2020 (10) TMI 1164 - HC - Income Tax

Tribunal decision upheld: Premium on forward contracts can be depreciated as part of asset cost.

The Commissioner of Income Tax, Chennai Versus M/s. Continuum Wind Energy (India) Pvt Ltd (Formerly known as M/s. Surajbari Windfarm Development Pvt Ltd)

The Commissioner of Income Tax, Chennai Versus M/s. Continuum Wind Energy (India) Pvt Ltd (Formerly known as M/s. Surajbari Windfarm Development Pvt Ltd) ... Issues Involved:1. Whether the Tribunal was right in directing the AO to allow depreciation by adding the premium on forward contract to the cost of the asset under Section 43A of the Income Tax Act, 1961.2. Whether the premium paid on forward contract should be allowed even if it is not connected with the cost of any assets.3. Whether the benefit provided in Section 43A, which relates to additions made to the cost of assets on account of exchange fluctuation, could be extended where no assets were purchased outside the country.Issue-wise Analysis:Issue 1: Allowance of Depreciation by Adding Premium on Forward Contract to the Cost of the AssetThe Tribunal directed the AO to allow depreciation by adding the premium on forward contracts to the cost of the asset, despite the assets not being acquired from outside India. The Tribunal held that the premium paid by the assessee was in the course of setting up a project, making the loss a capital loss. The Tribunal further reasoned that the loss suffered in foreign exchange fluctuation would increase the cost of the project, thus entitling the assessee to depreciation on the enhanced value of the asset. This decision was based on the precedent set by the Bangalore Bench in the case of JSW Steel Ltd.Issue 2: Premium Paid on Forward ContractThe Revenue contended that the premium paid on forward contracts should not be allowed as it was not connected with the cost of any assets. However, the Tribunal noted that although the loan was initially borrowed in Indian currency, it was later converted into a foreign currency loan. The premium paid, therefore, was connected with the cost of acquiring a capital asset, justifying the allowance of depreciation on the enhanced value.Issue 3: Application of Section 43AThe Revenue argued that Section 43A, which deals with additions to the cost of assets due to exchange fluctuation, should not apply as no assets were purchased outside the country. The Court, however, referred to previous judgments, including the Supreme Court's decision in Elecon Engineering Co. Ltd., which stated that exchange differences should be capitalized if the liabilities were incurred for acquiring fixed assets. The Court concluded that the exchange difference is required to be capitalized because the liability was incurred for acquiring a fixed asset, namely plant and machinery.Conclusion:The Court upheld the Tribunal's decision, agreeing that the loss suffered in foreign exchange fluctuation should be capitalized and added to the cost of the project, thereby allowing depreciation on the enhanced value of the asset. The Court dismissed the Revenue's appeal, answering the substantial questions of law against the Revenue and confirming that the Tribunal's interpretation and application of Section 43A were correct.