Foreign exchange fluctuation loss-If event has occurred before balance sheet date and a subsequent event materially affects profits, it has to be provided

Foreign exchange fluctuation loss event occurring before balance-sheet date.

If the event has occurred before the balance-sheet date and a subsequent event materially affects the profits, then the same has to be provided in the balance-sheet which is finalized after the closing of the year. This was held by ITAT in a recent case as under.

ABCAUS Case Law Citation:
948 2016 (06) ITAT
Date of Judgment/Order June, 2016
AY: 2006-07

Brief Facts of the Case:
The appellant assessee company in the year under assessment, had temporarily entered into a new venture of trading of telephone equipments. and had declared a net loss from foreign exchange fluctuation of Rs. 6,66,060/-. In response to AO’s query, the assessee stated that company imported 12000 telephone equipments (USD 68 per equipment) amounting USD 816000/-. As per bill of entry for the said import dollar pries were at Rs. 44.45 per dollar. However, at the time of actual payment i.e. on 10th May 2006 and 18th May 2006, company had paid USD 408000 @ Rs. 45,0325 and USD 408000 @ Rs. 45.50. The transaction caused a total loss of Rs. 666060.

The AO was not convinced with the assessee’s reply. AO was of the view that to claim the loss, it must actually be suffered in the relevant previous year. Actual suffering would arise only at the time of remittances and not before. He, therefore, disallowed the assessee’s claim treating the same as unrealized loss on account of foreign exchange fluctuation.

CIT(A) confirmed the AO’s order observing that the loss in question did not pertain to the assessment year under consideration.

Important Excerpts from ITAT Judgment:

……. Admittedly the loss on account of foreign exchange fluctuation related to the imports made during FY 2005-06. This loss got quantified only on the date of payment viz. 10.5.2006 when the payment was made by assessee, as per Accounting Standard-4, issued by the Institute of Chartered Accountants of India, as per paras 8.1 and 8.2, which are reproduced hereunder:

8.1. Events which occur between the balance sheet date and the date on which the financial statements are approved, may indicate the need for adjustments to assets and liabilities as at the balance sheet date or may require disclosure.

8.2. Adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date. For example, an adjustment may be made for a loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date.”

It is pertinent to note that in the same Accounting Standard it is specifically mentioned in para 8.3 that no adjustment is required to be made and liabilities for events occurring after the balance-sheet date, if such events do not relate to conditions existing at the balance-sheet date. Therefore, it is clear that if the event has occurred before the balance-sheet date and a subsequent event materially affects the profits, then the same has to be provided in the balance-sheet which is finalized after the closing of the year. We, therefore, direct the AO to allow the loss claimed by assessee, particularly because it is not disputed that the imports were made during FY 2005-06.