Appellate Tribunal allows inclusion of Forex losses in asset depreciation calculations for IT Assessment Years

The Appellate Tribunal ITAT Pune partially allowed the appeals related to the disallowance of Forex loss on an ECB loan for Assessment Years 2012-13 and 2014-15. The Tribunal held that Forex losses should be added to the actual cost of assets for depreciation purposes, in line with legal precedents and provisions of section 43A of the Income Tax Act and relevant Accounting Standards. The Assessing Officer was directed to adjust the actual cost of assets for the Forex losses incurred, resulting in a partial success for the appellant in including Forex losses in asset depreciation calculations.

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Issues:
- Disallowance of Forex loss on ECB loan
- Treatment of foreign exchange difference as an adjustment to interest cost
- Capitalization of forex loss on assets for depreciation

Analysis:
1. The appeals were against the CIT(A)'s orders dated 30.06.2017 for the Assessment Years 2012-13 and 2014-15, involving identical facts and issues.

2. The key issue was the disallowance of a Forex loss on an External Commercial Borrowing (ECB) loan, with the appellant challenging the decision to not treat it as an adjustment to interest cost or allow capitalization for depreciation.

3. The appellant, a subsidiary of a UK-based company, incurred a Forex loss on an ECB loan for asset acquisition in India. The Assessing Officer disallowed the loss claimed as revenue expenditure, which the CIT(A) upheld due to the absence of specific provisions in the Income Tax Act.

4. The appellant argued that the Forex loss should be added to the actual cost of the asset for depreciation, citing legal precedents supporting the inclusion of notional losses. The Assessing Officer and CIT(A) rejected this claim.

5. The Tribunal considered whether the Forex loss could be added to the asset's actual cost for depreciation purposes. Referring to legal decisions, it concluded that adjustments due to Forex fluctuations should be made to the actual cost of assets acquired using ECB loans.

6. Citing the provisions of section 43A of the Act and relevant Accounting Standards, the Tribunal held that adjustments in actual cost due to Forex rate fluctuations should be allowed, even for assets acquired in India using foreign loans.

7. Following the legal principles established by the Hon'ble Supreme Court and High Courts, the Tribunal directed the Assessing Officer to make necessary adjustments to the actual cost of the assets for the Forex losses incurred, allowing the appeal partially.

8. Consequently, both appeals were partly allowed, affirming the inclusion of Forex losses in the actual cost of assets for depreciation calculation.

9. The judgment was pronounced on October 29, 2020, by the Appellate Tribunal ITAT Pune, with detailed reasoning provided for the decision in each issue raised by the appellant.

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