HUECO ELECTRONICS (I) PVT.LTD,(NOW KNOWN AS HITACHI AUTOMOTIVE SYSTEMS PUNE (I) PVT.LTD),,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX,,

The relevant facts as culled out from the material on record are as under :-

During the course of assessment proceedings on perusing the details filed by assessee, the Assessing Officer noticed that the assessee has claimed foreign exchange loss of Rs.4,57,841/-. On enquiries it was noticed that it was on account of loss towards repayment of ECB Loan which was utilized by the assessee for purchase of fixed assets. The assessee was show caused as to why loss should not be capitalized instead of its claim of revenue expenditure, to which the assessee made the submissions which were not found acceptable to the Assessing Officer. The Assessing Officer thereafter held the expenditure to be capital expenditure, but eligible for depreciation. He thereafter, granted the benefit of depreciation amounting to Rs.66,067/- and disallowed the balance expenditure of Rs.3,94,774/- (Rs.4,57,841 – Rs.66,067). Aggrieved by the order of Assessing Officer, assessee carried the matter before the CIT(A), who upheld the order of Assessing Officer by observing as under:- “7. I have carefully considered the facts of the case as well as reply of the appellant. In this case, it is seen that ECB was utilized for acquiring assets in India. This being so, provisions of section 43A of the I.T. Act, 1961 cannot be applied in the present case. This being so, the important point to be decided is treatment of foreign exchange loss on account of ECB for assets acquired in India. The appellant has relied upon the decision of Hon. Supreme Court in the case of Tata Iron & Steel (TISCO-1998) 231 ITR 285 (SC). In that case the Hon. Apex Court had an occasion to deal with this issue for period prior to introduction of section 43A of the I.T. Act, 1961 which was introduced by Finance Act 1967 w.e.f. 1/4/1967. In that case the assessee had acquired certain depreciable assets using foreign currency loans and adjusted the foreign exchange fluctuation with cost of asset. The Hon. Apex Court on these set of facts held that section 43A is inapplicable as the same was introduced later and also held that the manner of repayment of loan cannot affect the cost of asset so acquired. The above observation was given in the context of applicability of section 43A of the I.T. Act, 1961 and therefore, the same cannot be applied in the present case. In Sutlej Cotton Mills Ltd (1979) 116 ITR 1 (SC), Hon. Supreme Court decided the issue in clear terms holding that “the law may, therefore, now be taken to be well settled that where the profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or a fixed capital, such profit or loss would be of capital nature. Similar view was taken in the case of Tata Locomotive & Engg. Co. Ltd. (TELCO-(1996) 60 ITR 405 (SC). The aforesaid decisions were later consistently followed by some High Courts in the context of ECB holding that if foreign exchange fluctuation loss arises on restatement of ECB utilized for acquiring capital assets indigenously in India, then such loss will be capital in nature. The details of the judgments are as under: (i) Bestobell (India) Ltd. (1979) 2 Taxmann 62 (Cal) (ii) Union Carbide India (1981) 130 ITR 351 (Cal) (iii) Oil India Ltd. (1982) 137 ITR 156 (Cal)

Aggrieved by the order of CIT(A), the assessee is now in appeal before us.

Before us the ld. AR reiterated the submissions made before the Assessing Officer and CIT(A) and further submitted that loss is on account of reinstatement of foreign currency loan availed by the assessee for acquisition of domestic assets. He submitted that the assessee has been following the same method of accounting and no disallowance was made by Assessing Officer either in A.Y. 2010-11 or in A.Y. 2011-12. He therefore, submitted that on the principle of consistency, the Assessing Officer was not right in denying the claim and making the addition. He further submitted that Pune Tribunal in the case of M/s. Neuman & Esser Compressor Application Centre Pvt. Ltd. Vs. DCIT in & 2657/PUN/2017 has held that foreign currency loan which was claimed by assessee as revenue expenditure was held by the Assessing Officer to be capital expenditure by invoking provisions of section 43-A of the Act. He submitted that the Hon‟ble Bench has decided the issue in favour of assessee and held that foreign currency loss was the revenue expenditure.

The ld. DR on the other hand took us through the observations of CIT(A) and supported the order of CIT(A).

We have heard the rival submissions and perused the material on record. The issue in the present appeal is with respect to treatment of loan on account of foreign currency. It is an undisputed fact that loss is on account of reinstatement of foreign currency loan which has been taken by the assessee for acquisition of assets in India. We find that the CIT(A) has given a finding that provisions of section 43-A of the Act are not applicable to the present case. We find that the Co-ordinate Pune Tribunal in the case of M/s. Neuman & Esser Compressor Application Centre Pvt. Ltd. Vs. DCIT (supra) has held that the provisions of section 43-A of the Act are applicable when the assets acquired from outside India. It further held that the said provisions are not applicable to the acquisition of indigenous assets. We further find that the Co-ordinate Bench of Cochin in the case of Baby Memorial Hospital Ltd. Vs. ACIT (supra) after considering various case laws including the decision of Hon‟ble Apex Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT 116 ITR 1 (SC) and other decisions has held that foreign exchange loss arising out of foreign exchange fluctuation in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure by charging the same into Profit and Loss Account and not as capital expenditure by deducting the same from cost of respective fixed assets. Before us Revenue has not placed any contrary binding decision in its support nor has demonstrated as to how the decision of Cochin Tribunal in the case of Baby Memorial Hospital Ltd. Vs. ACIT (supra) would not be applicable to the present facts. In such situation, we are of the view that the Assessing Officer was not justified in denying the claim of revenue expenditure. We however, find that the Assessing Officer has allowed depreciation on the amounts capitalized. Since we are holding the amount of expenditure claimed by assessee to be revenue expenditure, we direct the Assessing Officer to withdraw the benefit of depreciation on those assets that was allowed by him to the assessee and re-work the depreciation thereon. We thus, direct accordingly. In view of the aforesaid, the grounds raised by the assessee are allowed.

In the result, the appeal of assessee is allowed.