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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI O.P. KANT & SHRI KULDIP SINGH
ORDER PER O.P. KANT, AM:
The present appeals by the Revenue and Cross Objection and cross appeal by the assessee for assessment years 2012-13 have been preferred against the order dated 23/10/2017 passed by the learned Commissioner of Income Tax, (Appeals)-2, New Delhi [in short ‘the Ld. CIT(A)’]. The appeal by the Revenue and cross objection by the assessee for assessment year 2013-14 have been preferred against order dated 24/10/2017 passed by the Ld. CIT(A). These appeals and cross objections relates to a common issue in dispute, and therefore same were heard together and disposed off by way of this consolidated order for convenience.
2. First, we take up the appeals and cross objection for assessment year 2012-13. The grounds of appeal of the Revenue in 2012-13 are reproduced as under: 1. Whether the Ld. CIT(A) has erred on facts and in law in deleting the 50% addition of Rs.13,78,30,136/- on account of addition made after disallowance of foreign exchange loss, without appreciating the fact that assessee itself has failed to prove that the said loans were not used in investment in equity shares and the loan was used wholly & exclusively for business purpose. If interest on loan is not correlated with business purpose then foreign exchange loss suffered is also not allowable.
2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
2.1 The grounds raised by the assessee in cross objection are reproduced as under:
1. That the Ld. CIT(Appeal) erred in law in upholding the 50% of disallowance made by the Assessing Officer towards foreign exchange loss of Rs.6,89,15,068/- without applying his mind to the merits of the case, and on ad-hoc basis as not being incurred wholly and exclusively for the purpose of business of the Respondent.
2. That the Ld. CIT(Appeal) failed to appreciate that the gain on revaluation of foreign exchange on similar basis has been taxed as income in earlier years by the Respondent following mercantile system of accounting and in accordance with the accounting policy prescribed in Accounting Standard II—Accounting for the Effects of Changes in Foreign Exchange Rates’.
The cross objection, as submitted, as notwithstanding each other. The Respondent craves to amend, alter or add fresh grounds during the course of proceeding before your goodself.
2.2 The grounds raised by the assessee in its appeal for assessment year 2012-13 are reproduced as under: That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - 2, New Delhi (hereinafter referred to as the 'Ld CIT (Appeal)) erred in upholding disallowance made by the Assessing Officer towards foreign exchange fluctuation loss of Rs 6,89,15,068.
4 & 601/Del/2018; C.O. No. 77 & 78/Del/2018; ITA No.488/Del/2018 1. That the Ld CIT (Appeal) erred in law in upholding the 50% of disallowance made by the Assessing Officer towards foreign exchange loss of Rs 6,89,15,068 without applying his mind to the merits of the case, and on ad-hoc basis as not being incurred wholly and exclusively for the purpose of business of the Appellant.
2. That the Ld CIT (Appeal) failed to appreciate that the gain on revaluation of foreign exchange of similar basis has been taxed as income in earlier years by the Appellant following mercantile system of accounting and in accordance with the accounting policy prescribed in Accounting Standard 11 - ‘Accounting for the Effects of Changes in Foreign Exchange Rates’. The grounds of appeal, as submitted, are notwithstanding each other. The Appellant Company craves to amend, alter or add fresh grounds of appeal during the course of proceeding before your goodself.
3. Briefly stated facts of the case are that the assessee company was engaged in construction of highways, infrastructure development etc. For the year under consideration, the assessee filed return of income on 29/11/2012, declaring loss of ₹ 14,16,04,895/-. In the scrutiny assessment completed on 20/02/2015 under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’), the Assessing Officer disallowed ‘foreign exchange fluctuation loss’ of ₹ 13,78,30,136/- on the ground that loan taken by the assessee on which fluctuation loss had been claimed, were not utilized for the purpose of the business and those funds had been used for investment in equity shares. The Ld. CIT(A) however deleted 50% of disallowance and sustained balance 50% of disallowance observing as under: “3.3.1 I have considered the submissions of the appellant as well as the findings of the AO. The AO has disallowed loss of Rs. 13,78,30,136/- incurred on account of foreign exchange fluctuation as he was of the view that the loans were not utilized for business purposes but these funds were essentially utilized in investment in equity shares of M/s. Swama Tollway Pvt. Ltd. (STPL) and,
therefore, the expenditure/loss was not covered u/s 37(1) of the Act.
3.3.2 The general principles regarding the treatment of foreign exchange fluctuation are as below: i. A loss arising in the process of conversion of foreign currency which is part of the trading asset of the assessee is a trading loss. ii. A loss suffered by the assessee on account of exchange differences as on the date of balance sheet is an allowable expenditure u/s 37(1) of the I.T Act (CIT Vs Woodward Governor India Pvt. Limited (2009) 312 ITR 254 (SC)/179 Taxman 326 (SC), thereby confirming the order of the Hon’ble Delhi High Court in CIT Vs. Woodward Governor India Pvt. Limited 294 ITR 451 (Del), where it was held that the change in the value of foreign currency in relation to Indian currency is a fait accompli and not a notional one and therefore, the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year is allowable as a deduction and is not notional or contingent [BEML V CIT (2000) 245 ITR 428 (SC) relied on], iii. In determining the true nature and character of the loss, the cause which occasions the loss is immaterial, what is material is whether the loss has occurred in the course of the business or is incidental to it. iv. The loss resulting from depreciation of the foreign currency which is utilized or intended to be utilized in business and is a part of the circulating capital would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be a capital loss. v. To determine, whether devaluation loss is revenue or capital in nature, what is relevant is the utilization of the amount at the time of devaluation and not the object for which the loan had been obtained or even if the foreign currency was intended or had originally been utilized for acquisition of fixed asset, if at the time of devaluation, it had changed its character and had assumed the new character of stock in trade or circulating capital, the loss that occurred on account of devaluation shall be revenue loss and not a capital loss. vi. The entries made by the assessee in the books of the account are not determinative of the question whether the assessee has earned any profit or suffered any loss; what does need to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee [Sutlej Cotton Mills Ltd Vs CIT (1979) 116 ITR 1 (SC)]. vii. Even an unrealized loss on an interest rate swap transaction has been allowed as a deduction as the assessee had consistently followed the same method of accounting as mandated by the RBI guidelines (JP Morgan Chase Bank Vs ADIT (2010) 42 SOT 30 (MUM) (URO). viii. In a case, where assessee seeks deduction for foreign exchange loss in respect of conversion of different expenditure at a uniform rate, though it is not a foreign exchange fluctuation, the same shall be allowed as deduction - [CIT vs. Enron Oil & Gas Limited (2008) 305 ITR 75 (SC)].
3.3.3 The appellant company has categorically submitted that it supervised the two projects (Jalandhar and Orissa) directly undertaken by its Malaysian AE i.e. M/s Bumi Hiway (M) Sdn. Bhd (BHM) in India while it also supervised one road project (Vijayawada), awarded to it directly by M/s. Swama Tollway Private Limited (STPL). Regarding the projects of Jalandhar and Orissa, the same were originally awarded by the National Highway Authority of India (NHAI) to M/s Bumi Hiway (M) (BHM) but subsequently M/s Bumi Hiway (M) (BHM) sub-contracted them to the appellant company. Moreover, BHI (appellant company) held 16.8% equity shares in STPL, a consortium company specifically incorporated in executing the agreement between the Government of India and the group of companies in Malaysia, to build a certain length of national highway, by way of design, build, operate and transfer and as a shareholder of STPL, the appellant was awarded project by STPL to construct certain stretch of highways. In order to finance the working capital requirement and investment in STPL, the appellant secured loan financing from M/s Bank of Nova Scotia, India in 2002. The loan used for investment in STPL equity amounting to Rs. 20,67,83,000 was repaid by the appellant company in the FY 2002-03 itself.
3.3.4 Therefore, the advances received from Bumi Hiway Ventures Berhad, Bumi Hiway (M) (SDN BHD), Bumi Hiway Mauritius Limited, ECB Loan account were utilized for business purposes and since the advances received were in foreign currency, they have been revalued in accordance with AS-11 issued by ICAI and also following accrual system of accounting. Therefore, the appellant company has established that- i) Loans, funds and ECB loans as appearing in the financial statements of the appellant company for the year ending 2012 have been used for revenue expenditure and exclusively for business purpose. ii) The investment made in STPL equity was under commercial expediency to secure contract and its grouping in the books of account as investment was as per Companies Act and also according to the accounting standards issued by the ICAI. iii) The appellant company has rightfully transferred profit as well as loss accruing on revaluation of unsecured loan to its profit and loss account following mercantile system of accounting (followed consistently) and as per the AS-11 in the respective year.
3.3.5 Identical issue arose in the case of the appellant for A.Y. 2011-12 and the CIT (Appeals)-14 vide his order in A. No. 551/14- 15/I.T./Del/2015-16 dated 23.03.2016 has held as follows:-
“4. Considering the submission of the appellant that the foreign exchange fluctuation loss on revaluation of foreign currency loans and advance is allowable as business expenditure u/s 37(1) of the Act by way of business purpose and commercial expediency, I am of the view that the Ld. A.O. should have allowed 50% of the loss on foreign exchange fluctuation particularly while on similar facts, he has allowed 50% of bank charges u/s 37(1) of Act and also keeping in view the judgement of the Hon’ble Supreme Court of India in CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC)/179 Taxman 326 (SC) as deliberated in the above said paras. However, it is also a fact on record, that looking into the true nature of transaction, it cannot be said that the sum expended for the entire transactions are wholly or exclusively for the business expediency or business purposes. Therefore, the addition of Rs. 3,29,11,946/- as made by the Ld. A.O. on account of disallowance on foreign exchange loss is hereby restricted to Rs.1,64,55,973/-. Hence the grounds of appeal is this respect are partly allowed.” 3.3.6 Since the facts during the year under appeal are identical to those in the A.Y. 2011-12 discussed above, following the findings of the first appellate authority for the preceding year, the addition of Rs.13,78,30,136/- as made by the AO on account of disallowance of foreign exchange loss is hereby restricted to Rs.6,89,15,068/-(50% of the disallowance made by the A.O.). Hence, these grounds of appeal are partly allowed.
3.1 Aggrieved, both the Revenue and the assessee are before us by way of raising respective grounds in their appeals and cross objection. 4. Before us, the parties appeared through Video Conference facility and filed decisions relied upon through email. 5. At the outset, the learned Counsel of the assessee submitted that issue in dispute is covered by the order of the Tribunal in & 3132/Del/2016 for assessment year 2010-11 and 8 & 601/Del/2018; C.O. No. 77 & 78/Del/2018; ITA No.488/Del/2018 2011-12 and ITA No. 489/Del/2018 for assessment year 2013- 14.
The learned DR fairly conceded that issue in dispute raised in the appeals of the assessee has been restored back to the file of the Assessing Officer by the Tribunal, however, he submitted that in assessment year 2010-11, the grounds of the Revenue dismissed by the Tribunal relates to disallowance of interest in working capital and not relates to foreign exchange fluctuation loss.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In the instant appeals and cross objection, the issue in dispute is whether the ‘foreign exchange fluctuation loss’ claimed by the assessee should be allowed to the assessee or should be disallowed. According to the Assessing Officer, the loans were not utilized for the business purpose, whereas claim of the assessee that same have been utilized for the purpose of the business. The identical issue raised by the assessee in cross objection for assessment year 2010-11 has been restored by the Tribunal to the file of the Assessing Officer observing as under:
“15. Regarding the Cross Objections of the assessee, the matter is being referred to the file Assessing Officer for verification of the utilization of the loan for business purpose by taking into account the amount of the loan raised, the quantum of the own capital and the reserves & surplus, utilization of the amount for day-to-day running of the business and utilization of the amount for investment in the equity shares of the subsidiary company or the amount invested for infusion of the capital in any other company. The AO may then take a considered decision with regard to disallowance of interest on loan and bank charges in accordance with the provisions of the Income Tax Act.”
7.1 While arriving at the above decision, the Tribunal (supra) has followed the finding of the Tribunal in for assessment year 2009-10 in the case of the assessee. 7.2 The identical issue in the appeal of the assessee for assessment year 2013-14 has been sent to the file of the Assessing Officer by the Tribunal in ITA No. 489/Del/2018 observing as under:
“7. We have gone through the order of the Co-ordinate bench of the Tribunal for the earlier years in and in CO Nos. 239 & 240/Del/2016 wherein the matter has been referred to the file of the Assessing Officer for verification of the utilization of the loan for business purpose by taking into account the amount of the loan raised, the quantum of the own capital and the reserves & surplus, utilization of the amount for day-to-day running of the business and utilization off the amount for investment in the equity shares of the subsidiary company or the amount invested for infusion of the capital in any other company.”
7.3 Respectfully, following the findings of the Tribunal (supra) above, we restore the appeal of the Revenue; appeal of the assessee; and cross objection filed by the assessee to the file of the Assessing Officer for deciding the issue-in-dispute in the light of the direction given by the Tribunal(supra) in assessment year 2013-14. 7.4 Accordingly, the grounds raised in appeals and cross objection are accordingly allowed for statistical purposes.
8. The grounds raised by the Revenue in for assessment year 2013-13 are reproduced as under:
1. Whether the Ld. CIT(A) has erred on facts and in law in deleting the 50% addition of Rs. 6,77,95,765/- on account of addition of addition made after disallowance of foreign exchange loss, without appreciating the fact that assessee itself had failed to prove that the said loans were not used in investment in equity shares and the loan was used wholly & exclusively for business purpose. If interest on loan is not correlated with business purpose then foreign exchange loss suffered is also not allowable.
2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds(s) of appeal at any time before or during the hearing of this appeal.
8.1 The grounds raised by the assessee in cross objection for assessment year 2013-14 reproduced as under:
That the Ld CIT (Appeal) erred in law in upholding the 50% of disallowance made by the Assessing Officer towards foreign exchange loss of Rs 3,38,97,823 without applying his mind to the merits of the case, and on ad-hoc basis as not being incurred wholly and exclusively for the purpose of business of the Respondent.
That the Ld CIT (Appeal) failed to appreciate that the gain on revaluation of foreign exchange of similar basis has been taxed as income in earlier years by the Respondent following mercantile system of accounting and in accordance with the accounting policy prescribed in Accounting Standard 11 - ‘Accounting for the Effects of Changes in Foreign Exchange Rates’. 3. The grounds of appeal, as submitted, are notwithstanding each other. The Respondent craves to amend, alter or add fresh grounds of appeal during the course of proceeding before your goodself.
9. As the issue involved in assessment year 2013-14 in appeal of the Revenue and cross objection of the assessee is identical to the issue raised in assessment year 2012-13, the grounds raised in appeal of the Revenue and the cross objection of the assessee for assessment year 2013-14 are accordingly allowed for the statistical purposes.
In the result, all the appeals of the Revenue and assessee and cross objection of the assessee are allowed for the statistical purposes. Order pronounced in the open court on 10th August, 2021.