TMI Blog2022 (3) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... ihood of tax liability on this score seems unlikely. Addition on account of disallowance of foreign exchange loss on account of 'Marked to Market Losses ' - HELD THAT:- AO has, in fact, not made any estimation as to what is the foreign exchange fluctuation loss (which includes Marked to market loss), that he is likely to disallow. The only aspect that the AO has touched upon to justify the tax liability under this head is that an addition of ₹ 11 crores was made in AY 2016-2017, concerning Marked to market losses. After adverting to this aspect, the AO has let the issue hang in the air as he has not gone on to indicate an estimated amount which he is likely to disallow in AY 2018-2019 on account of foreign exchange fluctuation loss, which includes Marked to market losses, and, therefore, the additional tax burden it would result in imposing on the petitioner assessee under this head. Addition on account of unearned revenue - HELD THAT:- In this case as well, it is not as if the petitioner/assessee is not offering unearned revenue for tax; it is only on account of accounting policy followed consistently that unearned revenue is offered for tax in the year i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., that its refunds for AYs 2016-2017, 2017-2018 and 2018-2019 had been withheld for legal cause. 3.1. To agitate its grievance, the petitioner-assessee had filed three writ petitions qua each of the aforementioned assessment years i.e. W.P.(C) No.10373/2019; W.P.(C) No.10374/2019 and W.P.(C) No.10375/2019. 3.2. These writ petitions were disposed of by a coordinate bench of this Court, via a common judgment dated 18.02.2020. The Court, while disposing of the writ petitions, had issued the following operative directions: 19. In absence of any cogent reasons justifying withholding of the refund due to the petitioner under Section 143(1) for AY 2017-18, 2018-19, we find that the proposal as well as the approval granted by Principal Commissioner of Income Tax lacks consideration of the relevant and germane conditions. We, accordingly, set aside the order and direct the respondents to undertake the exercise afresh and pass an order under Section 241A. We, therefore, grant six weeks' time to the respondents to consider the aspect whether the amount found due to be refunded, or any part thereof, is liable to be withheld under Section 241A. While doing so, the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents- revenue to pass a fresh order bearing in mind the following : (i) Probable additions that may have to be made in the scrutiny assessment proceeding, based on a prima facie estimation. In this behalf, reasons were required to be furnished. (ii) Quantum of additions and disallowances, if any, on the basis of estimations and their likely tax impact. (iii) The financial wherewithal of the petitioner-assessee and its ability to meet and service any demand for tax that may be raised against it. 3.4 For the aforesaid purpose, the Assessing Officer [ O] was required to take into account, illustratively, past demands, pending litigation and the past conduct of the assessee. 3.5. It is not in dispute that after the judgment dated 18.02.2020 was rendered by this Court, the respondents-revenue refunded ₹ 561.72 crores (including interest) to the petitioner-assessee on 02.05.2020, in respect of AY 2017-2018. 3.6. Insofar as the AY in issue is concerned i.e., AY 2018-2019, a fresh order was passed, as noticed above, i.e. order dated 28.04.2020. Via this order, the respondents-revenue have withheld ₹ 349,41,45,020/-. The foundation of this order is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, concerning the AY in issue i.e., AY 2018-2019. The operative part of the said order, which is dated 26.07.2021, reads thus: 5. Accordingly, No adverse inference is drawn in respect of arm s length price of the International transaction for F.Y. 2017-2018 pertaining to A.Y. 2018-2019. 7.2. Therefore, any likelihood of tax liability on this score seems unlikely. 8. This brings us to the second head i.e., disallowance of foreign exchange losses on account of Marked to market losses . 8.1. A careful perusal of the impugned order shows that the AO has, in fact, not made any estimation as to what is the foreign exchange fluctuation loss (which includes Marked to market loss), that he is likely to disallow. The only aspect that the AO has touched upon to justify the tax liability under this head is that an addition of ₹ 11 crores was made in AY 2016-2017, concerning Marked to market losses. 8.2. After adverting to this aspect, the AO has let the issue hang in the air as he has not gone on to indicate an estimated amount which he is likely to disallow in AY 2018-2019 on account of foreign exchange fluctuation loss, which includes Marked to market losses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ACIT, Cir 10(1), New Delhi to submit his comments, however inspite of reminders no comments were submitted. It is seen that the assessee is regularly following the accounting method as described above. It is seen that it has offered for taxation unearned income for taxation regularly in the manner described above. The financials for the years ending on 31.03.2005 and 31.03.2008 also show that unearned I income had been recognized in the past as well as in the subsequent years. It shows that the accounting policy of recognizing unearned revenue each year and offering the same in the year in which services are rendered has been regularly followed by the assessee. As per the chart submitted by the assessee it has offered unearned income of ₹ 1,65,47,889/- this year, and ₹ 560034756/- has I been offered in AY 2008-09. This similar practice has been followed by the assessee right from AY 2003-04 till 2011-12. This being the case, the DRP is of the opinion that keeping in view the accounting policy being followed regularly, the addition made of ₹ 5,60,34,756/- is unjustified. Therefore the assessee's objection on this point is accepted and addition is deleted. [E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with Section 28. Therefore, Section 145(1) is attracted to the facts of the present 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 legal liability has been incurred before it is actually disbursed (see judgment of this Court in United Commercial Bank v. CIT [(1999) 8 SCC 338 : (1999) 240 ITR 355] ) Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the accounting standard followed by the assessee(s) in this batch of civil appeals. 35. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under Section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard 11 mandatory, we are now required to examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognised in the P L account for the reporting period. 9.5(a) Also see observations made in Commissioner of Income Tax-III v. ShyamTelelink Ltd., 2018 SCC OnLine Del 12872 : 15. On the question of application of the accounting principles, Section 145 of the Act and mandate of the Companies Act and paragraph 9 of the Accounting Standards, in Dinesh Kumar Goel (supra) it was observed:- 28. Reading of the aforesaid (AS) 9 makes it clear that revenue is recognized only when the services are actually rendered. If the services are rendered partially, revenue is to be shown proportionate with the degree of completion of the services. This really clinches the issue in favour of the assessee. 29. Though our discussion on the issue is complete, the parting comments need to be made. The receipts relate to the unexec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming its obligation and rendering services to the prepaid customers as per the terms. If the respondent- assessee had failed to perform the services as promised, it would be liable and under an obligation to refund the advance payment received under the ordinary law of contract or special enactments, like the Consumer Protection Act. The aforesaid legal position would meet the argument of the Revenue that the prepaid amount received was not liable to be refunded or repaid, whether or not any services were rendered. 19. In J.K. Industries Ltd. v. Union of India, [2008] 297 ITR 176 (SC) and Commissioner of Income Tax v. Woodward Governor India P. Ltd., [2009] 312 ITR 254 (SC), the Supreme Court has emphasized that the accounting standards as framed and followed by the auditors should be respected, for they provide harmonization of concepts and accounting principles and ensure discipline. Accounting methods followed continuously by the assessee for given period of time would ensure revenue neutrality and reflect true and correct income or profits. [Emphasis is ours.] 9.6. As would be evident upon a perusal of the aforesaid extracts, the court laid emphasis and gave weight ..... X X X X Extracts X X X X X X X X Extracts X X X X
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