The Income Tax Appellate Tribunal, Ahmedabad bench held that the claim of loss on exchange fluctuation in current assets and liabilities is allowable.
Shri Urjit Shah appeared for the appellant and Shri Bandish Soparkar appeared for the respondent.
The AO had disallowed the foreign exchange difference debited to the profit and loss account noting that it related to unascertained liability, which was not allowable under the Income Tax Act. The assessee has debited the profit and loss account with the provision of an exchange rate different amounting to Rs. 4,48,924/-. It was submitted that the assessee has accounted for the exchange rate difference on the last day of the year based on the prevailing rate of currency on the date and given the mercantile method of account, the claim is allowable.
The assessee claimed that the foreign exchange difference pertained to the restatement of Sundry debtors/sundry creditors which has remained uncontroverted and stated that the claim was by the law. The Accounting Standard prescribed by the ICAI dealing with Effects of Changes in Foreign Exchange Rates, AS-11, require the current liabilities and assets of transactions conducted in foreign exchange to be restated at the end of every year on the value of foreign exchange as at the end of the year and any appreciation or depreciation thereon is to be accordingly accounted for in the profit and loss account.
It was observed that a foreign currency transaction should be recorded, on initial recognition 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. The appellant revenue failed to point out any provision under the Income Tax Act requiring such provision to be specifically disallowed.
Ms Annapurna Gupta, Accountant Member and Shri Mahavir Prasad, Judicial Member observed that the claim was made by the universally accepted accounting practices as an eligible claim and the same cannot be disallowed. The Tribunal directed to delete the disallowance of foreign exchange fluctuation of Rs.4,48,924/- and the appeal filed by the revenue got dismissed.
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