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.
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.