TaxTMI 
TaxTMI 
2016 (5) TMI 809
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.... Rs. 1,02,06,863/- and consequent depreciation u/s. 32 of the Income Tax Act, 1961. 3. The appellant craves leave to add, alter, delete or substitute all or any of the above grounds of appeal. " 3. The predominant issue arising in the present appeal is disallowance of foreign exchange fluctuation loss of Rs. 1,02,06,863/- sustained by the CIT(A) out of total foreign exchange loss of Rs. 1,39,98,948/- disallowed by the Assessing Officer. The basic premise for sustaining the disallowance by the CIT(A) is that the loss is of capital nature and thus not allowable as revenue expenditure. 4. The relevant facts concerning the issue are that the assessee is a private limited company, primarily engaged in foundry business, manufacturing cylinder liners/heads, flywheels and other automobile components etc. besides generation of electricity through windmills. It was noticed by the Assessing Officer that in its financial statement, the assessee has interalia shown outstanding loans received in foreign currency at the end of the year. It was further noticed that the assessee has claimed a deduction of an amount of Rs. 1,39,98,948/- on account of devaluation of Indian currency qua foreign cur....
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....t the so called loss is merely a notional loss and not an actual loss incurred by the company. The Assessing Officer further observed that even presuming that increased liability for repayment of foreign currency loans have been saddled on the assessee, still the same will be a. payment of capital in nature since impugned loans were obtained for acquiring the capital asset. The AO thus held that the loss claimed on account of fluctuation in the foreign exchange rate could not be allowed as revenue expenditure. 5. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). The CIT(A) granted partial relief of Rs. 37,92,087/- on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items such as bill discounting, debtors etc. However, in respect of other loans, the CIT(A) observed that such loans in question were sanctioned and received for part financing the cost of expansion project of the foundry business, cost of acquisition of windmills and cost of expansion of the engine division, etc.. Thus, the loans were taken for capital purposes and therefore the assessee is not entitled to losses fro....
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....be necessarily converted into India currency by applying the foreign exchange rate prevailing as at the closing date of relevant accounting year. It was thereafter submitted that AS-11 further obliges the Assessee company to account for profit / loss arising from such exchange fluctuation, if any, in the books. In the impugned assessment year under consideration, the assessee has incurred losses on such fluctuation with reference to foreign currency rate prevailing at the end of the year and therefore the loss so incurred has been debited to profit and loss account of the assessee and claimed as deduction. The Ld. AR. emphasized that AS-11 has been duly notified by (he National Advisory Committee for Accounting Standards in terms of section 211(3C) of the Companies Act, 1956 whereby the compliance with the Accounting Standards has become mandatory for the assessee company. The Ld. AR made averment to the effect that the impugned loss is on account of re-statement or conversion of outstanding loans with reference to foreign currency rate prevailing at the year end. Extending his contentions, the Ld. AR submitted that it is well settled that business income should be computed in acco....
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.... the assessee due to fluctuation and in view of the accounting methods and policies employed consistent with Accounting Standards prescribed, the Ld. AR justified the action of the assessee in claiming the expense as business expenditure under section 37(1) of the Act. 7.2 The Ld. Authorized Representative for the assessee extensively relied upon the observations made by the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P) Ltd., [2009] 312 ITR 254 (SC). He submitted that in the absence of applicability of S. 43 A, the assessee is governed by generally accepted accounting principles and policies. The Losses arising to the assessee determined on commercial principles by adopting well recognized and generally accepted accounting policies are deductible under section 37(1) of the Act. He referred to the observations of the Hon'ble Supreme Court and asserted that the Central Government has made AS-11 mandatory for the purpose of determination of income chargeable under the head "Income from business/profession or income from other sources, etc." with regard to the provisions of section 145 of the Act. He next submitted that as per Woodward case supra, the....
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....ejoinder, The Ld. Counsel for the Assessee submitted that facts of the case in Sutlej Cotton Mills Ltd. are entirely different and is required to be read in the context. He submitted that when the foreign currency is held in revenue account which is the case here, the profit or loss would be regarded as trading profit / loss. 10. We have carefully considered the rival submissions, orders of the authorities below and case laws cited. The central issue involved in the present case is whether provision for loss in the hands of assessee on account of restatement of outstanding foreign currency loans necessitated by fluctuation in foreign exchange would be allowable as business loss or a loss of capital nature in the facts narrated above. While as per the revenue, the increased liability due to exchange fluctuation correspond with carrying costs of the fixed assets and thus capital in nature, the assessee seeks to submit that the loss is revenue in nature. 10.1 On consideration pf facts, it is noticed that certain loans were held in Indian currency in the earlier years. The Assessee entered into an agreement with the lenders to convert the loans in foreign currency equivalents to take....
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....e either by cash or mercantile system of accounting. Thus, in view of the various provisions of the Companies Act and Income Tax Act, it was mandatory to draw accounts as per AS 11. Thus, in our considered view, the loss recognized on account of foreign exchange fluctuation as per notified accounting standard AS 11 is an accrued and subsisting liability and not merely a contingent or a hypothetical liability. A legal liability also exists against the assessee due to fluctuation and loss arising therefrom. Actual payment of loss is an irrelevant consideration to ascertain the point of accrual of liability. As a corollary, the revenue has committed error in holding the liability as notional or contingent. 10.4 Copious reference has been made to S. 43A by Assessee as well as revenue. Thus, it would be pertinent to examine the issue on the touchstone of S. 43 A of the Act. Seption 43 A, to the extent relevant in the context, reads as under: Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the....
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....ision of Section 43 A, which opens with a non-obstante and overriding clause, would show that it comes into play only when the assets are acquired from a country outside India and does not apply to acquisition of indigenous assets. Another notable feature is that S. 43 A provides for making corresponding adjustments to the costs of assets only in relation to exchange gains/ losses arising at the time of making payment. It therefore deals with realised exchange gain/ loss. The treatment of unrealised exchange gain/ loss is not covered under the scope of S. 43 A of the Act. It is thus apparent that special provision of S. 43A has no application to the facts of the case. Therefore, the issue whether, the loss is on revenue account or a capital one is required to be tested in the light of generally accepted accounting principles, pronouncements and guidelines etc. 10.5 Before We delineate on the allowability of loss based on generally accepted accountancy principles, it may be pertinent to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital assets with reference to S. 43(1) of the Act. Section 43(1) defines the ex....
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....he assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs. " Thus, it is evident the variation in the loan amount has no bearing on the cost of the asset as the loan is a distinct and independent transaction as in comparison with acquisition of assets out of said loan amount borrowed. Actual cost of the corresponding fixed asset acquired earlier by utilizing the aforesaid loan will not undergo any change owing to such fluctuation. 10.7 The issue is also tested in the light of provision of S. 36(1)(iii) governing deduction of interest costs on borrowals. As stated earlier, manner of utilization of loan amount has nothing to do with allowability of any expenditure in connection with loan repayment. Both are independent and distinct tr....
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.... accounting standards for preparation of profit in the Profit & Loss Account and the Balance Sheet. A conjoint reading of section 145 of the Act and section 211 of the Companies Act leaves no room for doubt that the Assessee is obliged to follow the accounting standards prescribed to determine business income under the head "business or profession". We notice that the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed that AS-11 is mandatory in nature. In the light of observations made in Woodward Governor India (P) Ltd. (supra), we are of the view that loss arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in the Profit & Loss account in accordance with accounting fiat of AS-11. 10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. (supra) relied upon by the Ld. Departmental Representative is of no assistance to the Revenue. The Hon'ble Supreme Court therein stated the principle of law that where any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be ....