ITAT Lucknow on Foreign Exchange Gain Sharing: Key Takeaways from Syed Asif Ali Vs ACIT

1. Background of the Dispute

The Income Tax Appellate Tribunal, Lucknow Bench, in the case of Syed Asif Ali Vs ACIT (ITAT Lucknow), dealt with an appeal for Assessment Year 2013-14 arising from an order dated 26.08.2020 passed by the CIT(A)-1, Lucknow.

The appeal primarily involved:

  • A major addition of Rs.1,31,59,222/- on account of alleged undisclosed foreign exchange fluctuation gain, and
  • Several disallowances under different expense heads: Job Work, Travelling & Conveyance, Office Expenses, and Vehicle & Staff Welfare Expenses.

The assessee had filed return of income declaring Rs.1,01,80,980/-. The Assessing Officer completed assessment under Section 143(3) of the Income Tax Act 1961 determining total income at Rs.2,73,15,634/- (rounded to Rs.2,73,15,630/-).

Additions/disallowances made in the assessment order included:

  • Foreign Exchange Fluctuation Gain: Rs.1,31,59,222/-
  • Capital introduced: Rs.29,20,000/-
  • Disallowance out of Job Work Expenses: Rs.6,88,901/-
  • Disallowance out of Travelling & Conveyance Expenses: Rs.2,00,000/-
  • Disallowance out of Office Expenses: Rs.1,00,000/-
  • Disallowance out of Vehicle & Staff Welfare Expenses: Rs.66,531/-

In the first appeal, the CIT(A) partly allowed relief:

  • Confirmed the addition of Rs.1,31,59,222/- towards foreign exchange gain,
  • Deleted the addition of Rs.29,20,000/- relating to capital introduced,
  • Granted partial relief on Job Work and Office Expenses, but
  • Confirmed disallowances under Travelling & Conveyance and Vehicle & Staff Welfare Expenses.

The assessee carried the matter further to the ITAT, challenging both the foreign exchange gain addition and the sustained expense disallowances.

2. Facts Relating to Foreign Exchange Fluctuation Gain

2.1 Nature of Export Transactions and Forex Gain

The assessee was engaged in export of goods, with sale consideration denominated in foreign currency. Due to the movement in the exchange rate between:

  • the date of the Bill of Lading (used for invoicing and customs purposes), and
  • the date of actual receipt of export remittances,

there arose a net foreign exchange fluctuation gain of Rs.2,82,92,784/- during the relevant previous year.

In the books of account and the Profit & Loss Account, the assessee recognized:

  • Rs.1,51,33,562/- as foreign exchange fluctuation gain, and
  • Treated Rs.1,31,59,222/- as rebate/discount passed on to the foreign buyer pursuant to a contractual arrangement.

The assessee explained that this Rs.1,31,59,222/- represented the buyer’s share in foreign exchange gains which were required to be shared as per a pre-agreed commercial understanding.

2.2 Contractual Arrangement for Sharing Forex Gain

The record before the Tribunal showed that:

  • There was a prior written arrangement with the foreign buyer/importer.
  • The purchase orders provided that:
    • if foreign exchange gain exceeded 2% of the remittances,
    • such excess gain would be shared in the ratio 55:45 between the assessee and the buyer.
  • The assessee accounted the buyer’s share as “rebate and discount” in its books, aggregating to Rs.1,31,59,222/-.
  • The assessee’s own share of the foreign exchange gain had already been credited to the Profit & Loss Account.

The assessee also informed the RBI through its bankers about the rebate claimed by the buyer by way of deduction from future remittances.

2.3 Assessing Officer’s Stand

The Assessing Officer observed from the Profit & Loss Account that:

  • Total foreign exchange fluctuation gain was Rs.2,82,92,784/-,
  • Only Rs.1,51,33,562/- was credited as income, and
  • The balance Rs.1,31,59,222/- had not been shown as income.

The assessee explained that: