TMI Blog2012 (11) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... against the order dated 14- 09-2011 of CIT(A)-I, Bangalore, relating to AY: 2008-09. 2. The grounds raised by the assessee reads as follows; 1. The ld.AO had erred in passing the order in the manner passed by him and the ld.CIT(A) has erred in confirming the same. The orders passed by lower authorities being bad in law and are liable to be quashed. 2.1 The ld. AO had erred in disallowing the foreign exchange loss on conversion of rupee term into foreign currency loan by holding it to be capital in nature and the ld.CIT(A) has erred in confirming the same. The foreign exchange loss being revenue in nature is to be allowed as business expenditure. 2.2 The appellant had rightly debited the foreign exchange loss to the profit loss account as revenue expenditure. The act of lower authorities to treat the revenue expenditure as capital in nature is contrary to the AS-11. The action of the lower authorities being contrary to law is to be disregarded. 2.3. On the facts and circumstances of the case, the disallowance being contrary to the facts and law is to be deleted. 3. The appellant denies the liability to pay the interest u/s 234B of the IT Act, 1961. The interest h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee submitted that forward contract premium debited to profit loss account under the accounts head foreign exchange fluctuation loss, is on account of conversion of rupee term loan into foreign currency loan at forward exchange rate on the date of conversion and on the payment of installments i.e. at the contracted forward exchange rate and the balance on the last day of the year at the contracted forward exchange rate. The above conversion of rupee term loan into foreign currency loan was made to take the benefit of interest rate which was 16% on rupee term loan where as the rate of interest on foreign currency loan was 10.4% including exchange loss. Further the exchange loss is charged to profit loss account as per AS-II issued by ICAI, which is mandatory for corporate assessee to follow as per sec.211 of the Companies Act, 1956. 6. The CIT(A) did not agree with the submissions of the assessee and held as follows; 7. I have considered the above. Adoption of AS-II may be mandatory for the purpose of accounting under the company law but the same is not mandatory for determination of taxable income under the IT Act. The IT Act provides a scheme to compute the taxable inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting standards are to be followed for determining the tax liability under the Act. It was submitted that exchange differences arising from foreign currency borrowing and considered as borrowing costs are those exchange differences which arise on the amount of principal of the foreign currency borrowing to the extent of the differences between interest on local currency borrowings and interest on foreign currency borrowings. Thus, the amount of exchange difference not exceeding the difference between interest on local currency borrowings and interest on foreign currency borrowings is considered as borrowings cost to be accounted for under this standard and the remaining exchange difference, if any, is accounted for under AS-11. Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure under section 37(1) of the IT Act, 1961. The expression any expenditure has been used in section 37 of the IT Act, 1961 to cover both expenses incurred as well as an amount which is really a loss even though such amount has not gone out from the pocket of the assessee. This was the view held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from the actual cost of the asset as defined in clause (1) of Section 43. 10. There are two reasons why the aforesaid provisions cannot be applied to the facts of the present case. (i) The machinery in question was not purchased from a country outside India. (ii) The sum in question claimed as deduction by the Assessee is premium paid on forward contract to secure against fluctuation in foreign exchange and not loss on account of fluctuation of foreign exchange currency. 11. The learned counsel for the Assessee placed strong reliance on AS-11 issued by Institute of Chartered Accountants of India (ICAI) which lays down as to how the effects of changes in foreign exchange rates have to be reflected in the Financial Statements. Para-36 of AS-11 on which he relied, deals with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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