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2016 (9) TMI 303 - ITAT DELHI

2016 (9) TMI 303 - ITAT DELHI - TMI - Disallowance on account of foreign exchange fluctuation loss - Held that:- The issue in dispute stands decided in the decisions of ITAT Delhi Benches in assessee’s own cases for A.Y. 1999-2000 and 2001- 02 in favour of the assessee [2006 (12) TMI 175 - ITAT DELHI-C ] and (2006 (10) TMI 184 - ITAT DELHI-D ) respectively. - The special Bench of ITAT, Delhi also in the case of Oil & Natural Gas Corpn. Ltd. vs. DY. CIT (2002 (8) TMI 802 - ITAT DELHI) has he .....

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current liabilities and not on the transactions of the current year, in our opinion, does not stand on sound footings and is liable to be set aside. - In the assessment year 2013-14, the department itself has accepted foreign exchange fluctuation loss under identical circumstances. Not only this, the assessee has been following a consistent policy on re-statement of foreign currency payables and whenever there is a gain the same is duly offered to tax as also noted by ld. CIT(A) in a chart .....

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013 - Dated:- 24-8-2016 - Shri I. C. Sudhir, Judicial Member And Shri L. P. Sahu, Accountant Member Appellant by : Sh. Piyush Kaushik, Advocate Respondent by : Sh. B. Raman Janeylily, Sr. DR ORDER Per L. P. Sahu, Accountant Member: This is an appeal filed by the assessee against the order of ld. CIT(A)-XI, New Delhi dated 28.02.2013 for the assessment year 2009-10 on the following grounds : 1. That on the facts and circumstances of the case and in the Law, the CIT(A) has grossly erred in confirm .....

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the Apex Court. 1.2. That on the facts and circumstances of the case and in the Law, the CIT(A) has committed a gross impropriety by not following the decision of ITAT in assessee s own cases on the claim of foreign exchange fluctuation loss payment and also the mandate laid down by the Hon ble Apex Court in this regard. 2. From the above grounds of appeal, it transpires that the only question involved in this appeal is whether the ld. Authorities below are justified in disallowing the foreign e .....

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o. 3/2010 dated 23.03.2010 issued by the CBDT. In response, the appellant explained that the foreign exchange fluctuation loss of ₹ 12,41,11,179/- was on account of restatement of the foreign currency payables as per the year end rates in accordance with the provisions of Accounting Standard-11 (AS-11) issued by the ICAI. The details of such loss were also furnished before the AO. It was explained that since the CBDT Instruction No. 3/2010 relates to the transactions of forex derivatives, .....

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urt. The AO, however, disallowed the loss as claimed by appellant on the ground that the assessee did not furnish any evidence/details of restatement of foreign currency and at the time of passing the decision by ITAT in assessee s own case, Instruction No. 3 of 2010 was not in existence. He further observed that the losses claimed by the assessee are based on forex derivatives in the form of currency swaps, forex forwards etc. It was also observed that now, in view of the change in law, the dec .....

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assessee has claimed foreign exchange fluctuation loss on the entire amount of current liabilities and not on the transactions pertaining to the current year. Aggrieved by the order of ld. CIT(A), the assessee is in appeal before the Tribunal. 4. During the course of hearing, the ld. AR of the assessee furnished a brief synopsis before us containing various arguments of assessee which read as under : It is respectfully submitted that the ensuing submissions of the assessee be in the interest con .....

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services to SGI. Thus, it is abundantly clear as per the noting by AO himself that assessee is engaged in Information technology (IT) line of business by providing IT related purchase/sales / services. The assessee does not at all deals in forex derivatives (i.e. shares/scrips/bonds/stocks in foreign currency) which is a matter of fact and record. As per the audited accounts on record (pages 1-19 PB) there is not even a single rupee income or expenditure accounted for by the assessee on account .....

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he disclosed accounting policy of the company the outstanding foreign currency monetary items (receivables / payables on revenue account) are reported as per the closing exchange rate and the exchange differences arising there from vis a vis the opening balance of same is accounted for as income or expense as the case may be. This accounting policy is in view of the requirements of Accounting Standard 11 issued by Institute of Chartered Accountants of India ( ICAI). The exchange differences aris .....

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onsequent to conversion at closing exchange rate has been duly offered to tax. During the subject year pursuant to the aforesaid accounting policy there was an exchange loss of ₹ 124,111,179 which was consequently claimed as a deduction. The item wise working of such exchange loss was duly submitted before the AO & CIT(A) duly acknowledged by the AO enclosed at page 27 of PB. It is a matter of fact that both the lower authorities could not find any default / lacuna on the same. 1.4 Exc .....

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e but adjusted in the carrying cost of fixed assets as per the disclosed accounting policy. It was submitted before the lower authorities and noted at various places (for instance page 30 of CIT(A) order) that intercompany payables are on revenue account only. This position is not disputed by any of the lower authorities i.e. AO & CIT(A). 1.5 International transactions with parent entity accepted on an arm's length basis by the department: As submitted before the CIT(A) and noted at inte .....

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s is a speculative loss and accordingly disallowed to be set off against business income u/s 43(5). The AO had invoked the said instruction which is on altogether a different thing i.e. trading in derivatives whereas on the facts of assessee's case the assessee is in Information Technology line of business (as admitted by AO herself vide para 2 of her order] and had never done any trading in derivatives in past, present or till date. These facts were submitted before the AO (noted by AO hers .....

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policy on re-statement of foreign currency payables and whenever there is a gain the same is duly offered to tax - noted at pages 77; 18 of CIT(A) order along with a chart outlined at page 31 of CIT(A) order giving the year wise details wherein the gains arising consequent to conversion at closing exchange rate have been duly offered to tax', iii. Inter company payables have arisen only on account of revenue transactions in the past. Transactions undertaken by assessee with its parent entity .....

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the order of CIT(A) itself at pages 30 & 31. 3.2 Decision of CIT(A) The CIT(A) does not disputes the aforesaid position and submissions. In fact unlike the view taken by the AO the CIT(A) does not uphold the disallowance of foreign exchange fluctuation loss on the ground that it is a speculative loss as held by the AO. The sole reason framed by the CIT(A) in confirming the disallowance is that the assessee has claimed foreign exchange fluctuation loss on the entire amount of current liabili .....

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the AO to the effect that pursuant to CBDT Instruction No. 3 of 2010 the loss claimed by assessee is a speculative loss is manifestly incorrect. At the cost of repetition the said instruction is applicable only where there is a trading in forex derivatives which is not at all the situation on the facts of present case. The nature of business of assessee as noted by the AO herself vide para 2 of its order being that the assessee is a reseller of Silicon Graphics products. It imports computers (ha .....

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forex derivatives (i.e. shares/scrips/bonds/stocks in foreign currency) which is a matter of fact and record. As per the audited accounts on record (pages 1-19 PB) there is not even a single rupee income or expenditure accounted for by the assessee on account of forex derivatives. In fact it is also not the case of AO that the assessee has undertaken transaction in forex derivatives still very wrongfully the AO applies the said instruction. 4.3. The item wise working of foreign exchange loss of .....

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2 of its order that the assessee has not given details of foreign exchange loss. In fact the C1T(A) does not holds that the assessee has not given said details, the solitary reason framed by CIT(A) in confirming AO's decision is totally different outlined in para 3.2 supra. The outstanding intercompany payables / receivables arising as a result of transactions with the parent entity are as per the audited accounts of the current year and past years. Assessments for all the past years have be .....

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not considered necessary and expedient to make a reference to the Transfer Pricing Officer. 4.4 The CIT(A) unlike AO does not uphelds the disallowance of foreign exchange fluctuation loss on the ground that it is a speculative loss as held by the AO. The sole reason framed by the CIT(A) in confirming the disallowance is that the assessee has claimed foreign exchange fluctuation loss on the entire amount of current liabilities and not on the transaction pertaining to the current year. This is a .....

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outstanding as at the balance sheet date is to be re-instated as per the closing rate as required by AS-11: decisions from Supreme Court & as held in assessee's own cases on same issue: The CIT(A) has just failed to understand and appreciate that it is the entire amount of current liabilities outstanding as at the balance sheet date which has to be re-instated as per the closing rates otherwise the accounts will not give a true and fair view. The AS-11 in a very crystal clear manner pro .....

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n the transaction is settled within the same accounting period as that in which it occurred, all the exchange differences is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each intervening period upto the period of settlement is determined by the change in exchange rates during that period." Thus as per the very clear mandate of AS-11 the exchange differences arising in each subsequent accounting p .....

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ary items which have to be valued at the closing rate under AS-11. Under paragraph 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as " recording of transaction on initial recognition" . Paragraph 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to init .....

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180 SC in the following words: "12. Applying these factors on the facts of that case, it was held that the "loss" suffered by the assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had .....

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Delhi) in the case of Oil & Natural Gas Corpn. Ltd. vs. Dy. CIT(2002) 77 TTJ (Del)(SB) 387: (2003) 261 ITR 61 (Del)(SB)(AT) : (2002) 83 ITD 151(Del)(SB) provides the answer. In this case, it was held that the loss cannot be called notional since the fall in the exchange rate has already taken place in the accounting year. The Special Bench has a/so made a reference to the accounting standards (AS-11) in which it has been stated that the long-term liabilities should be restated and the loss s .....

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exchange fluctuation loss under identical circumstances has been accepted by the department itself in the subsequent years in the course of sec 143(3} scrutiny proceedings; It is submitted that in the latest scrutiny assessment order issued by the AO u/s 143(3} for AY 2013-14 dated 30/03/16 the department itself in the course of scrutiny assessment proceedings had pursuant to a specific deliberation with the assessee on assessee's claim of foreign exchange loss of ₹ 2,35,97,638 accepte .....

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xchange fluctuation loss is squarely covered by the provisions of AS-11 and the decisions from Apex Court including assessee's own cases for the preceding years which have been ultimately accepted by department itself in the course of section 143(3) scrutiny proceedings for the subsequent years. Thus, it is respectfully submitted that the addition made by the AO with respect to foreign exchange fluctuation loss as sustained by the CIT(A) deserves to be deleted forthwith. 5. On the other hand .....

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es / receivables was duly submitted before the AO & CIT(A) duly acknowledged by the AO & CIT(A). The written reply of assessee given vide letter dated 25.11.2011 reproduced by AO in her order also shows that such details were annexed by assessee with the said reply. Even the ld. CIT(A) has not recorded any finding that no such details were furnished by assessee/appellant. Besides, the outstanding intercompany payables/receivables arising as a result of transactions with the parent entity .....

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elf has mentioned the nature of appellant s business as that of Information Technology line, i.e., IT related purchase/sales or services. Therefore, the conclusion of the AO derived on the basis of CBDT Instruction No. 3 of 2010 in the above circumstances is not fit to be supported that the foreign exchange fluctuation loss is a speculative loss. The ld. CIT(A) has confirmed the disallowance on altogether different count that the assessee has claimed foreign exchange fluctuation loss on the enti .....

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rd-11 provides that at each balance sheet date the outstanding foreign currency monetary items should be reported using the closing rates. It clarifies that that when the transaction is not settled in the same accounting period in which it had occurred then in all the intervening period till the transaction is settled, the exchange differences have to be duly accounted for. Moreover, the issue in dispute stands decided in the decisions of ITAT Delhi Benches in assessee s own cases for A.Y. 1999- .....

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