TMI Blog2010 (9) TMI 1291X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to 7) 5. During the course of assessment proceedings the A.O. observed that the assessee claimed an expenditure of ₹ 1,56,64,040/- on account of foreign exchange loss. This loss has arisen on account of repayment of foreign exchange loan (of ₹ 13,18,841/)- and loss on revaluation of outstanding foreign exchange loan (of ₹ 1,43,45,199/)- as on 31.03.2001. The A.O. was of the view that the foreign exchange loan was utilised in expansion of assessee s manufacturing project, hence it is in the nature of capital expenditure. The A.O. asked the assessee why the amount should not be disallowed. It was the explanation of the assessee that during the implementation of company s Denim project at Navsari, the company had availed foreign currency term loans from ICICI and EXIM Bank of India for the purpose of meeting Rupee expenditure and in accordance with the accounting standards of ICAI the foreign currency transactions were charged to the P L Account. It was also submitted that in terms of section 43A of the I.T. Act the company has capitalised the foreign exchange difference on capital loans whereas this foreign exchange loss arose on revenue account and an all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d certain minor capital expenditure 2 ICICI (Rupee expenditure) 12,56,733 4.57 July 1998 Working capital and certain minor capital expenditure 7. It was further submitted that the assessee has purchased minor capital assets out of the foreign currency loan in rupee expenditure and an amount of ₹ 18,68,305/- may be attributed to the purchase of fixed assets and balance amount of ₹ 1,37,95,735/- are to be allowed as revenue expenditure. The assessee has furnished additional evidence with reference to loan disbursement documents, bank statements showing utilization of the foreign currency loans, details of expenditure incurred, etc. in order to substantiate its claim that the foreign currency loans in rupee expenditure were used for working capital requirement. He further distinguished that the Hon'ble Bombay High Court judgement in CIT vs. Sandoz (India) Ltd. 206 ITR 599 was in the context of loan used for purchase of capital asserts and does not apply to the facts of assessee s case. The learned counsel relied on the following case laws vide submission d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan during the year and was actual. The balance amount of ₹ 1,43,45,119/- pertains to exchange loss which has to be allowed as revenue expenditure in the year of loss and submitted that in the earlier year when there was a gain on foreign exchange the same was offered as income. Accordingly this amount is allowable as deduction, eventhough the loan amount was not repaid or repayable in the year. With reference to Assessing Officer s contention that the loss was notional loss/unascertained liability, learned counsel relied upon the judgement of the Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 245 and the decision of ONGC vs. CIT, Dehradun in Civil Appeal No. 7223 of 2008 dated 15.03.2010 in support of claim. The learned CIT-DR relied on the orders of the A.O. and the CIT(A) to submit that foreign exchange loss is capital in nature. 10. We have considered the submissions of both sides, examined the details placed in the paper book and detailed submissions made before the CIT(A). It is a fact that the assessee has obtained loans in foreign currency both for the purpose of purchase of machinery as well as for working capital requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase of reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof for the purposes of section 48, and the amount arrived at after such addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under section 73(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? The Hon'ble Supreme Court has held that loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of Balance Sheet is an item of expenditure under section 37(1) of the I.T. Act. Assessee satisfies the conditions laid down as propounded by the Hon'ble Supreme Court as assessee is following Mercantile system and is consistently giving the same treatment in booking the losses and gains in the books of account. The method adopted by the assessee is fair and reasonable. In view of this, the loss on account of foreign exchange loans utilised for working capital requirements is allowable deduction under section 37(1). Similar issue was also raised in the case of ONGC vs. CIT, Dehradun (supra) and Hon'ble Supreme Court again reiterated this principle established in earlier judgement of Woodward Governor P. Ltd. and upheld the contentions that the loss is all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decisions of the Hon'ble Bombay High Court in the case of Mahalakshmi Glass Works 318 ITR 116 and Hon'ble Delhi High Court in the case of Mahavir Alluminium 297 ITR 77. In view of the judgement of the jurisdictional High Court and also the Hon'ble Delhi High Court, the A.O. is directed to make necessary adjustments to the opening stock as well while considering the Modvat credit under section 145A. The issue is restored back to the file of the A.O. to do necessary adjustments. Grounds 8 9 are considered allowed. Issue of prior period expenses 16. Assessee during the year has written off an amount of ₹ 1,19,509/- as advances paid and an amount of ₹ 2,62,500/- towards legal and professional charges. In the assessment order the A.O. disallowed the amount of ₹ 10,15,326/- as pertain to prior period expenditure. Before the CIT(A) the assessee has furnished various details and submitted that the amounts are allowable in the year under consideration. The CIT(A), after considering assessee s submission, allowed the amounts of Textile Committee cess of ₹ 6,33,817/- but disallowed the balance amounts contested in the above ground. With ref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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