Princewaterhousecoopers Pvt. Ltd., Kolkata V. JCIT (OSD-CIT-I), KOLKATA, Kolkata

ITA 1156/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9139 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 23-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BIKASH KR JA
• Assessee Lawyers: T VARKE JUDICIAL MEMBER
• Section: 143(3); 37(1); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI ABY.T VARKE, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 1156 / KOL / 2014 ASSESSMENT YEAR :2008-09 PRICEWATERHOUSECOOPRS PVT. LTD. Y-14, BLOCK EP & GP, SECTOR-V, SALT LAKE, KOKATA-700 091 [ PAN NO.AABCP 9181 H ] V/S . JCIT (OSD-CIT-I), CIRCLE-2, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI K.M. GUPTA, ADVOCATE & SHRI BIKASH KR. JAIN, AR /BY RESPONDENT SHRI NIRAJ KUMAR, CIT-DR /DATE OF HEARING 31-01-2017 /DATE OF PRONOUNCEMENT 17-03-2017 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-XX, KOLKATA DA TED 27.02.2014. ASSESSMENT WAS FRAMED BY JCIT(OSD), CIT-1 KOLKATA U /S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT) VIDE HIS ORDER DATED 29.12.2011 FOR ASSESSMENT YEAR 2008-09. ITA NO.1156/KOL/2014 A.Y 2008-09 PRICEWATERHOUSECOOPERS PVT. LTD. VS. JCIT (OSD-CIT-I), KOL. PAGE 2 SHRI K.M. GUPTA AND SHRI BIKASH KR. JAIN, LD. ADVOC ATE APPEARED ON BEHALF OF ASSESSEE AND SHRI NIRJ KUMAR, LD. DEPARTMENTAL REPR ESENTATIVE REPRESENTED ON BEHALF OF REVENUE. 2. IN THIS APPEAL VARIOUS GROUNDS HAVE BEEN RAISED OUT OF WHICH GROUNDS NO. 2 AND 3 ARE NOT PRESSED, THEREFORE SAME ARE DIS MISSED AS NOT PRESSED. GROUND NO. 4 IS OF GENERAL NATURE AND DOES NOT REQU IRE SEPARATE ADJUDICATION. THE OTHER GROUND IS AS UNDER:- 1(A) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [LD. CIT(A)], ERRED IN CONFIRMING THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF RS.8,46,64 ,000/- 1(B) THAT THE LD. CIT(A) ERRED BY CONFIRMING THE DI SALLOWANCE OF FOREIGN EXCHANGE LOSS AMOUNTING TO RS.8,46,64,000/- ARISING OUT OF RESTATEMENT OF ITS FOREIGN CURRENCY HEDGING CONTRACTS AS NOTIONAL, WIT HOUT APPRECIATING THE FACT THAT SUCH LOSS WAS RECOGNIZED ON ACCRUAL BASIS AND MEASURED AS PER WELL ACCEPTED ACCOUNTING POLICY, BEING CONSISTENTLY FOLL OWED BY THE APPELLANT. 1(C). THAT THE LD. CIT(A) FAILED TO APPRECIATE THA T SUCH FOREIGN EXCHANGE LOSS ARISING OUT OF RE-STAT OF YEAR-END BALANCE IS ALLOW ABLE UNDER SECTION 37(1) READ WITH SECTION 145 OF THE INCOME TAX ACT 1961 (ACT) 1(D) THAT THE ACTION OF THE LD. CIT(A) IS IN DEFIAN CE OF SETTLED PRINCIPLES LAID DOWN BY THE APEX COURT. 3. ONLY ISSUE RAISED BY ASSESSEE IN THIS APPEAL IS THAT LD. CIT(A) ERRED IN CONFIRMING THE ORDER OF ASSESSING OFFICER BY SUSTAI NING THE DISALLOWANCE OF 8,46,64,000/- ON ACCOUNT OF FOREIGN EXCHANGE LOSS D UE TO FLUCTUATION. 4. BRIEFLY, THE FACTS OF THE CASE ARE THAT ASSESSEE IN THE PRESENT CASE IS A PRIVATE LIMITED COMPANY AND IS ENGAGED IN CONSULTAN CY BUSINESS. THE ASSESSEE IN ITS COMPUTATION OF INCOME HAS CLAIMED L OSS OF 8,46,64,000/- ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION. THE IMPUG NED AFORESAID LOSS WAS REPRESENTING THE FEES RECEIVABLE IN FOREIGN CURRENC Y. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AO OBSERVED THAT FEES RECEI VABLE IN FOREIGN EXCHANGE HAVE BEEN DULY HEDGED BY WAY OF TAKING FOR WARD CONTRACT. THEREFORE, SUCH LOSS CLAIMED BY ASSESSEE IS A NOTIO NAL LOSS AND CONTINGENT IN NATURE. ACCORDINGLY, AO TREATED THE SAME AS NOTIONA L LOSS AFTER HAVING ITA NO.1156/KOL/2014 A.Y 2008-09 PRICEWATERHOUSECOOPERS PVT. LTD. VS. JCIT (OSD-CIT-I), KOL. PAGE 3 RELIANCE ON CBDT INSTRUCTION NO. 3 OF 2010 DATED AN D ADDED THE SAME TO THE TOTAL INCOME OF ASSESSEE. 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D. CIT(A). THE ASSESSEE BEFORE LD. CIT(A) SUBMITTED THAT IT HAS BE EN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING ON REGULAR BASIS AND ACCORDING LY THE IMPUGNED LOSS WAS RECOGNIZED IN ITS BOOKS OF ACCOUNT WHICH IS DEDUCTA BLE U/S. 37(1) OF THE ACT. THE ASSESSEE FURTHER SUBMITTED THAT THE IMPUGNED LO SS WAS RECOGNIZED IN THE BOOKS OF ACCOUNT IN PURSUANCE OF PROVISION OF ACCOU NTING STANDARD-11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA. AS PER AS-11, IT IS COMPULSORY TO GIVE EFFECT TO THE FOREIGN CURRENCY T RANSACTIONS AS PER THE FOREIGN EXCHANGE RATES AS ON THE BALANCE-SHEET DATE . THE ASSESSEE ALTERNATIVELY SUBMITTED BEFORE LD. CIT(A) IF SUCH L OSS IS NOT ALLOWABLE ON ACCRUAL BASIS THEN THE EFFECT OF SUCH LOSS ARISING IN SUBSEQUENT YEAR ON MATURITY OF CONTRACTS SHOULD BE ALLOWED. HOWEVER, L D. CIT(A) CONFIRMED THE ORDER OF AO BY OBSERVING AS UNDER:- 4- GROUND NO. (I)(A) TO (I)(C) RELATE TO CONTENTION OF THE APPELLANT AGAINST DISALLOWANCE OF RS.8,46,64,000/- WHICH WAS CLAIMED BY THE APPELLANT TOWARDS LOSS ON FOREIGN EXCHANGE. THE FACT OF THE CASE IS T HAT THERE WAS A LOSS OF RS.8,46,64,000/- TO THE APPELLANT IN RESPECT OF LOS S OF FOREIGN EXCHANGE. THE APPELLANT HAD ENTERED INTO FOREIGN CURRENCY DERIVAT IVES WITH THE OBJECTIVE OF HEDGING ITS FOREIGN CURRENCY EXPOSURES. ON GOING TH ROUGH THE VARIOUS AGREEMENTS UNDERTAKEN BY THE APPELLANT WITH THE BAN KS FOR HEDGING ITS FOREIGN EXCHANGE EXPOSURE, THE BANKS CERTIFIED THE NET MARK TO MARKET LOSS OF RS.846,64 LAKSH. SINCE, THE LOSS WAS A NOTIONAL LOS S AS NO SALE OF GOODS/SETTLEMENT OF CONTRACT HAD BEEN TAKEN PLACE. BEING NOTIONAL LOSS/CONTINGENT LIABILITY, THE AO DISALLOWED THE AP ES CLAIM. THOUGH THE APPELLANT CLAIMED THAT THE LOSS WAS CLAIMED AS PER THEIR SYSTEM OF ACCOUNTING CONSISTENTLY WAS BEING FOLLOWED BY THEM AND THE LOS S WAS CERTIFIED BY THE BANKS, THE LOSS AROSE DUE TO FALL IN THE PRICE BELO W ITS COST. AFTER GOING THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE, I FIND THA T THE LIABILITY WAS YET TO BE ASCERTAINED, THE CLAIM / CERTIFICATE FROM THE BANK WAS ON NOTIONAL BASIS AND NOT ON ASCERTAINED/ACTUAL BASIS. THEREFORE, BEING C ONTINGENT / NOTIONAL LIABILITY, THE AO WAS JUSTIFIED TO DISALLOW THE CLAIM OF THE A PPELLANT. HOWEVER, THE ALTERNATIVE PLEA OF THE APPELLANT IS THAT THE LOSS SHOULD BE ALLOWED I THE YEAR OF CONCLUSION OF THE LIABILITY OR IN THE YEAR OF MATUR ITY. I FIND MERIT IN THE ALTERNATIVE SUBMISSION. THEREFORE, THE AO IS DIRECT ED TO ALLOW THE LOSS IN THE YEAR IN WHICH THE SAME BECOMES ASCERTAINED. BEING AGGRIEVED BY THIS, ASSESSEE CAME IN SECOND AP PEAL BEFORE US. ITA NO.1156/KOL/2014 A.Y 2008-09 PRICEWATERHOUSECOOPERS PVT. LTD. VS. JCIT (OSD-CIT-I), KOL. PAGE 4 6. BEFORE US LD. AR FOR THE ASSESSEE FILED PAPER BO OK WHICH IS RUNNING PAGES FROM 1 TO 96 AND SUBMITTED THAT THE IMPUGNED LOSS WAS RECOGNIZED IN THE BOOKS AS PER ACCOUNTING STANDARD 11 ISSUED BY T HE ICAI. THE LD. AR ALSO RELIED IN THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD REPORTED IN 312 ITR 254 (SC) AND IN THE ORDER OF HONBLE ITAT IN THE CASE OF DCIT VS. ASIAN TEA & EXPORTS LTD. IN ITA NO. 1241/KOL/2013 . THE LD. AR ALSO SUBMITTED THE BANKERS CERTIFICAT E IN RESPECT TO THE LOSSES INCURRED BY THE ASSESSEE WHICH ARE PLACE D ON PAGES 7 TO 13 OF THE PAPER BOOK. ON THE OTHER HAND, LD. DR SUBMITTED THAT THE CBDT H AS ISSUED INSTRUCTION NO. 3/2010 DATED 23.3.2010 WHICH IS BINDING ON INCOME T AX AUTHORITIES. THE LD. DR FURTHER SUBMITTED THAT THE HONBLE APEX COURT PA SSED THE JUDGMENT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA) DATED 8 TH APRIL 2009. THUS, IT IS CLEAR THAT THE SAID INSTRUCTION WAS ISSUED SU BSEQUENT TO THE DATE OF HONBLE APEX COURT JUDGMENT AND SO THE SAID INSTRUC TION WAS NOT CONSIDERED BY THE HONBLE APEX COURT AND OTHER COURTS. THE LD. DR VEHEMENTLY RELIED ON THE ORDER OF AUTHORITIES BELOW. 7. WE HAVE HEARD RIVAL CONTENTIONS OF BOTH THE PART IES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE ASSESSEE-COMPANY HAD DEBITED TO ITS PROFIT AND LOSS ACCOUNT CERTAIN UNREALIZED LOSS DUE TO FOR EIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTION ON REVENUE ITEMS, ON T HE LAST DATE OF THE ACCOUNTING YEAR. THE ASSESSING OFFICER HELD THAT TH E LIABILITY AS ON THE LAST DATE OF THE PREVIOUS YEAR UNDER CONSIDERATION WAS N OT AN ASCERTAINED LIABILITY, BUT A CONTINGENT LIABILITY AND, CONSEQUENTLY, IT HA D TO BE ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL, THE COMMISSIONER (APPEALS) CONFIRMED THE ORDER AO. THE FACTS IN THE INSTANT CASE ARE UNDISPUTED THAT T HAT THE INSTANT LOSS IS ARISING IN RESPECT TO THE FORWARD CONTRACTS WHICH HAD NOT E XPIRED ON THE LAST DAY OF THE ACCOUNTING YEAR. IT IS ALSO NOT DISPUTED THAT THE A SSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING WHICH REQUIRES TO A CCOUNT FOR ALL THE ITA NO.1156/KOL/2014 A.Y 2008-09 PRICEWATERHOUSECOOPERS PVT. LTD. VS. JCIT (OSD-CIT-I), KOL. PAGE 5 EXPENSES IN THE PROFIT AND LOSS ACCOUNT ON ACCRUAL BASIS. ACCORDINGLY, THE ASSESSEE HAS CLAIMED THE LOSSES ON THE BASIS OF MER CANTILE SYSTEM OF ACCOUNTING. THUS, IN OUR CONSIDERED VIEW THE ASSESS EE IS VERY MUCH ELIGIBLE FOR THE DEDUCTION OF THE IMPUGNED LOSS. IN THIS CON NECTION, WE FIND SUPPORT AND GUIDANCE FROM THE JUDGMENT OF THE HONBLE SUPREME C OURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA) WHEREIN IT WAS HELD AS UNDER:- IT IS IMPORTANT TO NOTE THAT FOREIGN CURRENCY NOTES , BALANCE IN BANK ACCOUNTS DENOMINATED IN A FOREIGN CURRENCY, AND RECEIVABLES/ PAYABLES AND LOANS DENOMINATED IN A FOREIGN CURRENCY AS WELL AS SUNDRY CREDITORS ARE ALL MONETARY ITEMS WHICH HAVE TO BE VALUED AT THE CLOSI NG RATE UNDER AS-11. UNDER PARA 5, A TRANSACTION IN A FOREIGN CURRENCY H AS TO BE RECORDED IN THE REPORTING CURRENCY BY APPLYING TO THE FOREIGN CURRE NCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. THIS IS KNOWN AS RECORDING OF TRAN SACTION ON INITIAL RECOGNITION. PARA 7 OF AS-11 DEALS WITH REPORTING O F THE EFFECTS OF CHANGES IN EXCHANGE RATES SUBSEQUENT TO INITIAL RECOGNITION. P ARA 7(A) INTER ALIA STATES THAT ON EACH BALANCE SHEET DATE MONETARY ITEMS, ENU MERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPORTE D USING THE CLOSING RATE. IN CASE OF REVENUE ITEMS FALLING UNDER S. 37(1), PA RA 9 OF AS-11 WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THAT PARA, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRE NCY 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 INC URRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TOPIC FALLS UNDER S. 43A. PARA 9 OF AS-11 RECOGNISES EXCHANGE DIFFERENCES AS INCOME OR EXPENS E. 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 THA T AS-11 STIPULATES EFFECT OF CHANGES IN EXCHANGE RATE VIS-A-VIS MONETARY ITEMS D ENOMINATED IN A FOREIGN CURRENCY TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUN TING 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 RECOGNIZED IN THE P&L ACCOUNT FOR T HE REPORTING PERIOD. CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. & ORS. (2007) 210 CTR (DEL) 354 AFFIRMED. THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COU RT ARE EXACTLY IDENTICAL TO THE FACTS OF THE INSTANT CASE. THEREFORE THE LOSSES WHICH ARE ARISING DUE TO THE FOREIGN EXCHANGE FLUCTUATION SHOULD BE ACCOUNTED FO R IN THE BOOKS OF ACCOUNTS AND ACCORDINGLY THE ASSESSEE IS ELIGIBLE TO CLAIM T HE DEDUCTION OF SUCH LOSSES. THE ARGUMENT OF THE LD. DR THAT THE INSTRUCTION ISS UED BY THE CBDT HAS NOT ITA NO.1156/KOL/2014 A.Y 2008-09 PRICEWATERHOUSECOOPERS PVT. LTD. VS. JCIT (OSD-CIT-I), KOL. PAGE 6 BEEN CONSIDERED BY THE HONBLE APEX COURT BECAUSE I T CAME SUBSEQUENT TO THE VERDICT OF HONBLE APEX COURT IS NOT TENABLE. I T IS BECAUSE THE INSTRUCTIONS ISSUED BY THE CBDT ARE NOT BINDING ON THE COURTS AN D WHETHER THESE ARE ISSUED EARLIER OR SUBSEQUENTLY TO THE VERDICT DO NO T MATTER. IN VIEW OF THE ABOVE WE HAVE NO HESITATION TO REVERSE THE ORDER OF AUTHORITIES BELOW. HENCE THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 8. IN THE RESULT, ASSESSEES APPEAL STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 17 /03/2017 SD/- SD/- (ABY. T. VARKE) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP !- 17 / 03 /201 7 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-PRICEWATERHOUSECOOPERS PVT.LTD., Y-14, B LOCK EP & GP, SECTOR-V SALT LAKE, KOLKA TA-700 091 2. /RESPONDENT-JCIT (OSD-CIT-I), CIRCLE-2, P-7 CHOWRIN GHEE SQUARE, KOL-69 3. ) *+ , , - / CONCERNED CIT KOLKATA 4. , , -- / CIT (A) KOLKATA 5. 012 33*+, , *+ , / DR, ITAT, KOLKATA 6. 267 89 / GUARD FILE. BY ORDER/ , , /TRUE COPY/ / , *+ ,