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2019 (8) TMI 613

..... tatement of the loan resulted in enhancement of principle amount 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 - CIT(A) dismissed the appeal holding that the provisions of section 43A is applicable in this case - HELD THAT:- In our view, section 43A has no application considering the fact that the fixed assets were purchased in Indian currency and only the term loan was converted into FCNR and back to rupee loan. The provisions of section 43A are applicable only when the assessee acquires any asset in any previous year from a country outside India and in consequence of a change in the exchange rate, there may be increase or decrease in the liability as expressed in Indian currency as compared to the liability at the time of 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 th .....

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..... cost of ₹ 4,80,93,348/- as against ₹ 2,33,95,822/- of previous year. When the AR was asked to explain the substantial difference in the finance cost, in response, assessee filed a letter dated 12/12/2014, which is reproduced as under: State bank of India sanctioned FCNRB Loan to us during the F.Y: 2009-10 when the limits were taken over from syndicate Bank. The FCNRB loan will be sanctioned in it phased manner based on the availability of the US Dollars with the bank. As and when there is shortage of US Dollars with the Bank the loan Will be converted into INR loans. Accordingly our FCNR(B) Loans were converted into INR Loans during F.Y: 2011-12. The difference 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 o .....

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..... d, which says as follows:, AS - 16 : Borrowing Cost The objective of this standard is to prescribe the accounting treatment for borrowing costs. This Standard should be applied in accounting for borrowing costs. The following terms are used in this Standard with the meanings specified. Borrowing costs are interest and other costs incurred, by an enterprise in connection with borrowing of funds. Borrowing costs may include : (a) Interest and commitment charges on bank, borrowings and other short-term 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 .....

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..... to in clause (ix) of sub-section (1) of section 36; or ' (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, 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. Exp .....

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..... the 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 claims that the amount of  .....

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..... 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 liabilities relating to the acquisition of 'fixed assets' are to be capitalized in terms of Expln.3 to S,43A as it stood prior to the amendment made by the Finance Act, 2002, and same are not allowable as bu .....

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..... 0/-. 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 from Syndicate Bank for the purpose of construction of factory building and plant & machinery. All the plant & machinery are domestic and the above term loan was rupee loan. Subsequently, assessee availed the FCNR loan from SBI and settled the loan taken from Syndicate Bank. As per the advise of SBI, assessee has to close the FCNR loan due to shortage in the availability of USD with the .....

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