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2019 (7) TMI 74 - AT - Income TaxRevision u/s 263 - under valuation of closing stock - non consideration of foreign exchange fluctuation cost in the valuation of the cost of closing stock - HELD THAT:- Accounting standard 11 clearly states that a foreign currency transaction should be recorded on initial recognition in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. Each Balance Sheet date, foreign currency monetary items should be reported using the closing rate and non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of transaction. The revaluation of creditors or debtors or the loss incurred on the actual of payment is not to be considered for the purpose of reporting the non-monetary items, like closing stock. Secondly, the foreign exchange loss incurred is not an item of cost, and rather it is a revenue outflow or an expenditure provided by prudence depending on the date of payment or the Balance 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 the realizable value and not 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 piece of the stock 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. Therefore, the foreign exchange fluctuation loss cannot be added to the cost of inventories. In view of the above, we are of the view that the Revision order carried out by PCIT is without any basis and on merits also the assessee has a case, hence, we set aside the revision order passed by PCIT and allow the appeal of the assessee.
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