2023 (2) TMI 256 - AT - Income Tax

Foreign exchange fluctuation loss on ECB loans allowed as revenue expenditure by ITAT under section 37(1)

The ITAT allowed the appeal filed by the assessee, holding that the foreign exchange fluctuation loss incurred on ECB loans should be treated as a revenue ... Disallowing foreign exchange loss - claim by the assesse on outstanding External commercial Borrowing loans - as argued said exchange loss is a business loss fully allowable under of the Income Tax Act, 1961 and hence the disallowance may be deleted - HELD THAT:- We observe that assessee has borrowed funds from ECB and incurred forex loss on account of outstanding ECB loan. This fact is also accepted by the tax authorities that assessee has borrowed funds from ECB and utilized the same to purchase the assets out of these funds were indigenous assets. Since borrowing for the purpose of business and incurring expenditure and loss is also the part of the business expenditure. It is also admitted fact that assessee has borrowed ECB to reduce the interest expenditure. On similar facts on record, we observe that ITAT bench of Pune Tribunal in the case of Cooper Corporation (P.) Ltd. v. DCIT [2016 (5) TMI 809 - ITAT PUNE] has considered the same facts and decided the issue in favour of the assessee as held in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification can not be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) - Appeal filed by the assessee is allowed. Issues Involved:1. Disallowance of foreign exchange loss on outstanding External Commercial Borrowing (ECB) loans claimed by the assessee as a business loss.Issue-wise Detailed Analysis:1. Disallowance of Foreign Exchange Loss on ECB Loans:The assessee filed an appeal against the order of the Learned Commissioner of Income Tax (Appeals)-24 ['Ld.CIT(A)'] dated 20.10.2017 for the Assessment Year 2013-14. The assessee had filed its return of income on 28.11.2013 declaring total income of NIL, which was processed under section 143(1) of the Income-tax Act, 1961 ('the Act'). The case was selected for scrutiny, and during the assessment proceedings, the Assessing Officer (AO) observed that the assessee had claimed a foreign exchange loss of Rs. 42,80,768/- on account of an outstanding ECB loan. The AO questioned the assessee on why this should not be disallowed as it was capital in nature. The assessee responded by citing a similar case decided by the Pune Bench of the Income-tax Appellate Tribunal (ITAT), where it was held that foreign exchange fluctuation loss has a direct nexus with savings in interest costs and should be considered as revenue expenditure.However, the AO rejected the assessee's submission by relying on several decisions and distinguishing the ITAT decision cited by the assessee. The AO's decision was upheld by the Ld.CIT(A), who observed that the facts in the assessee's case were different from the Pune ITAT case. The Ld.CIT(A) noted that the forex loan in the assessee's case was taken to purchase capital assets, unlike the Pune ITAT case where the loan was used to repay another loan. The Ld.CIT(A) also relied on the Supreme Court decision in CIT v. Woodward Governor India (P.) Ltd. to uphold the AO's additions.Aggrieved, the assessee appealed before the ITAT, arguing that the issue was covered in its favor by the decisions in Cooper Corporation (P.) Ltd. v. DCIT and Hueco Electronics (I) Pvt. Ltd. v. DCIT. The assessee contended that the foreign exchange loss incurred on ECB loans should be considered as a business loss and allowable under the Act.After considering the rival submissions and material on record, the ITAT observed that the assessee had borrowed funds from ECB and incurred a forex loss of Rs. 42,80,768/-. The ITAT noted that the borrowing was for business purposes and the loss incurred was a part of business expenditure. The ITAT referred to the decision in Cooper Corporation (P.) Ltd. v. DCIT, which held that foreign exchange fluctuation loss due to conversion of loans into foreign currency to benefit from lower interest rates should be treated as revenue expenditure. The ITAT emphasized that the loss was recognized as per Accounting Standard (AS) 11 and was not merely contingent or notional.The ITAT further analyzed the provisions of section 43A of the Act, which deals with adjustments to the cost of assets acquired from outside India due to exchange rate fluctuations. The ITAT concluded that section 43A did not apply to the assessee's case as the assets were indigenous. The ITAT also referred to the Supreme Court decision in Tata Iron and Steel Co. Ltd., which distinguished between the cost of an asset and the cost of raising money for its purchase, stating that subsequent events like exchange rate fluctuations do not alter the actual cost of the asset.The ITAT held that the foreign exchange fluctuation loss incurred by the assessee should be allowed as a revenue expenditure under section 37(1) of the Act. The ITAT allowed the appeal filed by the assessee, reversing the order of the Ld.CIT(A) and the AO.Conclusion:In conclusion, the ITAT allowed the appeal filed by the assessee, holding that the foreign exchange fluctuation loss incurred on ECB loans should be treated as a revenue expenditure and allowable under section 37(1) of the Income-tax Act, 1961. The ITAT emphasized that the loss was recognized as per mandatory accounting standards and was not merely contingent or notional.