TMI Blog2018 (3) TMI 1821X X X X Extracts X X X X X X X X Extracts X X X X ..... ad followed treatment of exchange loss or gain as per AS-11 (1994). In view of revision made in AS-11, now treatment shall be as per revised AS-11 (2003). Exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. However, in the Preamble of AS-11 (Revised 2003), it was stated that the Revised Standard supersedes AS-11 (1994) except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise before the date of AS-11 (2004) comes into effect, AS 11 (1994) will continue to be applicable. In the present case, though the assessee took the plea before the lower authorities that AS-11 is applicable, the lower authorities has not at all examined it and straightaway applied the provisions of sec. 43A. In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out of foreign currency loans. Hence, the AO has to bifurcate the foreign exchange fluctuation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assets acquired from outside India need to be applied for the assets acquired locally, needs to be reconsidered. iv) Foreign exchange rate fluctuations are notional figures for reinstating the foreign exchange loans on the date of reporting, to comply with the accounting standard, which has no relevance to the actual value of fixed assets for taxation purposes and hence the same has not been added or reduced from the original value of fixed assets for the computation of depreciation under the Act. v) The section 43A considered by the learned assessing officer is having no relevance in the case of the appellant, since the loan availed is not for the purpose of import of equipment's alone, but for part financing the entire hotel project. Therefore it is requested that the deletion of notional amount from the value of fixed assets for the purpose of computation of depreciation under the Income Tax Rules, may please be reversed. 2. The facts of the case are that the assessee-company is engaged in the business of running Hotel and Convention Centre at Maradu, Kochi. The return of income for the assessment year 2006-07 was filed declaring NIL income after setting off t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, based on the above discussion, the depreciation allowed on the following blocks are recomputed as under: Assets WDV as on 10.04.05 Addition Deletion Deprn. Allowed Deprn. allowable Above I80 days Below 180 days Hotel Buildings 214600295 - 12468769 619334 22954212 22021535 Equipments 61428961 699830 8955004 476980 10475823 9919396 EL Fittings 4222910 45000 1005234 - 598901 477055 Furniture 3363050 74301 1746600 85714 3578166 3449239 Comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assets acquired, and ii) The other in respect of foreign currency held on revenue account, or as a trading asset or as part of circulating capital of the business. The Delhi High Court found that AS-11 required year-end conversion of monetary items at closing foreign exchange rates, and that foreign exchange rate differences were required to be recognized as income or expenses of the period, except in cases of differences arising on repayment of liabilities incurred for purpose of acquiring fixed assets. According to the CIT(A), the Delhi High Court also noted the tests laid down by the Supreme Court in the cases of Sutlej Cotton Mills Ltd. vs. CIT 116 ITR 1 and CIT vs. Tata Locomotive Engineering Co. Ltd., 60 ITR 405 and by the Bombay High Court in case of CIT vs. V.S. Dempo Co. (P) Ltd. 206 ITR 291, for determining when foreign exchange losses or gains were of a capital nature, and when they were of a revenue nature. Thus the Delhi High Court held that the loss on account of foreign exchange rate difference was an actual loss on revenue account, allowable as a deduction, and not a contingent loss. 3.3 The CIT(A) noticed that the Assessing Officer had added the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t USD 37000/- Int on Loan 16,14,510 Dr SBI C/A Cr 22,69,110 Cr 6,54,600/- 04/01/2005 Part payment of principal repayment of USD 25,000/- 10,89,375/- 21/02/2005 Part payment of principal repayment of USD 1,00,000/- @ 43.85 43,85,250/- 02/03/2005 Part payment of principal repayment of USD 50,000/- @ 43.73 21,86,625/- 16/03/2005 Part payment of principal repayment of USD 75,000/- @ 43.71 32,78,125/- 13/04/2005 Payment of USD 14,400/- @ 43.98 6,33,448/- 05/10/2005 Term loan of NBO closed and balance transferred to UBI term loan of $35,35,309/- 16,76,67,700/- 3.5 The CIT(A) held that the adjustment in the cost of the assets made in A.Y. 2004-05 and 2005-06 that were added back again in the A.Y. 2006-07 as notional decrease in the value of assets was not correct. The CIT(A) held that even if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Commissioner Of Income-Tax vs Tata Iron And Steel Co. Ltd. reported in (1998) 231 ITR 285 wherein it was held that fluctuation in the rate of foreign exchange resulting in gain or loss at the time of repayment of loan would not alter the actual cost incurred for the purchase of assets for computing depreciation. 5. The Ld. DR relied on the order of the Ld. CIT(A) 6. We have heard the rival contentions and perused the material on record. The question that arises for our consideration is that whether gain on account of foreign exchange fluctuation can be reduced from the cost of assets as per the provisions of section 43(1) of the I.T. Act. As per the provisions of section 43(1) of the Act, actual cost means actual cost of the capital assets of the assessee reduced by that portion of the cost of the capital assets as has been met directly or indirectly by any other person or authority. The section also has Explanations. However, the section nowhere specifies that any gain or loss on foreign currency loans acquired for purchase of indigenous assets will have to be reduced or added to the cost of assets. 6.1 In the case of CIT Vs. Tata Iron and Steel Co. Ltd. (1998) 231 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was held that: In the absence of any specific provision in the Act dealing on the subject, when the Accounting Standard is now made the basis of maintaining the accounts for the purpose of income-tax, even if the Central Government has not notified in the Official Gazette the Accounting Standards, certainly the Accounting Standards prescribed by the Institute of Chartered Accountants have to be followed. Therefore, the reasoning of the authorities, though the claim of the assessee is based on such Accounting Standards of the ICAI while deciding whether receipt of money is taxable or not, that it has to be decided in accordance with the provisions of law and not in accordance with the accounting practice, has no substance as there is no inconsistency between the said accounting practice and any provisions of the Act. 6.3 Further, the nature of expenditure being capital or revenue does not depend on the purpose for which foreign currency loan was obtained or on nature of ultimate utilization of loan amount. The same was also affirmed by Apex court in case of India Cements Limited vs. CIT (1966) (SC) 60 ITR 52. 6.4 It is to be noted that liability to pay or to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets. 6.6 AS-11 (Revised 1994) provides for adjustment in the carrying cost of fixed assets acquired in foreign currency, due to foreign exchange balance sheet date which also correspond to treatment given in section 43A. The issue accordingly decided by apex court in the manner laid down in AS-11 (Revised 1994) at Para- 10. 6.7 The revised treatment provided at Para 13 of AS-11 (Revised 2003) is given below: Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 15. 6.8 In view of the revision made in AS-11 in 2003, it can be said that treatment of foreign exchange loss arising out of foreign currency fluctuations in respect of fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
