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Tax board orders scrutiny of firms taking AS-11 relief
August, 26th 2009

Move to check whether forex borrowings are genuine or speculative

The Central Board of Direct Taxes (CBDT) has advised its field formations to scrutinise all cases in which companies have amortised foreign exchange losses under the one-time discretion allowed by the government through an amendment to Accounting Standard 11 (AS-11).

In its discussions with chief commissioners last week, the board asked the tax departments to scrutinise long-term foreign currency monetary items in all company returns, especially in the light of this new amendment. Sources close to the development said the scrutiny will assess the nature of foreign exchange losses typically on overseas borrowings.

The temporary relief on AS-11 was permitted on March 31 against the background of the sharp depreciation of the rupee against the dollar, euro, pound and Swiss franc in 2008. As a result of this, several companies with significant foreign currency loans had to suffer mark-to-market losses.

Under AS-11, gains or losses from foreign exchange fluctuations have to be recognised in the profit and loss account. The amendment to AS-11 provided an option to capitalise or amortise exchange differences on long-term foreign currency positions (typically overseas borrowings) with retrospective effect from December 2006.

This was done by adding or deducting such losses from the cost of fixed assets if, and only if, the money was borrowed for acquiring an asset. This treatment enabled companies to make adjustments directly on the balance-sheet by bypassing provisioning in the profit and loss account.

The CBDT think the amendment has substantial revenue implications on corporate earnings since this option, once exercised, is irrevocable. Since almost every company has forex exposures, the losses could have run into thousands of crores, tax officials said.

"One has to see whether these borrowings are for the acquisition of capital assets or a part of speculative or treasury operations just to manage currencies," a source said.

There have been several reports of positions being taken on currency movements just for speculative gains, officials said. In that case, they pointed out, there is no justification for the company to take advantage of this one-time relief granted by the government

"The amortisation will be allowed if the reason is genuine; otherwise or the amortisation will be cancelled," they added.

 
 
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