TMI Blog2016 (2) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... cause no interest income is derived in this transaction, the character of the transaction for business purposes (i.e the loan utilization on revenue account) would not change. Hence the argument of the Learned AR that the utilization of borrowings is made on capital account is not appreciated. Once this is lost, then the decision of Woodward Governor case (2009 (4) TMI 4 - SUPREME COURT ) would automatically come into play on which point, the counsels of both the sides are agreeable. The concept of prudence has been considered in the judgement of supreme court in Woodward Governor case. Once the utilization of borrowings are held to be on revenue account, then the resultant exchange gain or loss at the end of the year due to restatement of foreign currency loan would automatically take the revenue receipt / expenditure as the case may be. However, we find that the assessee had incurred exchange losses due to restatement of the subject mentioned foreign currency loan at the end of the year in subsequent assessment years and had not claimed as deduction as it is notional in nature in line with the consistent stand taken by the assessee. In this regard, we deem it fit and appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of accounts. The assessee however chose to reduce the same in the statement of total income as the resultant foreign exchange gain is only notional gain and not actually realized by the assessee. As only the real income should be taxable for income tax purposes, this reduction was made by the assessee. However , this contention did not hold water in the mind of the Learned AO who added the same on the following grounds:- a) The assessee itself had credited the exchange gain in its profit and loss account as income. b) The assessee had borrowed monies from its foreign shareholder and utilized the same for advancing to its subsidiary company in the ordinary course of its business as the assessee itself is engaged in the business of investment and financing activity. Hence the loan was taken only on revenue account. c) The main business of the assessee is financing and investment activities. Since the borrowed funds have been deployed by the assessee in its financing activities in the ordinary course of business, the borrowed funds would be construed as the business liabilities of the assessee. The only income derived by the assessee is interest income. d) As per Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT (EIH Hotels Ltd). i. Foreign exchange gain is only hypothetical in nature and not realized by the assesssee. 5. Aggrieved, the revenue is in appeal before us on the following ground:- On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of the ₹ 6,71,12,500/- though there has been a violation of Accounting Standard AS -11 which is mandatory for companies. 6. The arguments of the Learned DR could be summarized as under:- a. The assessee had borrowed monies from its shareholder without any interest and had advanced the same to its subsidiary company without any interest in the ordinary course of its business. Moreover, the loan agreement filed by the assessee clearly stipulates that the foreign currency loan is meant for general corporate purposes. Hence the loan is utilized only on revenue account. Accordingly the resultant foreign exchange gain arising out of restatement of foreign currency loan at the end of the year is to be brought to tax in the light of decision rendered by the Hon'ble Apex Court in the case of Oil Natural Gas Corporation Ltd vs CIT reported in 322 ITR 180 (SC) which had followed the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pg 56 of the paper book. He stated that these notional exchange losses were not claimed as deduction by the assessee in line with the consistent method followed by the assessee for tax purposes. In other words, notional gain is not offered to tax and similarly notional loss is not claimed as deduction. He stated that even the decisions of ONGC Ltd (322 ITR 180 SC) and Woodward Governor case (312 ITR 254-SC) relied on by the Learned DR , affirms the view of consistency and method of accounting system adopted by the assessee. c. He argued that Accounting standard 1 (AS 1) issued by ICAI is notified u/s 145(2) of the Act. In AS 1, the principle of Prudence states that unrealized gains should not be recognized in the books and whereas the provision should be made for known liabilities including future liabilities on the basis of principle of conservatism. He argued that the Learned AO completely erred in understanding the concept of prudence as per AS 1 and presented misleading facts in page 3 para 1 of his order with regard to income recognition. He further argued that even the decision of Woodward Governor (312 ITR 254 - SC) states that the unrealized profits in the shape of app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ha Martin Telematics Ltd) in the ordinary course of business, which is factually incorrect. (b) Similarly the concept of prudence as per AS -1 issued by ICAI further notified u/s 145(2) of the Act has been mistakenly stated by the Learned AO that it states that even the unrealized gains should be recognized in the profit and loss account, which is factually incorrect. In this regard, it would be relevant to get into AS -1 'Disclosure of Accounting Policies' under the heading 'Prudence', the revenue recognition is made on the following basis:- Para 17 a. In view of the uncertainity attached to future events , profits are not anticipated but recognized only when realized though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. (c) that the foreign exchange gain on restatement is out of a settled loan transaction and hence it is not notional. This finding is factually incorrect as the loan is outstanding at the end of the year and the same is repayable only in June 2006. The Learned AR was on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt assessment years. 8.1. We agree that Woodward governor case dealt with foreign currency borrowed on capital account from the perspective of prospective applicability of section 43A w.e.f 1.4.2003 and no decision was rendered by the Hon'ble Apex Court in this case with regard to the foreign exchange fluctuations arising out of loan borrowed on capital account. But the said decision duly considered the recognition of foreign exchange gains for tax purposes if the loan is utilized on revenue account. Admittedly, the loan in the instant case has been utilized only on revenue account. Hence the resultant foreign exchange gain arising due to restatement at the end of the year needs to be brought to tax. Reliance in this regard is also placed on the decision of the Hon'ble Apex Court in the case of Sutlej Cotton Mills Ltd vs CIT reported in 116 ITR 1 (SC) wherein it was held that: The law may , therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency , such profit or loss would ordinarily be trading profit or loss i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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