4.

The assessees submission is carefully considered. The point of

contention is whether the notional loss arising on account of foreign exchange fluctuation is to be allowed as revenue expenditure u/s 37(1), vis-vis Accounting Standards prescribed by the ICAI and Supreme Courts judgement in the case of CIT v. Woodward Governor India (P) Ltd. 4.2 Before evaluating the above point, it is imperative to understand the

meaning and relevance of Accounting Standards and their place in the Indian fiscal law. Accounting Standards are adopted in order to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements. Sub Section (3A) to Section 211 of Companies Act, 1956 requires that every Profit/Loss Account and Balance Sheet shall comply with the Accounting Standards. 4.3 The Institute of Chartered Accountants of India, recognizing the need

to harmonize such diverse accounting policies and practices, constituted Accounting Standard Board (ASB) on 21st April, 1977. Based on their recommendations, the 'Accounting Standards' are prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAs) constituted under section 210(1) of companies Act, 1956. 4.4 One of the main objectives of Accounting Standards is true and

correct disclosure of financial status of a concern, which is necessary to protect the interests of various concerned parties like the companys shareholders, its employees, its creditors, regulating agencies and investing public. Accounting Standard 11 is one such standard which mandates companies to make mark to market provisions in their profit and loss accounts on account of fluctuations in foreign exchange rate. Accordingly, assessee has recognized the notional losses as expenditure, thereby

reducing profit. Further the assessee has claimed the same u/s 37(1) of the IT Act, as revenue expenditure. 4.5 However, the fiscal law of a nation can have objectives which may be

divergent from the Accounting Standards. As such, adherence to Accounting Standards is not binding on tax authorities unless specifically mandated so. AS 11 is not notified to be binding. On the other hand, AS 11 runs contrary to the Incometax Act, 1961. The provisions consequential to changes in rate of exchange of currency are dealt with in Section 43A of the Act. The allowability of forex loss vis--vis Section 43A has been a subject matter of much judicial litigation, and many judicial pronouncements have interpreted the application of the section, including the Supreme Court judgement in the case of CIT vs. Woodward Governor India (P) Ltd. which the assessee has relied upon. However, it is to be distinguished clearly that the Section under went a total structural change owing its substitution with a new section by the Finance Act 2002, w.e.f. 01.04.2003. The Supreme Court also held so, in the same caselaw that the assessee quoted, i.e. CIT vs. Woodward Governor India (P) Ltd. In this case, in para 34 of the said order, the Supreme Court held that : Lastly, we are of the view that amendment of Section 43A by the Finance Act, 2002 w.e.f. 1.4.2003 is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended Section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended Section 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words "at the time of making payment". In other words, under the unamended Section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended

Section

43A

w.e.f.

1.4.2003

such

actual

payment

of

the

decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in Section 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature. 4.6 In view of the above emphatic statement by the Apex Court that the

substitution is amendatory in nature and is not clarificatory, any judicial pronouncements that interpret the pre-amended Section 43A find no relevance to the current assessment which pertains to the post-amended time period. 4.7 The judgement that the assessee relied on, i.e. CIT vs. Woodward

Governor India (P) Ltd., pertains to AY 1998-99, and the procedure for treatment of notional forex losses laid down by the Supreme Court in that caselaw relied by the assessee is restricted to the pre-amended period and is not relevant to the present case, which pertains to AY 2008-09. A reading of the judgement, which was passed after the amendment came into force, makes it clear that the SC has time and again made its stance clear that its discussion is centred around the pre-amended position. Therefore, in view of the total structural change of the Section owing to the substitution, the assessees reliance on said judgement is misplaced. Assessee is now bound by the letter and spirit of the post-amended Section 43A. 4.8 Incidentally, the meaning of the new substituted Section is also

elucidated in the same judgement, i.e. CIT vs. Woodward Governor India (P) Ltd. The Supreme Court has made it clear that .. under the unamended Section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under

amended Section 43A w.e.f. 1.4.2003 such actual payment of the decreased/enhanced liability is made a condition .. 4.9 The essence of the above words is that post 01.04.2003, any such

claim can be allowed only if the losses are actually incurred, i.e. actual payment is made. Until such time i.e., until the time payment is not actually made, the assessee cannot claim those losses under the Incometax Act, notwithstanding the treatment given in the financial statements as per AS 11. In this case, the payment is not actually made and the loss arrived is on basis of book entries only, and therefore, it is not allowed.