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Cooper Corporation (P.) Ltd. Versus Deputy Commissioner of Income-tax

2016 (5) TMI 809 - ITAT PUNE

Disallowance of foreign exchange fluctuation loss - Held that:- In the absence of applicability of section 43 A 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 can not be faulted. No inconsiste .....

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us reversed. - Decided in favour of assessee - IT APPEAL NO. 866 (PN) OF 2014 - Dated:- 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 " .....

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ative, 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 the above grounds of appeal. " 3. The predominant issue arising in the present appeal is disallowance of foreign exchange fluctuation loss of ₹ 1,02,06,863/- sustained by the CIT(A) out of total foreign exchange loss of ₹ .....

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sing Officer that in its financial statement, the assessee has interalia shown outstanding loans received in foreign currency at the end of the year. It was further noticed that the assessee has claimed a deduction of an amount of ₹ 1,39,98,948/- on account of devaluation of Indian currency qua foreign currency on outstanding foreign currency loans under section 37(1) of the Act. It was contended by the assessee before the Assessing Officer that the assessee has obtained various loans in f .....

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ch translation is required to be recognized as income or expense for the respective financial period. It was submitted that the assessee had, for acquisition of assets and for expansion of project etc., initially availed various term loans in Indian rupee from banks in FY 2004-05 to FY 2006-07. However, the existing loans in Indian currency were converted into foreign currency loans to take benefit of lower rate of interest on such foreign currency loans vis a vis loans in Indian rupee. The Asse .....

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pplication 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 provide .....

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of capital in nature since impugned loans were obtained for acquiring the capital asset. The AO thus held that the loss claimed on account of fluctuation in the foreign exchange rate could not be allowed as revenue expenditure. 5. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). The CIT(A) granted partial relief of ₹ 37,92,087/- on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items .....

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at conversion from rupee loan to foreign currency loan resulting in saving of interest costs which is in revenue field, the CIT(A) observed that such action may have some commercial justification but the loss is on account of outstanding liability taken for fixed asset for a period spanning over 5 to 7 years. The CIT(A) relied upon the decision of Elecon Engineering Co. Ltd. 189 Taxman 83 (SC) wherein it was held that if the loss is on capital account, then it can not be allowed as revenue expen .....

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the exchange rate fluctuation loss and submitted that the assessee had taken certain loans from Corporation Bank, IDBI Bank and Bank of Maharashtra in the earlier years in Indian currency for the purposes of acquisition of fixed assets and windmills, etc. 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 expansi .....

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ional 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 accounting year. It was thereafter submitte .....

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y (he National Advisory Committee for Accounting Standards in terms of section 211(3C) of the Companies Act, 1956 whereby the compliance with the Accounting Standards has become mandatory for the assessee company. The Ld. AR made averment to the effect that the impugned loss is on account of re-statement or conversion of outstanding loans with reference to foreign currency rate prevailing at the year end. Extending his contentions, the Ld. AR submitted that it is well settled that business incom .....

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exchange fluctuation has been recognized as per AS-11 notified by the ICAI read with Notification of the National Advisory Committee for Accounting Standards as submitted earlier. He thereafter referred to page 74 of the Paper Book and adverted our attention to a subsequent notification of the CBDT dated 31st March, 2015 issued in exercise of powers conferred under S. 145(2) of the Act. As per the aforesaid notification no. S.O. 892(E), the CBDT has notified that the income computation and disc .....

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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 appl .....

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ccounting methods and policies employed consistent with Accounting Standards prescribed, the Ld. AR justified the action of the assessee in claiming the expense as business expenditure under section 37(1) of the Act. 7.2 The Ld. Authorized Representative for the assessee extensively relied upon the observations made by the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P) Ltd., [2009] 312 ITR 254 (SC). He submitted that in the absence of applicability of S. 43 A, the as .....

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ion or income from other sources, etc." with regard to the provisions of section 145 of the Act. He next submitted that as per Woodward case supra, the liability owing to fluctuation has accrued and crystallized to the assessee and following mercantile system of accounting as mandated under S. 209 of the Companies Act, 1956, the loss has been rightly accounted for and claimed as revenue loss. 7.3 The Ld. AR finally submitted that the assets were earlier acquired by utilizing loans borrowed .....

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stified and requires to be reversed. 7.4 The Ld. AR in the alternative and without prejudice to the aforesaid ground submitted that the assessee would be entitled to depreciation on the aforesaid loss as part of the capital asset. 8. The Ld. Departmental Representative for the Revenue, on the other hand, relied upon the order of the CIT(A) in justification of the disallowance. In furtherance, he submitted that it is obvious in the facts of the case that the borrowed funds were utilized for the p .....

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count. 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 cu .....

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issue involved in the present case is whether provision for loss in the hands of assessee on account of restatement of outstanding foreign currency loans necessitated by fluctuation in foreign exchange would be allowable as business loss or a loss of capital nature in the facts narrated above. While as per the revenue, the increased liability due to exchange fluctuation correspond with carrying costs of the fixed assets and thus capital in nature, the assessee seeks to submit that the loss is r .....

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there is no dispute on the fact that the acquisition of capital assets / expansion of projects etc- from the term loans taken are already complete and the assets so acquired have been put to use. As a consequence, the loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. We simultaneously notice that there is no adverse finding from the Revenue about the correctness or completeness of accounts of assessee on the touchs .....

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year. It also requires that any difference, loss or gain, arising from 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 .....

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e 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 Income Tax Act, it was mandatory to draw accounts as per AS 11. Thus, in our considered view, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting li .....

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touchstone of S. 43 A of the Act. Seption 43 A, to the extent relevant in the context, reads as under: Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as .....

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g 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- (i) the actual cost of the asset as defined in clause (1) of section 43; or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of subsection (1) of section 35; or (iii) the amount of expenditure of a capital nature referred to in section 35 A; or (iv) the amoun .....

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ition 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 .....

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provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It therefore deals with realised exchange gain/ loss. The treatment of unrealised exchange gain/ loss is not covered under the scope of S. 43 A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on revenue account or a capital one is required to be .....

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cost of the assets to the assessee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to S. 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or added to the costs of the assets. Thus, viewed from this perspective also, such increased liability cannot be bracketed with cost of acquisition .....

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g installments of foreign loan raised to acquire asset cannot alter actual cost of assets. The relevant operative para is reproduced hereunder. "Coming to the question raised, we find it difficult to follow how the manner 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 .....

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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 has paid for it, is the price of the asset. That price cannot change by any .....

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s in comparison with acquisition of assets out of said loan amount borrowed. Actual cost of the corresponding fixed asset acquired earlier by utilizing the aforesaid loan will not undergo any change owing to such fluctuation. 10.7 The issue is also tested in the light of provision of S. 36(1)(iii) governing deduction of interest costs on borrowals. As stated earlier, manner of utilization of loan amount has nothing to do with allowability of any expenditure in connection with loan repayment. Bot .....

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st expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure. As also noted, S. 43A specifically and categorically calls for adjustments in cost of assets for loss or gain arising out of foreign currency fluctuations in respect of funds borrowed in foreign currency for acquisition of foreign assets. However, the same rationale of a deeming provision of S. 43A cannot be applied to loss or gain arising from foreign currency loss utilized for purchase of .....

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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-a .....

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Loss Account and the Balance Sheet. A conjoint reading of section 145 of the Act and section 211 of the Companies Act leaves no room for doubt that the Assessee is obliged to follow the accounting standards prescribed to determine business income under the head "business or profession". We notice that the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed that AS-11 is mandatory in nature. In the light of observations made in Woodward Governo .....

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o an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading loss if the foreign currency held by the assessee on revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The aforesaid principle of law is required to be applied to the facts of case to determine whether th .....

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