Tribunal allows forward cover premium as revenue expense, excess depreciation disallowance dismissed

The tribunal allowed the assessee's claim of amortizing the forward cover premium as a revenue expense for all the assessment years in question. Additionally, the tribunal dismissed the ground related to excess depreciation for the Assessment Year 2016-17 as not pressed. The final orders for the respective assessment years were as follows: for A.Y. 2014-15 and 2015-16, the appeals were allowed, and for A.Y. 2016-17, the appeal was partly allowed with the forward cover premium allowed and the excess depreciation disallowance dismissed.

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Issues Involved:
1. Disallowance of forward cover premium as capital expenditure instead of revenue expenditure.
2. Confirmation of disallowance of excess depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of Forward Cover Premium:

The appeals pertain to the same assessee for the Assessment Years (A.Y) 2014-15 to 2016-17, focusing on the disallowance of forward cover premium. The primary issue is whether the premium paid on forward covers of foreign exchange rates should be considered a capital expenditure or a revenue expenditure under Section 37(1) of the Income Tax Act, 1961.

The assessee, engaged in the business of power generation, claimed expenses on forward cover premiums to mitigate foreign currency exposure due to external commercial borrowings for renewable energy projects. The assessee argued that the premium should be treated as a revenue expense based on Accounting Standards (AS-11) issued by the Institute of Chartered Accountants of India (ICAI) and Income Computation and Disclosure Standards (ICDS).

The Revenue authorities, however, treated the premium as capital expenditure, arguing that neither AS-11 nor ICDS explicitly prescribed the premium to be charged to the Profit and Loss account. They noted that the premium was linked to foreign currency loans for capital projects, thus deeming it capital in nature.

The tribunal examined AS-11, which deals with the effects of changes in foreign exchange rates, including the treatment of forward exchange contracts. AS-11 recommends amortizing the premium as an expense or income over the life of the contract. The tribunal found that the term "expense" in AS-11 implies revenue expenditure, to be recorded in the Profit and Loss account.

The tribunal referred to the Supreme Court decision in CIT vs. Virtual Soft Systems Ltd. [2018] 404 ITR 409, which held that in the absence of a specific bar in the Income Tax Act, deductions based on ICAI's Accounting Standards should be allowed. The tribunal concluded that no specific provision in the Act barred the treatment of forward cover premiums as revenue expenditure.

The tribunal also addressed the Revenue's reliance on the ITAT Bangalore Bench's decision in Orchid Ply Industries Ltd. vs. DCIT, noting that the Visakhapatnam Bench of the ITAT in Maddi Lakshmaiah & Co. Ltd. held that the purpose of obtaining foreign currency is irrelevant; what matters is the utilization at the time of devaluation.

Conclusion: The tribunal allowed the assessee's claim of amortizing the forward cover premium as a revenue expense for all the assessment years in question.

2. Confirmation of Disallowance of Excess Depreciation:

For A.Y. 2016-17, the assessee also contested the disallowance of excess depreciation amounting to Rs. 10,71,535. However, the assessee's counsel did not press this ground, considering the smallness of the amount involved.

Conclusion: The tribunal dismissed the ground related to excess depreciation as not pressed.

Final Orders:
- ITA No. 1110/Ahd/2018 for A.Y. 2014-15: Allowed.
- ITA No. 1605/Ahd/2019 for A.Y. 2015-16: Allowed.
- ITA No. 1606/Ahd/2019 for A.Y. 2016-17: Partly allowed (forward cover premium allowed, excess depreciation disallowance dismissed).

Order Pronounced: The orders were pronounced in the open court on 31-08-2022.

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