TMI Blog2020 (11) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax Act, 1961; in short the Act . 2. The solitary ground of appeal of the revenue is against the decision of ld. CIT(A) in deleting the addition of ₹ 8,50,70,594/- made on account of disallowance of foreign exchange fluctuation loss. 3. The brief fact of the case is return of income declaring income of Rs. (- )81,56,56,631/- was filed on 23rd November, 2012. The case was subject to scrutiny assessment and notice u/s. 143(2) was issued on 1st August, 2014. During the course of assessment, the Assessing Officer noticed that assessee has claimed foreign exchange fluctuation loss amounting to ₹ 8,63,86,195/-. On further, verification of the detail filed, the Assessing Officer observed that these losses was inclusive of notional losses of ₹ 8,50,70,594/-. On verification of the detail filed, the Assessing Officer was of the view that such loses was contingent in nature as has not been crystallized during the year under consideration, therefore, claim of amount of ₹ 8,50,70,594/- was disallowed and added to the total income of the assessee. 4. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has deleted the impugned disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain to foreign exchange derivative instruments but is on account of outstanding balances of debtors and creditors as on 31/03/2012and in accordance with Accounting Standard-11 issued by the Institute of Chartered Accountants. To support its contention the appellant placed reliance on decision of Hon'ble Bombay High Court decision in the case of CIT V/s Vinergy International Private Limited [Tax Appeal No. 376 of 2014], dated 11th August, 2016. Further, the Appellant has also argued that the circulars are binding on Assessing Officer and not on the Appellant. Further, the Appellant contended that it is not necessary that the expenditure covers only that amount which goes out from the pocket of the person but includes any expenditure including loss incurred during the course of business and profession. For the same, reliance was placed on the decision of Woodward Governor India (P) Ltd [2009] 179 Taxman 326 (SC). The Appellant has also relied on the decision of Hon'ble Ahmedabad IT AT in case of Deputy Commissioner of Income-tax, Circle 2 (1) -(1), Ahmedabad v. E/itecore Technologies (P.) Limited IT Appeal Nos. 197 AND 508 wherein it is held that said Instruction cannot overw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law. Thus, not entertained. . 4.7. It is observed that claim of Appellant is allowable revenue expenditure and not notional loss is also supported by decision of Hon'ble Supreme Court in case of Governor India (P.) Ltd [2009] 179 TAXMAN 326 wherein it is held as under: FACTS-1 The assessee-company had debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items, on the last date of the accounting year. The Assessing Officer held that the liability as on the last date of the previous year under consideration was not an ascertained liability, but a contingent liability and, consequently, it had to be added back to the total income of the assessee. On appeal, the Commissioner (Appeals) upheld the impugned order. On second appeal, the Tribunal, while relying on its earlier decision in the assessee's own case for the earlier years, held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year had to be allowed. The said decision of the Tribunal was upheld by the High Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken as correct, unless there are_strotig and sufficient reasons to indicate that they are unreliable. Under section 28/7), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take intQ__account stockin- trade for ^determination of profits. The Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account, the value of the stock-in-trade at the beqinninq and at the end of the year should be entered at cost _or_jnarket price, whichever is lower. This is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1). with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last 'date is relevant, because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 is not 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 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. Section 145(1) enacts that for the purpose of sections 28 and 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, section 145(1) was attracted to the facts of the instant case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the hooks both in respect of losses and gains as per nationally accepted Accounting Standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reduce the incidence of taxation. The word 'expenditure' is not defined in the Act. The word 'expenditure' is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purpose of the business, should be allowed in computing the income chargeable under the head 'profits and gains of business . In sections 30 to 36, the expression 'expenses incurred' as well as 'allowances and depreciation' have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, the Parliament has used the expression 'any expenditure' in section 37 to cover both. Therefore, the expression 'expenditure' as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a loss', even though said amount h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with the law and binding judicial precedents. That has not been done. Be that as it may, in the case of Woodward Governor (supra), the issue regarding deductibility of foreign exchange loss came up for consideration before Hon'ble Supreme Court. The above decision is further confirmed by Hon'ble Gujarat High court in Tax Appeal No 139 of 2018 dated 20/02/2018 in the case of Elitecore Technologies Private Limited. It is observed that Hon'ble Ahmedabad ITAT in above referred case has held that Instruction cannot override decision of Hon'ble Supreme Court and when Appellant is consistently following same method of accounting for recognizing income/loss of marked-to-market, such loss cannot be disallowed treating it as notional loss. As held in preceding paras, Appellant has been consistently following same method of accounting and had recognized marked-to-market gain in subsequent Assessment Year. The Hon'ble Delhi High Court in the case of Munjal Showa Limited V/s DCIT (WPC 1707/2014 and CM No. 3569/2014, dated 22nd February, 2016) has held that in CBDT Instruction No. 3 of 2010 cannot override the existing decision of Supreme Court/ High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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