The Income Tax Appellant Tribunal, Chennai has held that the loss suffered by the assessee on account of foreign exchange difference as on the date of the balance sheet is an item of expenditure allowable u/s.37(1) of the Act.
The appellant, M/s. Venture Lighting India Limited is engaged in the business of manufacturing and sale of Metal Halide Lamps and exporting the same. The AO during the course of scrutiny assessment proceedings noticed that the assessee has claimed deduction/loss on account of the difference between actual exchange amount and exchange amount accounted for in the financial year relevant to the assessment year 2012-13 amounting toRs.3,15,16,252/-. The AO required the assessee to furnish the details of exchange gain as well as exchange loss. In response to the same, the assessee filed a letter dated 18.02.2016 and contended that as and when exports are made, invoices are made and issued in foreign currency and accounted in Indian rupees by converting the foreign currency to Indian rupees on the prevailing market rate of exchange on the date of invoice. When the export proceeds were realized on a later date, the company receives a slightly higher or lower amount vis-a-via the invoice value as recorded in the books of accounts as the export value.
The assessee has followed the mercantile system of accounting and is in compliance with the Accounting Standard applicable, it translates all the assets and liabilities at the end of the year which are receivable or payable in foreign currency convertible into Indian Rupees at the prevailing conversion rate as of 31st March of every year. The debit or credit arising on account of said reinstatement fluctuations are accounted in the profit & loss account. If the exchange fluctuations arising due to reinstatement pertain to the revenue account, the same is treated as a business loss or business income depending upon the facts.
It was submitted by Shri S. Sridhar, Counsel for the assessee that the assessee from the beginning is following the same method of accounting consistently in respect of accounting for the gain or loss arising due to exchange fluctuations on reinstatement. The AO was not convinced with the reply of the assessee and thereby disallowed the claim of exchange fluctuation loss and added back to the returned income of the assessee. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) after considering submissions of the assessee confirmed the disallowance. Thus the assessee preferred an appeal before the Tribunal.
The division bench of Sri Mahavir Singh, Vice President, and Sri Girish Agrawal, Accountant Member held that, “Thus, this factual matrix remained uncontroverted and unchallenged. In the course of hearing, a query was also raised before Counsel of the assessee to demonstrate the accounting procedure adopted for the reversal of reinstatement of assets and liabilities as on 31st March of every year on account of exchange fluctuations, for which the Counsel referred to the paper-book compilation submitted before us and demonstrated the accounting methodology adopted by the assessee for the same. We have also gone through the judgment of Hon’ble Supreme Court in the case of Woodward Governor India P. Ltd., supra, wherein it was held that the loss suffered by the assessee on account of foreign exchange difference as on the date of the balance sheet is an item of expenditure allowable u/s.37(1) of the Act”. Further, it was held that “the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till AO comes to a conclusion for reasons to be given that said systems does not reflect true and correct profits”. Hence the orders of the lower authorities are set aside and the appeal was allowed.
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