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Facts
The assessee obtained an External Commercial Borrowing (ECB) from its parent company for setting up an SEZ unit. On restatement of the ECB at the year-end, a foreign exchange fluctuation loss of Rs. 91,54,500/- arose, which the assessee treated as a revenue expenditure. The AO and CIT(A) treated this loss as capital in nature.
Held
The Tribunal held that the issue was tax neutral as the genuineness of the expenses was not in dispute and the dispute was only about the timing of the deduction. Considering the substantial time elapsed and the tax neutral nature of the issue, the assessee's claim for allowing the expenses as a deduction in the year under consideration was accepted.
Key Issues
Whether foreign exchange fluctuation loss on ECB, used for setting up an SEZ unit, should be treated as revenue expenditure or capital in nature, and if it should be allowed as a deduction in the current year.
Sections Cited
234C, 37, 44AB, 43A, 145, 43(1), 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order of the NFAC, Delhi vide order dated 10/02/2025 in DIN No. ITBA/NFAC/S/250/2024- 25/1073076533(1) for the assessment year 2013-14.
The ground No. 1 of the assessee’s appeal is general in nature and the same does not require any separate adjudication. Likewise, the ground No. 3 of the assessee’s appeal pertains to levy of interest under section 234C of the Act, which is consequential in nature and the same
Page 2 of 11 does not require any separate adjudication. Hence, the Ground Nos. 1 and 3 of the assessee’s appeal are hereby dismissed as infructuous.
The issue raised by the assessee through Ground Nos. 2.1 to 2.6 of the appeal is that the learned CIT(A) and the AO erred in treating the foreign exchange fluctuation loss of Rs. 91,54,500/- on restatement of External Commercial borrowings as capital in nature.
The relevant facts are that the assessee company M/s Evry India Pvt Ltd (formerly known as M/s SPAN Infotech (India) Pvt Ltd) is engaged in the business of Software Development Agencies, IT Enabled Services, BPO Services. During the year under consideration, the assessee company has obtained loan from its parent company namely “EDB Ergo Group” in the form of External Commercial Borrowing-ECB. The impugned ECB was obtained for the purpose of setting up of SEZ unit at Mohali Punjab. On restatement of ECB on the date of finalisation of balance sheet, the foreign exchange fluctuation loss of Rs. 91,54,500/- arose which the assessee debited to the profit and loss account. The assessee claimed that impugned exchange loss was recognised in the books as per the requirement of accounting standard - 11 issued by the ICAI.
However, the AO held that the ECB was taken for capital asset being setting up of SEZ Unit. Hence, the exchange fluctuation on the ECB taken for setting up of SEZ unit is of capital nature which cannot be allowed as revenue expenses deduction. The AO in this regard referred the provision of section 37 of the Act.
The AO further noted that the assessee in the tax audit report under section 44AB of the Act for immediate subsequent year i.e. A.Y. 2014-15 has disallowed the foreign exchange fluctuation loss on ECB. Accordingly, the AO held that the claim of the assessee that consistency policy adopted is factually wrong. Further a loss or expenditure disallowed in the subsequent and same loss or expenditure claimed as deduction in the year doesn’t hold water. Accordingly, the AO disallowed the deduction of Rs. 91,54,500/- claimed on account of exchange loss on restatement of ECB and added the same to the total income.
The aggrieved assessee preferred an appeal before the learned CIT (A).
The assessee before the learned CIT(A) submitted that the ECB loan was taken in the earlier year and remained unused in that year. In the year under consideration, the loan was used for both capital and revenue purposes. A part of the loan was used for purchasing capital assets. However, only a very small part of the capital expenditure related to imported assets. Most of the capital assets were indigenous. A portion of the loan was also used for revenue expenditure. Therefore, the assumption that the entire ECB loan was connected with imported capital assets is not correct.
8.1 Furthermore, the provision of section 43A of the Act applies only when an asset is acquired from outside India and the exchange loss arises at the time of making payment. In the assessee’s case, the loss is an unrealised loss arising only on year-end reinstatement. No payment .
Page 4 of 11 was made during the year. Section 43A of the Act does not apply to such restatement losses. It applies only to realised losses. Since the loss in the present case is unrealised, the provision of section 43A of the Act cannot be invoked to disallow the claim.
8.2 It is further submitted that the borrowing of money and the acquisition of assets are two different and independent transactions. This principle has been clearly stated by the Hon’ble Supreme Court in the case of CIT vs. Tata Iron & Steel Co. Ltd. reported in 231 ITR 285. The Hon’ble Court held that the cost of assets does not change because of later exchange fluctuations on loan repayment. Following this principle, the present exchange loss cannot be added to the cost of assets, especially when no payment has been made during the year.
8.3 It was claimed that the assessee followed AS-11, which is mandatory. AS-11 requires all foreign currency monetary items to be reinstated at the closing rate and any resulting gain or loss to be recorded in the Profit and Loss Account. Section 145 of the Act also requires the assessee to follow such notified accounting standards. The CBDT notification also supports the same treatment. The Hon’ble Supreme Court in the case of Woodward Governor India Pvt Ltd. has confirmed that such losses, even if unrealised, are allowable as revenue expenditure if they arise from reinstatement under AS-11. Therefore, the assessee has followed the correct and mandatory accounting method.
8.4 Furthermore, the provisions of section 43(1) of the Act, which defines actual cost, does not require adjustments for exchange .
Page 5 of 11 differences relating to indigenous assets. There is no provision under section 43(1) of the Act that requires capitalisation of year-end exchange loss linked to indigenous assets. Therefore, even on this ground, the exchange loss cannot be added to the cost of assets.
8.5 The assessee claimed that the part of the ECB loan was also used for revenue expenditure. Exchange loss relating to revenue utilisation of funds is clearly revenue in nature. Borrowing money does not itself bring any capital asset into existence. Hence, the exchange fluctuation on such borrowing must be treated as revenue expenditure. The loss arises on the loan liability, not on the assets. Therefore, the loss is allowable under section 37(1) of the Act.
8.6 Besides the Hon’ble Supreme Court’s decision in Tata Iron & Steel Co. Ltd (supra) and Woodward Governor (supra), the assessee placed reliance on the decision of various ITAT orders such as Chennai Tribunal order in case of Hyundai Motor Company reported in 81 taxmann.com 5 and Green Star Fertilizers in & 35/Cheny/2020, Pune bench decision in case of Cooper Corporation Pvt Ltd in and Bangalore Tribunal in Coffeeday Global Ltd in 3041/Bang/2018, to support the claim that the foreign exchange losses on reinstatement of ECB loans are allowable as revenue expenditure.
Considering these facts the assessee prayed the learned CIT(A) that the disallowance made by the AO is unjustified. The assessee has correctly recognised the exchange loss in accordance with mandatory .
Page 6 of 11 accounting standards, CBDT notifications, and binding judicial principles. The loss is revenue in nature and should be allowed as a deduction.
9.1 However, the learned CIT(A) after considering the facts in totality confirmed the disallowances made by the AO. The learned CIT(A) observed that the assessee’s reliance on the decision of the Hon’ble Supreme Court in CIT v. Tata Iron & Steel Co. Ltd. (1998) is misplaced. It was observed that the decision of the Hon’ble Supreme court was delivered prior to the amendment to section 43A of the Act by the Finance Act, 2002, effective from 01.04.2003. On the contrary the learned CIT(A) placed reliance on the judgment of the Hon’ble Madras High Court in Continuum Wind Energy India Pvt. Ltd., reported in 122 taxmann.com 118 (2020). The ld. CIT(A) noted that the Madras High Court had elaborately analysed the effect of the amendment to section 43A of the Act and clarified that after the amendment, section 43A of the Act applies where there is an increase or decrease in the liability arising from changes in foreign exchange rates and that such increased or decreased liability has to be adjusted to the actual cost of the asset, provided the borrowing was specifically for acquiring capital assets from abroad. The Hon’ble High Court also observed that under the amended section 43A of the Act, actual payment is not relevant for making the adjustment. It is enough if there is a change in liability due to exchange fluctuation.
9.2 The learned CIT(A) further noted that in the case of Hon’ble Madras High Court case, the Standing Counsel for the Revenue had demonstrated that the assessee in that case had borrowed funds .
Page 7 of 11 exclusively for the purchase of machinery in foreign exchange and that the borrowing was sanctioned strictly for capital expenditure and expansion. The Hon’ble High Court held that to the extent the loans were used for acquiring capital assets, the exchange fluctuation had to be added to the cost of the asset for depreciation purposes. The ld. CIT(A) reproduced the relevant discussion to emphasise that the judicial position, after the amendment to section 43A of the Act, supported the view that the fluctuation relating to foreign exchange borrowings used for capital purposes must be capitalised.
9.3 The learned CIT(A) then relied on the decision of the Hon’ble Karnataka High Court in PCIT v. Bangalore International Airport Ltd., reported in 154 taxmann.com 394. The Hon’ble Karnataka High Court held that gains or losses arising on external commercial borrowings used to acquire capital assets are on capital account after the amendment to section 43A of the Act. The Hon’ble Court observed that where ECB funds are used for acquiring capital assets, the adjustment on account of exchange fluctuation has to be made to the actual cost of the assets at the end of each year.
9.4 The ld. CIT(A) next examined the factual position. The appellant had admitted before the Assessing Officer that the ECB loans were taken for expansion of business and for establishment of the SEZ unit at Mohali. The ld. CIT(A) held that this clearly showed that the purpose of the ECB was capital in nature. If the appellant intended that the loan was used for working capital or revenue expenditure, it should have produced evidence. No such evidence was produced either before the .
Page 8 of 11 Assessing Officer or during appellate proceedings. In the absence of any proof to show that the loan was used for revenue items, the ld. CIT(A) held that the ECB loan was utilised for capital purposes and thus, the provisions for section 43A of the Act were applicable.
9.5 Based on this factual position and following the Hon’ble High Court decisions noted above, the ld. CIT(A) concluded that the Assessing Officer was correct in treating the fluctuation loss as capital in nature. The ld. CIT(A) held that the disallowance made by the Assessing Officer was justified. However, the ld. CIT(A) directed that depreciation may be allowed on the amount of interest added to the capital assets. Hence, the ld. CIT(A) dismissed ground of appeal of the assessee.
Being aggrieved by the order of ld. CIT-A, the assessee is in appeal before us.
The learned Authorised Representative submitted that the provisions of section 43A of the Act do not apply to the facts of the present case. He filed a paper book running from pages 39 to 165 and a case law compilation from pages 166 to 274 in support of his submissions. The learned AR explained that section 43A of the Act can be invoked only when a capital asset is acquired from a country outside India and the liability is adjusted due to fluctuation in foreign exchange at the time of repayment of the loan. In the present case, no capital asset was acquired from outside India. Further, there was no repayment of any foreign loan during the year under consideration. There was only .
Page 9 of 11 reinstatement of the liability. Therefore, the essential conditions required for applying section 43A of the Act are not satisfied.
11.1 The learned AR further submitted that the decisions relied upon by the learned CIT(A) were rendered on different facts. According to him, those cases involved acquisition of capital assets from outside India and actual repayment of foreign loans. Since such facts are absent in the present case, the reliance placed by the learned CIT(A) is misplaced and the said decisions are clearly distinguishable.
11.2 The learned AR also contended that the genuineness of the expenses claimed by the assessee has not been doubted by the Assessing Officer or by the learned CIT(A). The dispute relates only to the year of allowability and the manner in which the deduction should be granted. He pointed out that the issue pertains to Assessment Year 2013–14 and a substantial period of time has already elapsed. If the directions of the learned CIT(A) are to be followed, the Revenue will be required to allow depreciation on the disputed expenses over several years. According to the learned AR, such an exercise would be cumbersome and impractical at this stage. He submitted that the issue is tax neutral, as the total deduction remains the same and only the year of allowance changes. Therefore, the expenses should be allowed as deduction in the year under consideration.
On the other hand, the learned Departmental Representative strongly supported the orders passed by the authorities below. He submitted that the learned CIT(A) has correctly applied the provisions of .
Page 10 of 11 law and has passed a reasoned order. The learned DR relied upon the findings recorded by the Assessing Officer and the learned CIT(A) and contended that there is no infirmity in their conclusions. He prayed that the order of the learned CIT(A) should be upheld.
We have carefully considered the rival submissions and perused the materials available on record. It is an admitted position that a substantial period of time has already elapsed since the relevant assessment year. It is also not in dispute that the genuineness of the expenses claimed by the assessee has not been questioned by the lower authorities. The dispute is confined only to the manner and timing of allowance of such expenses.
13.1 We observe that if the directions of the learned CIT(A) are to be implemented, the Revenue would be required to allow depreciation on the disputed expenses over a number of years. This would involve repeated adjustments in subsequent assessment years. Considering the lapse of time, giving effect to such directions would be a cumbersome and time-consuming exercise for the Revenue.
13.2 We further note that the assessee is otherwise entitled to deduction of the expenses. The deduction can either be allowed in one year by treating the expenses as revenue in nature or it can be spread over several years by allowing depreciation. In either case, the total amount of deduction remains unchanged. Thus, the issue does not affect the total taxable income of the assessee over a period of time.
Page 11 of 11 13.3 Therefore, the dispute only results in shifting of tax effect from one year to another. It does not cause any loss to the Revenue. In view of these facts and considering that the genuineness and origin of the expenses are not in doubt, we are of the considered view that the issue involved is tax neutral. Hence, considering the fact that the genuineness of the expenses is not in dispute, the substantial period of time has already elapsed, and the issue involved is tax neutral, we are of the considered opinion that the assessee’s claim deserves to be accepted. Accordingly, the ground of appeal raised by the assessee is allowed.