TMI Blog2008 (4) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) deleted the addition made by the Assessing Officer by making following observations in the order:- "In the accounts, an amount of Rs. 80,68,159 has been debited by way of net foreign exchange loss. The adjustment in P L a/c is terms of the method 9f accounting for the impact of foreign exchange to the appellant's accounts as per the policy mentioned in the notes to the account. The policy states 'foreign exchange transactions are recorded at the exchange rate prevailing as on the date of the transaction. Exchange differences arising on the settlement of these transactions are dealt with in the P L a/c. All mandatory items denominated in foreign currency are translated at the year end rates and exchange differences arising on such transactions are also adjusted in the P L a/c. The original cost of fixed assets acquired through foreign currency liability, is adjusted so as to show the liabilities at the rate of exchange prevailing at the end of the year. The exchange differences arising on repayment of these liabilities are also adjusted in the carrying amount of the fixed assets.' The finding of the Assessing Officer that foreign exchange fluctuation of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign exchange rates on the closing day of the year, has been disallowed by the Assessing Officer, inter alia, on the ground that this liability was a contingent liability and the loss was a notional one. The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessee, Tribunal the 'event' i.e., the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessee is a fait accompli and not a notional one." 8. In the case of Dy. CIT v. Maruti Udyog Ltd. [2006] 99 ITD 666 (Delhi) the Tribunal held that additional liability incurred by the assessee on account of variation in foreign exchange rate was an allowable trading liability where borrowed foreign currency was utilized to meet need of working capital. The above conclusion was drawn by the Tribunal after following the decision of the Apex Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1978] 116 ITR 1 and also the principles laid down in the case of CIT v. Bharat Heavy Electricals Ltd. [1999] 239 ITR 756 decided by the Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst question whether the additional liability which the assessee had incurred on account of change in the rupee-rouble parity ratio would necessarily depend on the answer to the question whether the additional liability pertains to the trading asset or capital asset.... In the present case, admittedly the initial liability arose on account of purchase of new material, a trading debt, and after it had arisen, nothing happened to divest it of the character of a trading debt, and after it had arisen, nothing happened to divest it of the character of a trading debt. In this view of the matter, applying the principles of law adumbrated in Sutlej Cotton Mills' case [1979] 116 ITR 1 (SC), we are of the opinion that the Tribunal came to the correct conclusion that the additional liability incurred by the assessee on the change of the rupee-rouble parity ratio was allowable as a trading liability." 11. In Sutlej Cotton Mills Ltd.'s case, the assessee, a limited company, was having its head office inCalcutta, it had inter alia, a Cotton Mill situated inWest Pakistanwhere it carried on business of manufacturing and selling cotton fabrics. In the financial year ending31-3-1954, being the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of the assessee. Whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be a trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital.... Putting it differently, if the amount in foreign currency is utilized or intended to be utilized in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss, but if the amount is held as a capital asset, loss arising from depreciation would be a capital loss.... where an assessee in the course of its trade engages in a trading transaction, such as purchase of goods abroad, which involves as a necessary incident of the transaction itself, the purchase of currency of the foreign country concerned, then profit resulting from appreciation or loss resulting from depreciation of the foreign curr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngent. The main ingredient of a contingent liability was that it depended upon the happening of a certain event. The change in the value of foreign currency in relation to Indian currency by the assessee was a fait accompli and not a notional one. Therefore the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year was allowable as a deduction and was not notional or contingent. Bharat Earth Movers Ltd v. CIT [2000] 245 ITR 428 (SC) relied on. (ii) That there was no provision for the assessment of the actual cost at a stage subsequent to the date of acquisition of the asset. Depreciation had to be worked out therefore only on the basis of the actual cost at the time of acquisition to provide for subsequent revisions to the actual cost. In computing the capital gains arising to the assessee on the sale or transfer of a capital asset acquired by him from abroad on deferred payment terms or against a foreign loan, the additional rupee liability incurred by him in repaying the instalments of the cost or the foreign loan, as the case may be, after the date of devaluation of the rupee, would be added to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
