TMI Blog2017 (10) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... in the definition of section 43(5)(d) of the Act. Therefore, we are of the view that the A.O. was erred in disallowing premium charges on FC forward contracts on the ground that the loss incurred by the assessee is a speculative loss, which falls u/s 43(5)(d) of the Act. The CIT(A) after considering the relevant provisions of the Act and also relied upon certain judicial precedents, directed the A.O. to delete additions made towards premium charges. We do not find any error in the order of the CIT(A) Disallowance of foreign exchange fluctuation loss - Held that:- In this case, on perusal of the facts available on record, we find that the assessee has acquired the asset in India and the acquisition of such asset has been financed out of term loans borrowed from India banks. Though the assessee subsequently converted Indian currency loan into foreign currency loans for the purpose of reducing cost of interest, these loans cannot be considered as foreign currency loans acquired for the purpose of acquiring an asset from a country outside India. Therefore, we are of the view that the provision of section 43A, of the Act has no application to the facts of the present case. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee appeared from time to time and furnished books of accounts and other relevant information as called for. The assessment was completed u/s 143(3) of the Income Tax Act, 1961 (hereinafter called as 'the Act') on 31.12.2011 determining the total income of ₹ 21,48,46,051/-, inter-alia making additions towards disallowance of speculative loss from foreign exchange derivatives, disallowance of foreign exchange fluctuation loss and disallowance of additional depreciation. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions. The assessee further contended that the A.O. was erred in treating premium charges on FC forward contracts/underlying options as speculative in nature, ignoring the fact that the assessee has entered into forward contracts to hedge the loss in currency movement with its bankers. The assessee further submitted that it has entered various forward contracts to hedge the currency to mitigate the possible loss in fluctuation in currency in its normal course of business and the total value of forward contracts does not exceed the underlying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and hence, eligible for additional depreciation, accordingly, directed the A.O. to delete additions made towards additional depreciation. Aggrieved by the CIT(A) order, the revenue is in appeal before us. 5. The first issue that came up for our consideration is disallowance of premium charges on FC forward contracts/underlying options. During the course of assessment proceedings, the A.O. asked the assessee to furnish the details of premium charges on FC forward contracts with necessary details. In response to notice, the assessee has filed details of forward contracts entered into with ICICI Bank Mumbai along with option number, contract, pay out, trade date, expiration date, settlement date, mode of payment, etc. The assessee further contended that it has entered into forward contracts to mitigate the possible loss in currency movement and total value of forward contracts does not exceed total underlying exposure in foreign currency. The assessee further contended that it has borrowed foreign currency term loans and to hedge the foreign currency term loans, entered into forward contracts to mitigate the loss arising in course of currency movement and the resultant loss has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed as a deduction. 7. Before, we go into the facts of the case, let us understand the terms of forward contracts, speculative transactions, hedging, foreign exchange loss and treatment of such loss in the books of accounts of the assessees. A forward contract is an agreement between an enterprise and a banker to purchase or sale a particular quantity of currency for a mutually agreed price at a particular date. These forward contracts are used by the exporters to hedge against adverse currency movements. Hedging is defined as to enter into transactions to reduce the risk of adverse movement of currency. Any person having exposure to foreign currency, may enter into hedging to fix his cost and profits at a particular level. Therefore, forward contract means entering into agreement with bankers to hedge the currency fluctuations to mitigate the loss in the course of import/export business. 8. Forward exchange contracts and treatment of any profit/loss arising on cancellation or renewal of said contracts has been dealt by AS-11 issued by The Institute of Chartered Accountants of India. As per AS-11, any forward exchange contracts entered to hedge the foreign currency expos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT Vs. Woodword Governor India Pvt. Ltd. 312 ITR 254, wherein the Hon ble Supreme Court by relying upon earlier judgement in the case of Sutluz Cotton Mills Ltd. Vs. CIT (116 ITR 1) observed that the law, therefore now be taken to be well settled that where profit or loss arises to any person on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss, if the foreign currency is held by the person on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as a fixed capital, such profit or loss should be of capital nature. Further in the aforesaid ruling of the apex court also affirmed the principle laid down in the ruling of CIT Vs. Dempo and Company Pvt. Ltd. 206 ITR 291, wherein it was held that a loss arising in the process of conversion of foreign currency, which is part of trading asset of the assessee is a trading loss as any other loss. In determining the true nature and character of the loss, the case which occasioned the loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r our consideration is disallowance of foreign exchange fluctuation loss amounting to ₹ 7,92,51,868/-. The A.O. disallowed foreign exchange fluctuation loss on the ground that the loss incurred by the assessee is a capital loss, which cannot be allowed as a revenue expenditure u/s 37(1) of the Act. The A.O. further observed that the assessee has incurred exchange loss mainly on account of repayment of term loan which is in the nature of capital expenditure, therefore, any loss arising out of such repayment of loan cannot be considered as revenue expenditure. It is the contention of the assessee that it has incurred exchange loss due to rise in dollar rate, which has been treated as foreign exchange fluctuation loss. The assessee further contended that it has purchased a software technology park at Navi Mumbai, for which it has borrowed certain term loans as well as working capital loans. Subsequently, these loans have been converted into foreign exchange loans to reduce the higher interest cost to the company. In the process, it has incurred exchange loss due to adverse movement of dollar, which resulted in exchange loss which has been considered as revenue in nature. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amended AS-11 of ICAI notified by the Central Government u/s 211(3c) of the Companies Act, does not make any distinction between items of capital nature and revenue nature, both are required to be recognised in the profit loss account. In view of the aforesaid amendment, there exist a divergence views on the treatment to be given in the books of accounts and in the Indian tax laws. Further, with an increased flow of inbound/outbound transactions and their complex dynamic structuring, the tax treatment of foreign exchange has been a great litigation and various courts have discussed the same in detail. Exchange fluctuation difference and tax treatment of the captioned issue was discussed at length in the recent land mark ruling of Hon ble Supreme Court, in the case of CIT Vs. Woodword Governor India Pvt. Ltd. 312 ITR 254, wherein the Hon ble Supreme Court by relying upon the earlier judgement in the case of Sutluz Cotton Mills Ltd. Vs. CIT (116 ITR 1) observed that the law, therefore now be taken to be well settled that where profit or loss arises to any person on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s applicable only when the assessee has acquired an asset from a country outside India for the purpose of its business or profession. The said section does not apply when the asset is acquired in India. Therefore, to apply the provisions of section 43A of the Act, to deal with changes in rate of exchange of currency, one has to understand whether the said asset has been acquired within India or outside India and the assessee has borrowed any money from any person for the purpose of acquisition of any asset from a country outside India. 15. In this case, on perusal of the facts available on record, we find that the assessee has acquired the asset in India and the acquisition of such asset has been financed out of term loans borrowed from India banks. Though the assessee subsequently converted Indian currency loan into foreign currency loans for the purpose of reducing cost of interest, these loans cannot be considered as foreign currency loans acquired for the purpose of acquiring an asset from a country outside India. Therefore, we are of the view that the provision of section 43A, of the Act has no application to the facts of the present case. 16. The assessee has incurred e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under the provisions of section 32(iia) of the Act. The CIT(A) by following the decision of Hon ble Madras High Court, in the case of CIT Vs. Premier Tobacco Pakcers Pvt. Ltd. (2006) 284 ITR 222, held that drying and threshing of tobacco leaves is manufacture and accordingly, entitled for additional depreciation as per the provisions of section 32(iia) of the Act. The relevant portion of the CIT(A) order is extracted below: I have considered the submissions made by the appellant, gone through the order of the AO and heard the AR in person besides perusing all other material available on record. The AO has not allowed the appellant s claim on the ground that drying and threshing of tobacco leaves cannot be called manufacturing activity, hence the claim of additional depreciation was not allowed as per the provisions of section 32(iia) of the Act. Thus, if drying and threshing of tobacco could be shown as manufacturing, then there should not be any problem for the AO to accede to the request of the appellant. In this context, I am reminded of the case of CIT Vs. Premier Tobacco Pakcers (P), reported in (2006) 284 ITR 222 (Mad), wherein the same question of whether drying and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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