TMI Blog2022 (4) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... red in law and on facts in deleting the addition of ₹ 6,46,83,102/- made on account of disallowance of SWAP contract loss. 2. On the facts and circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of ld. CIT(A) may be set aside and that of the Assessing Officer be restored. 3. The assessee Company is engaged in the business developed by/general cargo Company and associated facilities at Hazira. The original return of income was filed by the assessee on 26.11.2014 declaring total loss of Rs.(-)177,98,05,980/-. Notice under Section 143(2) read with Section 129 of the Income Tax Act, 1961 and notice under Section 142(1) of the Act along with questionnaire was issued on 08.06.2016. The assessee filed details before the Assessing Officer. The Assessing Officer made disallowance under Section 14A read with Rule 8D amounting to ₹ 9,66,764/- and also made disallowance of SWAP Contract Loss amounting to ₹ 6,46,83,102/-. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 5. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to A.O the same represents unascertained liability is therefore, not allowable as expenditure under the I. T Act. On the basis of these observations, provision of forward contract payable of ₹ 34,35,000/- has been disallowed and added to the total income of assessee. Submissions of the Appellant 7.2. During the course of appellate proceedings, the learned AR made various submissions; the relevant portion of the same is reproduced hereunder: In the course of appellate proceedings, it is submitted that assessing officer has erred in making addition of ₹ 34,35,000/- to the total income of assessee on account of provision for forward contract payable. During the course of assessment proceedings, assessee submitted that account of forward contract was reflected in the books of accounts as per MTM certificate of ABN Amro Bank. Assessee is required to record forward contract transactions as per Accounting Standard 11 of ICAI the same provides that forward contracts remaining outstanding at the end of financial year should be recorded at closing rate prevailing at the end of the year i.e. 31st March. This treatment is in line with the accrual metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prevailing at the end of the year i.e. on 31.03.2008 as per MTM certificate issued by ABN Amro Bank. It is not in dispute that assessee is following mercantile method of accounting and as per this method, all the expenses/gains which pertains/arises during the year under consideration is required to be considered in the Profit and Loss account for that year itself. The provision entry has been made because the exchange as on 31st day of March has gone up as compared to the exchange rate of forward contract prevailing as on the date of transaction. In my view, the entry passed in the books of account in respect of the difference amount cannot be said to be in the nature of notional/unascertained liability as said entry is passed on the basis of actual exchange rate prevailing at the end of the year. The fluctuation in exchange rate has material bearing on the P L A/c as forward contract has been entered into during the year under consideration, losses/gain relating to the fluctuation in exchange rate pertaining to said forward contract should also be considered in P L A/c for the year under consideration. It is also further seen that in the immediately succeeding year when for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it has the sanction of law. As a matter of fact, it is this principle, as recognized by Hon'ble Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481, which explains the valuation of closing stock on market price or cost price whichever is less. There is thus, in principle, no difficulty is seeking a deduction in respect of a reasonably anticipated loss, even though it may not have actually fructified, in computation of profits and gains of business. To this extent, the Assessing Officer was clearly in error in treating the loss on foreign exchange as a notional loss not deductible in computation of business income. On the facts of the present case, however, not only anticipated losses have been claimed as deduction but anticipated profits have been offered to tax. The gains have been offered to tax on the basis of assessee's following mandatory accounting standards, and on the basis of same accounting standards losses on forward contracts have been recognized too. The claim of deduction of ₹ 22.15 crores represents the difference between total foreign exchange loss of ₹ 50.11 crores as at the year end date and foreign exchange gains of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the case of United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). 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. 17. 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 s. 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 the said Accounting Standard ( AS ). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P L account for the reporting period. 10. As stated above, on facts in the case of M/s. Woodward Governor India (P) Ltd., the Department has disallowed the deduction/debit to the P L a/c made by the assessee in the sum of ₹ 29,49,088 being unrealized loss due to foreign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department. 11. The dispute in this batch of civil appeals centers around the year(s) in which deduction would be admissible for the increased liability under s. 37(1). 12. We quote hereinbelow s. 28(i), s. 29, s. 37(1) and s. 145 of the 1961 Act, which read as follows : Sec. 28. Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of expenditure is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression expenditure incurred while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word expenditure is not defined in the 1961 Act. The word expenditure is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled reasons set out above, are deductible in computation of profits and gains of business. 10. In view of the above discussions, we uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance of ₹ 22,15,55,371 on account of loss, at the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter. 15. In view of these binding judicial precedents, with which we are in considered agreement, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 73,00,000. The assessee gets the relief accordingly. 16. Ground no 3 is thus allowed. 8. It is observed by the CIT(A) that the M2M loss on SWAP contract is allowable where loans were converted into foreign currency loan to take benefit of low interest rate and loss recognised on account of foreign exchange fluctuation as per notified Accounting Standard 11 is an accrued and subsisting liability and not merely a contingent or hypothetical liability. There is no need to interfere with the findings of the CIT(A). Therefore, appeal of the Revenue is dismissed. 9. In the result, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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