INCOME TAX ACT, 1961

Section 143(3)

Assessment - Addition to income - Foreign exchange gain computed by AO in relation to settlement of loan obtained in foreign currency -

Assessee-company was engaged in business of textiles manufacturing, trading and retailing. AO treating loss claimed by assessee with regard to derivative transactions as 'speculative loss' and brought it to tax under section 43(5). CIT(A) confirmed the addition. Tribunal remanded the matter to AO for deciding the same afresh. During remand proceedings, AO observed that while computing the loss on foreign exchange, booking rate for conversion was taken at higher figure than bank's invoice rate. Further, AO alleged that assessee availed foreign currency loan and at time of closure of financial account, said loan was re-stated in books, which resulted in notional loss. AO considered the rate of exchange taken by bank to debit assessee's account and after reducing the loss already considered in previous year, AO computed total loss and disallowed the same.Held: CIT(A) observed that first loan of US $ 61,00,000 was availed of on 4-12-2007 for a period of six months and at that time the exchange rate was Rs. 39.3750/US$ and the maturity date was 4-6-2008. The said loan was settled at rate of Rs. 43.015/US$. This resulted in the foreign exchange loss of Rs. 2,22,04,000[ 61,00,000*(39.3750- 43.0150)]. Out of this Rs. 44,22,500 was accounted for in the financial year 2007 -08 (at the year-end rate of Rs. 40.100 being the loss accrued up to 31-3-2008). The balance loss of Rs. 1,77,81,500 was accounted for in the subsequent assessment year assessment year 2009-10 upon maturity on 04-6-2008. The second loan of the equivalent amount, US $ 61,00,000 was taken on the subsequent day, i.e., 05-6-2008 at the rate of Rs. 42.785/US$ by assessee company, for a period of six months and the same was settled by the assessee on 05-12-2008 at the rate of Rs. 43.0636/ US $. resulting in a loss of Rs. 16,99,460 in the financial year 2008-09 relevant to the assessment year 2009-10. Strangely, AO computed the gain at Rs. 14,03,000 [61,00,000* (42.7850 - 43.0150)]. This difference was only due to SBI selling rate and buying rate on 04-06-2008 and 05-06-2008. Erroneously, AO made the addition, whereas there was no profit emanated out of foreign exchange transaction. Thus, CIT(A) held that there was no basis of making addition of Rs. 1,91,84,500 and it was to be deleted. CIT(A), therefore correctly appreciated the facts of the case and accordingly deleted the addition made by AO.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2009-10

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