THE PRINCIPAL COMMISSIONER OF INCOME TAX-4 V. M/S FOREVER GEMS PVT. LTD.

TAXAP/839/2019

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The case revolves around a tax appeal by the Principal Commissioner of Income Tax-4 against M/s Forever Gems Pvt. Ltd., concerning the disallowance of a provision for import exchange difference amounting to Rs.11,61,18,652. The provision was claimed by the assessee for foreign exchange differences on imports, which the Assessing Officer disallowed, citing that such provisions represent unascertained liabilities and are only deductible upon actual payment as per Section 43A of the Income Tax Act, 1961. The CIT (Appeals) reversed this decision, which was upheld by the Tribunal. The Tribunal's decision was based on the finding that the provision was made for current liabilities and was consistent with the principles of accounting and previous revenue acceptance. The High Court dismissed the Revenue's appeal, agreeing with the Tribunal's application of the law and facts.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 728264 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 20-01-2020
• Assessment Year: misc
• Other Referred Cases: CIT vs. Woodward Governor India Private Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: B S SOPARKAR
• Assessee Lawyers: MAUNA BHATT
• Keywords: Currency fluctuation; Deduction; Foreign exchange difference; Unascertained liabilities; Provision for import exchange difference
• Section: 37(1); 260A; 43A

Judgement Text

"C/TAXAP/839/2019 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 839 of 2019 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX-4 Versus M/S FOREVER GEMS PVT. LTD. ========================================================== Appearance: MRS MAUNA M BHATT(174) for the Appellant(s) No. 1 MR B S SOPARKAR(6851) for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 20/01/2020 ORAL ORDER (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1 This Tax Appeal is filed under Section 260A of the Income Tax Act, 1961 [for short, 'the Act, 1961') at the instance of the Revenue and is directed against the order dated 26th June 2019 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'C' in ITA No.1798/Ahd/2017 for A.Y. 2013­14. 2 Revenue has proposed following question as substantial question of law: “Whether the Appellate Tribunal has erred in law and on facts by upholding the decision of the CIT(A) in deleting the addition on account of disallowance of provision for import exchange difference of Rs.11,61,18,652/­ incurred on unexpired contracts at the end of accounting period?” 3 The assessee, which is a private limited company, is engaged in Page 1 of 4 C/TAXAP/839/2019 ORDER the business of imports, exports and manufacturing of Diamonds, Precious and Semi Precious Stones and other sources during the year. The assessee in the year under consideration claimed provision for the foreign exchange difference in respect of the import of goods amounting to Rs.11,61,18,652/­. The Assessing Officer disallowed the claim of provision made by the assessee firstly on the ground that deduction for the provision relating to the import of goods on account of exchange fluctuation is available only on the actual payment as per the provisions of Section 43A of Act, 1961, and secondly, such provision on account of currency fluctuation is representing the unascertained liabilities which is not allowable as deduction under Section 37(1) of the Act. 4 Being dissatisfied with the assessment order, the assessee carried the appeal before the CIT (Appeals) to delete the addition made by the Assessing Officer. 5 The Revenue carried the matter before the Tribunal. The Tribunal, after considering the submissions made before it as well as the order passed by the CIT(Appeals), confirmed the order of deletion of addition by observing as under: “5 We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the assessee created the provision in respect of the revenue transactions. This fact can be verified from the annual accounts of the assessee which is available on pages 31­69 of the paper book. There was no long­term loan liability, and the fixed assets were of negligible value. Therefore, the provisions of section 43A of the Act cannot be applied in the present facts and circumstances as it deals with the capital account transaction. Accordingly, we hold that the AO erred in applying the provisions of section 43A of the Act. 5.1 The next controversy arises whether the impugned transaction is presenting the unascertained liabilities. The assessee created such provision in respect of the current liabilities represented in foreign currency at the end of the financial i.e. 31st March 2013 based on the rate of currency prevailing at the relevant time. Therefore, we are of the considered opinion that such liabilities cannot be treated as unascertained liabilities. Page 2 of 4 C/TAXAP/839/2019 ORDER 5.2 We also note that the Hon'ble Apex Court involving identical facts and circumstances in the case of CIT versus Woodward Governor India Private Ltd reported in 312 ITR 254 has held as under: “15 For the reasons given hereinabove, we hold that, in the present case, the “loss” suffered by the assessee on account of exchange differences as on the date of the balance sheet is an item of expenditure under section 37(1) of the 1961 Act.” From the above, it is clear that the trading liability arising on account of currency fluctuation is ascertained liability, and therefore, it is eligible for deduction. 5.3 We also note that the assessee has been adjusting the books of accounts consistently on account of currency fluctuation, which has been accepted by the Revenue in the earlier years. Therefore, we are of the view that the assessee is also entitled to the deduction of such provision as per the principles of consistency. In view of the above, we do not find any reason to interfere in the finding of the learned CIT(A). Hence, the ground of appeal of the Revenue is dismissed.” 6 Thus, the Tribunal concurring with the order passed by the CIT(Appeals) held that there was no long term loan liability, and the fixed assets were of negligible value, and therefore, the provisions of Section 43A of the Act cannot be applied in the present facts and circumstances as it deals with the capital account transaction. The Tribunal following the decision of the Supreme Court in CIT vs. Woodward Governor India Private Litd reported in 312 ITR 254 held that the trading liability arising on account of currency fluctuation is ascertained liability, and therefore, it is eligible for deduction. 7 In view of the findings of fact arrived at by both the authorities, there is no infirmity in the impugned order passed by the Tribunal which is based upon the facts emerging from the record as well as the application of the decision of the Supreme Court of India in the aforesaid case. 8 In that view of the matter, no question of law much less any Page 3 of 4 C/TAXAP/839/2019 ORDER substantial question of law arises from the impugned order passed by the Tribunal. This appeal is, therefore, dismissed. No order as to costs. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) CHANDRESH Page 4 of 4 "