Exchange Rate Dispute in Mridu Hari Dalmia vs ACIT – ITA No. 6264/DEL/2019 (Assessment Year 2011-12)

Case Analysis: Mridu Hari Dalmia vs ACIT – ITA No. 6264/DEL/2019

Case Number: ITA 6264/DEL/2019

Appellant: Mridu Hari Dalmia, New Delhi

Respondent: ACIT, Circle-1(2)(2) (International Taxation), New Delhi

Assessment Year: 2011-12

Order Type: Final Tribunal Order

Date of Order: 29th September 2022

Case Filed On: 24th July 2019

Bench: Sh. Saktijit Dey, Judicial Member, and Dr. B. R. R. Kumar, Accountant Member

Introduction

The case of Mridu Hari Dalmia vs ACIT concerns a dispute over the correct exchange rate to apply to foreign remittances received by the appellant during the assessment year 2011-12. The issue arose from the Assessing Officer (AO) adding Rs. 13,36,077 to the appellant’s taxable income, based on an average exchange rate instead of the actual exchange rates on the dates of receipt. This addition led to the appellant filing an appeal before the Income Tax Appellate Tribunal (ITAT), Delhi.

Background of the Case

Mridu Hari Dalmia, a resident of New Delhi, received foreign remittances during the financial year 2010-11. The remittances, made in US dollars, were converted to Indian Rupees at the time they were deposited into the appellant’s bank account. The dispute arose because the AO applied an average exchange rate of 44.58 per USD to calculate the income from these remittances, leading to an additional Rs. 13,36,077 being added to the appellant’s income. The appellant contended that the actual exchange rates on the dates of receipt, ranging from 39.29 to 48.33 per USD, should have been used instead.

Why the Case Was Filed

The case was filed because the appellant believed that the income had been incorrectly assessed by the revenue authorities. The primary contention was that the AO’s use of an average exchange rate did not accurately reflect the true income received by the appellant. The appellant argued that applying the actual exchange rates on the dates of receipt would provide a more accurate representation of the income earned from the foreign remittances.

Proceedings at the ITAT

The appeal was heard by the ITAT Delhi Bench ‘D’, where the appellant was represented by Sh. Dharam Gandhi, Advocate, and Sh. Rotash Jain, Chartered Accountant. The revenue was represented by Ms. Garima Sharma, Senior Departmental Representative. During the hearing, the appellant’s representatives argued that the use of an average exchange rate was arbitrary and did not align with the actual receipts. They emphasized that the Income Tax Act requires the conversion of foreign currency at the exchange rate prevailing on the date of receipt.

The revenue, on the other hand, argued that the use of an average exchange rate was a reasonable and consistent method for assessing income from foreign remittances, and that the addition made by the AO was justified.

Grounds of Appeal

The appellant raised several grounds of appeal, including:

• The CIT(A) erred in confirming the addition of Rs. 13,36,077 by using an average exchange rate of 44.58 per USD instead of the actual exchange rates on the dates of receipt.
• The addition was arbitrary and did not reflect the true income received during the assessment year.
• The method of using actual exchange rates on the dates of receipt is in line with the provisions of the Income Tax Act and should be accepted.

Tribunal’s Findings

After reviewing the arguments and the evidence on record, the ITAT found that the appellant’s approach of using the actual exchange rates on the dates of receipt was correct. The Tribunal noted that the Income Tax law mandates that foreign currency receipts be converted into Indian Rupees at the exchange rate prevailing on the date of receipt. This approach ensures that the income is accurately represented, based on the actual value received.

The Tribunal criticized the AO’s use of an average exchange rate, stating that it did not account for the fluctuations in the exchange rate during the year, which could lead to an inaccurate representation of the appellant’s income. The Tribunal emphasized that the assessment should reflect the real economic transactions and that the use of an average rate could distort the actual income received.

In its order, the ITAT stated, “We have gone through the entire facts on record and find that the revenue has taken an average exchange rate of 44.58 per USD on the remittances received, whereas the assessee has offered to tax the entire receipts by taking the exchange rate prevalent as on the date of receipt of the dollars in the bank account with the exchange rate ranging from 39.29 to 48.33 per USD. Considering the exchange rate as on the date of receipt, we hold that no further addition is attracted in this case.”

ITAT’s Conclusion and Order

The ITAT concluded that the addition made by the AO was unwarranted, as the appellant had correctly computed the income based on the actual exchange rates on the dates of receipt. The Tribunal directed the deletion of the Rs. 13,36,077 addition, reinforcing the principle that income should be assessed based on the real value received by the taxpayer.

This ruling underscores the importance of using accurate and context-specific exchange rates in assessing income from foreign remittances. The ITAT’s decision serves as a precedent for similar cases, emphasizing that the assessment must reflect the actual economic reality of the transactions.

Final Judgment

The final judgment in the case of Mridu Hari Dalmia vs ACIT (ITA No. 6264/DEL/2019) confirms that income from foreign remittances should be assessed based on the actual exchange rates on the dates of receipt, rather than an arbitrary average rate. The Tribunal’s decision to allow the appeal and delete the addition of Rs. 13,36,077 provides clarity on the correct approach to be taken in similar cases.

Bench: Sh. Saktijit Dey, Judicial Member, and Dr. B. R. R. Kumar, Accountant Member

Order Pronounced On: 29th September 2022

Result: The appeal is allowed, and the addition of Rs. 13,36,077 is deleted.

Exchange Rate Dispute in Mridu Hari Dalmia vs ACIT – ITA No. 6264/DEL/2019 (Assessment Year 2011-12)