Ambadi Enterprises Ltd., CHENNAI V. DCIT, CHENNAI

ITA 975/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8584 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 15-04-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: M KARUNAKARAN
• Section: 143(3); 37(1); 147; 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , ! ' . # , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICI AL MEMBER ./ I.T.A.NO.975/MDS/2016 ( / ASSESSMENT YEAR: 2009-10) M/S. AMBADI ENTERPRISES LTD., PARRY HOUSE, 5 TH FLOOR, 43, MOORE STREET, CHENNAI - 600 001. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-I(1),CHENNAI. PAN: AAACA6374J ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. M.KARUNAKARAN, ADVOCATE /RESPONDENT BY : MR.SHIVA SRINIVAS, JCIT /DATE OF HEARING : 12 TH JULY, 2016 /DATE OF PRONOUNCEMENT : 15 TH SEPTEMBER, 2016 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL IS FILED BY THE ASSESSEE AGGRIEVED BY T HE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS)- 1, CHENNAI DATED 19.01.2016 IN ITA NO.194/CIT(A)-1/ 2013- 14 PASSED UNDER SECTION 143(3) R.W.S.147 & 250(6) OF THE ACT FOR THE ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL, HOWEVER, THE CRUX OF THE ISSUE IS AS FOLLOWS:- THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF ` 50,08,482/- MADE BY THE LEARNED ASSESSING OFFICER O N ACCOUNT OF FOREIGN EXCHANGE LOSS. 2 ITA NO.975/MDS/2016 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY FILED ITS RETURN OF INCOME ON 29.09.2009 FO R THE ASSESSMENT YEAR 2009-10 DECLARING LOSS OF ` 1,89,10,153/-. THE LEARNED ASSESSING OFFICER HAD REOPENED THE ASSE SSMENT UNDER SECTION 147 OF THE ACT BY ISSUING NOTICE UNDE R SECTION 148 OF THE ACT TO THE ASSESSEE. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE LEARN ED ASSESSING OFFICER THAT THE ASSESSEE HAD CLAIMED FOR EIGN EXCHANGE LOSS OF RS.50,08,482/- RELATING TO PACKING CREDIT LOAN REINSTATED. THE LEARNED ASSESSING OFFICER OP INED THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM THE AFORESAID AMOUNT AS DEDUCTION BY OBSERVING AS UNDER:- THE AS-11 WHICH IS NOTIFIED BY THE GOVT. STIPULATES THA T THE EXCHANGE DIFFERENCES WHICH HAVE ACTUALLY SETTLED AN D WHICH ARE CARRIED AFTER THE END OF THE BALANCE SHEET DATE SHO ULD BE RECOGNIZED AS INCOME OR EXPENSES ONLY FOR THE MONET ARY ITEMS AND NOT FOR THE NON-MONETARY ITEMS. ACCOUNTING STAN DARD ITSELF SPECIFIES CERTAIN EXAMPLES AS MONETARY ITEMS AND N ON- MONETARY ITEMS. THE CASH RECEIVABLES AND PAYABLES A RE MONETARY ITEMS I.E. TRADE RECEIVABLES AND TRADE PAY ABLES. IN SUCH CASE, THE LOANS TAKEN IN THE FOREIGN CURRENCY ARE NOT A MONETARY ITEMS BUT A NON-RECOGNIZING THE LOSSES OF FOREX DIFFERENCE IN RESPECT OF THE LOANS FOR AN AMOUNT OF RS.50,08,482/- TOWARDS PACKING CREDIT LOAN REINSTAT ED IS NOT AS PER THE ACCOUNTING STANDARDS WHICH IS IN VIOLATION OF THE PROVISIONS OF THE I.T.ACT UNDER SECTION 145. HENCE THE ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE IS REJEC TED FOR THE REASONS STATED ABOVE. AS A RESULT, THE FOREX LOSS C LAIMED TOWARDS PACKING CREDIT LOAN REINSTATED IS DISALLOWE D AND ADDED BACK TO THE TOTAL INCOME UNDER THE HEAD INCOME FRO M BUSINESS OR PROFESSION. 3 ITA NO.975/MDS/2016 4. ON APPEAL, THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) CONFIRMED THE ORDER OF THE LEARNED ASSESS ING OFFICER BY OBSERVING AS UNDER:- 18. IN THE CASE OF THE APPELLANT WHICH IS AN EXPORTER OF FABRICS AND OTHER TEXTILES THE ECB WAS AVAILED TO FACILITATE PACKING CREDIT FACILITIES AND FOR THE WORKING CAPITAL REQUIREMENTS. THE BORROWING THEREFORE WOULD BE IN THE NATURE OF A NON-INTEGRAL FOREIGN OPERATION IN VIEW OF THE AFORESAID. THE APPELLANT COULD HAVE MOBILIZED ITS OWN FUNDS OR AVAILED SUCH FUNDS FROM ANY OTHER SOURCE. HAVING HELD SUCH THE LOSS OR GAINS FROM THE CHANGE IN CURRENCY RATE HAS TO BE CREDITED TO A RESERVE ACCOUNT AND WOULD ONLY BE ELIGIBLE FOR DEDUCTION AS AN EXPENSE ON SETTLEMENT THEREOF. SUCH HAS BEEN THE VIEW HELD BY THE ITAT HYDERABAD BENCH IN M/S M+W ZANDER (S) PTE LTD V. ADLT IN ITA NO.2095/HYD/2011 ORDER DATED 3.8.2012. ON THE FACTS OF THAT CASE IT WAS FOUND THAT THE LOAN OBTAINED BY THE BRANCH WHICH WAS INDEPENDENTLY CONDUCTING ITS BUSINESS ACTIVITIES FROM THE HEAD OFFICE WAS A NON-INTEGRAL FOREIGN OPERATION. THE FLUCTUATION IN TH6 RATE OF EXCHANGE CANNOT HAVE EFFECT ON ITS INTEGRAL OPERATION. THE ENTIRE TRANSACTI01 IS NON- INTEGRAL IN NATURE AND HENCE THE SAME IS TO BE TREATED AS PER PARA 24 OF AS-11. THE FLUCTUATIONS IN THE RATE OF EXCHANGE ON THE QUANTUM OF LOAN WOULD NOT AFFECT THE DAY TO DAY WORKING OR THE PROFIT OF GIVEN YEAR. IT WOULD AFFEC T ONLY ON REPAYMENT AT THE TIME OF SETTLEMENT. HENCE, THE GAIN OR LOSS IS TO BE ACCUMULATED IN THE RESERVE ACCOUNT UNTIL THE DATE OF SETTLEMENT WHEREUPON IT CAN BE CREDITED OR DEBITED IN THE P & L A/C.. THE HON'BLE TRIBUNAL WHILE ADJUDICATING IN THE MATTER HAD ALSO TAKEN INTO CONSIDERATION THE RELIANCE PLACED BY THE ASSESSEE ON THE RATIOS OF CIT V. DEMPO & CO. P LTD 206 1TR 291 (BOM.) AND CIT V. WOODWARD GOVERNOR INDIA P LTD (312 ITR 254). HENCE, THE LOSS CLAIMED IS TO BE CARRIED FORWARD IN THE FOREIGN CURRENCY TRANSLATION RESERVE ACCOUNT AND SQUARED UP AT THE TIME OF SETTLEMENT. I T WOULD SUFFICE TO SAY THAT THE CIAIM MADE BY THE 4 ITA NO.975/MDS/2016 APPELLANT CANNOT BE ALLOWED TILL THE TIME OF SETTLEMENT AND ACCORDINGLY THE DISALLOWANCE. 5. BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE IN HIS WRITTEN SUBMISSIONS EXPLAINED THE NATURE OF TRANSAC TION AS FOLLOWS:- THE APPELLANT IS EXPORTER OF FABRICS AND OTHER TEX TILES. FOR THE PURPOSE OF ITS EXPORT BUSINESS IT AVAILED P ACKING CREDIT FACILITIES FROM THE BANK FOR THEIR WORKING C APITAL REQUIREMENTS. WHEN THE APPELLANT GETS AN EXPORT PURCHASE ORDER, IT AVAILS PACKING CREDIT LOAN FROM THE BANK. THE BANK USED TO ADVANCE 90% OF THE PURCHASE VALUE OF THE EXPORT ORDER TO THE ASSESSE AS A LOAN. THE LOAN WAS UTILIZED BY THE APPELLANT IN MANUFACTURING AND PRODUCING THE GOODS FOR EXPORT. WHEN THE EXPORT IS MADE, THE EXPORT INVOICE WAS PRESENTED TO THE BANK AND THE BANK CLOSES THE PACKING CREDIT LOAN BUT GRANTS FOR THE FULL VALUE OF THE EXPORTS MADE AS POST SHIPMENT LOA N. THIS LOAN IS ADJUSTED WHEN THE BANK RECEIVES THE EX PORT PROCEEDS FROM THE FOREIGN BUYER. THE BANK USED TO CHARGE INTEREST FOR THE FACILITY PROVIDED. THE PACK ING CREDIT LOAN IS AVAILED IN FOREIGN EXCHANGE ACCOUNT AS THE INTEREST ON SUCH LOAN IS LOW WHEN COMPARED TO THE O THER BUSINESS LOANS. THIS LOAN IS AVAILABLE ONLY TO THE EXPORTERS AND NOT TO OTHER BUSINESS PEOPLE. THE FOR EIGN CURRENCY OUTSTANDING AS ON THE LAST DAY OF THE ACCO UNTING YEAR IS REINSTATED INTO INDIAN RUPEES WITH LAST DAT E OF THE EXCHANGE RATE (31 ST MARCH) AS PER RULE 115 OF THE IT RULES AND AS 11. IN OTHER WORDS, THE INR VALUE OF FOREIGN CURRENCY OUTSTANDING EITHER LOAN OR DEBTORS ARE SHOWN IN THE LEDGER AS PER CLOSING EXCHANGE RATE OF THE RESPECTIVE CURRENCIES. WHEN SUCH CONVERSION IS MADE , THERE OCCURRED A LOSS WHICH IS CLAIMED UNDER THE FO REIGN EXCHANGE LOSS. THE LOSS DURING THE YEAR ON THIS ACC OUNT WAS RS 50,08,482/- WHICH WAS CLAIMED IN THE ACCOUNTS AS AN EXPENDITURE. 5 ITA NO.975/MDS/2016 HE FURTHER RELIED IN THE DECISION OF THE HONBLE AP EX COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P.LTD ., REPORTED IN 312 ITR 254 WHEREIN IT WAS HELD THAT THE ADDITIONAL LIABILITY ARISING AS ON THE DATE OF THE BALANCE SHEET ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EX CHANGE IN RESPECT OF LOANS TAKEN FOR REVENUE PURPOSES WILL BE ALLOWABLE AS DEDUCTION UNDER SECTION 37(1) OF THE ACT . THE LEARNED AUTHORIZED REPRESENTATIVE THEREFORE PLEADED THAT TH E LOSS SUFFERED BY THE ASSESSEE AMOUNTING TO RS. 50,08,482 /- AS ON THE DATE OF THE BALANCE SHEET WITH RESPECT TO FLUCT UATION IN FOREIGN EXCHANGE IN REGARD TO THE PACKING CREDIT LO AN AVAILED BY THE ASSESSEE MAY BE ALLOWED AS DEDUCTION. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE O THER HAND, RELIED ON THE ORDERS OF THE REVENUE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS AVAILABLE ON RECORD. FROM THE FACTS OF THE CASE, IT IS EVIDENT THAT THE ASSESSEE HAS AVAIL ED PACKING CREDIT LOAN FOR ITS WORKING CAPITAL REQUIREMENT TOW ARDS EXPORT 6 ITA NO.975/MDS/2016 PURCHASE ORDER. THE EXPENDITURE INCURRED TOWARDS PA CKING CREDIT LOAN FALLS IN THE REVENUE FIELD. FURTHER AS -11 STATES THAT MONETARY ITEMS SUCH AS DEBTORS, CREDITORS, LOA N SHOULD BE CONVERTED AT CLOSING RATE(CLOSING RATE IS THE EX CHANGE RATE ON THE BALANCE SHEET DATE) AND REPORTED AS SUCH AND ALL TYPES OF EXCHANGE DIFFERENCES SHOULD BE CHARGED TO PROFIT AND LOSS ACCOUNT FOR THE PERIOD. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE DECISION OF THE HONBLE AP EX COURT RELIED ON BY THE ASSESSEE IN THE CASE OF CIT VS. WO ODWARD GOVERNOR INDIA P.LTD., SUPRA AND AS-11IS SQUARELY A PPLICABLE IN THE CASE OF THE ASSESSEE. ACCORDINGLY, WE HEREBY DIRECT THE LEARNED ASSESSING OFFICER TO GRANT THE DEDUCTIO N OF RS.50,08,482/- UNDER SECTION 37(1) OF THE ACT IN TH E CASE OF THE ASSESSEE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 15 TH SEPTEMBER, 2016 SD/- SD/- ( ! ' . # ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) # % / JUDICIAL MEMBER % / ACCOUNTANT MEMBER # /CHENNAI, ( /DATED 15 TH SEPTEMBER, 2016 SOMU 7 ITA NO.975/MDS/2016 *+ ,+ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. - () /CIT(A) 4. - /CIT 5. + 1 /DR 6. /GF