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. 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.
(3.) 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.;