Astt.CIT-14(2)(1), Mumbai v. M/s. Leighton India Contractors Private Ltd
[Citation -2016-LL-0914-27]

Citation 2016-LL-0914-27
Appellant Name Astt.CIT-14(2)(1), Mumbai
Respondent Name M/s. Leighton India Contractors Private Ltd.
Court ITAT-Mumbai
Relevant Act Income-tax
Date of Order 14/09/2016
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags mercantile system of accounting • rate of foreign exchange • cost of acquisition • accounting method • transfer pricing • draft assessment • foreign currency • legal liability
Bot Summary: The Authorised Representative(AR)supported the order of the DRP and relied upon 2346 M 15 Leighton India four cases delivered by the various benches of the Tribunal wherein judgment of Woodward Governor(supra)was referred to in the cases of MTML. We find that the issue of loss on marked to market losses has been conclusively decided by the Hon ble Apex Court in the matter of Woodward Governor(supra as under: Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. On general principles of commercial accounting, the value of the stock-in-trade at the beginning and at the end of the accounting year should be entered in the profit and loss account at cost or market price, whichever is lower the market value being ascertained on the last date of the accounting year, not at any intermediate date. The concept of profits and gains made by a business during the year can only materialize where a comparison of the assets of the business at two different dates are taken into account. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period.


Income-tax Appellate Tribunal - G Bench Mumbai, Before S Shri Rajendra,Accountant Member and Ram Lal Negi,Judicial Member . ITA 2346 Mum 2015, Assessment Years: 2010-11 Astt.CIT-14(2)(1) M s. Leighton India Contractors Private th 432, Aayakar Bhavan,4 Floor Ltd. M.K. Marg 7 F, Tower-3, Equinox Business Park, Vs. Mumbai-400 020. (Peninsula Techno Park) Off-Bandra-Kurla Complex, LBS Marg Kurla (W), Mumbai-400 070. PAN:AAECL 3338 D ( Appellant) ( Respondent) Revenue by: Ms. Vidisha Kalra-(CIT-DR) Assessee by: Shri Sunil Moti Lala & Shri Tushar Hathiramani-AR Date of Hearing: 25.08.2016 Date of Pronouncement: 14.09.2016 , 1961 254(1) Order u s.254(1)of Income-tax Act ,1961(Act) PER RAJENDRA, AM- Challenging directions of Dispute Resolution Panel-III,Mumbai,dated 30.12.2014, Assessing Officer (AO), has filed present appeal.Assessee -company engaged in business of construction contracts executing facilitiesand construction of off shore pipelines,filed its return of income on 15.10.2010,declaring income of Rs.180.61 Crores. mater was selected for scrutiny and was referred to Transfer Pricing Officer(TPO), who recommended TP adjustment of Rs.702.01 crores.The AO,in draft assessment order, made addition as suggested by TPO,besides making addition of Rs.13,00,34,360 - on account of marked to market losses(MTML). 2.Aggrieved by draft order assessee filed objection before DRP.With regard to MTNL it was argued that AO had relied upon instruction no.3 2010 dated 23.03.2010 for making addition,that instruction referred to by him was against decision of Woodward Governor(312ITR254)of Hon ble Apex Court.Considering said judgment of Hon ble Court DRP directed AO to delete proposed addition. 3.Before us,the Departmental Representative(DR)stated that matter could be decided on merits.The Authorised Representative(AR)supported order of DRP and relied upon 2346 M 15 Leighton India four cases delivered by various benches of Tribunal wherein judgment of Woodward Governor(supra)was referred to in cases of MTML. We find that issue of loss on marked to market losses has been conclusively decided by Hon ble Apex Court in matter of Woodward Governor(supra as under: Loss suffered by assessee on account of fluctuation in rate of foreign exchange as on date of balance-sheet is item of expenditure under section 37(1) of Income-tax Act, 1961. For valuing closing stock at end of particular year, value prevailing on last date is relevant. This is because profit loss is embedded in closing stock. While anticipated loss is taken into account, anticipated profit in shape of appreciated value of closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is theory underlying rule that closing stock is to be valued at cost or market price whichever is lower. expression any expenditure has been used in section 37 of Income-tax Act, 1961, to cover both expenses incurred as well as amount which is really loss even though such amount has not gone out from pocket of assessee. Profits and gains of previous year are required to be computed in accordance with relevant accounting standard. On general principles of commercial accounting, value of stock-in-trade at beginning and at end of accounting year should be entered in profit and loss account at cost or market price, whichever is lower market value being ascertained on last date of accounting year, not at any intermediate date. No gain or profit can arise until balance is struck between cost of acquisition and proceeds of sale. word profits implies comparison between state of business at two specific dates, usually separated by interval of twelve months. Stock-in-trade is asset : it is trading asset. Therefore, concept of profits and gains made by business during year can only materialize where comparison of assets of business at two different dates are taken into account. Under mercantile system of accounting, what is due is brought into credit before it is actually received : it brings into debit expenditure for which legal liability has been incurred before it is actually disbursed. accounting method followed by assessee continuously for given period of time has to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that system does not reflect true and correct profits. AS-11 deals with giving of accounting treatment for effects of changes in foreign exchange rates. AS-11 deals with effects of exchange differences. Under paragraph 2, reporting currency is defined to mean currency used in presenting financial statements. Similarly, words " monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. word " paid" is defined under section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in foreign currency, and receivables payables and loans denominated in foreign currency as well as sundry creditors are all monetary items which have to be valued at closing rate under AS-11. Under paragraph 5, transaction in foreign currency has to be recorded in reporting currency by applying to foreign currency amount exchange rate between reporting currency and foreign currency at date of transaction. This is known as " recording of transaction on initial recognition" . Paragraph 7 of AS-11 deals with reporting of effects of changes in exchange rates subsequent to initial recognition. Paragraph 7(a), inter alia, states that on each balance- sheet date monetary items, enumerated above, denominated in foreign currency should be reported using closing rate. In case of revenue items falling under section 37(1), paragraph 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that paragraph, exchange differences arising on foreign 2 2346 M 15 Leighton India currency transactions have to be recognized as income or as expense in period in which they arise, except as stated in paragraph 10 and paragraph 11 which deals with exchange differences arising on repayment of liabilities incurred for purpose of acquiring fixed assets, which topic falls under section 43A of 1961 Act. At this stage, we are concerned only with paragraph 9 which deals with revenue items. Paragraph 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., rate of dollar rises vis-a-vis Indian rupee, there is expense during that period. important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in foreign currency to be taken into account for giving accounting treatment on balance sheet date. Therefore, enterprise has to report outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of said liability at closing rate, should be recognized in profit and loss account for reporting period. Respectfully following above judgment,we hold that directions of DRP does not suffer from any defect.Confirming same,we decide effective ground of appeal against AO. As result,appeal field by AO stands dismissed. . Order pronounced in open court on 14th September,2016. 14 , 2016 Sd - Sd - ( R.L.Negi ) ( Rajendra) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated : 14 .09.2016. Jv.Sr.PS. Copy of Order forwarded to : 1.Appellant 2. Respondent 3.The concerned CIT(A) , 4.The concerned CIT 5.DR G Bench, ITAT, Mumbai,6.Guard File True Copy BY ORDER, Dy. Asst. Registrar , ITAT, Mumbai. 3 Astt.CIT-14(2)(1), Mumbai v. M/s. Leighton India Contractors Private Ltd
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