TMI Blog2002 (8) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... of repayment of such loans ? Maruti Udyog Ltd., whose appeals involving the above issues are pending before the Tribunal, were allowed to join as an Intervenor. We would firstly refer the facts of the case. To be stated succinctly the assessee, i.e., ONGC, which is a wholly owned Government of India Undertaking, established under the ONGC Act, 1959, for exploration, exploitation and extraction of mineral oils, had filed its return for the assessment year under consideration, declaring a total income of Rs. 4,39,49,86,580, against which the Assessing Officer completed the assessment on a total income of Rs. 8,12,37,78,325 by making various disallowances and additions. The Assessing Officer disallowed, inter alia, the claim of loss of Rs. 5,78,25,83,451 on accrual basis on revenue account on account of fluctuation of foreign exchange rate. He did so by following the assessment order for an earlier year, wherein it was held that such loss was a notional loss. The assessee had also claimed deduction on account of revenue loss due to fluctuation in foreign currency rate on the basis of actual payment at Rs. 1,13,37,36,360 and it was allowed by the Assessing Officer. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also guided by AS-II issued by the Institute of Chartered Accountants of India (ICAI). It was further stated that ONGC has been consistently following this system of accounting year after year and the accounts have been audited by the Comptroller and Auditor General of India and endorsed by Parliament which reviews the accounts every year. Accordingly, it was submitted that expenses incurred and liability undertaken of foreign loans, etc., are accounted at the exchange rate prevailing on the date of transaction and these liabilities are revalued at the end of the year by adopting the prevailing exchange rate, and effect given in the accounts of the appellant. It was accordingly explained before the Commissioner of Income-tax (Appeals) that the assessee suffered huge losses on account of revaluation of the loan value and, thus, claimed as revenue loss under section 37(1) of the Income-tax Act during the year under consideration. In the written submissions filed before the Commissioner of Income-tax (Appeals) it was further explained that the Assessing Officer accepted the above method of accounting and allowed the claim on account of foreign exchange loss right from the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is fluctuating every day and on the last date of the previous year, it was known to the assessee as to what was the value of the dollar and accordingly, the valuation of loan was done and the difference between the liability on the first day of the previous year, i.e., April 1, 1990, and on the last day of the previous year, i.e., March 31, 1991, was taken into profit and loss account. It was further stated that there is no dispute that in case of devaluation of rupee, the loss of the assessee is allowable in the year of devaluation itself. It was contended that there is no difference between devaluation and the fluctuation of the foreign currency. It was also stated that fluctuations are also approved by the Reserve Bank of India and commercial banks as commercial banks buy and sell foreign currency at such rate. Attention of the Bench was drawn to the provisions of rule 115 of the Income-tax Rules. It was further stated that even as per the provisions of the Income-tax Rules, conversion of foreign currency into Indian rupee as per telegraphic transfer rate is allowable. Therefore, it was pleaded that the claim of the assessee in all respect is allowable. It was further stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detail and stated that in all circumstances the claim of the assessee has to be allowed. It was further stated that the Commissioner of Income-tax (Appeals) has relied on several decisions, but he has failed to apply the direct decisions referred by the assessee before him. It was further added that the Commissioner of Income-tax (Appeals) has just picked up some observations of the decisions of the various High Courts and the Supreme Court, but if totality of those decisions is taken into consideration, then it will be found that the ratio of those decisions are not applicable on the facts of the present case. It was further stated that the claim of the assessee was allowed in the earlier years by the Commissioner of Income-tax (Appeals) and the appeals of the department are pending before the Tribunal because the COD has not yet granted permission to the Department ; whereas in the case of the assessee, the COD has granted the approval. It was further stated that during the assessment year 1997-98 the value of Indian rupee had increased and consequently there was a gain amounting to Rs. 293.37 crores, which was offered to tax and the assessment has been accordingly completed. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for these years the department is in appeal and for the assessment years 199394 and 1995-96 the appeals of the assessee were dismissed by the Commis sioner of Income-tax (Appeals). Therefore, the assessee is in appeal before the Tribunal. The issue in these appeals is the same, i.e., revenue loss on account of fluctuation in foreign currency rate. Counsel of Maruti Udyog opened his arguments by mentioning that the issue has already been argued at length by learned counsel appearing on behalf of the ONGC. Therefore, those arguments he will not like to repeat. It was submitted that facts and circumstances of the assessee s case are similar to those of the ONGC and the assessee is adopting the method of mercantile system of accountancy. Therefore, it was stated that the system adopted by the assessee cannot be disturbed. Reliance was placed on this issue on various case laws mentioned in the written synopsis filed by counsel for the assessee before start of the hearing of the appeal. It was further submitted that on similar circumstances the Tribunal in the case of Eicher Goodearth [2000] 72 ITD 360 (Delhi), rendered in I. T. A. No. 7078 Delhi of 1992, relating to the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered them carefully. We have also perused the relevant material to which our attention was drawn by the respective parties. After considering and perusing the material on record, we noted that the crux of the arguments of the learned senior advocate, Shri Dastur, and counsel for Maruti Udyog, Shri Ajay Vohra, is that the assessees are following the mercantile system of accounting since long and hence without giving any cogent reasons, the results cannot be disturbed. Though learned counsel for ONGC has also vehemently argued that there is no difference between devaluation of rupee or the fluctuation in foreign currency rate and, therefore, the loss claimed by the assessee on account of fluctuation of foreign currency rate is allowable, but for deciding the controversy in the cases before us, we do not consider it necessary to go deep into this aspect. Suffice it to say that even though in legal terms there is a difference in devaluation and fluctuation of the currency, the effect is the same. Section 43A gives legal recognition, of course only for a limited purpose specified therein, to the periodical fluctuation in currency rates in respect of foreign currency. Before proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, according to the mercantile method actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. Both the methods are somewhat rough. In some cases these methods may not give a clear picture of the true profits earned and certainly not of taxable profits. The quantum of allowances permitted to be deducted under diverse heads under section 10(2) from the income, profits and gains of a business would differ according to the system adopted. In the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, the apex court had held that the liability arising due to the entries made in the books of account are allowable, because the method of accountancy adopted by the assessee was mercantile one. In the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC), the apex court has held that where the assessee was following the mercantile system of accounting, expenditure accrued but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting system adopted by the assessees, then the claim of the assessees was allowed by various High Courts and Benches of the Tribunal. On the basis of principles enunciated in various judicial decisions, we propose to formulate certain test questions with a view to deciding the issue before us in the light of answers to those questions. These are as under : (i) Whether the system of accounting followed by the assessee is mercantile system, which brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received ? (ii) Whether the same system is followed by the assessee from the very beginning and, if there was a change in the system, whether the change was bona fide ? (iii) Whether the assessee has given same treatment to the losses claimed to have accrued and to the gains that may accrue to it ? (iv) Whether there has been consistency and definiteness in making entries in the account books in respect of losses and gains ? (v) Whether the method adopted by the assessee for making entries in the books both in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that by adopting the same accounting principles that are adopted in the year under consideration, the assessee had shown a gain of Rs. 293.37 crores during the assessment year 1997-98 because the Indian rupee appreciated as compared to foreign currency. The assessee offered this amount for taxation and the Department also has taxed the same. In one year the Department is denying the claim, in another year when there was a profit, the Department is taxing the same. This situation is like blow hot blow cold, which in our considered view, should not be permitted, as the same is against the principle of natural justice and also against the principle of accounting. The answer to question No. (iii) is, thus, also in the affirmative. The Accounting Standard-II (AS-II) on Accounting for the Effects of Changes in Foreign Exchange Rates issued by the Institute of Chartered Accountants of India, which came into the effect in respect of the accounting periods commencing on or after April 1, 1987, provides in paragraphs 23 and 25(a) as under : 23. At each balance-sheet date, there may be items of foreign currency assets and liabilities, i.e., items to be received or paid in foreign curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are in favour of the assessee. We further note that various Benches of the Tribunal have also considered this aspect. In the case of Hindustan Aeronautics Ltd. v. Deputy CIT decided by the Banglore Bench of the Income-tax Appellate Tribunal in I. T. A. No. 2420 of 1990 for the assessment year 1983-84, it was held that loss on account of change in foreign currency rate, is allowable. While doing so the Tribunal considered the various case laws, such as, New India Industries Ltd. v. CIT [1993] 203 ITR 933 (Guj) ; IBM World Trade Corporation s case [1986] 161 ITR 673 (Bom) ; Sutlej Cotton Mills Ltd. s case [1979] 116 ITR 1 (SC) and Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). Copy of the Tribunal s order is placed at page 574 of the paper book. We further noted that in this case a reference application was filed and the matter was also sent to the Department of Legal Affairs for its consideration and the Department of Legal Affairs, after considering that similar issue was decided in the case of Welding Rods Manufacturing Co. by the Gujarat High Court reported in [1997] 225 ITR 525, and in the case of CIT v. Super Scientific Clock Co. [1999] 238 ITR 731 (Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 1994-95 is placed in the paper book at page 714 onwards. In this year the Tribunal has dismissed the appeal of the assessee on account of exchange loss. After perusing the order of the Tribunal, nowhere we found that the aspect in regard to adopting the mercantile system of accounting has been discussed. We further noted that the various case laws, as discussed above, were also not discussed by the Tribunal, may be for the reasons that these decisions may not have been brought to the knowledge of the Bench at that point of time. We have also perused the auditors report in the case of ONGC, copy placed at page 127, in which it has specifically been stated that the foreign loans/credits outstanding at the end of the year are converted at the mean exchange rate of TT buying and selling. It has been further clarified that loss or gain due to exchange fluctuation is charged to profit and loss account. In rule 115 of the Income-tax Rules, 1962, issue in regard to rate of exchange for conversion into rupees of income expressed in foreign currency, has also been clarified as under : The rate of exchange for the calculation of the value in rupees of any income accruing or ari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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