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Deputy CIT, Circle-7 (1) , New Delhi Versus Sarvshaktiman Traders Pvt. Ltd.

2016 (8) TMI 454 - ITAT DELHI

Addition on account of foreign exchange loss - whether assessee has not suffered any actual loss during the year under consideration? - Held that:- The allegation of the AO that assessee entered into a currency swap with the bank for an instrument involving a swap of a liability of Japanese Yen vs. Rupees is against the facts on record. The observation made by the AO in the assessment order in this regard demonstrate the indulgence into surmises without considering the fact that this is an advan .....

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he learned CIT(A) is correct that the AO has gone on to elaborate the principle of derivatives from Pages 4 to 14 of the assessment order but the whole discussion is on theory of derivatives of mark to market losses. It is also evident from the facts on record that the AO has not disputed the advance received as trading advance towards supply of soya bean meal. It is also a fact that there were several other transactions in foreign exchange fluctuation account which has been treated similarly. T .....

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assessee having followed the system of accounting regularly for accounting foreign exchange fluctuation in accordance with accepted method of accounting and the same have not been inconsistent with any provisions of the Income Tax Act any profit or loss arising on this account has to be taken into consideration and the same cannot be rejected. CIT(A) was justified in holding that the AO was not correct in picking one transaction and treating the same as derivative and disallowing the loss by co .....

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above appeal are that the assessee filed its return of income declaring a loss of ₹ 11,91,93,780/-. During the year under consideration the assessee has received advance against export from its overseas buyers, M/s Bunge S.A. in Japanese Yen and due to foreign exchange fluctuation there was a loss of ₹ 17,63,24,155/- in the value of the advance as on 31st March, 2008. The AO disallowed the said loss. The AO was also of the view that this loss is a notional loss and further mark to m .....

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eleted the disallowance made by the AO. 4. Aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us challenging the deletion of above addition by the learned CIT(A). 4.1 It was contended by the learned DR that assessee has not suffered any actual loss during the year under consideration. The assessee has received advance during the year and has made export in the subsequent year. Thus, this loss accounted for in the year under consideration is a notional loss and the AO w .....

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2. These Japanese Yen came to the assessee s bank account through proper banking channel and the same was credited to assessee s bank account on 31st July, 2007 by applying the exchange rate of 34.11 as on that date. The net payment received against this advance was ₹ 100,20,66,525/-. The advance so received from the foreign buyer was outstanding at the year end i.e. as on 31st March, 2008. This advance being a current liability outstanding as on 31st March, 2008, the same was converted at .....

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accordance with the provisions of the Income Tax Act and the accounting policy consistently being followed by the assessee and is fully allowable and hence the learned CIT(A) was justified in deleting the addition on this account. It was further submitted by the learned AR that against the above advance the assessee has made export in the next financial year i.e. 2008-09 and the value of such export is at enhanced amount of ₹ 118.90 Crores as against the export at original rate when the ad .....

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ring this loss as mark to market loss on account of trading in derivatives by not appreciating the facts about bank guarantee correctly. The assessee company provided a bank guarantee to the buyer in order to ensure the security of the money advanced to it. It was submitted that this bank guarantee is the normal guarantee given to the buyer in case advance is received from a buyer for the due performance of the purchase contract. The learned AR invited attention to the guarantee issued by the Pu .....

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o be valued at the rate of exchange on the specified date and for the purpose of computing profit and gains of business and provision the specified date mean the last date of the year. The assessee having computed the loss in accordance with the Rule 115, the learned CIT(A) was justified in deleting the disallowance made by the AO. It was also submitted by the learned AR that even the new Income Tax and Disclosure Standards recently notified by the CBDT, mandates conversion of foreign exchange t .....

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the issue is regarding loss on account of foreign exchange rate fluctuation in respect of trading advance received by the assessee company and outstanding at the closing day of the year. The assessee had received an advance of Japanese Yen 2993604642 on 31st July, 2007. The Punjab National Bank has converted the advance into Indian Rupees by applying exchange rate of 34.11 and credited the account ₹ 100,20,66,525/- to the account of the assessee as per the bank advice placed at Paper Book .....

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he difference of ₹ 17,63,24,155/- was the loss suffered by the assessee on account of this fluctuation. 5.1 As per Rule 115 of Income Tax Rules, foreign exchange transactions while computing profit and gains from business and profession are to be converted at the exchange rate prevalent on the last date of the year and the difference so arising on account of such conversion is to be taken into consideration while computing profit and loss of the business or profession. As per the above fac .....

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e contention of the learned AR that AO s action in treating such loss to be on account of derivative is incorrect. In fact from the assessment order we note that the AO has not appreciated the transaction in the right perspective. The allegation of the AO that assessee entered into a currency swap with the bank for an instrument involving a swap of a liability of Japanese Yen vs. Rupees is against the facts on record. The observation made by the AO in the assessment order in this regard demonstr .....

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nese Yen and why it was not received in Euro or Swiss Franc. 5.3 We are also in agreement with the contention of the learned AR that such transactions do not involve any element of derivatives as has been alleged by the AO. In this regard we are of the view that the AO has gone wrong in interpreting the bank guarantee issued by the bank on behalf of the assessee. This bank guarantee has been issued by the bank to provide security to the buyer in respect of the advance given for the product it wa .....

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ry of derivatives of mark to market losses. It is also evident from the facts on record that the AO has not disputed the advance received as trading advance towards supply of soya bean meal. It is also a fact that there were several other transactions in foreign exchange fluctuation account which has been treated similarly. The assessee all along has treated this advance in accordance with Accounting Standards AS-11. This also has been followed in earlier assessment years as well as in subsequen .....

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