The DCIT, Circle-8, Ahmedabad V. M/s. Shree Swati Texdyes Pvt. Ltd., Ahmedabad

ITA 2016/AHD/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6209 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 29-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: A C SHAH HEARING CONCLUDED ON
• Keywords: Business income; Depreciation; Cost of acquisition; Speculation loss; Capital expenditure
• Section: 37(1); 43(5); 145; 37; 56; 28

Judgement Text

ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND S S GODARA JM] ITA NO. 2016 /AHD/201 3 ASSESSMENT Y EAR : 20 10 - 11 DY. COMMISSIONER OF INCOME TAX, CIRCLE 8 , AHMEDABAD. ... ...... APPELLA NT VS. SHREE SWATI TEXDYES PVT. LTD. .RESPONDENT 134 - A, PHASE - I, GIDC INDUSTRIAL ESTATE, NARODA, AHMEDABAD. [PAN: AA CCS 0297 C ] APPEARANCES BY JAMES KURIAN FOR THE A PPELLANT A.C. SHAH FOR THE R E SPONDENT HEARING CONCLUDED ON: 1 3 .0 1.2017 ORDER PRONOUNCED ON : 11 . 0 4 .2017 O R D E R PER PRAMOD KUMAR , AM: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CALLED INTO QUESTION CORRECTNESS OF THE ORDER DATED 2 7 . 05 .201 3 PASSED BY THE LEARNED CIT(A) , IN THE MATTER OF AS SESSMENT UNDER SECTION 143( 3 ) OF THE I NCOME TAX ACT 1961, FOR THE ASSESSMENT YEAR 20 10 - 11 . 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) - XIV, AHMEDABAD HAS ER RED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.4,20,000/ - MADE ON ACCOUNT OF FORWARD BOOKING LOSS TREATED AS SPECULATION LOSS. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING, EXPORTING AND TRADING IN ALL TYPES OF REACTIVE DYES. D URING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE HAS SHOWN A FORWARD BOOKING LOSS OF RS 4,20,000. WHEN THIS MATTER WAS PROBED FURTHER, IT WAS NOTICED THAT THE SAID LOSS OCCURRED ON ACCOUNT OF FORWARD CONTRACTS FOR SALE OF FOREIGN EXCHANGE. WHILE THE DEAL WAS FOR SALE OF US$ @ RS 47.70 AND @ RS 47.10 RESPECTIVELY, DUE TO NEED OF FUNDS, THE ASSESSEE HAD TO SELL THE DOLLARS ON AN EARLIER DATE @ RS 46.53 AND @ RS 45.82 ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 2 OF 8 RESPECTIVELY. AS THIS FORWARD CONTRACT WAS SAID TO BE I N THE COURSE OF ASSESSEE S BUSINESS, AND IN RESPECT OF HIS FOREIGN EXCHANGE DEALINGS, THE LOSS WAS CLAIMED AS A BUSINESS LOSS. THE ASSESSING OFFICER, HOWEVER, DID NOT AGREE. HE WAS OF THE CONSIDERED VIEW THAT SINCE THE CONTRACT WAS SETTLED, OTHERWISE THAN THROUGH DELIVERY, SECTION 43(5) WAS ATTRACTED, AND, ACCORDINGLY, LOSS WAS REQUIRED TO BE TREATED AS SPECULATIVE LOSS. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) HELD THAT THE TRANSACTIONS IN QUESTION WERE TO GUARD AG AINST FLUCTUATIONS IN FOREIGN EXCHANGE RATES AND WERE THUS INCIDENTAL TO THE BUSINESS. RELYING UPON HON BLE BOMBAY HIGH COURT DECISION IN THE CASE OF ITO VS BH DR I DAS GAURIDU PVT LTD [(2003 ) 261 ITR 256 (BOM)] AND A COORDINATE BENCH DECISION IN THE CASE OF DCIT VS BOMBAY DIAMOND CO LTD [(2010) 33 DTR 59 (MUM)] , LEARNED CIT(A) UPHELD THE PLEA OF THE ASSESSEE, AND HELD THE LOSS TO BE A BUSINESS LOSS AND DEDUCTIBLE UNDER SECTION 37(1). THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US. 4. WE HAVE H EARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 5. WE HAVE NOTICED THAT, AS EVIDENT FROM A PLAIN READING OF THE ASSESSMENT ORDER, THE SHORT CASE OF THE ASSESS ING OFFICER IS THAT SINCE THE TRANSACTION LEADING TO THE IMPUGNED LOSS IS A SPECULATIVE TRANSACTION, UNDER SECTION 43(5) OF THE ACT, THE LOSS INCURRED ON THE TRANSACTION IS REQUIRED TO BE TREATED AS LOSS FROM SPECULATIVE BUSINESS WHICH CANNOT BE SET OFF AG AINST INCOME OF THE ASSESSE UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AND PROFESSION . HOWEVER, IN OUR CONSIDERED VIEW, THIS APPROACH ITSELF PROCEEDS ON THE FALLACY THAT EVERY LOSS, IN THE COURSE OF OR DUE TO A SPECULATIVE TRANSACTION, IS TO BE TREAT ED AS LOSS OF THE SPECULATIVE BUSINESS. EXPLANATION 2 TO SECTION 28 STATES, WHERE SPECULATIVE TRANSACTIONS CARRIED ON BY AN ASSESSEE ARE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS, THE BUSINESS (HEREINAFTER REFERR ED TO AS 'SPECULATION BUSINESS' SHALL BE DEEMED TO BE DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS , WHICH IMPLIES IT IS ONLY WHEN SPECULATIVE TRANSACTIONS ARE OF SUCH A NATURE AS TO CONSTITUTE BUSINESS ON STANDALONE BASIS, THE INCOME AND LOSSES FROM SUCH TRANSACTIONS IS REQUIRED TO BE TREATED AS DISTINCT AND SEPARATE FROM ANY OTHER NORMAL BUSINESS . IN OTHER WORDS, EVEN SPECULATIVE TRANSACTION S , AS LONG AS SUCH TRANSACTIONS ARE INCIDENTAL TO THE MAIN BUSINESS OF THE ASSESSEE, CANNOT RESULT IN THE PROFITS OR LOSSES FROM SUCH TRANSACTIONS BEING T REATED SEPARATELY AS THAT OF A SPECULATION BUSINESS AND THUS MAKING THEM INELIGIBLE FOR BEING SET OFF AGAINST NORMAL BUSINESS PROFITS AND LOSSES. NOTHING REALLY, THEREFORE, TURNS ON A TRANSACTION BEING SETTLED, OTHERWISE THAN THROUGH DELIVERY, AS LONG AS S UCH A TRANSACTION HAS STANDALONE CHARACTER ISOLATED FROM THE MAIN ACTIVITIES OF BUSINESS. FOR THIS SHORT REASON ALONE, THE ACTION OF THE ASSESSING OFFICER MUST BE HELD TO BE UNSUSTAINABLE IN LAW. IN ANY EVENT, THERE IS A CATEGORICAL FINDING BY THE CIT(A) THAT THE TRANSACTIONS IN QUESTION WERE INTEGRAL TO THE BUSINESS AND THAT THE LOSS ON SUCH TRANSACTIONS IS ADMISSIBLE AS DEDUCTION UNDER SECTION 37(1). THERE IS A CATEGORICAL FINDING BY THE CIT(A) THAT T HE TRANSACTIONS WERE ENTERED INTO TO SAFEGUARD LEGITIM ATE BUSINESS INTERESTS OF THE ASSESSEE IN RESPECT OF ITS FOREIGN EXCHANGE TRANSACTIONS. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PERUSED THE MATERIAL ON ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 3 OF 8 RECORD, WE APPROVE THESE W ELL REASONED FINDINGS OF THE FIRST APPELLATE AUTHORITY, AND, FOR THIS REASON ALSO, DECLINE TO INTERFERE IN THE MATTER. 6. GROUND NO. 1 IS THUS DISMISSED. 7. IN GROUND NO. 2, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) - XIV, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETIN G THE ADDITION OF RS.1,15,37,454/ - MADE ON ACCOUNT OF EEFC ACCOUNT, ON ACCOUNT OF FOREX LOSS CLAIMED BY ASSESSEE WHEN THESE WERE PROVED TO BE NOT PERTAINING TO IMPORT PAYABLE OR EXPORT RECEIVABLE. 8. THE ASSESSEE WAS MAINTAIN ING A US DOLLAR DENOMINATED BA NK ACCOUNT, IN THE NATURE OF EEFC (EXCHANGE EARNER S FOREIGN CURRENCY) ACCOUNT, WITH CITIBANK. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CREDITED FOREIGN EXCHANGE GAIN OF RS 43,94,762, AS ON 3 1 ST MARCH, THE ASSESSEE HAS ALSO DEBITED FOREIGN EXCHANGE LOSS OF RS 28,24,686 ON THE SAME DATE. WHEN THE MATTER WAS PROBED FURTHER, IT WAS EXPLAINED BY THE ASSESSEE THAT THE ASSESSEE MAINTAINS THE ABOVE ACCOUNT IN US DOLLARS, AND EVERY TIME A TRANSACTION TAKES PLACE, THE DIFFERENCE BETWEEN US DOLLAR RATE THEN PREVAILING AND THE RATE AT WHICH THE ACCOUNT WAS EARLIER CREDITED, IS TAKEN A FOREIGN EXCHANGE GAIN OR LOSS. AS ON THE YEAR END, SINCE AGAIN THE VALUE OF US DOLLAR BALANCE IS TO BE TAKEN IN THE BALANC E SHEET AT THE APPLICABLE CONVERSION RATE, THE LOSS OR GAIN BETWEEN THE AMOUNT SO COMPUTED VIS - - VIS THE AMOUNT ALREADY TAKEN TO BOOKS IS TAKEN AS FOREIGN EXCHANGE LOSS OR GAIN. THE ASSESSING OFFICER DID NOT AGREE WITH THE STAND OF THE ASSESSEE. HE WAS OF THE VIEW THAT THE CONTENTIONS OF THE ASSESSEE ARE FACTUALLY AS ALSO LEGALLY INCORRECT. HE NOTED THAT THE AMOUNT OF RS 43,94,762 IS NOT IN RESPECT OF DAY TO DAY TRANSACTIONS BUT AN YEAR END ENTRY BY CUMULATIVELY CONSIDERING ALL THE TRANSACTIONS IN EEFC ACC OUNT . AS FOR THE REFERENCES TO THE ACCOUNTING STANDARDS REFERRED TO BY THE ASSESSEE, THE AO WAS OF THE VIEW THAT THESE SUBMISSIONS ARE IRRELEVANT AS THE AMOUNTS ARE NOT DEDUCTIBLE UNDER THE INCOME TAX ACT. AS REGARDS HON BLE SUPREME COURT S JUDGMENT IN T HE CASE OF CIT VS WOODWARD GOVERNOR INDIA PVT LTD [(2009) 312 ITR 254 (SC)] , THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS DECISION DOES NOT APPLY TO THE FATS OF THE CASE. IT WAS HELD THAT NO DOUBT, FOREIGN EXCHANGE LOSS IN RESPECT OF IMPORT PAYABLE AND EXPORT RECEIVABLE IS AN ALLOWABLE EXPENDITURE BUT IN THE PRESENT CASE THE TRANSACTIONS ARE NOT IN RESPECT OF EXPORTS AND IMPORTS AND THEREFORE, THESE EXPENSES ARE CAPITAL IN NATURE . AS REGARDS THE ADJUSTMENT OF RS 28,24,686 IN RESPECT OF YEAR END BALA NCE, THE AO OBSERVED THAT THE LOSS OF RS 28,24,686 DOES NOT PERTAIN TO ANY DEPOSIT/ WITHDRAWAL IN THE EEFC ACCOUNT AND THEREFORE, THE ENTRY OF RS 28,24,686 IS A NOTIONAL ENTRY . THE AMOUNTS OF RS 87,12,768 AND RS 28,24,686 WERE THUS DISALLOWED. AGGRIEVE D, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO DELETED THESE DISALLOWANCES BY FOLLOWING HON BLE SUPREME COURT S DECISION IN THE CASE OF WOODWARD GOVERNOR (SUPRA). THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US. ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 4 OF 8 9. HAVING HEA RD THE RIVAL CONTENTIONS, AND HAVING PERUSAL THE MATERIAL ON RECORD, WE SEE NO REASONS TO INTERFERE IN THE CONCLUSIONS ARRIVED AT BY THE CIT(A). AS REGARDS THE AMOUNT OF RS 87,12,768 ALL IT REPRESENTS IS THE DIFFERENCE IN CONVERSION RATE, OF US DOLLARS IN TO INDIAN RUPEES, AT THE POINT OF TIME WHEN THE EEFC ACCOUNT WAS ORIGINALLY CREDITED VIS - - VIS THE POINT OF TIME WHEN SUBSEQUENT DEBIT ENTRY, OR VICE VERSA , IS MADE. AS A MATTER OF FACT , THESE ENTRIES , TRULY SPEAKING, DO NOT EVEN REPRESENT LOSSES BUT MEREL Y DEAL WITH CORRECTIONS IN THE CONVERSION RATE WITH RESPECT TO THE AMOUNTS UTILIZED FROM EEFC ACCOUNT. THESE CORRECTIONS ARE TO BE TAKEN INTO ACCOUNT IN COMPUTING THE CORRECT PROFITS AND LOSSES. BE THAT AS IT MAY, WHETHER THESE LOSSES ARE TREATED AS LOSSE S OR CORRECTIONS, THE EFFECT IS THE SAME - I.E. ACCOUNTING FOR FOREIGN EXCHANGE AT THE RIGHT RATES. QUITE INTERESTINGLY, SIMILAR ENTRIES RESULTING IN GAINS HAVE BEEN ACCEPTED BY THE ASSESSING OFFICER. THESE ENTRIES ARE ADMITTEDLY IN ACCORDANCE WITH THE ACCO UNTING STANDARDS WHICH ARE BINDING ON THE ASSESSEE. THE METHOD OF ACCOUNTING HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE, IT IS FAIR AND REASONABLE, AND, AS A RESULT OF THE LOSSES SO BOOKED, THE ACCOUNTS OF THE ASSESSEE SHOW TRUE AND FAIR PICTURE OF THE TRANSACTIONS. IT IS ALSO NOTED THAT SIMILAR APPROACH, WHEN IT RESULTED IN NET GAINS IN SUBSEQUENT ASSESSMENT YEARS I.E. 2011 - 12 AND 2012 - 13, WAS ACCEPTED BY THE REVENUE AUTHORITIES. IN THE LIGHT OF WOODWARD GOVERNOR DECISION (SUPRA) OF HON BLE SUPREME COU RT, AS THE CIT(A) CORRECTLY CONCLUDES, THE FOREIGN EXCHANGE LOSS WAS INDEED ADMISSIBLE. AS REGARDS THE LOSS OF RS 28,24,686 IN RESPECT OF US DOLLAR BALANCE IN THE EEFC ACCOUNT, IF THESE US DOLLARS ARE CREDITED IN THE BOOKS OF ACCOUNTS AT X VALUE, WHEREAS THE PRESENT VALUE IS LOWER AMOUNT OF Y , THE LOSS TO THE EXTENT OF X - Y IS REQUIRED TO BE ACCOUNTED FOR DUE TO LOWER REALIZABLE VALUE OF THESE FOREIGN EXCHANGE BALANCE. IT IS ONE OF THE MOST FUNDAMENTAL PRINCIPLES OF ACCOUNTING THAT WHILE ALL ANTICIPATED L OSSES ARE TAKEN INTO ACCOUNT IN COMPUTING THE PROFITS AND LOSSES OF BUSINESS, EVEN THOUGH SUCH LOSSES MAY NOT HAVE CRYSTALLIZED, AS LONG AS THESE LOSSES CAN BE REASONABLY QUANTIFIED. THIS APPROACH CAN BE CONTRASTED WITH THE ANTICIPATED PROFITS BEING IGNORE D, IN THE COMPUTATION OF PROFITS AND LOSSES OF AN ENTERPRISE, UNLESS THE PROFITS ARE ACTUALLY REALIZED. TO THAT EXTENT, THERE IS A DICHOTOMY IN ACCOUNTING APPROACH BUT THEN THIS IS WHAT IS THE SOUND ACCOUNTING POLICY AND IT HAS THE SANCTION OF LAW. AS A MA TTER OF FACT, IT IS THIS PRINCIPLE, AS RECOGNIZED BY HON BLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATRAM VS CIT [(1953) 24 ITR 481 (SC)], 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 TRE ATING THE LOSS ON FOREIGN EXCHANGE AS A NOTIONAL LOSS NOT DEDUCTIBLE IN COMPUTATION OF BUSINESS INCOME. LEARNED CIT(A) RIGHTLY REVERSED THE ACTION OF THE ASSESSING OFFICER IN THIS REGARD. 10 . IN THE CASE OF WOODWARD GOVERNOR (SUPRA), THE ISSUE REGARDING DEDUCTIBILITY OF FOREIGN EXCHANGE LOSS CAME UP FOR CONSIDERATION BEFORE HON BLE SUPREME COURT. THEIR LORDSHIPS, DEALING WITH THIS ISSUE AND HOLDING THAT SUCH A LOSS WILL BE DEDUCTIBLE IN COMPUTATION OF BUSINESS PROFITS, OBSERVED AS FOLLOWS: .IT IS CLE AR THAT PROFITS AND GAINS OF THE PREVIOUS YEAR ARE REQUIRED TO BE COMPUTED IN ACCORDANCE WITH THE RELEVANT ACCOUNTING STANDARD. IT IS IMPORTANT TO BEAR IN MIND THAT THE BASIS ON WHICH STOCK - IN - TRADE IS VALUED IS PART OF THE METHOD OF ACCOUNTING. IT IS WELL ESTABLISHED, THAT, ON GENERAL PRINCIPLES OF COMMERCIAL ACCOUNTING, IN THE P&L ACCOUNT, THE VALUES OF THE STOCK - IN - TRADE AT THE BEGINNING AND AT THE END OF THE ACCOUNTING YEAR SHOULD BE ENTERED AT COST OR MARKET VALUE, ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 5 OF 8 WHICHEVER IS LOWER - THE MARKET VALUE BEING ASCERTAINED AS ON THE LAST DATE OF THE ACCOUNTING YEAR AND NOT AS ON ANY INTERMEDIATE DATE BETWEEN THE COMMENCEMENT AND THE CLOSING OF THE YEAR, FAILING WHICH IT WOULD NOT BE POSSIBLE TO ASCERTAIN THE TRUE AND CORRECT STATE OF AFFAIRS. NO GAIN OR PRO FIT CAN ARISE UNTIL A BALANCE IS STRUCK BETWEEN THE COST OF ACQUISITION AND THE PROCEEDS OF SALE. THE WORD 'PROFIT' IMPLIES A COMPARISON BETWEEN THE STATE OF BUSINESS AT TWO SPECIFIC DATES, USUALLY SEPARATED BY AN INTERVAL OF TWELVE MONTHS. STOCK - IN - TRADE IS AN ASSET. IT IS A TRADING ASSET. THEREFORE, THE CONCEPT OF PROFIT AND GAINS MADE BY BUSINESS DURING THE YEAR CAN ONLY MATERIALIZE WHEN A COMPARISON OF THE ASSETS OF THE BUSINESS AT TWO DIFFERENT DATES IS TAKEN INTO ACCOUNT. SEC. 145(1) ENACTS THAT FOR T HE PURPOSE OF S. 28 AND S. 56 ALONE, INCOME, PROFITS AND GAINS MUST BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. IN THIS CASE, WE ARE CONCERNED WITH S. 28. THEREFORE, S. 145(1) IS ATTRACTED TO THE FACTS OF THE PRESENT CASE. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, WHAT IS DUE IS BROUGHT INTO CREDIT BEFORE IT IS ACTUALLY 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 VS. 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 COM ES 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 C ONCLUSION 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 EXCHANGE DIFFERENCES. UNDER PARA 2, REPORTING CURRENCY IS DEFINED TO MEAN THE CURRENCY USED IN PRESENTING THE FINANCIAL STATEMENTS. SIMILARLY, THE WORDS 'MONETARY ITEMS' ARE DEFINED TO MEAN MONEY HELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS, E.G., CASH, RECEIVABLES AND PAYABLES. THE WORD 'PAID' IS DEFINED UNDER S. 43(2). THIS HAS BEEN DISCUSSED EARLIER. SIMILARLY, 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 CLOSING RATE UNDER AS - 11. UNDER PARA 5, A TRANSACTION IN A FOREIGN CURRENCY HAS TO BE RECORDED IN THE REPORTING CURRENCY BY APPLYING TO THE FOREIGN CURRENCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. THIS IS KNOWN AS RECORDING OF TRANSACTION ON INITIAL RECOGNITION. PA RA 7 OF AS - 11 DEALS WITH REPORTING OF THE EFFECTS OF CHANGES IN EXCHANGE RATES SUBSEQUENT TO INITIAL RECOGNITION. PARA 7(A) INTER ALIA STATES THAT ON EACH BALANCE SHEET DATE MONETARY ITEMS, ENUMERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPO RTED USING THE CLOSING RATE. IN CASE OF REVENUE ITEMS FALLING UNDER S. 37(1), PARA 9 OF AS - 11 WHICH DEALS WITH RECOGNITION OF ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 6 OF 8 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 FA LLS UNDER S. 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 RUP EE, 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 T HE 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, SHOUL D 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 RS. 29,49,0 88 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 DEPARTME NT. 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. PROFITS AND GAINS OF BUSINESS OR PROFESSION THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME - TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', (I) THE PROFITS AND GAINS OF ANY BUSINESS OR PROFESSION WHICH WAS CARRI ED ON BY THE ASSESSEE AT ANY TIME DURING THE PREVIOUS YEAR.' 'SEC. 29. INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION, HOW COMPUTED THE INCOME REFERRED TO IN S. 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SS. 30 TO 43D.' 'SEC. 37. GENERAL (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SS. 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF T HE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION. ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 7 OF 8 EXPLANATION : FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.' 'SEC. 145. METHOD OF ACCOUNTING (1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL, SUBJECT TO THE PROVISIONS OF SUB - S. (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED B Y THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE AO IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB - S. (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB - S. (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE AO MAY MAKE AN ASSESSMENT IN THE MANNER PROV IDED IN S. 144.' 13. AS STATED ABOVE, ONE OF THE MAIN ARGUMENTS ADVANCED BY THE LEARNED ADDL. SOLICITOR GENERAL ON BEHALF OF THE DEPARTMENT BEFORE US WAS THAT THE WORD 'EXPENDITURE' IN S. 37(1) CONNOTES 'WHAT IS PAID OUT' AND THAT WHICH HAS GONE IRRETRIEV ABLY. IN THIS CONNECTION, HEAVY RELIANCE WAS PLACED ON THE JUDGMENT OF THIS COURT IN THE 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 WA S 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 EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SS. 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINE SS'. IN SS. 30 TO 36, THE EXPRESSIONS 'EXPENSES INCURRED' AS WELL AS 'ALLOWANCES AND DEPRECIATION' HAS ALSO BEEN USED. FOR EXAMPLE, DEPRECIATION AND ALLOWANCES ARE DEALT WITH IN S. 32. THEREFORE, PARLIAMENT HAS USED THE EXPRESSION 'ANY EXPENDITURE' IN S. 3 7 TO COVER BOTH. THEREFORE, THE EXPRESSION 'EXPENDITURE' AS USED IN S. 37 MAY, IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVER AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. ITA NO. 2016 / AHD/201 3 ASSESSMENT Y EAR: 20 10 - 11 PAGE 8 OF 8 15. FOR THE RE ASONS GIVEN HEREINABOVE, WE HOLD THAT, IN THE PRESENT CASE, THE 'LOSS' SUFFERED BY THE ASSESSEE ON ACCOUNT OF THE EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE UNDER S. 37(1) OF THE 1961 ACT 11 . IN THE PRESENT CASE ALS O, THE ASSESSEE IS CONSISTENTLY FOLLOWING THE MERCANTILE METHOD OF ACCOUNTING, THE SAME ACCOUNTING TREATMENT FOR THE FOREIGN EXCHANGE LOSSES AND GAINS HAS BEEN GIVEN BY THE ASSESSEE ALL ALONG, THE ASSESSE IS MAKING ENTRIES IN RESPECT OF SUCH LOSSES AND GAI NS, AND THE TREATMENT IS CONSISTENT WITH THE ACCOUNTING STANDARDS. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 12. GROUND NO. 2 IS THUS DISMISSED. 13. GROUND NOS. 3 AND 4 ARE GENERAL IN NATURE AND DO NOT CALL FOR ANY SPECIFIC ADJUDICATION. 14. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 11 TH DAY OF APRIL , 2017 . SD/ - SD/ - S S GODARA PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: 11 TH DAY OF APRIL , 201 7 . PBN/* COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FI LE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD