2020 (2) TMI 419 - AT - Income Tax

Tribunal allows appeal on foreign exchange loss, deems it revenue expenditure.

Hueco Electronics (I) Pvt. Ltd. (Now known as Hitachi Automotive Systems Pune (I) Pvt. Ltd.,) Versus The Dy. Commissioner of Income Tax, Circle 11, Pune

The Tribunal allowed the appeal, ruling in favor of treating the foreign exchange loss on repayment of the ECB loan as revenue expenditure. It held that ... Foreign exchange fluctuation (loss) arising on repayment of ECB Loan - allowable deduction u/s 37(1) - HELD THAT:- Co-ordinate Bench of Cochin in the case of Baby Memorial Hospital Ltd. Vs. ACIT [2019 (11) TMI 703 - ITAT COCHIN] after considering various case laws including the decision of Sutlej Cotton Mills Ltd. Vs. CIT [1978 (9) TMI 1 - SUPREME COURT] and other decisions has held that foreign exchange loss arising out of foreign exchange fluctuation in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure by charging the same into Profit and Loss Account and not as capital expenditure by deducting the same from cost of respective fixed assets. Revenue has not placed any contrary binding decision in its support nor has demonstrated as to how the decision of Cochin Tribunal in the case of Baby Memorial Hospital Ltd. Vs. ACIT (supra) would not be applicable to the present facts. In such situation, we are of the view that the Assessing Officer was not justified in denying the claim of revenue expenditure. Assessing Officer has allowed depreciation on the amounts capitalized. Since we are holding the amount of expenditure claimed by assessee to be revenue expenditure, we direct the Assessing Officer to withdraw the benefit of depreciation on those assets that was allowed by him to the assessee and re-work the depreciation thereon. Grounds raised by the assessee are allowed. Issues:Treatment of foreign exchange loss on repayment of ECB loan as revenue or capital expenditure.Analysis:The appeal involved the treatment of foreign exchange loss on repayment of ECB loan as revenue or capital expenditure for the assessment year 2012-13. The assessee, engaged in the business of manufacturing automotive electronic components, claimed foreign exchange loss of Rs. 4,57,841 arising from the repayment of the loan. The Assessing Officer considered the loss as capital expenditure but allowed depreciation on a portion of it. The CIT(A) upheld the AO's decision, stating that the loss should be capitalized. The assessee contended that the loss was revenue in nature, following accounting standards and consistency in treatment. The issue revolved around whether the loss should be treated as a revenue or capital expenditure.The CIT(A) relied on the decision of the Hon. Supreme Court in the case of Tata Iron & Steel, emphasizing the treatment of foreign exchange loss on account of ECB for assets acquired in India. The appellant cited various judgments supporting the revenue treatment of such losses. The CIT(A) also referred to the decision of the Hon. Pune Tribunal in a similar case where the loss was considered a revenue expenditure due to the nature of the loan and interest cost savings. The appellant argued for consistency in treatment and compliance with Accounting Standards, asserting that the loss should be treated as revenue expenditure.Upon hearing the submissions, the Tribunal found that the loss was on account of reinstatement of a foreign currency loan for acquiring domestic assets. It noted that the provisions of section 43-A of the Act were not applicable in this case, as the assets were acquired in India. The Tribunal referred to the decision of the Co-ordinate Bench in a similar case and the Cochin Tribunal's ruling, which supported treating foreign exchange losses as revenue expenditure. The Tribunal held that the Assessing Officer was unjustified in denying the claim of revenue expenditure and directed the AO to withdraw the depreciation benefit on the assets and rework the depreciation. Consequently, the Tribunal allowed the grounds raised by the assessee, ruling in favor of treating the loss as revenue expenditure.In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the treatment of foreign exchange loss on repayment of the ECB loan as revenue expenditure and directing the AO to adjust the depreciation accordingly.