Income Tax Act, 1961, Section 37(1)

Business expenditure--Allowability--Foreign exchange fluctuation loss on sale proceeds held in EEFC account

Conclusion: Loss suffered by assessee due to fluctuation of foreign exchange as on date of balance sheet in respect of purchase and sale of goods is an allowable expenditure under section 37(1).

AO made addition on account of disallowance of foreign exchange fluctuation loss on sale proceeds held in EEFC account. The matter travelled to Tribunal, whereby it deleted the addition. Held: In view of decision of Supreme Court in the case of CIT v. M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC) and the decision of Co-ordinate Bench of this Court in the case of CIT-5 Mumbai v. M/s. Vinergy International Pvt. Ltd. Income Tax Appeal No. 376 of 2014 decided on 11-8-2016 : 2016 TaxPub(DT) 3773 (Bom-HC), loss suffered by assessee due to fluctuation of foreign exchange as on date of balance sheet in respect of purchase and sale of goods is an allowable expenditure under section 37(1). Tribunal rightly deleted the impugned addition.

Decision: In assessee’s favour

Followed: CIT v. M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC), CIT-5 Mumbai v. M/s. Vinergy International Pvt. Ltd. Income Tax Appeal No. 376 of 2014 decided on 11-8-2016 : 2016 TaxPub(DT) 3773 (Bom-HC)

IN THE BOMBAY HIGH COURT

M.S. SONAK & VALMIKI MENEZES, JJ

Asstt. CIT v. Sociedade De Fomento Industrial (P) Ltd.

Tax Appeal No. 379 of 2024 (Filing No.)

3 April, 2024

Appellant by: Susan Linhares, Standing Counsel.

Respondent by: Nishant Thakkar, Ms Linette Rodrigues and Jasmin Amalsadvala, Advocates.

ORDER

Heard Ms S. Linhares, learned Standing Counsel for the Appellant and Mr Thakkar who appears with Ms L. Rodrigues and Ms J. Amalsadvala for the Respondent.

2. The challenge in this appeal is to the ITAT's order dated 12-9-2022.

3. By a separate order, we have condoned the delay in instituting this appeal, and with the consent of the learned counsel for the parties, we have taken up this appeal for consideration.

4. Ms Linhares submits that this appeal raises the following substantial questions of law:

(a) Whether on the fact and in the circumstances of the case, the Hon'ble ITAT erred in deleting the addition of Rs. 8,65,74,413 made on account of disallowance of foreign exchange fluctuation loss on sale proceeds held in the EEFC account as the sale proceeds which were already received by the assessee and the assessee was not under obligation to keep sale proceeds under EEFC account?

(b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is perverse in holding that the amount of Rs. 8,65,74,413 related to forex loss on creditors and debtors outstanding as on 31-3-2010 although it was not so?

5. Ms Linhares submits that the reasoning of the I TAT is improper and that foreign exchange fluctuation should have been ignored when considering profit and loss. She relies on the reasoning in the assessing officer's order dated 13-3-2013 to submit that the above substantial questions of law indeed arise in this matter.

6. Mr Thakkar, learned counsel for the Respondent, submits that the issue raised in this appeal stands answered against the Revenue by the decisions of the Hon’ble Supreme Court in the case of CIT, Delhi v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC) and of the coordinate Bench of this Court in the case of CIT-5 Mumbai v. M/s. Vinergy International Pvt. Ltd. Income Tax Appeal No. 376 of 2014 decided on 11-8-2016 : 2016 TaxPub(DT) 3773 (Bom-HC).

7. Mr Thakkar submits that the Hon'ble Supreme Court, in the case of Woodward Governor India (P) Ltd. (supra), has clearly held that whether the loss suffered by the assessee due to fluctuation of foreign exchange as on the date of the balance sheet is in respect of the purchase and sale of goods (payments have to be made/received) is an item of expenditure under section 37(1) of the Income Tax Act. He, therefore, submits that no substantial question of law arises in this appeal.

8. We have considered the rival contentions. In our judgment, the decision of the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) affords the complete answer to the contentions now raised on behalf of the Revenue by Ms Linhares.

9. In Woodward Governor India (P) Ltd. (supra), the Hon'ble Supreme Court made the following observations at Paras 14 and 18 :

14..... That is why in deciding the question as to whether the word "expenditure" in section 37(1) includes the word "loss" one has to read section 37(1) with section 28, section 29 and section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under Section 28(i), 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 into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or marker price, whichever is the lower. This is how business profits arising during the year needs 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. This is 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 profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or marker price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment.........

18……..In case of revenue items falling under section 37(1), para 9 of AS-II which deals with recognition of exchange differences, needs to be considered. Under that Para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under section 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet dare. 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 rare, should be recognized in the P&L account for the reporting period.”

10. The ITAT has relied on Woodward Governor India (P) Ltd. (supra) in its impugned judgment and order dated 12-9-2022, which is now assailed in this appeal. Besides, in similar circumstances, and relying upon Woodward Governor India (P) Ltd. (supra), the coordinate Bench of this Court in the case of M/s Vinergy International Pvt. Ltd. (supra) refused to admit the appeal under section 260-A of the Income Tax Act, 1961 in which similar questions were urged for consideration.

11. For the above reasons, we decline to admit this appeal because, in our judgment, it does not involve any substantial questions of law. In any case, the questions raised stand answered against the Revenue in the decisions of Woodward Governor India (P) Ltd. (supra) and M/s. Vinergy International Pvt. Ltd. (supra).

12. Accordingly, this appeal is dismissed. There shall be no order for costs.