovesaid claim appears to be abnormal in the Profit & Loss account and ld. PCIT observed that since there is no operation in the business, the claim of foreign exchange loss is not an allowable or available to the assessee. Accordingly, in revision proceedings, the details were called for and since the abovesaid payments were still outstanding in their books of account, method of accounting adopted by the assessee were rejected. Accordingly, the claim of the assessee was denied and accordingly in order giving effect to the revision order, the same was denied to the assessee. After considering the various documents submitted before us, it is a fact on record that there is an outstanding liability in the books of account in foreign currency i.e. US Dollar and as per the method of accounting adopted by the assessee, assessee recognizes the exchange rate at the end of the year, the liability recorded in the books of account may be more or less compared to the previous outstanding. We shall explain the same, the assessee owes to a creditor of US$ 1000 as on 31.03.2012, at that point of time, the exchange rate was Rs.53.06 per dollar. The liability stood at Rs.53,060/-. The same liability not settled upto 31.03.2015. The ex. Rate for 2015 was Rs.66.79 per dollar. The liability as on 31.03.2015 was Rs.66,079/-. The loss as on 31.03.2015 was Rs.12,019/-. The abovesaid liability has to be recorded in the books so that at the time of settlement, it will be settled as per present liability. We observe that the method adopted by the assessee is consistent over the years and rupee liability will keep increasing depending upon the period of outstanding, considering the state of Indian currency, the liability will keep on increasing every year. Considering the consistent method of accounting adopted by the assessee, in our considered view, the loss claimed by the assessee is justified, it may look not actual but since assessee is following mercantile system, the loss has to be recorded immediately. Accordingly, the same is directed to be deleted and the grounds raised
by the assessee are allowed.