TMI Blog2017 (4) TMI 725X X X X Extracts X X X X X X X X Extracts X X X X ..... business interests of the assessee in respect of its foreign exchange transactions. Having heard the rival contentions and having perused the material on record, we approve these well reasoned findings of the first appellate authority, and, for this reason also, decline to interfere in the matter. - Decided against revenue Addition on account of EEFC account on account of forex loss claimed by Assessee - CIT-A allowed claim - Held that:- As regards the amount of ₹ 87,12,768 all it represents is the difference in conversion rate, of US Dollars into Indian rupees, at the point of time when the EEFC account was originally credited vis-à-vis the point of time when subsequent debit entry, or vice versa, is made. As a matter of fact, these entries, truly speaking, do not even represent losses but merely deal with corrections in the conversion rate with respect to the amounts utilized from EEFC account. These corrections are to be taken into account in computing the correct profits and losses. Be that as it may, whether these losses are treated as losses or corrections, the effect is the same- i.e. accounting for foreign exchange at the right rates. Quite interestingly, similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on an earlier date @ ₹ 46.53 and @ ₹ 45.82 respectively. As this forward contract was said to be in the course of assessee s business, and in respect of his foreign exchange dealings, the loss was claimed as a business loss. The Assessing Officer, however, did not agree. He was of the considered view that since the contract was settled, otherwise than through delivery, section 43(5) was attracted, and, accordingly, loss was required to be treated as speculative loss. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) held that the transactions in question were to guard against fluctuations in foreign exchange rates and were thus incidental to the business. Relying upon Hon ble Bombay High Court decision in the case of ITO Vs Bhdridas Gauridu Pvt Ltd [(2003) 261 ITR 256 (Bom)] and a coordinate bench decision in the case of DCIT Vs Bombay Diamond Co Ltd [(2010) 33 DTR 59 (Mum)], learned CIT(A) upheld the plea of the assessee, and held the loss to be a business loss and deductible under section 37(1). The Assessing Officer is aggrieved and is in appeal before us. 4. We have heard the rival contentions, perused the material on record and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record, we approve these well reasoned findings of the first appellate authority, and, for this reason also, decline to interfere in the matter. 6. Ground no. 1 is thus dismissed. 7. In ground no. 2, the assessee has raised the following grievance: The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of ₹ 1,15,37,454/- made on account of EEFC account, on account of forex loss claimed by Assessee when these were proved to be not pertaining to import payable or export receivable. 8. The assessee was maintaining a US Dollar denominated bank account, in the nature of EEFC (Exchange Earner s Foreign Currency) account, with Citibank. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has credited foreign exchange gain of ₹ 43,94,762, as on 31st March, the assessee has also debited foreign exchange loss of ₹ 28,24,686 on the same date. When the matter was probed further, it was explained by the assessee that the assessee maintains the above account in US Dollars, and every time a transaction takes place, the difference between US Dollar rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when subsequent debit entry, or vice versa , is made. As a matter of fact, these entries, truly speaking, do not even represent losses but merely deal with corrections in the conversion rate with respect to the amounts utilized from EEFC account. These corrections are to be taken into account in computing the correct profits and losses. Be that as it may, whether these losses are treated as losses or corrections, the effect is the same- i.e. accounting for foreign exchange at the right rates. Quite interestingly, similar entries resulting in gains have been accepted by the Assessing Officer. These entries are admittedly in accordance with the Accounting Standards which are binding on the assessee. The method of accounting has been consistently followed by the assessee, it is fair and reasonable, and, as a result of the losses so booked, the accounts of the assessee show true and fair picture of the transactions. It is also noted that similar approach, when it resulted in net gains in subsequent assessment years i.e. 2011-12 and 2012-13, was accepted by the revenue authorities. In the light of Woodward Governor decision (supra) of Hon ble Supreme Court, as the CIT(A) correctly conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower- the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word profit implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Sec. 145(1) enacts that for the purpose of s. 28 and s. 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with s. 28. Therefore, s. 145(1) is attracted to the facts of the present case. Under the merca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under s. 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate visa- vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Sec. 145. Method of accounting - (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-s. (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-s. (1) or accounting standards as notified under sub-s. (2), have not been regularly followed by the assessee, the AO may make an assessment in the manner provided in s. 144. 13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word expenditure in s. 37(1) connotes what is paid out and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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