2022 (9) TMI 299 - AT - Income Tax

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. ... Claim of premium paid on forward covers of foreign exchange rates - capital expenditure or revenue expenditure claimed u/s 37(1) - AS-11 Applicability - premium paid was in relation to foreign currency loan taken for execution of projects - contention of the assessee is that the claim is in accordance with Accounting Standard AS-11 issued by the ICAI in this regard and in the absence of any bar in the Act regarding the applicability of the Accounting Standard, the treatment as per Accounting Standard is applicable - HELD THAT:- AS-11 prescribes how the effects of changes in foreign exchange rate is to be accounted for on transactions undertaken in foreign currency or in foreign country. One of the effects dealt with the standard relates to premium paid on foreign exchange cover. Thus with respect to the issue before us ,undoubtedly it is AS-11 which prescribes the method of accounting for the same and it recommends the premium paid on foreign exchange forward contracts to be amortized as expense or income over the life of the contracts. The term expense has been used in juxtaposition with income and its meaning has to be derived in conjunction and consonance with the term “income”, which undoubtedly is revenue receipts. There is no doubt therefore that the recommendation by AS-11 of writing off the premium on forward exchange contracts as expense means writing it off as revenue expenditure in the profit and loss account. The language of the Accounting Standard is very clear when it recommends amortizing the premium as expense or income. The manner of writing off recommended by the Standard, i.e” expense or income” itself makes it very clear that it is to be written off in the Profit and Loss account where all expenses and incomes are recorded. The claim of the assessee therefore clearly is in accordance with AS-11 of the ICAI. For allowability of the claim as per AS-11,it is pertinent to see whether there is any bar to the applicability of the same in the Act? - Apex Court in the case of Virtual Soft Systems Ltd. [2018 (4) TMI 1472 - SUPREME COURT] has laid down the proposition that where there is no express bar in Act regarding the application of a Accounting Standard prescribed by ICAI, deductions /claims of assesses are to be determined on the basis of these accounting standards. The Act, under section 43A, prescribes the adjustments on account of foreign exchange fluctuations to be made to the cost of fixed assets purchased outside India which requires payment to be made in foreign exchange. Explanation 3 to the said section requires cost of such assets to be computed with reference to the rate agreed in the foreign exchange forward contracts if any entered. The said section, we find is not applicable to the facts of the present case since it is not the case of the Revenue that the foreign exchange loan has been taken for purchasing any asset outside the country. No other section dealing with the allowability of premium paid on forward contracts has been pointed out by the Ld.DR before us - Therefore as per the decision of the Hon’ble apex court in the case of Virtual Soft [2018 (4) TMI 1472 - SUPREME COURT] the accounting prescribed by AS-11 will apply, according to which the premium/discount on forward exchange contracts is to be amortized as expense/income. We hold that the assessee is entitled to claim the amortization of premium paid on foreign exchange contracts. Appeal of assessee allowed. 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.