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2019 (11) TMI 857 - AT - Income TaxClaim for deduction on account of foreign exchange fluctuation loss as a result of restatement of the Assessee’s liability as on the last date of the previous year, without there being an actual payment or settlement - HELD THAT:- It is no doubt true that there has been no actual payment and at the time of ultimate settlement, there may not be a loss also. Nevertheless, AS – 11 of ICAI requires such liability also to be reflected in the financial statements. The Hon’ble Supreme Court considered all these aspects in the case of CIT(A) Vs. Woodward Governor [2009 (4) TMI 4 - SUPREME COURT]. The first aspect examined by the Hon’ble Supreme Court was as to whether the additional liability due to exchange rate fluctuation was a liability. The Hon’ble Supreme Court held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. The Court explained that the word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29 and that Sec. 37(1) has to be read with ss. 28, 29 and 145(1). Therefore, loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1). The Court explained that under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11. An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange. Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period. In the present case, there is no dispute that the outstanding liability was in respect of trade receivables and payables and therefore loss would be on revenue account. In such circumstances, we are of the view that the CIT(A) was justified in allowing the claim made by the assessee. We find no grounds to interfere in the order of the CIT(A). Accordingly, appeal by the Revenue is dismissed.
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