The ACIT, Amritsar. V. M/s. Pleasant Time Industries, Amritsar.

ITA 359/ASR/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5833 (ITAT-AMRITSAR)
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 29-07-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 12-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANJEEV MEHRA
• Keywords: Capital asset; Business expenditure; Rule of consistency
• Section: 80HHC; 37(1); 143(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR. BEFORE SH. H.L. KARWA, VICE PRESIDENT AND SH. MEHAR SINGH, ACCOUNTANT MEMBER I.T.A. NO. 359ASR)/2010 ASSESSMENT YEAR: 2004-05 PAN :AABFP1269R THE ASSTT. COMMR. OF INCOME-TAX, VS. M/S. PLEASANT TIME INDUSTRIES, CIRCLE V, AMRITSAR. 16, THE MALL, AMRITSAR. (APPELLANT) (RESPONDENT) DEPARTMENT BY: SH. TARSEM LAL, DR ASSESSEE BY: SH. SANJEEV MEHRA, CA ORDER PER MEHAR SINGH, AM, THE PRESENT APPEAL FILED BY THE REVENUE IS DIRECTE D AGAINST THE ORDER OF THE CIT(A), AMRITSAR, DATED 26.05.2010, PASSED U NDER SECTION 250(6) OF THE INCOME-TAX ACT, 1961 ( HEREINAFTER REFERRED TO IN SHORT THE ACT), FOR THE ASSESSMENT YEAR 2004-05. 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL: I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE THE ORDER OF THE LD. CIT(A) IS BAD IN LAW. II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.8,25,000/- MADE BY THE A.O. ON ACCOUNT OF DISALLOWANCE OF EXCHANGE FLUCTUATION LOSS BOOKED BY THE ASSESSEE ON REVALUATION OF DEBTORS. III) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE LOSS SUFFE RED BY THE ASSESSEE ON REVALUATION OF DEBTORS ON ACCOUNT O F 2 EXCHANGE RATE DIFFERENCE AS ON THE DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABLE U/S 37(1) OF TH E ACT. IV) THAT THE ORDER OF THE LD. CIT(A) BE VACATED AND THA T OF THE A.O. BE RESTORED. V) APPELLANT CRAVES LEAVE TO AMEND OR ADD ANY OR MORE GROUNDS OF APPEAL. 3. THE BRIEF AND NEAT FACTS OF THE CASE, AS CULLED OUT, FROM THE RELEVANT RECORDS, ARE THAT THE ASSESSEE IS ENGAGED IN THE BU SINESS OF MANUFACTURE AND EXPORT OF CHESS AND OTHER BOARD GAMES. THE ENTIRE P RODUCTION IS EXPORTED OUT OF INDIA. GOODS ARE EXPORTED TO FOREIGN COUNTRIES AND THE SALE INVOICES ARE RAISED IN FOREIGN CURRENCY. THE RETURN OF INCOME DE CLARING INCOME OF RS.13,23,360/- WAS FILED ON 01.11.2004 ENCLOSING TH EREWITH THE AUDIT REPORT AS REQUIRED UNDER SECTION 44AB AND REPORT IN FORM N O.10CCAC. THE RETURN WAS PROCESSED U/S 143(1) OF THE ACT ON 04.02.2005. THEREAFTER THE CASE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESS MENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAD CLAIMED LOSS OF RS.8 ,25,000/- ON ACCOUNT OF EXCHANGE RATE FLUCTUATION ON REVALUATION OF DEBTORS AND RS.6,01,636/- ON SALES REALIZATION. THE AO HELD THAT WHILE THE EXCHA NGE RATE DIFFERENCE IN CASE OF REVENUE ACCOUNTS WAS DEDUCTIBLE EXPENDITURE AS PER VARIOUS CASE LAWS DECIDED BY THE COURTS, THE EXCHANGE RATE DIFFE RENCE ON REVALUATION OF DEBTORS ON NOTIONAL BASIS WAS NOT ALLOWABLE EVEN IF THE ACCOUNTS ARE KEPT IN MERCANTILE BASIS. THE AO RELIED ON THE DECISIONS IN THE CASES OF CIT VS. MOGUL LINE LTD.( 46 ITR 590) AND STATE BANK OF TRAV ANCORE ( 50 CTR 290 AND ALSO REFERRED TO THE AMENDMENTS IN SECTION 43A OF THE ACT W.E.F. 01.03.2003 IN WHICH THE INCREASE IN LIABILITY ON AC COUNT OF EXCHANGE RATE FLUCTUATION IS ALLOWED TO BE CONSIDERED AS INCREASE D COST OF CAPITAL ASSET ONLY WHEN THE INCREASE LIABILITY IS ACTUALLY PAID. THE A O WAS OF THE VIEWE THAT THOUGH THE AMENDMENT IN SECTION 43A IS APPLICABLE T O CAPITAL ASSETS, THE 3 SAME LOGIC APPLY TO THE TRADING ASSETS ALSO AND THE LOSS ON REVALUATION WAS ALLOWABLE ON ACTUAL REALIZATION OF PROCEEDS AND NOT ON ACCRUAL BASIS NOTIONALLY. THE AO DISALLOWED THE LOSS IN REVALUATI ON OF DEBTORS, DID NOT ALLOW THE ENHANCED CLAIM OF DEDUCTION U/S 80HHC ON THE PROFIT INCREASED BY THE ABOVE ADDITION AND ALSO DID NOT ACCEDE TO THE R EQUEST OF THE ASSESSEE FOR ALLOWING DEDUCTION U/S 80HHC ON THE EXPORT PROCEEDS REALIZED AFTER 31.10.2004. ON APPEAL, THE LD. CIT(A), DELETED THE DISALLOWANCE OF EXCHANGE FLUCTUATION LOSS ON REVALUATION OF DEBTORS . AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE THIS BENCH. 4. THE LD. DR, RELIED ON THE ORDER OF THE ASSESSI NG OFFICER. 5. THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, RELIED ON THE ORDER OF THE CIT(A) AND REITERATED THE SUBMISSIONS MADE BEFORE HIM. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE FOR THE LAST SEVERAL YEARS IS MERCANTI LE SYSTEM AND IT HAS BEEN CONSISTENTLY CLAIMING THE LOSSES SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY RATES ONLY ON ACCRUAL BASIS. HE F URTHER STATED THAT IN THE ASSESSMENT YEAR 2003-04, THE CLAIM OF THE ASSESSEE WAS ALLOWED BY THE A.O. THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS : (I) BHARAT EARTH MOVERS VS. CIT (2005) 245 ITR 428 (SC) (II) CIT VS. MARTIN & HARRIS P. LTD. (1985) 154 IT R 460(CAL) (III) CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. & ORS. (20 07) 249 ITR 451 (DEL). (IV) OIL & NATURAL GAS CORPORATION LTD. VS. DCIT (2002) 83 ITD 151 (DEL) (SB). 4 6. WE HAVE HEARD BOTH THE PARTIES, AND CAREFULLY GI VEN OUR THOUGHTFUL CONSIDERATION THE RIVAL SUBMISSIONS AND GONE THE R ELEVANT MATERIAL PLACED ON RECORD. WE HAVE CONSIDERED THE CASE LAWS RELIED U PON BY THE LD. COUNSEL FOR THE ASSESSEE, AND FOUND THAT THE SAME SUPPORT THE CASE OF THE ASSESSEE. WE HAVE ALSO GONE THROUGH THE ORDERS OF THE AUTHO RITIES BELOW. A CAREFUL PERUSAL OF THE IMPUGNED APPELLATE ORDER DATED 26.05 .2010, CLEARLY REVEALS THAT THE LD. CIT(A), HAS CONSIDERED AND ADJUDICATED THE ISSUE, IN QUESTION, IN GREATER DETAIL, AFTER APPRECIATION OF THE EVIDENCES AND MATERIAL ON RECORD, AS ALSO THE LEGAL AND FACTUAL POSITION OF THE CASE. N EEDLESS TO SAY THAT THE IMPUGNED APPELLATE ORDER IS WELL REASONED AND BASED ON THE COGENT AND CREDIBLE MATERIAL AND FACTS OF THE CASE. HOWEVER, I T WOULD PERTINENT TO REPRODUCE ONLY THE RELEVANT PART OF THE DECISION O F THE CIT(A), FOR THE PURPOSE OF PROPER APPRECIATION OF THE SAME: 6.2. I HAVE GONE THROUGH THE JUDICIAL RULINGS RELI ED ON BY THE LD. COUNSEL FOR THE APPELLANT. IN THE CASE OF BHARAT EA RTH MOVERS VS. CIT (245 ITR 428) THE HONBLE SUPRME COURT HAS HELD THA T IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING Y EAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE T O BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. SIMILARLY, IN THE CASE OF CIT VS. MARTIN & HARRIS P. LTD (154 ITR 460), THE HONBLE CALCUTTA H IGH COURT, HAS HELD THAT THE DEVALUATION GAIN RESULTING FROM THE R EDUCTION IN LIABILITY ON VALUE OF GOODS RECEIVED FROM A FOREIGN COUNTRY IS ASSESSABLE AS INCOME AND THE ACTUAL CONVERSION FROM ONE CURRENCY TO ANOTHER IS NOT ESSENTIAL. THE DECISION OF HONBLE DELHI HIGH COUR T IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) & ORS. RELIED O N BY THE APPELLANT HAS BEEN AFFIRMED BY THE HONBLE SUPREME COURT (312 ITR 254). IT HAS BEEN HELD BY THE HONBLE APEX COURT T HAT THE EXPRESSION EXPENDITURE AS USED IN SECTION 37 MAY, COVER AN A MOUNT WHICH IS A LOSS EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT OF THE POCKET OF THE ASSESSEE. THE LOSS SUFFERED BY THE ASSESSEE IN RESPECT OF A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABL E UNDER SECTION 5 37(1) OF THE ACT. UNDER PARA 9 OF AS 11, EXCHANGE D IFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR EXPENSES IN THE PERIOD IN WHICH THEY ARIS E. AN ENTERPRISE HAS TO REPORT THE OUTSTANDING LIABILITY USING CLOSING RATES OF EXCHANGE AND ANY LOSS ARISING ON CONVERSIO N OF SUCH LIABILITY AT CLOSING RATES HAS TO BE RECOGNIZED IN THE P&L ACCOUNT OF THE REPORTING PERIOD. THUS, THE JUDICIALLY ACCEPTED POSITION IS THAT IN DETERMINING WHETHER THERE HAS IN FACT BEEN ACCRUAL LIABILITY OR INCOME, THE ACCOUNTANCY STANDARDS PRESCRIBED BY THE ICAI HAVE T O BE FOLLOWED AND APPLIED. IN THE CONTEXT OF THE REVENUE ACCOUNT CASES, THE INCREASE IN LIABILITY ON ACCOUNT OF THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE PREVAILING ON THE LAST DAY OF THE FINANCIA L YEAR IS NOT A NOTIONAL OR CONTINGENT LIABILITY BUT ASCERTAINED LI ABILITY AND IS REQUIRED TO BE ALLOWED AS A DEDUCTION IN TERMS OF SECTION 37 OF THE ACT. 6.3. IT IS A MATTER OF RECORD THAT THE APPELLANT HA S BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING ON REGULAR BASIS FR OM YEAR TO YEAR. THE LOSS HAS BEEN CLAIMED ON REVALUATION OF DEBTORS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION BY APPLYING THE FOREIG N EXCHANGE RATE AS ON THE DATE OF BALANCE SHEET BY FOLLOWING THE PRESC RIBED ACCOUNTING STANDARDS. IN THE DECISIONS DISCUSSED ABOVE, THE IS SUE INVOLVED WAS THE PROFIT OR LOSS ARISING ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AS ON THE BALANCE SHEET DATE IN RESPECT OF LIABILITIES HELD O N REVENUE ACCOUNT. HOWEVER, THE PRINCIPLES LAID DOWN BY THE HONBLE CO URTS HOLD EQUALLY GOOD IN RESPECT OF DEBTS AS THE MONEY RECEIVABLE FROM THE DEBTORS IS A MONETARY ITEM AS PER ACCOUNTING STANDARDS AND A NY PROFIT OR LOSS ARISING ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AS ON THE BALANCE SHEET DATE HAS TO BE RECOGNIZED AS INCOME OR LOSS FOR THE YEAR IN WHICH SUCH PROFIT OR LOSS ARISE. THE APPELLANT HAS FILED A COP Y OF THE ASSESSMENT ORDER FOR THE A.Y. 2003-04 DATED 10.02.2006 PASSED BY THE ACIT CIRCLE-V, AMRITSAR. WITH THE CONTENTION THAT THE FO REIGN RATE EXCHANGE DIFFERENCE RESULTING INTO LOSS OF RS.5,66,693/- WAS ALLOWED BY THE AO IN THE ASSESSMENT. ALTHOUGH, THERE IS NO DISCUSSION IN THE ASSESSMENT ORDER ON THIS ISSUE, BUT THE SUBMISSIONS OF THE APP ELLANT CANNOT BE DISBELIEVED IN VIEWS OF SCHEDULE I SHOWING THE SAL E FILED AT PAGE 21 OF THE PAPER BOOK IN WHICH THE ABOVE LOSS WAS REDUCED FROM THE SALES. SIMILARLY, THE APPELLANT HAS CONTENDED THAT THE INC OME OF RS.5,26,146/- ON ACCOUNT OF EXCHANGE RATE FLUCTUATI ON WAS OFFERED TO TAX IN A.Y. 2002-03 FOLLOWING THE SAME ACCOUNTING P RINCIPLE. SINCE 6 THE APPELLANT HAS BEEN FOLLOWING THE SAME ACCOUNTIN G POLICIES YEAR AFTER YEAR, THE RULE OF CONSISTENCY HAS TO BE APPLI ED PARTICULARLY WHEN THE ACCOUNTING PRACTICE WAS IN CONFORMITY WITH THE PROVISIONS OF LAW AND PRESCRIBED ACCOUNTING STANDARDS. A PERUSAL OF T HE ORDER UNDER APPEAL REVEALS THAT THE AO HAS ALLOWED THE DEDUCTIO N OF LOSS OF RS.6,01,603/- ON SALES REALIZATION HOLDING IT TO BE THE MONEY ACTUALLY RECEIVED DURING THE YEAR ON ACCOUNT OF SALES. HOWEV ER, THE LOSS SO ALLOWED WAS NOT ACTUALLY ON REALIZATION BUT ON ACCO UNT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF BALANCE LYING IN THE EEFC ACCOUNT IN FOREIGN CURRENCY AS ON 31.03.2004. THE ACTUAL LO SS WAS RS.6,15,704/- AS SUBMITTED BY THE APPELLANT INSTEAD OF RS.6,01,636/- MENTIONED BY THE AO IN THE ORDER. HENCE, THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF DEBTORS AND BALANCE IN THE EEFC ACCOUNT WERE CLAIMED BY THE APPELLANT BY APPLY ING THE FOREIGN EXCHANGE RATE AS ON 31.03.2004 AND STOOD ON SAME FO OTING BUT THE AO DISALLOWED THE LOSS IN RESPECT OF REVALUATION OF DE BTORS AND ALLOWED THE LOSS ON REVALUATION OF BANK ACCOUNT BALANCE. IT APPEARS THAT THE AO HAS NOT LOOKED INTO THE FACTUAL ASPECTS OF THE C ASE PROPERLY AND COMPLETELY. NEVERTHELESS, THE LOSS ON ACCOUNT OF RE VALUATION OF DEBTORS/BALANCE OF FOREIGN CURRENCY IN THE BANK ACC OUNT CANNOT BE DISALLOWED ON THE GROUND OF BEING ON NOTIONAL BASIS . IN VIEW OF THE PROVISIONS OF LAW, THE PRESCRIBED ACCOUNTING STANDA RDS AS DISCUSSED ABOVE AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD & ORS. (SUPRA) THE LOSS SUFFERED BY THE ASSESSEE ON REVALUATION OF DEBTORS ON ACCOUNT O F EXCHANGE RATE DIFFERENCE AS ON THE DATE OF BALANCE SHEET IS AN IT EM OF EXPENDITURE ALLOWABLE UNDER SECTION 37(1) OF THE ACT. HENCE, ADDITION OF RS.8,25,000/- MADE BY THE AO BY DISALLOWING EXCHANG E FLUCTUATION LOSS ON REVALUATION OF DEBTORS IS DELETED AND THIS GROUND OF APPEAL IS ALLOWED. 6.1. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIR MITY IN THE FINDINGS OF THE CIT(A), AS THE SAME ARE BASED ON PROPER APPREC IATION OF THE LEGAL AND FACTUAL POSITION OF THE CASE. 7 6.2. WE HAVE ALSO CONSIDERED THE DECISION OF THE HO NBLE SUPREME COURT, IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (2009) 312 ITR 254, WHICH IS SQUARELY APPLICABLE TO THE FACT SITUA TION OF THE PRESENT CASE. A BARE PERUSAL OF THE SAID CASE LAWS SHOWS THAT ANY LOSS ARISING ON CONVERSION OF SAID LIABILITY AT THE CLOSING RATE HAS TO BE REC OGNIZED IN THE P & L A/C FOR THE REPORTING PERIOD. THE RELEVANT PART OF THE SAI D JUDGMENT IS REPRODUCED HEREUNDER: BUSINESS EXPENDITURE YEAR OF ALLOWABILITY ADDI TIONAL LIABILITY DUE TO EXCHANGE RATE FLUCTUATION EXPRESSION EXPENDIT URE AS USED IN SECTION 37 MAY, IN THE CIRCUMSTANCES OF A PARTICUL AR CASE, COVER AN AMOUNT WHICH IS REALLY A LOSS EVEN THOUGH THE SAI D AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEE WORD PA ID IN SECTION 43(2) MEANS ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING ON THE BASIS OF WHICH PROFITS AND GAINS ARE COMPUTED UNDER SECTION 28/29 SEC. 37(1) HAS TO BE READ WIT H SECTION 26, 29 & 145(1) THERE IS NO FINDING OF THE AO ON THE CORRE CTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR THA T THE ASSESSEE HAS NOT COMPLIED WITH THE ACCOUNTING STANDARDS-THEREFOR E, LOSS SUFFERED BY THE ASSESSEE IN RESPECT OF A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE S HEET IS AN ITEM OF EXPENDITURE ALLOWABLE UNDER SECTION 37(1) UNDER P ARA 9 OF AS-11, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TR ANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR EXPENSE IN THE PERIOD I N WHICH THEY ARISE, EXCEPT AS STATED IN PARA 10 AND PARA 11 AN ENTERP RISE HAS TO REPORT THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MATERIALS USING CLOSING RATE OR EXCHANGE ANY LOSS ARISING ON CONV ERSION OF SAID LIABILITY AT THE CLOSING RATE HAS TO BE RECOGNIZED IN THE P & L A/C FOR THE REPORTING PERIOD. 6.3. IN VIEW OF THE ABOVE DETAILED DISCUSSIONS, WE ARE OF THE CONSIDERED OPINION THAT THE ORDER OF THE CIT(A) DOES NOT SUFFE R FROM ANY INFIRMITY AND THE SAME IS UPHELD. HENCE, THE APPEAL OF THE REVENU E STANDS DISMISSED. 8 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 9TH J UNE, 2011. SD/- SD/- (H.L. KARWA) (MEHAR SINGH) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 9TH JUNE, 2011 /SKR/ COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE:M/S. PLEASANT TIME INDUSTRIES, AMRITSA R. 2. THE ACIT, CIRCLE V, AMRITSAR. 3. THE CIT(A),AMRITSAR. 4. THE CIT,AMRITSAR 5. THE SR DR TRUE COPY BY ORDER (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH : AMRITSAR.