TMI Blog2019 (8) TMI 613X X X X Extracts X X X X X X X X Extracts X X X X ..... f acquisition of such asset and at the time of settlement. Since, the assets acquired by assessee are not in foreign currency, the provisions of section 43A are not applicable. Let us consider that the assessee has availed rupee loan of ₹ 1 lakh from Syndicate Bank @ interest cost of 10% and later assessee converts the same into FCNR loan with the interest rate of 5%. The assessee services the FCNR loan and at the time of availing the FCNR loan, assessee aware that it is taking interest rate benefit but at the same time, there is exposure of foreign rate fluctuation. Subsequently, assessee converts the FCNR loan into rupee loan during this AY and due to exchange fluctuation, the liability of the assessee towards term loan increases to, let us say, ₹ 1,05,000/-. The original term loan availed by the assessee remains same but due to exchange fluctuation, the assessee takes the additional burden of ₹ 5,000/-. The question before us is, how to treat the above loss of ₹ 5,000/-. The assessee has converted the rupee loan into FCNR in order to take the interest benefit. It is purely a business decision and at the time of conversion, it is aware that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between FCNRB loan balances and the conversion into INR loans will be debited to our account. This difference will be treated as conversion charges or difference interest by the bank. Accordingly the difference between the FCNRB loan balance and their conversion into INR loan amounting to Rs.l,55,95,941/- debited to account as conversions charges/difference interest. 2.2 AO noticed that by conversion of foreign currency loan into Indian currency loan, principle portion of the outstanding loan due to restatement of loan was included in the finance cost and claimed in the P L A/c. Further, he noticed that assessee has availed initial loan from Syndicate Bank and the loan was taken for the purpose of civil works for construction of factory buildings and plant machinery. In view of the above observations, the AO asked the assessee to justify the claim of expenditure. In response, assessee filed another letter dated 22/12/2014, which is reproduced below: The assessee has initially availed term loans from Syndicate. Rank, Kakinada for expansion OF its existing unit in the year 2008-09. During the F.Y.2009-10, SBI, Rajahmundry has taken over the term loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and long-term borrowings; (b) amortization of discounts or premiums relating to borrowings; (c) amortization of ancillary costs incurred in connection with the arrangement of borrowings; (d) Finance charges in respect of assets acquired under finance leases or under other similar arrangements, and (e) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest. As per para 6 of AS-16: Borrowing costs that are directly attributable to the acquisitions, construction or production of a quality asset should be capitalized as part of the asset. The amount of borrowing costs eligible for capitalization should be determined in accordance with this statement. Other borrowing costs should be recognized as an expense in the period in which they are incurred. In. view of the above, the difference on account of the fluctuations in foreign exchange has to be debited to profit and loss account and accordingly we have recognized them as expenditure allowable under Sec. 36(1)(iii) of the Income Tax Act, 1961. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenditure 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. Explanation 1 - In this section, unless the context otherwise requires,- (a) rate of exchange means the rate of exchange determined recognised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions of the assessee, AO observed that as a result of conversion of foreign currency loan into Indian rupee loan, there is an increase in Indian currency loan to the tune of ₹ 1,55,95,941/- and this increased loan amount was debited to P L A/c as interest/bank charges. He, therefore, was of the view that there is no merit in the claim of the assessee that conversion of loan from one currency to another currency is nothing but a restatement of the loan which resulted in enhancement of principle amount. He, therefore, held that repayment of principle amount of loan is not allowable expenditure since it is capital in nature. Further, he held that loan liability being related to acquisition of plant and machinery, the conversion loss has direct nexus with the acquisition of capital asset and hence, it is a capital loss which is not allowable. He relied on various case law to make the addition. 3. Aggrieved with the above order, assessee preferred an appeal before the CIT(A). The CIT(A) after considering the submissions of the assessee, dismissed the appeal of the assessee by observing as under: 4. In the above background the appellant clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court in case of Sutlej Cotton Mills Ltd Vs CIT (1979) 116 ITR 1 (A.Y 1957-58, 1959-60) clearly held that the loss in respect of capital asset would not be allowable. The Hon'ble Court further held that whether the loss suffered by the assessee was a trading loss or not would depend on the answer to the question, whether the loss was in respect of a trading asset or a capital asset. In the former case, it would be trading loss but not so in the latter. The test may also be formulated in another way by asking the question whether the loss was in respect of circulating capital or in respect of fixed capital. Further the Hon'ble Supreme Court while referring to several precedents on the issue of foreign exchange fluctuation referred to Davies Vs Shell Co. of China Ltd. (1952) 22 ITR (Suppl.)l (CA) wherein the Hon'ble Court held that the result of change in foreign exchange fluctuation would bear the same character (Capital or Revenue) for which the loans were taken The Hon'ble Supreme Court in case of ACIT Vs Elecon Engineering Co. Ltd (2010) 322 ITR 20 (A.Y1986-87)held that roll over charges paid on foreign exchange forward contracts in respect of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular relied on para 10.7 of the order. 5.2 Further, he brought to our notice a statement, as per which, assessee has paid interest during the period of conversion of loan from rupee into FCNR loan and he submitted that assessee has paid actually ₹ 2,26,68,647 as interest, whereas, in the normal situation, assessee must have paid ₹ 4,29,28,900/-. He submitted that, now, the assessee has charged to P L A/c of dollar difference to the extent of ₹ 1,57,06,189. Still, assessee has benefited with the above conversion of foreign currency loan into rupee loan. 6. The ld. DR, on the other hand, submitted that the CIT(A) has elaborately discussed the facts of the case and came to proper conclusion. He relied on the judgment of the Hon ble Supreme Court in the case of Challapalli Sugars Vs. CIT [1975] 98 ITR 167. Further, he submitted that term loan conversion into FCNR and back in rupee loan is only a conversion of capital and it is capital in nature, as such conversion cannot be allowed as revenue expenditure. 7. Considered the rival submissions and perused the material on record. In the given case, assessee availed term loan fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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