Tribunal allows foreign exchange loss deduction and depreciation on Plant & Machinery WDV, dismissing Revenue's appeal.

The Tribunal upheld the CIT(A)'s decision to allow the deduction for foreign exchange fluctuation loss and depreciation on the opening WDV of Plant & Machinery. The Tribunal found that the foreign exchange loss was notional and contingent, thus allowable as a deduction. Additionally, the Tribunal agreed with the CIT(A) that the depreciation on the opening WDV of Plant & Machinery was justified due to changes in Customs Rules and the long wait for Customs Department assessment. The Revenue's appeal was dismissed on both issues, affirming the CIT(A)'s order.

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Issues Involved:
1. Deletion of disallowance of foreign exchange fluctuation loss.
2. Deletion of disallowance of depreciation on the opening WDV of Plant & Machinery (P&M) related to customs duty on imported machinery.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Foreign Exchange Fluctuation Loss:

The Revenue challenged the deletion of disallowance of foreign exchange fluctuation loss amounting to Rs. 28,45,070/-, arguing that it was contrary to CBDT Instruction No.3/2010. The assessee had taken a foreign currency loan (ECB) of USD 3 million for working capital, which led to a claimed deduction for notional loss due to foreign exchange fluctuation. The AO disallowed the loss, citing that the loss must be actually suffered in the relevant year, supported by decisions from Indian Overseas Bank and Karam Chand Thapar and Bros.

The CIT(A) reversed the AO's decision, noting that the loan was disbursed and utilized in the relevant financial year, and the devaluation losses were declared in the respective Profit & Loss Accounts. The CIT(A) emphasized the consistency in the assessee's accounting treatment and referenced several judicial decisions, including CIT Vs Woodward Governor India (P) Ltd. and Sutlej Cotton Mills Ltd. Vs CIT, which supported recognizing exchange differences as income or expense in the period they arise.

The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Woodward Governor India Pvt. Ltd., which established that increase in liability due to exchange rate fluctuation as of the financial year-end is neither notional nor contingent and thus allowable as a deduction.

2. Deletion of Disallowance of Depreciation on Opening WDV of P&M:

The Revenue also contested the deletion of disallowance of depreciation amounting to Rs. 5,73,791/- on the opening WDV of P&M related to customs duty paid for machinery imported in 1994-95. The AO disallowed the depreciation, arguing that the assessment by the Customs Department was still pending, and thus the capitalization by the assessee was not in accordance with the law.

The CIT(A) found that the assessee had capitalized the security deposit related to customs duty, treating it as part of the machinery cost, and claimed depreciation accordingly. The CIT(A) noted that the Customs Rules had changed, and the requirement of paying provisional duty and security deposit had been removed. The CIT(A) referenced the ITAT's earlier decision in the assessee's favor for AY 2003-04 and 2004-05, which allowed depreciation on the enhanced value of assets, considering the long wait and futile follow-up with the Customs Department.

The Tribunal agreed with the CIT(A), affirming that the issue was covered by the ITAT's previous decision, and upheld the deletion of the disallowance of depreciation.

Conclusion:

The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s order on both issues. The appeal was pronounced dismissed in the open court on 06.11.2015.

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