TMI Blog2016 (6) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... eleted the addition - HELD THAT:- As decided in IBM Global Services India P. Ltd [ 2007 (5) TMI 554 - ITAT BANGALORE] held at the time of purchase of the inventory, if the item has been purchased from a foreign country and the amount is payable in foreign exchange and if, the payment is deferred and the liability increases in Indian Rupees, then such liability cannot be termed to have increased the cost of the material. The cost price would be the original cost price and it cannot be increased due to subsequent foreign exchange fluctuation and increased liability on that account. Also confirmed by HC [ 2014 (5) TMI 852 - KARNATAKA HIGH COURT] Addition on account of sale of wastage and scrap value - Whether such scrap is valuable and used in various industries? - CIT-A deleted the addition - HELD THAT:- AO has made addition on certain assumptions that the scrap/wastage of the rough diamond must have fetched to the assessee an income. However, there is no evidence brought by him in this respect. He has just estimated the income at the rate of 5% of the purchase value of the rough diamonds. The Ld. CIT(A), however, has deleted the addition observing that there was no evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f creditors at the end of the year due to foreign exchange fluctuation. The Assessing Officer (hereinafter referred to as the AO) in his assessment order noted that assessee has debited an amount of Rs. 8,23,15,161/- to the Profit and Loss Account on account of foreign exchange loss and out of the said loss, an amount of Rs. 4,03,05,856/- was incurred due to revaluation of creditors outstanding at the year-end towards the imports made during the year. The AO observed that such loss was incurred merely on revaluation of the creditors at the closing foreign exchange rate prevalent on 31-03-2009 and therefore, such loss was not actually incurred and it was contingent in nature. Accordingly, the AO disallowed the aforesaid loss being a notional loss. The AO also observed that the impugned loss was not allowable u/s. 43A of the Act also since the provisions of section 43A speak about allowance of expenditure on account of fluctuation in foreign exchange on actual payment basis for acquisition of an asset and not otherwise. 4. The Ld. CIT(A), however, deleted the additions made by the AO observing as under: 5. I have carefully considered the contents of the assessment order and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, I hereby delete the disallowance made by the AO Appellant succeeds on this issue. 5. We have gone through the above findings given by the Ld. CIT(A). The Ld. CIT(A) has rightly relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. (2009) 179 Taxman 326, wherein, while dealing with the question as to whether the additional liability arising on account of fluctuation in the rate of exchange can be allowed to be adjusted pending actual payment of the varied, the Hon'ble Supreme Court has observed that expenditure as used in section 37 in Income Tax Act may in the circumstances of a particular case cover an amount which is a loss even though said amount has not been given from the pocket of the assessee. Further the ld. CIT(A) has also rightly held that section 43A is not applicable to the trading assets. The issue is thus, squarely covered in favour of the assessee. Ground No.1 of the appeal of the Revenue is, therefore, dismissed. Ground No.2 6. Vide ground No.2, the Revenue has contested the action of the Ld. CIT(A) in deleting the addition made on revaluation of closing stock contending that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Sheet date and therefore, it cannot be added to the cost of the inventory even under the AS-2. Even for a moment it is accepted that the increase in foreign exchange rate would yield a higher value of the unsold stocks, still it would amount that it would go to add to the realizable value and not to the cost of the said stocks. Thus, considering the principle that as a matter of prudence stocks are valued at lower of the cost or the realizable value, such increase in realizable value has no bearing on the profits computed. Normally, the expenditure/loss incurred due to foreign exchange fluctuation on account of actual payments would be a parameter kept in mind for deciding the sale price of the stocks that a prudent businessman would like to recover the said expenditure/loss when the stocks are sold and would not increase the value of the closing stock and thereby increase the profits before actual realization of the same. He therefore held that the foreign exchange fluctuation loss can not be added to the cost of inventories. Being aggrieved by the order of the Ld. CIT(A) the Revenue has come in appeal before us. 9. At the outset, the Ld. A.R. of the assessee, before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 300. The stock was valued at the end of the year at Rs. 300 as market price was low. In the subsequent year, the market price at the end of the year was Rs. 400. The assessee argued that the cost price at the end of the year was Rs. 300. The assessee argued that cost price of the item in the opening stock was Rs. 300 and therefore the same should be adopted as cost price in the subsequent year for valuation. This contention was rejected by the learned Madras High Court. It was submitted that one has to see the original cost price. The original cost price is Rs. 500 and at the end of the subsequent year, the market price was Rs. 400. The assessee was allowed to value at original cost or market value, whichever is less. When the assessee has purchased stock, the original cost price is to be seen. Subsequent effect in the increase in the liability of the assessee will not affect the original cost price of the inventory. 12. The learned Authorised Representative during the course of proceedings has pointed out that the assessee is consistently following the system of accounting vide which the foreign exchange fluctuations are not added to the cost. The amount has not been included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: 5.4 As regards the estimated addition made towards the sale of scrap, I note that there is no material brought on record by the AO to show that appellant was in possession of any such scrap / wastage and has received monies on sale of the same. It is pertinent to note that no evidence whatsoever was found in this direction at the time of survey u/s. 133A of the Act conducted at the appellant's premises during the financial year relevant to the assessment year under consideration. Further, the AO has not made any enquiry whatsoever with any of the karigars / labour contractors in this direction. Secondly, it is an accepted judicial position that the onus lies on the Revenue for bringing an item of income to tax, and in the present circumstances, I am of the considered opinion that such onus is not discharged by the AO. It is further noted that the yield of 34.6% is not only comparable to the earlier years results of the appellant but also comparable to the average yield reported in the diamond industry. It is also noted that the assessments for the earlier years were completed u/s. 143(3) of the Act and no finding was given as to generation of any scrap/wastage and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the labour contractor. 16. After hearing both the Ld. Representatives of the parties on this issue, we find that the AO has made addition on certain assumptions that the scrap/wastage of the rough diamond must have fetched to the assessee an income. However, there is no evidence brought by him in this respect. He has just estimated the income at the rate of 5% of the purchase value of the rough diamonds. The Ld. CIT(A), however, has deleted the addition observing that there was no evidence of sale of scrap by the assessee. However, the Ld. CIT(A) has not given any finding as to what is done with the scrap and whether it has a nil value or it fetches some value to the assessee. The contention of the Ld. A.R., before us, is that the value of the scrap is taken into consideration while settling the rates with the labour contractor. We find that these facts have not been thoroughly examined by the lower authorities. We accordingly restore this issue to the file of the AO to decide it afresh after considering the evidences and explanations that may be furnished by the assessee in this respect. 17. In view of our above observations, the appeal of the Revenue is treated as partl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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