ORDER
R.K. Gupta, J.M.
1. In this appeal, the assessee, M/s Oil & Natural Gas Corporation Ltd., Dehradun (ONGC), had taken the following grounds of appeal:
“1. In the circumstances of the case the learned CIT(A) has erred in fact and in law and in confirming the order of the AO on the point of foreign exchange loss suffered on foreign loans attributable to revenue account.
2. The appellant craves to take any other ground of appeal before or at the time of hearing.”
1.2. At the instance of the assessee, a Special Bench was constituted to consider the following question :
“Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuations in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction in the year of fluctuations in the rate of exchange or the same could only be allowed in the year of repayment of such loans.”
1.3. M/s Maruti Udyog Ltd., whose appeals involving the above issues are pending before the Tribunal, were allowed to join as an Intervenor.
2. We would firstly refer the facts, of the case. To be stated succinctly the assessee i.e., ONGC, which is a wholly-owned Government of India undertaking, established under the ONGC Act, 1959, for exploration, exploitation and extraction of mineral oils, had filed its return for the assessment year under consideration, declaring a total income of Rs. 4,39,49,86,580, against which the AO completed the assessment on a total income of Rs. 8,12,37,78,325 by making various disallowances and additions. The AO disallowed, inter alia, the claim of loss of Rs. 5,78,25,83,451 on accrual basis on revenue account on account of fluctuation of foreign exchange rate. He did so by following the assessment order for an earlier year, wherein it was held that such loss was a notional loss. The assessee had also claimed deduction on account of revenue loss due to fluctuation in foreign currency rate on the basis of actual payment at Rs. 1,13,37,36,360 and it was allowed by the AO.
3. The assessee preferred appeal before the CIT(A). Detailed submissions were made before the CIT(A) along with the written opinion of Shri G.N. Gupta, ex-chairman of CBDT. It was explained before the CIT(A) through written submissions that ONGC, which is engaged in capital intensive exploration and production had to heavily depend on foreign loan to cover its expenses, both capital and revenue, on import of machinery on capital account, such as, rigs, platform, etc.” import of stores, both on capital and on revenue account; payment to non-resident contractors in foreign currency for various services rendered and to repay old foreign loans and interest by fresh borrowings. It was explained that the ONGC has been raising external commercial borrowings as well as suppliers/buyers credit in the global market. It was further stated that such type of external commercial borrowings are with the approval of Central Government and some time at its behest. It was further explained, “that ONGC has been keeping its books of accounts on accrual basis i.e., mercantile system
of accounting, although certain heads of income, like dividend on units, receipts on account of short-lifted gas, interest on delayed payments, penalties, liquidated damages, subsidies and grants, statutory payments, etc. which cannot be ascertained, are accounted on receipt basis”. Accordingly, it was submitted that the assessee had filed its return of income on the basis of accounts prepared on mercantile system of accounting. The past history was also stated before the CIT(A), and it was clarified that till financial year 1980-81, the ONGC claimed loss on account of fluctuation of foreign exchange rate on the basis of repayment of foreign currency loans in the year in which such loans or part of loans were repaid. ONGC resorted to heavy borrowings to buy latest machinery, etc. due to availability of easy loans. With effect from 1st April, 1981, it changed its accounting policy to account for the liability on account of such loans, interest and exchange losses suffered on year-to-year basis on purchase of foreign currency. It was explained that this loss was claimed on the basis of accounting system adopted by assessee, which is internationally accepted method also guided by AS-11 issued by the Institute of Chartered Accountants of India (ICAI). It was further stated that ONGC has been consistently following this system of accounting year after year and the accounts have been audited by the Comptroller and Auditor General of India and endorsed by the Parliament which reviews the accounts every year. Accordingly, it was submitted that expenses incurred and liability undertaken of foreign loans, etc. are accounted at the exchange rate prevailing on the date of transaction and these liabilities are revalued at the end of the year by. adopting the prevailing exchange rate, and effect given in the accounts of the appellant. It was accordingly explained before the CIT(A) that assessee suffered huge losses on account of revaluation of the loan value and, thus, claimed as revenue loss under Section 37(1) of the IT Act during the year under consideration. In the written submissions filed before the CIT(A) it was further explained that the AO accepted the above method of accounting and allowed the claim on account of foreign exchange loss right from asst. yrs. 1982-83 to 1986-87, but for asst. yr. 1987-88, the AO deviated from the past practice and disallowed foreign exchange loss claimed by ONGC on revaluation, on the ground that the loss is notional and anticipatory and hence not allowable under the IT Act, 1961. It was stated that the order of the AO was challenged before the CIT(A) and after considering the decisions of the Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) and the Calcutta High Court in the case of CIT v. International Combustion (I) (P) Ltd. (1982) 137 ITR 184 (Cal), the appeal of the assessee was allowed by the CIT(A) for asst. yr. 1987-88. It was also stated that appeals for asst. yrs. 1988-89 to 1990-91 were also allowed by the CIT(A) and the appeals of the Department are pending before the Tribunal, because the COD has not yet granted the approval for these years.
4. The learned CIT(A) was not satisfied with the submissions of the assessee. In his view the order of the AO was correct because loss claimed by assessee was a notional loss as the same was not an ascertained one. In holding so, the CIT(A) has placed reliance on observations made in various decisions of different High Courts as well as also by the Supreme Court. The assessee has come up in appeal before the Tribunal.
5. Shri Dastur, senior advocate, appearing on behalf of ONGC, opened his argument by stating that the loans taken in foreign currency were for the purpose of carrying on the business of the assessee as well as for capital investment. It was stated that regarding loans for capital investment there is no dispute. Attention of the Bench was drawn on relevant paragraph of CIT(A)’s order where it has clearly stated that the claim of the assessee, which is in dispute, is on revenue account. The learned counsel then started his arguments on merits and it was stated that the assessee is maintaining mercantile system of accounting and the valuation of foreign loans has been made on the last date of the financial year, on the basis of dollar rate prevailing on that date. It was further stated that the price of dollar is fluctuating everyday and on the last date of the previous year, it was known to the assessee as to what was the value of the dollar and accordingly, the valuation of loan was done and the difference between the liability on the first day of previous year i.e., 1st April, 1990, and on the last day of the previous year i.e., 31st March, 1991, was taken into P&L a/c. It was further stated that there is no dispute that in case of devaluation of rupee, the loss of the assessee is allowable in the year of devaluation itself, It was contended that there is no difference between devaluation and the fluctuation of the foreign currency. It was also stated that fluctuations are also approved by Reserve Bank of India and commercial banks as commercial banks buy and sell foreign currency at such rate. Attention of the Bench was drawn to the provisions of Rule 115 of the IT Rules. It was further stated that even as per provisions of the IT Rules, conversion of foreign currency into Indian rupee as per telegraphic transfer rate is allowable. Therefore, it was pleaded that the claim of the assessee in all respect is allowable. It was further stated that there is no dispute that the assessee is following mercantile system of accounting, and the method of accounting cannot be disturbed merely on the ground that no such payment has been made by the assessee during the year under consideration. Attention of the Bench was drawn to p. 17 of CIT(A)’s order where it has clearly been stated that the method of accounting adopted by assessee is mercantile system. For this purpose reliance was placed on the decision of the Supreme Court in the case of CIT v. A. Krishnaswami Mudatiai and Ors. (1964) 53 TTR 122 (SC) at p. 129. Further reliance was placed on the decision of Supreme Court in the case of Sutlej Cotton v. CTT (supra) and the Calcutta High Court’s decisions in the case of CIT v. Bharat General & Textile Industries Ltd. (1986) 157 ITR 158 (Cal). Union Carbide India Ltd. v. CIT (1993) 203 1TR 584 (Cal) and Bombay High Court in the case of CIT v. Bank of India (1996) 218 ITR 371 (Bom), Copies of these decisions are placed in the paper book. Reliance was also placed on the decision of the Tribunal in case of Brock Hoven B.V. v. Dy. CTT, which is approved by the Bombay High Court, copies of the orders are placed at pp. 632-635 of the paper book. Further reliance was placed on the decision of the Tribunal in Telemecanique & Controls (India) Ltd, v. Dy. CIT (1998) 60 TTJ (Del) 434 : (1998) 60 TTD 483 (Del) and Hindustan Aeronautics Ltd. v. Dy. CTT (Bang). Copy of the order is placed at p. 574, and it was pointed out that the same was considered by the Department of legal Affairs and the permission to pursue the reference application has been rejected by the COD, Therefore, it was
submitted that the assessee deserves to succeed in its appeal, as in similar circumstances even the COD had rejected the request of the Department to contest the issue before the High Court. It was thus further submitted that the profit of the assessee has to be computed as per commercial principles and in this connection, reliance was placed on the decision in the case of Calcutta Co. Ltd. v. CIT (1959) 37 ITR I (SC), Kedar Nath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), Metal Box Company of India Ltd. v. Their Workmen (1969) 73 7 ITR 53 (SC) and in the case of Welding Rod Mfg. Co. v. CIT (1997) 225 ITR 525 (Guj). The learned counsel of the assessee discussed the ratio of decision of each case is detail and stated that in all circumstances the claim of the assessee has to be allowed. It was further stated that the CIT(A) has relied on several decisions, but he has failed to apply the direct decisions referred by assessee before him. It was further added that the CIT(A) has just picked up some observations of the decisions of the various High Courts and Supreme Court, but if totallity of those decisions is taken into consideration, then it will be found that the ratio of those decisions are not applicable on the facts of the present case.
6. It was further stated that the claim of the assessee was allowed in earlier years by the CIT(A) and the appeals of the Department are pending before Tribunal because the COD has not yet granted permission to the Department, whereas in the case of assessee, the COD has granted the approval.
7. It was further stated that during asst. yr. 1997-98 the value of Indian rupee had increased and consequently there was a gain amounting to Rs. 293.37 crores, which was offered to tax and the assessment has been accordingly completed. It was further added that the claim of the assessee was on the basis of consistent method of accounting followed by it on principle of commercial sense. In support of this, reliance was placed on the decision of the apex Court’ in the case of Metal Box reported (supra). It was further stated by the counsel of the assessee that no doubt that in case of assessee for asst. yr. 1994-95, the Tribunal has taken a view against the assessee, but the case law relied upon by it before the Tribunal have not been considered at all. Further, the decisions of the Bangalore Bench and Delhi Bench of Tribunal were not available to the Bench, who decided the appeal for asst. yrs. 1994-95. It was further stated that the system of accounting maintained regularly by assessee has also not been considered by the Tribunal. The counsel of the assessee invited our attention to the decision of the Delhi Bench itself in the case of Eicher Good Earth decided in ITA No. 7078, wherein it is held that in mercantile system of accounting, it was mandatory to translate the outstanding liability on the basis of fluctuation in foreign currency rate and thereby allowing the appeal of that assessee. It was further stated that the accounting standard (AS-11) issued by Institute of Chartered Accountants of India are well recognised and acceptable and since the assessee has maintained its accounts accordingly, its claim has to be allowed. Reliance was again placed on the decision of the Supreme Court in the case of Sutlej Cotton (supra). Further reliance was also placed on various case laws mentioned in written synopsis, and again it was stated that when the account books are maintained properly and no defect of any kind was found, the claim of the assessee cannot be disallowed, by merely observing that claim is not genuine as the loss is notional one.
8. After the arguments of the assessee i.e., M/s ONGC, Shri Ajay Vohra who appeared as an Intervenor on behalf of Maruti Udyog Ltd. submitted that similar issue is involved in the case of Maruti Udyog, where the claim of loss on account of fluctuation in foreign currency rate was disallowed by the AO for asst. yrs. 1991-92 and 1994-95. The CIT(A) allowed the claim of assessee. Therefore, for these years the Department is in appeal and for asst. yrs. 1993-94 and 1995-96 the appeals of the assessee were dismissed by the CIT(A). Therefore, the assessee is in appeal before the Tribunal. The issue in these appeals is same i.e., revenue loss on account of fluctuation in foreign currency rate. The counsel of Maruti Udyog opened his arguments by mentioning that. the issue has already been argued at length by the learned counsel appearing on behalf of ONGC. Therefore, those arguments he will not like to repeat. It was submitted that facts and circumstances of the assessee’s case are similar to those of ONGC and the assessee is adopting the method of mercantile system of accountancy. Therefore, it was stated that the system adopted by assessee cannot be disturbed. Reliance was placed on this issue on various case laws mentioned in the written synopsis filed by the counsel of assessee before start of the hearing of the appeal. It was further submitted that on similar circumstances the Tribunal in the case of Richer Goodearth, rendered in ITA No. 7078/Del/1992, relating to asst. yr. 1989-90, dt. 26th April, 1999 [reported as Eicher Goodearth v. Dy. CIT (1999) 64 TTJ (Del) 208–Ed.], decided the issue in favour of assessee, and attention of the Bench was drawn on findings of the Tribunal given in para 6.34 onwards of the order. It was further stated that Accounting Standard.-11 issued by ICAI has been followed and the Tribunal has accepted the accounting standard adopted by assessee. Attention of the Bench was then drawn to the provisions of Section. 43A and 43B and it was submitted that no addition can be made even by invoking the provisions of Section 43B of the Act. Attention of the Bench was also drawn on various paragraphs of the written synopsis placed on record, and after summarising the facts of the case and the legal position, it was stated that almost all High Courts as well as Supreme Court have decided the issue in favour of assessees, where a consistent method of accounting has been adopted by them.
9. The standing counsel Shri R.D. Jolly, who appeared in case of ONGC, opened his arguments by stating that the claim of the assessee is allowable in the year when the payment is made and the admitted position in this case is that payment of the amount in dispute has not been made by the assessee during the year, who has claimed the deduction only on account of exchange rate of foreign currency at the end of the year. He submitted that both the lower authorities were right in holding that the loss claimed by the assessee is not a real loss, as the same is notional one. It was further stated that in similar circumstances in the case of assessee itself, the Tribunal has decided the issue against it in asst. yr. 1994-95. Therefore, he pleaded that the order of the CIT(A) should be confirmed. After that the learned standing counsel of the Department read certain pages of the CIT(A)’s order and stated that the CIT(A) has discussed the issue at great length and has decided the issue after placing reliance on several decisions. Therefore, the order of the CIT(A) deserved to be confirmed.
10. In counter-reply, Shri Dastur invited the attention of the Bench to various pages of the written synopsis filed on 30th May, 1995, saying that these are summarised submissions of the arguments advanced on earlier occasions.
11. We have heard the rival submissions and have considered them carefully. We have also perused the relevant material to which our attention was drawn by the respective parties. After considering and perusing the material on record, we noted that crux of the arguments of the learned senior advocate Shri Dastur and the counsel for Maruti Udhyog, Shri Ajay Vohra, is that the assessees are following the mercantile system of accounting since long and hence without giving any cogent reason, the results cannot be disturbed. Though the learned counsel for ONGC has also vehemently argued that there is no difference between devaluation of rupee or the fluctuation in foreign currency rate and, therefore, the loss claimed by the assessee on account of fluctuation of foreign currency rate is allowable. But for deciding the controvery in the cases before us, we do not consider it necessary to go deep into this aspect. Suffice it to say that even though in legal terms there is a difference in “devaluation” and “fluctuation” of the currency, the effect is the same. Section 43A gives legal recognition, of course only for a limited purpose specified therein, to the periodical fluctuation in currency rates in respect of foreign currency.
12. Before proceeding further, we consider it relevant to refer to some of the judicial decisions cited by the learned counsel for the assessee.
13. In the case of Sutlej Cotton Mills Ltd v. CIT (supra) the Hon’ble apex Court has held as under :
“The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business.”
14. The ratio of the decision in the case of Sutiej Cotton Mills Ltd. (supra) has been considered by the Hon’ble Allahabad High Court in the case of CIT v. Martin & Harry (P) Ltd. (1985) 154 ITR 460 (Cal) and on similar facts the issue was decided in favour of assessee.
15. In the case of CIT v. A. Krishnaswami Mudaliar and Ors. (supra) the apex Court had long back settled the issue that whatever the method adopted by assessee i.e., either cash method or mercantile method, the results shown as per method have to be accepted. At p. 129 the Hon’ble apex Court has discussed this aspect as under :
“Among Indian businessmen, as elsewhere, there are current two principal systems of book-keeping. There is, firstly, the cash system in which a record is maintained of actual receipt and actual disbursements, entries being posted when money or money’s worth is actually received, collected or disbursed. There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e., on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment. For example, when goods are sold on credit, a receipt entry is posted as of the date
of sale, although no cash is received immediately in payment of such goods;and a debit entry is similarly posted when a liability is incurred although payment on account of such liability is not made at the time. There may have to be appropriate variations when this system is adopted by an assessee who carried on a profession. Whereas under the cash system no account of what are called the outstandings of the business either at the commencement or at the close of the year is taken, according to the mercantile method actual cash receipts during the year and the actual cash outlays during the year are treated in the same way as under the cash system, but to the balance thus arising, there is added the amount of the outstandings not collected at the end of the year and from this is deducted the liabilities incurred or accrued but not discharged at the end of the year. Both the methods are somewhat rough. In some cases these methods may not give a clear picture of the true profits earned and certainly not of taxable profits. The quantum of allowances permitted to be deducted under diverse heads under Section 10(2) from the income, profits and gains of a business would differ according to the system adopted.”
16. In the case of Kedar Nath Jute Mfg. Co. Ltd. v. CYT (supra) the Hon’ble apex Court had held that the liability arising due to the entries made in the books of accounts are allowable, because the method of accountancy adopted by assessee was mercantile one.
17. In the case of Calcutta Co. Ltd. v. CJT (supra), the apex Court has held that where the assessee was following the mercantile system of accounting, expenditure accrued ‘but not actually incurred during the relevant accounting year, was allowable.
18. In the case of Bestowell (India) Ltd. v. CYT (1979) 117 ITR 789 (Cal) the Hon’ble Calcutta High Court has held that the assessee maintained its accounts on mercantile basis. On devaluation of the Indian currency, the liability of the assessee immediately increased to the extent the rupee was devalued and the assessee became liable to pay and/or spent an extra amount in rupee in order to pay its dues. The liability of the assessee arose during the assessment year and cannot be said to be a contingent liability or as anticipated further loss.
19. Similar view has been expressed by the Calcutta High Court in the case of CIT v. International Combustion (I) (P) Ltd. (supra) and in case of Oil India Co. Ltd. v. CIT (1982) 137 ITR 156 (Cal).
20. In the case of CIT v. IBM. World Trade Corporation (1986) 161 ITR 673 (Bom), the Hon’ble Bombay High Court, by following the decision of Supreme Court in the case of Sutlej Cotton Mills Ltd. (supra) allowed the similar claim of assessee by holding that the excess in Indian rupees in the year in which the remittance was made was as much a trading liability as the amount in Indian rupees required earlier and allowed as revenue expenditure.
21. In the case of CIT v. Bank of India (supra) the Bombay High Court has held that the Tribunal was right in holding that the exchange loss claimed by assessee as a result of fluctuation in the rate of exchange of foreign currencies held by it as balance in its foreign branches, was allowable as deduction because the foreign currencies were stock-in-trade.
22. We have given our anxious consideration to the facts and circumstances of
the case, rival submissions and the various case law relied upon by the learned counsel in regard to claim of loss on account of difference in value of Indian rupee against foreign currency. We find that most of the cases are where the devaluation of rupee took place. The issue in regard to devaluation of rupee has almost settled now, that where devaluation took place and on that basis a difference arose, the loss has to be allowed even without considering whether any payment was made or not. There are certain decisions on this issue of fluctuation in foreign currency rates also. In all these cases the method of accountancy was mercantile system, and after considering the aspect of accounting system adopted by assessees, then the claim of the assessees was allowed by various High Courts and Benches of the Tribunal.
23. On the basis of principles enunciated in various judicial decisions, we propose to formulate certain test questions with a view to deciding the issue before us in the light of answers to those questions. These are as under:
(i) Whether the system of accounting followed by the assessee is mercantile system, which brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received;
(ii) Whether the same system is followed by the assessee from the very beginning and, if there was a change in the system, whether the change was bona Me;
(iii) Whether the assessee has given same treatment to the losses claimed to have accrued and to the gains that may accrue to it;
(iv) Whether there has been consistency and definiteness in making entries in the account books in respect of losses and gains;
(v) Whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards;
(vi) Whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation.
24. We would now advert to the facts of ONGC’s case.
25. We find that the AO has disallowed the claim of the assessee following the assessment order for the preceding year wherein it was held that the loss claimed by assessee is a notional one and the claim of the assessee will be allowed only in the year when the loan would be actually repaid. In other words, according to the AO the liability was only a contingent liability which would remain so and convert itself into an ascertained liability only at the time of repayment of the loan. Nowhere the AO has considered the method of accountancy adopted by the assessee. The CIT(A) has not stated anywhere that the method of accounting adopted by assessee is not consistent, Rather at p. 17 of the order of the CIT(A), it has been stated that the method of accounting adopted by assessee is mercantile system of accountancy. However, the CIT(A) confirmed the order of AO by observing that the liability is contingent and contingent liability is not allowable.
25.1. From the facts of the present case it is seen that the method of accounting adopted by the assessee right from asst. yr. 1982-83 is mercantile
system and it has been consistently claiming the losses suffered by it on account of fluctuation in foreign currency rates only on accrual basis. In fact, in asst. yrs. 1982-83 to 1986-87 the claim of the assessee was allowed by the AO. Of course, upto asst. yr. 1981-82 the loss was claimed in the year in which the loans or part thereof were repaid. Thus, the assessee had changed its method of accounting from asst. yr. 1982-83 but the bona fides of the change were not doubted or disputed by the Department. Further, the assessee has been consistent and definite in making entries in its account books in respect of the losses suffered on account of fluctuation in foreign currency rates. In the circumstances, the answer to question Nos. (i), (ii) and (iv) is in affirmative.
26. It is noticed that by adopting the same accounting principles that are adopted in the year under consideration, the assessee had shown a gain of Rs. 293.37 crore during asst. yr. 1997-98 because the Indian rupee appreciated as compared to foreign currency. The assessee offered this amount for taxation and the Department also has taxed the same. In one year the Department is denying the claim in another year when there was a profit, the Department is taxing the same. This situation is like blow hot blow cold, which in our considered view, should not be permitted, as the same is against the principle of natural justice and also against the principle of accounting. The answer to question No. (iii) is, thus, also in affirmative.
27. The Accounting Standard-11 (AS-11) on ‘Accounting for the Effects of Changes in Foreign Exchange Rates’ issued by the Institute of Chartered Accountants of India, which came into effect in respect of accounting periods commencing on or after 1st April, 1987, provides in paras. 23 and 25(a) as under:
“23. At each balance sheet date, there may be items of foreign currency assets and liabilities, i.e., items to be received or paid in foreign currency, in respect of transactions not settled within the same accounting period. An exercise should be carried out to perceive the impact of convening such items at the closing rate. This conversion process should be carried out separately for the following two categories of items –(a) current assets and current liabilities; and (b) long-term liabilities. The results of the conversion should be dealt with in the manner described in paras. 24 and 25.
25.(a) In the case of long-term liabilities other than those incurred for the acquisition of fixed assets, if the result of conversion at the closing rate is an overall net gain, such gain should not be taken into account and the long-term liabilities should continue to appear in the books at the rates at which they were originally recorded. On the other hand, if the result is a net loss, the long-term liabilities should be restated and the loss should be charged in the profit and loss statement. However, such losses can also be deferred and recognised in the profit and loss statement of current and future periods over the remaining term of liabilities to which they relate. Such deferral is not permitted if it is reasonable to expect that recurring exchange losses will arise on that item in future.”
27.1. It is clear from the guideline issued by ICAI as AS-11 that if the result of conversion at the closing rate is a net loss, the long-term liabilities should be
restated and loss should be charged in the P&L a/c. However, deferral of the liability over the remaining term of the liability is not permitted if such losses are likely to recur. Thus, the claim made by assessee is according to the accepted accounting standards and question No. (v) is also to be answered in affirmative.
28. Nothing is brought by the Department on record even to whisper that the system adopted by the assessee for claiming fluctuation losses or gains was a device to reduce the incidence of taxation. As is mentioned above, M/s ONGC are a wholly-owned Government of India undertaking: Admittedly, their accounts are prepared as per the provisions of the Companies Act. They are duly audited by the Accountant General of India and further approved and endorsed by Parliament. There is, therefore, no scope for answering the question No. (vi) in negative.
29. In view of the foregoing discussion, answer to all the test questions is in favour of the assessee.
30. We further note that various Benches of the Tribunal have also considered this aspect. In the case of Hindustan Aeronautics’Ltd. v. Dy, CIT decided by Bangalore Bench of ITAT in ITA No. 2420/90 for asst. yr. 1983-84, it was held that loss on account of change in foreign currency rate, is allowable. While doing so the Tribunal considered the various case laws, such as, New India Industries Ltd. v. CIT (1993) 203 ITR 933 (Guj) ; IBM World Trading Corporation: Sutiej Cotton Mills and Kedar Nath Jute Mfg. Co. (supra). Copy of the Tribunal’s order is placed at p. 574 of the paper book. We further noted that in this case a reference application was filed and the matter was also sent to the Department of Legal Affairs for its consideration and the Department of Legal Affairs, after considering the similar issue was decided in the case of Welding Rods Manufacturing Co. by the Gujarat High Court (supra) and in the case of CIT v. Super Scientific Clock Co. (1999) 238 ITR 731 (Guj), where Additional Solicitor General of India advised not to file SLP has stated that the Tribunal has decided the issue correctly and it was further mentioned in its advisory note dated 24th August, 1999, that as such the CBDT should not be permitted to challenge the Tribunal’s order before the High Court. Copy of this advisory note of Department of Legal Affairs is placed at pp. 580 to 582 of the paper book filed by assessee. We further noted that on the basis of advice of Department of Legal Affairs, the Committee on Disputes has not granted approval. Copy of the order of the COD is placed at pp. 583 and 584 of the paper book.
30.1. In another case of Brockhoven B.V. v. Dy. CIT, the Bombay Bench of the Tribunal in ITA No. 8344/B/90 for asst. yr. 1986-87, has held that the claim of the assessee is revenue in nature and is allowable. Copy of the order of the Tribunal is placed at pp. 632 of the paper book. The Department filed writ petition before the High Court and the High Court has dismissed the writ petition of the Department by observing that “the AO admits that liability is of revenue nature. Assessee followed mercantile system. Hence, appeal is dismissed.” Copy of the order of the High Court is placed in the paper book at p. 635.
30.2. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Telmechanique & Control India Ltd. v. Dy. Off (supra) and has decided the issue by holding that the system of the assessee is mercantile system and the claim of the assessee on account of fluctuation in exchange rate is a revenue loss. Copy of the order of the Tribunal is placed at p. 641 of the paper book.
30.3. Identical issue came before the Delhi Bench of the Tribunal in the case of Richer Goodearth in ITA No. 7078/Del/1992 for asst. yr. 1989-90 (supra) and the Tribunal decided the issue in favour of assessee. The findings and observations are given in para. 6.34 onwards of the order of the Tribunal, wherein it has observed that the method of accounting of the assessee is mercantile one, accordingly the loss on account of foreign exchange rate accrued and assessee has rightly claimed the loss.
31. The copy of decision in the case of assessee, i.e., M/s ONGC decided by the Tribunal for asst. yr. 1994-95 is placed in the paper book at p.. 714 onwards. In this year the Tribunal has dismissed the appeal of the assessee on account of exchange loss. After perusing the order of the Tribunal, nowhere we found that the aspect in regard to adopting the mercantile system of accounting has been discussed. We further noted that the various case laws, as discussed above, were also not discussed by the Tribunal, may be for the reasons that these decisions may not have been brought to the knowledge of the Bench at the point of time.
32. We have also perused the auditors report in the case of ONGC, copy placed at p. 127, in which it has specifically been stated that the foreign loans/credits outstanding at the end of the year are converted at the mean exchange rate of TT buying and selling. It has been further clarified that loss or gain due to exchange fluctuation is charged to P&L a/c.
32.1. In Rule 115 of the IT Rules, 1962, issue in regard to rate of exchange for conversion into rupees of income expressed in foreign currency, has also been clarified as under:
“The rate of exchange for the calculation of the value in rupee of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in the foreign currency, shall be telegraphic transfer buying rate of such currency as on the specified date.”
In sub-cl. (c) it has been further clarified that,
(c) in respect of income chargeable under the heads “Income from house
property”, “profits and gains of business or profession”….., the last date of
the previous year of the assessee.”
33. We further find that COD has not yet granted approval to the Department to agitate the issue in the appeals filed by it for asst. yrs. 1987-88 to 1990-91; whereas in the case of assessee for asst. yr. 1991-92, the COD has granted approval for contesting appeal before the Tribunal. We have also seen that on same set of facts, in case of Hindustan Aeronautics, even the Department of Legal Affairs has advised the CBDT not to take approval for contesting further and COD has rejected the application of the Department.
34. Before concluding, we would like to point out that the assessee’s claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year, has been disallowed by the AO, inter aha, on the ground that this liability was a contingent liability and the loss was a notional one. The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessee, the “event” i.e., the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessee is a fait accompli and not a notional one.
35. On a careful consideration of all the facts and circumstances and the decisions of the various Benches of the Tribunal, High Courts and Supreme Court, as discussed above, the only conclusion which can be drawn is that the assessee’s claim of loss on account of fluctuation in foreign currency rate is allowable. Accordingly, we allow the claim of the assessee.
36. For the sake of clarification we may point out that in the appeal in case of ONGC no other issue is involved. This is, however, not so in the case of M/s Maruti Udyog. Therefore, the appeals of Maruti Udyog may be put up before regular Bench, who may decide the issue with regard to loss on account of fluctuation in foreign currency rate in accordance with the decision of this Special Bench, and other issues in accordance with law.
37. In the result, the appeal of the assessee is allowed.