APRAAVA RENEWABLE ENERGY PRIVATE LIMITED,MUMBAI vs. THE PR.CIT, AHMEDABAD-1, AHMEDABAD

I have carefully and thoroughly gone through submission of the assessee. The submission of the assessee is not acceptable. The assessee has relied on Hon'ble ITAT's order in the assessee's own case for the A.Y. 2014-15 to 2016-17 vide ITA No. 1110/Ahd/ 2018 and 1605 & 1606/Ahd/2019 dated 31.08.2022. The assessee has contended that the issue is covered by Hon'ble ITAT's order dated 31.08.2022. In this connection, it is to mention here that the decision of the ITAT has not been accepted by the Department and further appeal u/s 260A of the Act has been filed before Hon'ble Gujarat High Court. Therefore, the issue under consideration, i.e. Forward cover premium, has not reached to its finality and cannot be termed as 'settled as of now. The decision of the ITAT was not accepted in view of the following reasons:- 1. The premium amount of forward contract does not represent foreign exchange fluctuation loss but it is in the nature of the premium paid to secure the foreign currency loss which may arise at the time of repayment of instalment of such loan. As such the amount of repayment represents the principal amount of the loan and not the interest cost on such borrowing. Furthermore, the foreign currency loan obtained by the assessee was utilized for meeting the capital expenditure. The Effects of Changes in Foreign Exchange Rates, may be relevant and mandatory for maintaining the books of accounts under the Companies Act. But the same is not relevant while computing the income for the purpose of the taxes. 2. That exchange difference should be recognized in the statement of profit and loss in the reporting period in which the exchange rates change and profit or loss should be recognized as income or expense. However, in the present case we are not dealing with actual exchange fluctuation but a case of premium paid on forward contract to secure against adverse fluctuation of foreign exchange. The premium on forward exchange contract is to be accounted for separately from the exchange differences on the forward exchange contract.

The relied upon judgment by the Hon'ble ITAT in the case of Virtual Soft (supra) is with respect of allowability of lease equalization charges. The observation of Hon'ble Supreme Court at para 14 of this judgment reads as under- 14. The bifurcation of the lease rental is by no stretch of imagination, an artificial calculation and, therefore, lease equalization is an essential step in the accounting process to ensure that real income from the transaction in the form of revenue receipts only is captured for the purposes of income tax. Moreover, we do not find any express bar in the IT Act which bars the bifurcation of the lease rental. This bifurcation is arialogous to the manner in which a bank would treat an EMI payment made by the debtor on a loan advanced by the bank. The repayment of principal would be a balance sheet item and not a revenue item Only the interest earned would be a revenue receipt chargeable to income tax. Hence, we do not find any force in the contentions of the Revenue that whole revenue from lease shall be subjected to tax under the IT Act Thus, the Hon'ble Supreme Court has extended their findings with respect to revenue recognition by holding that interest earned on lease equalization charges would be revenue receipt. However, the moot question in the case on hand is premium on forward exchange contracts on ECB loans for capital asset development is capital expenditure or revenue. The relied upon judgment of Virtual Soft (supra), is on different set of fact, hence not applicable. 1. The decision of the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. (relied upon by the ITAT) would apply only in respect of exchange fluctuation on loans taken for revenue purposes. In the case of the Assessee admittedly the foreign exchange loan was in connection with conversion of a rupee term loan into a foreign currency loan. The purpose of the loan was for purchase of construction and setting up of the power projects of the assessee which is on capital account. Therefore, the sum in question cannot be claimed as deduction. The other decisions relied upon by the Assessee are on the loss on account of fluctuation of foreign exchange relatable to revenue account and have nothing to do with the claim of the Assessee as made in the present case. In view of the above, the submission of the assessee is not acceptable…”