TaxTMI 
TaxTMI 
2026 (9) TMI 1537
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....einstatement of Long-Term External Commercial Borrowing (ECB), thereby wrongly reducing the returned loss of Rs. 18,79,04,371 to Rs. 16,17,61,545. b) The learned CIT(A) erred in law in upholding the application of section 43A of the Act to unrealised foreign exchange fluctuation on ECB, despite the undisputed fact that: (a) no repayment of the ECB liability was made during the year; and (b) section 43A applies only upon actual payment of foreign currency liability and only for adjustment to the actual cost of imported assets. c) The learned CIT(A) failed to appreciate that unrealised foreign exchange gain arising on restatement of a long-term foreign currency loan availed for acquisition of capital assets is purely notional and capital in nature and does not constitute taxable income under the Act. d) The learned CIT(A) erred in law and on facts in sustaining the addition on the ground that the ECB was partly utilised for acquisition of indigenous assets and that unrealised exchange gain relatable thereto is taxable, ignoring that the Act does not provide for taxation of notional gains merely because the underlying assets are indigenous. e) The A....
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....oresaid view expressed by him has computed the ratio of unrealized exchange gain in terms of assessee's investment in imported as well as indigenous plant and machinery and worked out the disallowance in the following table: 1 Imported Plant & Machinery 55,88,83,784/- 2 Indigenous Plant & Machinery 32,38,92,872/- 3 Total 88,27,76,656/- 4 % age of Imported 63.31 5 % age of Indigenous 36.69 6 Total Unrealized Exchange Gain (UEG) 7,12,53,273/- 7 UEG where Section 43A is not applicable (i.e. 36.69 % of Rs. 7,12,53,273/-) 2,61,42,826/- 8 UEG where Section 43A is applicable (i.e. 7,12,53,273 - 2,61,42,826) 4,51,10,447/- 6. In above terms, a show-cause notice was issued to the assessee along with draft assessment order, in response to which the assessee has raised certain contentions relying upon the following decisions and findings therein which is reproduced as under: "a. The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd b. Union Carbide Limited-Calcutta High Court C. CIT vs. V.S. Dempo & Co Pvt. Ltd- Bombay High Court (206 ITR 291) d. Periyar Chemicals Limit....
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.... a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The 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 ofan 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." 8. In terms of aforesaid observations, the Ld. AO was of the view that once the asset is purchased and put to use in business later due to change in foreign currency fluctuation, its cost cannot be changed however the assessee is given benefit of change in the cost of asset that has been imported from outside India due to currency fluctuation as per provisions of section 43A. Therefore, the contention of the assessee is not acceptable. Ld. AO also relied on he CBDT' Circular 10/2017 in which certain FAQs....
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.... building which is not in dispute in the present case. It is submitted that as per settled principles of law, a capital receipt cannot be taxed as business income u/s 28 unless explicitly provided by the Act. Ld. AR relied on the decision of Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1) (SC) and CIT vs. Dempo & Co. Pvt. Ltd. (206 ITR 291) (Bombay HC). The second argument of the Ld. AR was that the income is a notional one and cannot be treated as real income therefore, the income tax cannot be levied on a hypothetical income. 12. It is submitted that the unrealized exchange gain on the reinstatement of ECB at the year-end cannot be treated as actual repayment of the principal amount so as to crystallize this gain during the year under consideration. Reliance was placed on the decision of Godhara Electricity Co. Ltd. vs. CIT (225 ITR 746) (SC)and CIT vs. Excel Industries Ltd. [2013] 358 ITR 295 (SC). Ld. AR submitted that the core principle established in Godhara is the "Real Income Theory". The Hon'ble Supreme Court held that even if the assessee follows the mercantile system of accounting and makes book entries recognizing an income, Income Tax cannot be levied unless that incom....
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.... provision for calculating depreciation by adjusting the actual cost. It is not charging section. The inability to reduce the cost of an indigenous asset u/s 43A does not automatically transform capital receipt into a revenue receipt. Addressing the AO's reliance on Tata Iron and Steel Co. Ltd. (SC)., Ld. AR submitted that the Ld. AO used this case to state that cost of asset cannot change due to subsequent currency fluctuations. In fact, even in the said case Hon'ble Supreme Court has held that the loan repayment and assets purchase are two different and independent transactions, the loan remains a capital liability. A notional reduction in a capital liability is a capital surplus, not a taxable revenue profit. Regarding ICDS, it is submitted by the Ld. AR that the ICDS cannot override the capital nature of receipts. The Ld. AO relied heavily on CBDT Circular 10/2017 to argued that ICDS overrides judicial precedents. To respond the aforesaid view of the Ld. AO, Ld. AR submitted that while section 43AA and ICDS-VI (effects of changes in foreign exchange rates) provide for the recognition of exchange differences, it is a settled constitutional and legal principle that delegated legi....
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....realized exchange gain arising on reinstatement of the long-term External Commercial Borrowings (ECB), which were utilized by the assessee for acquiring capital assets in India, is in the nature of a capital receipt or a revenue receipt and, consequently, whether such exchange fluctuation is liable to be brought to tax under the provisions of the Act. In order to examine the aforesaid issue, it would be appropriate to first refer to the provisions of section 43AA of the Act, which were inserted by the Finance Act, 2018 with retrospective effect from 01.04.2017. The said provision specifically deals with the treatment of gain or loss arising on account of change in foreign exchange rates and, therefore, assumes relevance in the facts of the present case. The relevant provisions of section 43AA read as under: "43AA. (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145. (2) For the purposes of ....
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....ge fluctuation arising in respect of the ECBs cannot be dealt with under section 43A merely on the ground that the borrowed funds originated outside India or were denominated in foreign currency. 22. The question that then arises is as to the provision governing the resultant foreign-exchange gain or loss. Section 43AA specifically provides for the treatment of gains or losses arising from foreign exchange fluctuations in accordance with the prescribed accounting standards. The provision does not, in its application, make a distinction merely on the basis of whether the underlying foreign-currency transaction has a capital or revenue character, except to the extent that a particular transaction is specifically governed by the special regime contained in section 43A. Therefore, where the transaction does not fall within the specific field occupied by section 43A, the consequences arising from foreign-exchange fluctuation would require examination under section 43AA, subject, of course, to the other statutory conditions governing its applicability. 23. Accordingly, in the facts of the present case, the foreign-exchange gain arising on reinstatement, at the year-end, of the fore....