- (1.) WE have heard Shri S.P. Gupta, Senior Advocate assisted by Shri R.P. Agarwal for the applicant -assessee. Shri A.N. Mahajan appears for the income tax department.
(2.) THIS income tax reference arises out of a combined order of the Tribunal in ITA Nos.1505 of 1986, 1992 of 1986 and M.A. No.9 of 1987 on the questions called for and referred by the Income Tax Appellate Tribunal as follows: (1) Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the surplus of Rs.79,68,902/ - arising on transition of items of debits and credits in the assessee's trial balance kept in Iraqui Dinars into Indian currency (rupees), gave rise to income liable to tax under I.T. Act, 1961? (2) Whether on the facts and on the circumstances of the case, the ITAT was legally correct in holding that the amount of Rs.37,58,732/ - assessed under Rule 115 of I.T. Rules, 1962 was not included in the aforesaid surplus of Rs.79,68,902/ - ? (3) Whether on the facts and in the circumstances of the case, the ITAT was legally correct in further holding that the amount of Rs.37,58,732/ - assessed under Rule 115 of I.T. Rules, 1962, could not be attributed to the surplus, arising out of translation of items of income and expenditure in the assessee's trial balance kept in Iraqi Dinars, into Indian currency (Rupees) and this was not liable to be excluded from the surplus of Rs.79,68,902/ - ? The facts as stated in the statement of the case in the order of reference are as follows: The assessee is a Govt. company owned by the State of Utter Pradesh. It derives income from contract work undertaken, inter alia, in foreign countries for the construction of bridges etc. Its accounting period for the assessment year 1982 -83 commerced on Ist October, 1980, and ended on 30th of September, 1981. During the accounting period under consideration, bulk of its contract work was being done in Iraq and most of its income was from its contract earned in Iraqi Dinars. While going through the notes on accounts, forming part of the Balance Sheet as on 30th September, 1981, and profit and loss account for the year ended on that date, the ITO observed that the difference in exchange rate due to conversion of foreign currency into Indian rupees had been kept in the Exchange Reserve Account (Note No.26). The said difference this year was a credit figure of Rs.79,68,902/ - In the earlier year, this figure was debit figure and was debited by the assessee to its profit and loss account as an item of loss. This year, however, the aforesaid amount being a credit figure was not similarly credited to the profit and loss account but was instead taken to the Exchange Variation Reserve Account in the Balance Sheet directly. This change in the accounting pattern was pointed out by the Auditor vide Note No.26 referred to above. The company explained to the IAC (Asstt.) that the aforesaid amount was kept in the Exchange Variation Reserve Account on account of Company's Accounting policy No.8. The said accounting policy No.8 read as below: 5. I have also gone through the accounting policy No.8 which reads as under: Translation variances in respect of non current items end depreciation are transferred to exchange variation account and, if the balance at the end of the year is debit, the same is changed to profit and loss account. If the balance is in credit, it is carried to exchange variation reserve account for subsequent set off of debit balance, if any.
(3.) THE IAC (Asstt.) did not accept the above contention of the assessee. He made, inter alia , the following observations in this regard: The contention of the assessee is not accepted and the gain on account of fluctuation in exchange rate should have been shown as receipt. The assessee Corporation can not have a policy where the loss on this account is debited to the profit and loss account and the gain is not so credited. Even if this is the accounting policy of the Corporation, the treatment given by them in their books of account will not matter as far as the taxation of the receipt is concerned. Such gains or losses are obviously trading receipts or trading expenses, as the case may be, and should be given due effect too. This is an accepted principle of taxation and in a very recent case of M/s Jai Prakash Associated Private ltd., the learned CIT (A) has exhaustively dealt with the issue and come to the some conclusion. Assessee Corporation also was claiming it as loss or showing it as profit till assessment year 1981 -82, but when the gains were huge in the assessment year under assessment, the policy was changed. Obviously, it was done to understate its income and the change is not bona fide. The amount of Rs.79,68,902/ - representing gain to fluctuation in Foreign Exchange Rate, will, therefore, be brought to tax.;