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2023 (3) TMI 909 - AT - Income TaxUpward adjustment on account of foreign exchange losses on ECB loan - upward adjustment on account of ‘loss on derivative contracts’ - AO had rejected the claim on the ground that ECB loan was availed by the assessee from Canara bank to refinance the other capital expenditure loans which was obtained in rupees and the foreign exchange loss incurred on repayment was in the nature of capital loss which has to be capitalized to the cost of the same and hence was not allowable u/s. 37 - HELD THAT:- Section 42A of the Act is not applicable for the present case where the assessee is not said to have accrued any asset in foreign currency and the only object of refinancing the loan was to pay the earlier debts for the purpose of reducing the cost of interest. As in the case of Cooper Corporation (P.) Ltd. vs. Dy. CIT, Satara [2016 (5) TMI 809 - ITAT PUNE] where similar issue has been dealt with extensively in favour of the assessee and the relevant extract of the said decision is cited hereunder for ease of reference For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case 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 cannot be faulted. No inconsistency with any provision of Act or with any accounting practices 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 savings 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. Loss incurred by the assessee in foreign currency exchange is allowable as ‘revenue expenditure’ and is a ‘revenue loss’ for which the assessee is entitled to deduction as ‘revenue expenditure’. In the absence of any finding that the loan obtained by the assessee is utilized for the purpose of accruing assets, we hold that the said loan was availed for the purpose of reducing the cost of interest, which is an allowable expenditure u/s. 37(1). Adjustment on account of loss on derivative contracts - HELD THAT:- We would like to place our reliance on the decision of Reliance Industries Ltd. [2014 (2) TMI 836 - ITAT MUMBAI] wherein it was held that the forex loss incurred during fluctuation in foreign currency exchange is not a notional loss and was allowable as ‘deduction’. 'Marked to market loss’ is not a notional loss and is, therefore, allowable expenditure. We also hold that the said transaction is not a speculative transaction as per section 43(5) of the act and is merely a hedging transaction and thereby the same would fall under the exception to section 43(5) of the Act. We hereby direct the A.O. to allow the said loss while computing the income of the assessee.
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