2019 (6) TMI 1432 - AT - Income Tax

Addition on account of provision of exchange difference - section 43A applicability - HELD THAT - Assessee created the provision in respect of the revenue transactions. This fact can be verified from the annual accounts of the assessee which is available on pages 31-69 of the paper book. There was no long-term loan liability, and the fixed assets were of negligible value. Therefore, the provisions of section 43A of the Act cannot be applied in the present facts and circumstances as it deals with the capital account transaction. Accordingly, we hold that the AO erred in applying the provisions of section 43A. Whether the impugned transaction is representing the unascertained liabilities ? - The assessee created such provision in respect of the current liabilities represented in foreign currency at the end of the financial, i.e. 31st March 2013 based on the rate of currency prevailing at the relevant time. Therefore, we are of the considered opinion that such liabilities cannot be treated as unascertained liabilities. Referring to case M/S WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT it is clear that the trading liability arising on account of currency fluctuation is ascertained liability, and therefore, it is eligible for deduction. Assessee has been adjusting the books of accounts consistently on account of currency fluctuation, which has been accepted by the Revenue in the earlier years. Therefore, we are of the view that the assessee is also entitled to the deduction of such provision as per the principles of consistency. - Decided against revenue

Summary

Issues:
- Appeal by Revenue against CIT(A) order on addition of exchange difference provision.
- Eligibility of deduction for provision of foreign currency exchange.
- Applicability of Section 43A and Section 37(1) of the Income Tax Act.
- Consistency in treatment of provisions for currency fluctuation.

Analysis:

1. The Revenue appealed against the CIT(A) order regarding the addition of ?11,61,18,652 on account of provision of exchange difference. The primary issue raised by the Revenue was the deletion of this addition by the CIT(A).

2. The assessee, a private limited company engaged in Imports, Exports, and manufacturing, claimed a provision for exchange difference in import of goods amounting to ?11,61,18,652. The AO disallowed this deduction, stating it was only available on actual payment as per Section 43A and represented unascertained liabilities not allowable under Section 37(1) of the Act.

3. The CIT(A) deleted the addition made by the AO, leading to the Revenue's appeal. Both parties relied on lower authorities' orders.

4. After hearing both sides, the Tribunal noted the provision created by the assessee in its revenue transactions, emphasizing the absence of long-term loan liability or significant fixed assets, making Section 43A inapplicable.

5. The Tribunal determined that the provision for current liabilities in foreign currency at the end of the financial year was not unascertained liabilities. Citing a relevant Supreme Court case, it concluded that trading liability due to currency fluctuation is an ascertained liability eligible for deduction.

6. Considering the consistency in the assessee's treatment of currency fluctuation provisions, accepted by the Revenue in previous years, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

7. Ultimately, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order.