BELLISSIMO PROPERTIES DEVELOPMENT P. LTD,MUMBAI vs. DY CIT, CENTRAL RANGE-7(3), MUMBAI

The solitary issue involved in the appeal is the disallowance made with regard to foreign exchange loss of Rs.2,69,59,466/- arising on restatement / revaluation of foreign currency loans due to adverse foreign exchange fluctuations claimed under section 37(1) of I.T. Act.

The brief facts necessary to appreciate the controversy involved in this appeal are as follows:-

Aggrieved by the said order, the assessee is in appeal before us. During the appellate proceedings, the Ld.AR had contended that the assessee has offered income from gain in forex fluctuation of loan in earlier year which was accepted whereas the foreign exchange loss in the impugned year was disallowed. The Ld.AR stated that the loss on foreign exchange was on account of loan to Lodha Developers International to the tune of Rs.15.22 crores and stated that the said loan cannot be treated as ‘Capital loss’ as it was on account of revaluation of loans which is of revenue in nature. The Ld.AR relied on the decision of Hon’ble Supreme Court in CIT vs M/s Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC).

The Ld.DR, on the other hand, argued that since income from gain is accepted by the department, it does not necessitate that loss pertaining to fluctuation in foreign currency exchange rate has to be allowed. The Ld.DR relied on the decision of the lower authorities.

Having heard both the sides and perused the material on record, we find that it is submitted that the assessee had outstanding loan given to the tune of Rs.17,92,52,695/- which was given to its foreign subsidiary, M/s Lodha Developers International (Netherlands) B.V. Ltd where the receivable was amounting to GBP 21,46,574/-. The said loan was restated / revalued at Rs.15,22,93,229/- in accordance with the method of accounting followed by the assessee and the provisions of section 43AA of the I.T. Act read with Income Computation Disclosure Standards (ICDS)-VI thereby incurred foreign exchange loss of Rs.2,69,59,466/-. The same was claimed as deduction while computing the total income. The Assessing Officer as well as the Ld.CIT(A) had disallowed the said loss on the ground that it was capital expenditure and not revenue expenditure and the same was not allowable under section 37(1) of the Act as the same was not business expenditure. It was also noted that the assessee was receiving interest @14% on the said loan. On the other hand, the assessee had raised a contention that since the assessee was required to set up special purpose vehicle (SPVs) as subsidiary or joint venture company for real estate projects for which the assessee had to provide necessary seed funding by way of loans to its subsidiaries / group companies for business expediency and such expenditure related to business should be allowed as deduction under section 37(1). It was also submitted that even if such expenditure does not have anything to do with the profit / loss, merely because such expenditure was necessary to carry on business through its subsidiaries / by itself amounts to business expenditure of the assessee. It is also pertinent to point out that even in earlier years, i.e. F.Y. 2015-16 (A.Y. 2016-17), gain on account of the said loan of Rs.40.32 lakhs has been offered to tax which was duly acknowledged by the department. The assessee had ITA 1348/MUM/2021 cited the decision of Hon’ble Apex Court in CIT vs M/s Woodward Governor India P. Ltd (supra) and Hon’ble Tribunal’s decision in Lupin Limited in alongwith various other decisions.

From the above observations, it is evident that there is no dispute that the assessee has granted loan to its foreign subsidiary. Though the Ld.CIT(A) has doubted the transaction, between assessee and its foreign subsidiary as trade / business purpose, the Assessing Officer in the assessment order has not specified the said reason but has only decided on the fact that the assessee has specified the said loan under the head “current assets” instead of trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset by relying on the decision of the Hon’ble Supreme Court in Sutlej Cotton Mills Ltd vs CIT 116 ITR 1 (SC). Furthermore, the Assessing Officer has not stated that the assessee has not produced any evidence to show that it was business / trading transaction, which ground was only taken up by the CIT(A) in the appellate proceedings.

Considering the facts of the case, we infer that the assessee has extended loans / advances facility to its subsidiaries only for the purpose of business, as the nature of assessee’s business relates to constructions and development of real estate properties. The contention of the Revenue that the impugned loss was only notional loss does not hold good. The reasoning that since there was no settlement of loan as on 31/03/2017 will not entitle the assessee to claim as per method of accounting followed and the provisions of section 43AA of the I.T. Act, 1961 read with Income Computation Disclosure Standard (ICDS)-VI has been countered by the assessee stating that assessee has been following AS-11 which states that unrealised foreign exchange gain / loss should be booked at the year end. Though the principle of res judicata

In view of the above, we hold that the assessee is entitled to claim foreign exchange fluctuation loss under section 37(1) of the Act, in the instant case.

In the result, appeal filed by the assessee is allowed. Order pronounced in the open Court on 28th June, 2022.