TMI Blog2019 (7) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... f payment or the Balance Sheet Date and therefore, it cannot be added to the cost of the inventory even under the AS-2. Even for a moment it is accepted that the increase in foreign exchange rate would yield a higher value of the unsold stocks, still it would amount that it would go to add the realizable value and not the cost of the said stocks. Thus, considering the principle that as a matter of prudence stocks are valued at lower of the cost or the realizable value, such increase in realizable value has no bearing on the profits computed. Normally, the expenditure/ loss incurred due to foreign exchange fluctuation on account of actual payments would be a parameter kept in mind for deciding the sale piece of the stock that a prudent businessman would like to recover the said expenditure/ loss when the stocks are sold and would not increase the value of the closing stock and thereby increase the profits before actual realization of the same. Therefore, the foreign exchange fluctuation loss cannot be added to the cost of inventories. In view of the above, we are of the view that the Revision order carried out by PCIT is without any basis and on merits also the assessee has a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and profit and loss account has been credited. According to him, the purchase of rough diamonds in the trading account has been declared at ₹ 84,06,12,392/- (both local and import), the value of closing stock of rough diamond was declared at ₹ 18,56,67,324/- and of polished diamond at ₹ 54,600/-. He noted, after perusing the case records that the AO has not examined whether the amount of ₹ 77,88,482/- being exchange difference on import and ₹ 89,27,734/- being exchange different on exports had been taken into account for the purpose of valuation of closing stock of rough diamonds and polished diamonds. The PCIT noted the decision of Delhi Tribunal in the case of West Falia Separator India Pvt. Ltd. Vs. ACIT (52 taxmann.com 381 Delhi Trib), wherein it is held that forex gain or loss or trading transactions is part of price import or value of export transaction. On that basis, the PCIT noted that this exchange rate different should be taken into consideration while valuing closing stock of rough diamonds and polished diamonds. The PCIT directed the AO vide Para 4, 4.2 and 5 as under: - 4. On perusal of rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial to the interest of Revenue. 4. Aggrieved, assessee came in appeal before Tribunal. Before us, the learned Counsel for the assessee argued that the valuation of rough diamonds and polished diamonds are done in the following manner (a) Rough diamonds are valued on cost. (b) Polished diamonds are valued at estimated cost or realizable value whichever is lower. 5. The learned Counsel for the assessee stated that while valuing closing stock, the assessee has not considered the exchange difference as part of cost of goods since the same is considered as financial gain or loss whichever is shown in profit and loss account but was not part of trading account. He stated that the amount is not being included in the opening stock and also in closing stock. For this, he argued that the assessee has employed the consistent method of valuing the opening and closing stock of rough and polished diamonds. He stated that the method consistently followed cannot be disturbed if the method is one of the accepted methods of accounting. The learned counsel for the assessee referred the provisions of section 145A of the Act and stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 as under: - 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words monetary items are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word paid is defined under section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 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. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P L account and is not to be adjusted against the cost of raw materials. 8. We noted that from the above and came to conclusion that the loss on account of foreign exchange fluctuation is recognized in terms of AS-11. The said accounting standard clearly states that a foreign currency transaction should be recorded on initial recognition 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. It further states that each Balance Sheet date, foreign currency monetary items should be reported using the closing rate and non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of transaction. In other words, the revaluation of creditors or debtors or the loss incurred on the actual of payment is not to be considered for the purpose of reporting the non-monetary items, like closing stock. Secondly, the foreign exchange loss incurred is not an item of cost, and rather it is a revenue outflow or an expenditure provided by prudence depending on the date of paym ..... 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