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TMI Blog2016 (5) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 29-4-2016 - MS.SUSHMA CHOWLA, JUDICIAL MEMBER AND PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER For The Appellant : Krishna Gujarathi For The Respondent : Hitendra Ninawe ORDER Pradip Kumar, Accountant Member - The captioned appeal filed by the assessee is against the order of CIT(A)-III, Pune dated 26.02.2014 relating to assessment year 2008-09 passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. In this appeal, the assessee has raised the following Grounds of Appeal :- 1. The learned CIT (A) erred on facts and in law in upholding disallowance of foreign exchange fluctuation loss of ₹ 1,02,06,863/- considering it as capital in nature. She failed to appreciate the facts in its proper perspective and also failed to appreciate the arguments and contentions advanced by the assessee in this regard. 2. Without prejudice to the above ground No. 1 and in the alternative, the CIT (A) ought to have allowed capitalization of foreign exchange fluctuation loss of ₹ 1,02,06,863/- and consequent depreciation u/s. 32 of the Income Tax Act, 1961. 3. The appellant craves leave to add, alter, delete or substitute all or any of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the impugned year. It was thereafter submitted that subject to the provisions of S. 43A, the profit / loss arising from such conversion which is in accordance with the method of accounting regularly employed by the assessee is a revenue item. The Assessee took a stand before the AO that overriding provision of section 43A has no application in the instant case since, the assets were not acquired from a country outside India. Such loans so converted are for the purpose of business and therefore loss incurred due to fluctuation in the rate was correctly claimed as business loss in the course of carrying on of business. It was further argued before the Assessing Officer that there is no provision in the Income-tax Act to reject the loss incurred on fluctuation in exchange as revenue expense except section 43 A which provides capitalization of such loss where the loan was taken on acquisition of any capital asset outside the India. The Assessing Officer, however, did not find merit in the claim of the assessee. The AO took a view that the so called loss is merely a notional loss and not an actual loss incurred by the company. The Assessing Officer further observed that even presumi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were purchased in India. It was submitted that interest on these rupee loans were charged at the rate ranging from 12% to 14% p.a.. Therefore, in order to save on the interest costs, these term loans sanctioned to part finance its expansion projects etc. were converted, over a period of years, into foreign exchange loans where the interest rate was chargeable ranging from 6% to 7% p.a.. The Ld. AR for the assessee thus explained that the purpose of the conversion was essentially to save on interest costs and hence the obligations in foreign currency were taken on such conversion with a view to gain an advantage in the revenue field. He submitted that due to unfortunate fall in the value of the Rupee vis-a-vis USD in the international market, the assessee was made to suffer foreign exchange losses on the outstanding loans repayable in foreign currency. Mr. Gujarathi, thereafter canvassed that as per AS-11 concerning effects of changes in foreign exchange rates issued by ICAI, the outstanding liabilities in foreign currency are required tp be necessarily converted into India currency by applying the foreign exchange rate prevailing as at the closing date of relevant accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year. The Ld. AR submitted that as per the aforesaid notification also, the CBDT has addressed the issues relating to the effects of changes in foreign exchange rates, With reference to above CBDT Notification, the Ld. AR submitted that the profit or loss arising from the exchange differences shall be recognized as income or as an expense in the relevant assessment year except in cases governed by provisions of section 43A of the Act. It was submitted that CBDT notification merely clarifies the existing position of law and equally applies to assessment year 2008-09 in appeal. 7.1 Addressing the applicability of S. 43A in the context, the Ld. AR submitted that the aforesaid provision is not applicable in the present case on the ground that rupee term loans initially taken were not utilized for acquisition of capital assets from outside India. The Ld. AR added that there is no provision to disallow the foreign exchange fluctuation losses under the Income-tax Act except section 43 A of the Act. In view of the legal liability accrued against the assessee due to fluctuation and in view of the accounting methods and policies employed consistent with Accounting Standards presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e utilized for the purpose of acquisition of capita asset and the foreign currency loan substituted in place of the Indian Rupee loan taken earlier year makes no difference to the nature of the loan. He relied upon the decision of the Hon'ble Supreme Court in the case Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1 (SC) for the proposition that the loss incurred in respect of capital asset is not allowable business expenditure irrespective of the manner in which the entries have been passed in the books of account. The Ld. Departmental Representative also submitted that apart from the stand of the revenue that foreign exchange fluctuation loss have been originated in the capital field, it is also the case of the revenue that the liability is contingent in nature and therefore requires to be ignored. He submitted that the impugned increase in liability and corresponding losss are merely notional and contingent with no actual outgo owing to devaluation of the value of Indian rupee vis a vis foreign currency in which the loans have been secured. 9. In rejoinder, The Ld. Counsel for the Assessee submitted that facts of the case in Sutlej Cotton Mills Ltd. are entirely differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom such conversion of the liability at the closing rate should be recognized in the profit loss account for the reporting period. In the same vain, CBDT notification S.O. 892(E) dated 31-03-2015 referred to also inter alia deals with recognition of exchange differences. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in Section 43 A or Rule 115 of the Income Tax Rules, 1962 as the case may be. 10.3 The contention of the revenue that the loss is only contingent and notional and subsisting has been examined. As per section 209 of the Companies Act, 1956, the Assessee being a company is required to compulsorily follow mercantile system of accounting. S. 211 of the Companies Act, 1956 also, in terms, mandates that accounting standards as applicable is required to be followed while drawing statement of affairs. S. 145 of the Income Tax Act, 1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. Thus, in view of the various provisions of the Companies Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment A bare reading of the aforesaid provision of Section 43 A, which opens with a non-obstante and overriding clause, would show that it come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r reduce revenue losses of the assessee. The impugned fluctuation loss therefore has a direct nexus to the saving in interest costs without bringing any new capital asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, We are of the opinion that the plea of the assessee for claim of expenditure is attributable to revenue account has considerable merits. 10.8 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter-alia has to be computed in accordance with cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify accounting standards to be followed for determination of business income. Section 211 of the Companies Act also similarly casts a duty on a company to give a true and fair view of the profit and loss of the company for the financial year. It also requires the company to adhere the accounting standards for preparation of profit in the Profit Loss Account and the Bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification can not be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. The order of the CIT(A) sustaining the disallowance is not called for and is thus reversed. In the result, the Ground No.1 is allowed. 12. The Assessee has sought relief towards depreciation in the alternative as per Ground no. 2. Thus, Ground no. 2 is rendered infructuous and does not require adjudication in view of the relief given as per Ground No. 1 of the Appeal. 13. Resultantly, the appeal of the assessee is al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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