Foreign exchange gains on ECB for capital assets held capital; MAT setoff clarified under Sections 43A, 115JB

HC upheld ITAT's decision that foreign exchange gains arising from restatement of external commercial borrowings used for acquisition of capital assets are on capital account and not liable to tax. Relying on SC precedent and amended Section 43A, the court affirmed that such exchange fluctuations adjust the actual cost of the asset and do not constitute taxable income. On MAT under Section 115JB, HC held that, as per Explanation 1, clause 2(iii), the lower of brought forward book loss or unabsorbed depreciation must be allowed to be set off, accepting cumulative figures per CBDT Circular No.495. Questions of law were answered in favour of the assessee, with computation remitted to AO.

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Issues:
1. Taxability of foreign exchange gain on restatement of external commercial borrowings.
2. Entitlement of set off of brought forward Book Loss in the computation of income under Section 115JB of the Income Tax Act.

Analysis:

Issue 1: Taxability of Foreign Exchange Gain

The appeal challenged the order regarding the disallowance of a foreign exchange gain of Rs. 29,83,65,068/- by the Revenue. The contention was whether the gain made on restatement of external commercial borrowings is taxable, even when the assessee failed to provide evidence to substantiate the claim. The Revenue argued that since the assessee gained the amount, it should be taxable. Conversely, the respondent argued that such gains or losses should be kept to the capital account and are not taxable. The court referred to the fluctuation in foreign exchange rates, citing the Woodward Governor India case, and held that the gain arising from exchange fluctuation is on the capital account and not liable to tax.

Issue 2: Entitlement of Set Off of Brought Forward Book Loss

The second substantial question revolved around whether the assessee is entitled to set off a Book Loss of Rs. 36,33,40,000/- in the computation of income under Section 115JB of the Income Tax Act. The Revenue contended that the loss claimed was impermissible as the CBDT circular referred to the relevant year and not the previous year. However, the respondent argued that as per the statute, the brought forward losses or unabsorbed depreciation should be considered for set off. The court examined the Explanation to Section 115JB and upheld that the assessee is entitled to claim set off, remitting the actual amount determination to the Assessing Officer.

In conclusion, the court dismissed the appeal, answering the substantial questions of law in favor of the assessee and against the Revenue, with no costs awarded.

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