M/S. SAKURA AUTOPARTS INDIA PVT. LTD.,CHENNAI vs. ITO, CORP. CIRCLE-3(1), CHENNAI

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ITA 1475/CHNY/2025Status: DisposedITAT Chennai03 August 2026AY 2021-226 pages

In favour of the Revenue: the assessee's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the Assessing Officer (AO) failed to examine the applicability of Section 43AA of the Act regarding foreign exchange fluctuations. Consequently, the PCIT's order invoking Section 263 was justified as the assessment order was erroneous and prejudicial to the revenue's interest.

What were the facts?

The assessee's appeal challenges an order passed by the Principal Commissioner of Income Tax under section 263. The core issue revolves around the tax treatment of foreign exchange gains and losses on an ECB loan, with the assessee arguing that notional gains should not be taxed if prior year losses were not claimed.

What were the issues?

Whether the PCIT rightly invoked Section 263 jurisdiction when the AO had not adequately examined the applicability of Section 43AA concerning foreign exchange fluctuations on an ECB loan.

Which sections of the Income-tax Act were involved?

Section 263,Section 43AA,Section 145(2),Section 143(3),Section 144B

AI-generated summary — verify with the full judgment below

Before: Shri Inturi Rama Rao & Shri S.S. Viswanethra Ravi

Hearing: 17.06.2026Pronounced: 03.08.2026

आयकर अपीलीय अिधकरण, ’ए’ �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI �ी इंटूरी रामाराव, लेखा सद� एवं �ी एस.एस. िव�ने� रिव, �ाियक सद� के सम� । Before Shri Inturi Rama Rao, Accountant Member & Shri S.S. Viswanethra Ravi, Judicial Member आयकर अपील सं./I.T.A. No.1475/Chny/2025 िनधा�रण वष�/Assessment Year: 2021-22 M/s. Sakura Autoparts India Private Vs. The ITO, Limited, Corp. Circle-3(1), No.3 Sipcot Industrial Park, Vallam Chennai. Vadagal Village, Sriperumbudur Kancheepuram, Tamil Nadu, 631604. [PAN: AASCS0174N] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Mr. R. Vijayaraghavan, Advocate ��थ� की ओर से/Respondent by : Ms. R. Anita, CIT सुनवाई की तारीख/ Date of hearing : 17.06.2026 घोषणा की तारीख /Date of Pronouncement : 03.08.2026 आदेश /O R D E R PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:

This appeal filed by the assessee is directed against the order dated 25.03.2025 passed by the ld. Principal Commissioner of Income Tax, Chennai-3, under section 263 of the Income-tax Act, 1961 (for short, "the Act"), for the assessment year 2021-22.

2.

The assessee raised five grounds of appeal, amongst which the only issue emanating for consideration is as to whether the ld. PCIT

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rightly invoked the jurisdiction under section 263 of the Act in the facts and circumstances of the case.

3.

At the outset, it is argued by the ld. AR, Mr. R. Vijayaraghavan, Advocate, that under section 43AA, loss or gain in respect of monetary items arising on account of any change in foreign exchange rates shall be treated as income or loss computed in accordance with the Income Computation and Disclosure Standards as per sections 43AA and 145(2) of the Act. He argued that the purpose of the said section is that the loss or gain arising from fluctuation in foreign exchange is allowed/taxed in each of the years on accrual instead of allowing and charging the same in totality in the year of settlement. He submits that the assessee did not claim deduction for the foreign exchange loss in the earlier years and the Department is proposing to tax the foreign exchange gains arising in the current year while ignoring the fact that the losses arising from foreign exchange fluctuation were not claimed in the earlier years, which results in an artificial inflation of income. He drew our attention to page No. 14 of the ld. PCIT's order and, by referring to the details in tabular form, argued that the amount of foreign exchange gain was not excluded from the income of the year only because, if the loan is settled in the 4th year at the then prevailing rate of ₹70 per USD, there will be no gain or loss.

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Further, he explained that if the assessee had taken the loan at the exchange rate of ₹70 per USD and settled it at the same rate, which clearly shows that there was no actual loss or profit in the transaction. He argued vehemently that the Department is assessing notional income, which is not real income, in the sense that it will not be adjusted in the final settlement of the loan. Further, only if the loss or income of each year is taken into account, the final amount would represent the real income which will accrue at the time of final settlement. By referring to the facts of the present case, he argued that the liability in respect of the loan, without taking into account the foreign exchange losses/gains in the interregnum, the liability as per the books at the rate as on the date of receipt of the loan is ₹87.96 crores, whereas the loan liability restated at the exchange rate prevailing as on 31.03.2021 is ₹88.80 crores, resulting in a loss for the year of ₹84 lakhs. He argued that, during the course of the original assessment proceedings, the AO, vide notice dated 24.11.2022, sought a specific query about the allowability of foreign exchange fluctuation, and the assessee filed submissions vide response dated 13.12.2022 and clarified that the total amount of foreign exchange gain related to the unrealized foreign exchange gain on the currency fluctuations arising out of the revaluation of the amount of ECB loan availed by the assessee for the purchase of capital goods. He vehemently

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argued that the order of the ld. PCIT is not justified when the issue was decided by the AO in the assessment proceedings and that the grounds raised by the assessee need to be allowed.

4.

Ld. DR, Ms. R. Anita, CIT, relied on the order of the ld. PCIT and strongly supported the reasonings given by the ld. PCIT in para Nos. 10.1 to 10.15 of the impugned order. She submits that the ld. PCIT passed a well-considered order taking into account the submissions made by the assessee in respect of the issue and prayed to dismiss the grounds raised by the assessee.

5.

Heard both the parties and perused the material available on record. We find the main contention of the assessee is that no claims were made in respect of foreign exchange losses related to the earlier years and the respondent Revenue is proposing to tax the foreign exchange gain arising in the current year, ignoring the earlier years' losses arising from foreign exchange fluctuations. Further, the main contention of the assessee is that, for example, if the loan is taken at the exchange rate of ₹17 per USD and it is settled at the same rate, no actual loss or profit arises in the transaction. Further, the assessee does not make a profit or loss out of the transaction but is assessed to tax on ₹6 lakhs arising on account of losses not being allowed in the earlier years.

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Further, we note that the contention is that the respondent Revenue is assessing a notional income which is not a real income in the sense that it will not be adjusted in the final settlement of the loan, and only if the loss or income of each year is taken into account, the final amount would represent the real income which will accrue at the time of final settlement. On perusal of the details of foreign exchange loss/gain at page No. 14 of the impugned order, the foreign exchange gain was not excluded from the income of the assessee for the year under consideration. Therefore, on perusal of the assessment order, we note that no discussion whatsoever was made by the AO in the original assessment proceedings, which clearly shows as to whether the AO considered the issue with reference to the provisions under section 43AA of the Act or not. The main contention of the ld. PCIT is that the provisions under section 43AA are mandatory, wherein the AO failed to verify the applicability of section 43AA of the Act to the facts and circumstances of the case of the assessee. On perusal of the assessment order dated 24.12.2022 passed under Section 143(3) read with Section 144B of the Act, which is on record, there is no finding of the AO as to whether the facts and circumstances attract the provisions under section 43AA with reference to section 43A of the Act. Therefore, we find no force in the arguments of the ld. AR with reference to the contention that, when the foreign

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exchange fluctuation loss was not claimed by the assessee in the earlier years, the foreign exchange gain cannot be taxed in the year under consideration. Therefore, we find no infirmity in the order of the ld. PCIT in treating the assessment order dated 24.12.2022 passed under Section 143(3) read with Section 144B of the Act as erroneous and prejudicial to the interest of the Revenue. Thus, the order of the ld. PCIT in exercising jurisdiction under section 263 of the Act is justified and the grounds raised by the assessee are dismissed.

6.

In the result, the appeal of the assessee is dismissed.

Order pronounced on 3rd August, 2026 at Chennai.

Sd/- Sd/- (INTURI RAMA RAO) (S.S. VISWANETHRA RAVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, 03.08.2026 MM/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR & 5. गाड� फाईल/GF. Digitally signed MANISH by MANISH MISHRA MISHRA Date: 2026.08.06 10:49:49 +05'30'

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