TMI Blog2001 (7) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) erred in holding that the entire exchange fluctuation of Rs. 2,66,30,857 was inadmissible. The nature of fluctuation loss or its admissibility as revenue expenditure was not disputed. The allowance of the said loss is not conditional upon the revaluation of the closing stock and that the two are independent issues, according to the assessee. It is the further contention of the assessee that no such condition has been prescribed in the Act for allowance of the fluctuation loss and that s. 37(1) of the IT Act mandates the allowance of any business expenditure which is neither a capital expenditure nor a personal expenditure. According to the assessee the issue stands concluded in favour of the assessee by the judgment of Hon'ble Supreme Court in the case of Sutlej Cotton Mills vs. CIT 1978 CTR (SC) 155 : (1979) 116 ITR 1 (SC) and a catena of judgments based in the principles laid down in the said judgment. Further, according to the assessee the method of accounting followed by the assessee is in conformity with the accounting standards laid down by the Institute of Chartered Accountants of India and that the loss should have been allowed, as the method of accounting is bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 1,40,726) Rs. 20,02,823 2. Preliminary expenses 654 20,03,477 Total loss Rs. 83,72,995 6. The assessee preferred an appeal before the CIT(A) as regards the disallowance of the exchange loss of Rs. 2,27,350 and certain other issues. The CIT(A) dismissed the appeal and the assessee preferred a second appeal before the Tribunal. 7. Subsequently, the AO issued notice under s. 154 proposing to rectify the assessment order dt. 8th March, 1995, to adopt the official rate for determining the exchange fluctuation loss instead of the free market rate and also passed an order under s. 154 on 23rd Sept., 1996. The assessee preferred an appeal on this rectification order before the CIT(A), who had allowed the assessee's appeal holding that the issue being debatable issue no rectification under s. 154 could have been made. Thereafter, the AO issued notice under s. 148 and after rejecting the reply filed by the assessee had passed reassessment order on 31st March, 1999, disallowing the exchange fluctuation loss of Rs. 2,66,30,857 which had been allowed in the earlier assessment order. 8. The assessee challenged the order of the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case are different from the facts of the case before the Delhi Bench. Smt. Vidya Sharma contended that the assessee is following regular method of accounting and the Department had accepted the same. She had drawn our attention to s. 145 of the IT Act. According to her "profits and gains of business or profession" shall be computed in accordance with the methods of accounting regularly employed by the assessee. The accounts of the assessee were duly audited by a chartered accountant and a report under s. 44AB as certified by the CA accompanied the accounts of the assessee. She has pointed out that the method of accounting employed by the assessee in capable of deducing the income therefrom. Therefore, according to Smt. Vidya Sharma the Department has accepted the method of accounting of the assessee and therefore, the question of not properly deducing the profits therefrom does not arise. 13. According to Smt. Vidya Sharma, the assessee has maintained the closing stock according to the standards of accountancy and the lower authorities are not entitled to disturb the valuation of closing stock. She has referred to p 38 of the paper book filed on behalf of the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible. No such finding had been recorded by the CIT(A) that foreign exchange fluctuation loss is per se inadmissible. If a certain sum is deductible as per the provisions of the Act, unless the Act itself prescribes that certain other conditions to be performed before considering the admissibilities of the expenditure, the allowance of deduction cannot be made conditional upon performance of such conditions. In the present case, according to the learned counsel for the assessee Smt. Vidya Sharma, the admissibility of foreign exchange fluctuation loss, being a revenue expenditure admissible in accordance with the provisions of the Act, is unconditional. 15. Smt. Vidya Sharma, learned counsel for the assessee, further argued that nowhere is it stipulated that the admissibility of the loss is conditional upon revaluation of the closing stock. According to her allowance of exchange fluctuation loss and revaluation of closing stock are two independent issues and be dealt with accordingly. 16. The learned counsel for the assessee Smt. Vidya Sharma has relied on the following decisions on the issue of validity of reopening of the assessment under s. 148 when the basic facts are full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , by the assessee. 18. According to the learned counsel Mrs. Sharma the AO had also wrongly observed that the goods purchased are to be treated as part of the inventory and only on actual consumption they should be treated as expenditure to be debited to the P L a/c. The liability having been determined and accounted for the same has to be treated as expenditure and debited to the P L a/c. She has relied on the following decisions in support of her claim of allowing deduction in respect of fluctuation loss: 1. Sutlej Cotton Mills Ltd. vs. CIT; and 2. Goodricke Group Ltd. vs. CIT (1993) 201 ITR 262 (Cal). She had also relied on the decision of Pune Bench of the Tribunal in the case of Spirax Marshall Ltd. vs. Dy. CIT (2001) 70 TTJ (Pune) 156 : (2000) 77 ITD 320 (Pune) and the decision of Hon'ble Supreme Court in the case of CIT vs. Arvind Mills Ltd. (1992) 101 CTR (SC) 91. 19. The learned counsel for the assessee, Smt. Vidya Sharma has also relied on the decision of Mumbai Bench of the Tribunal in M/s B.V. Brockhoven vs. Dy. CIT (ITA No. 8344/B/90, dt. 27th Nov., 1998) and the decision of the Tribunal, Ahmedabad Bench in the case of Shri Dinesh Mills Ltd. vs. Asstt. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "The application of the provision of s. 43A(1) cannot be restricted to actual payment of the increased liability on account of fluctuation in the exchange rate. The legislature has used the words 'increase or reduction in the liability' which itself shows that such increase liability is yet to be paid. Similarly is the effect of wordings 'for repayment of the whole or a part of the moneys borrowed. Therefore, if there is any change in the exchange rate during the previous year on account of which there is either increase or decrease in the liability of the assessee, then such liability has to be increased or decreased to or from the cost of acquisition determined under s. 43(1). There is nothing in the language of s. 43A to indicate that such provisions are applicable only where the increased liability has been actually paid. Had it been so, the legislature would not have used the word 'liability', and instead thereof, would have used the words 'actually paid'. Even the Board has taken the similar view as is apparent from its Circular F. No. 1/408/67-PPL, dt. 9th Aug., 1967. Hence, provisions of s. 43A were applicable where the instalment remained outstanding at the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ka High Court in the case of CIT vs. Motor Industries Co. (1988) 173 ITR 374 (Kar). The relevant decision is as follows: "The question relates to entitlement to the benefit under s. 43A on the increase in liability on account of fluctuations in the exchange rates. On account of fluctuations in exchange rates, the assessee revalued its liability in respect of foreign currency loans obtained for purchase of machinery, tools and spare parts as on 31st Dec., 1975, and made a provision of Rs. 3,44,838. Out of it, Rs. 2,89,582 relatable to machinery was capitalised and apportioned among various assets and depreciation was claimed; and the balance of Rs. 55,256 relatable to tools/spares was debited to the P L a/c as revenue expenditure. The claims were rejected by the ITO. The AAC and the Tribunal held that the assessee was entitled to the benefit of s. 43A. The same question arose in regard to the asst. yr. 1974-75 and this Court upheld the view of the Tribunal holding that the claim of the assessee also attracted Board's Circular F. No. 1 (408/67-TPL), dt. 9th Oct., 1967, which properly interpreted the scope and ambit of s. 43A—vide CIT vs. Motor Industries Co. Ltd. (1988) 173 ITR 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid principles laid down by the Delhi Bench of the Tribunal, we hold that a suitable adjustment will have to be made in the valuation of the closing stock to be carried over to the subsequent period. In coming to this conclusion, we have carefully considered the 'Accounting Standard-2/(AS-2) which governs "Valuation of Inventories" and 'Accounting Standard-11' (AS-11) titled as "Accounting for the effects of charges in foreign exchange rates". The mere fact that the assessee has not made suitable adjustments to the closing stock should not be a reason for denying the claim of deduction of loss on exchange fluctuation. In these circumstances, while agreeing with the Revenue's contention that suitable adjustment to the closing stock is required, we are not in agreement with the Revenue's decision not to allow the deduction claimed in respect of exchange loss fluctuation. 29. In view of the foregoing discussion, we hold that the assessee is entitled to the claim of loss in respect of exchange rate fluctuation subject to the condition that a suitable adjustment to the valuation of the closing stock as prescribed in AS-2 of the Council of Institute of Chartered Accountants is to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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