ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), VADODARA, RACE COURSE vs. UNIMED TECHNOLOGIES LIMITED, HALOL

These cross appeals by the Revenue and the assessee arise out of the appellate order dated 08.02.2024 passed by the Commissioner of Income- tax (Appeals), National Faceless Appeal Centre, NFAC, Delhi [hereinafter referred to as “CIT(A)”], for the Assessment Year 2016–17, under section 250 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”]. The Revenue is in appeal challenging the deletion of two disallowances made by the ACIT, Circle 2(1)(1), Vadodara [hereinafter referred to as “Assessing Officer or AO”] vide order dated 29.12.2018 passed u/s 143(3) of the Act, whereas the assessee has filed a cross-objection challenging the confirmation of two other disallowances sustained by the CIT(A).

Facts of the Case

i. Software expenditure of Rs.31,96,245/- ii. Testing fees of Rs.50,29,391/- iii. Consultancy charges of Rs.2,18,58,050/- iv. Foreign exchange fluctuation loss of Rs.3,17,88,107/- v. Interest expenditure of Rs.1,76,03,597/-

However, the Ld. CIT(A) upheld the disallowance of consultancy fees amounting to Rs.2,18,58,050/-, incurred by the assessee in respect of regulatory and technical consultancy services obtained from Quality Executive Partners Inc., USA, for obtaining approvals from the USFDA for its manufacturing facility at Baska. The CIT(A) was of the view that the said expenditure conferred an enduring benefit to the assessee and therefore fell within the nature of capital expenditure not allowable under section 37(1) of the Act. The CIT(A) also confirmed the disallowance of foreign exchange fluctuation loss to the extent of Rs.2,78,31,758/- incurred in connection with the purchase of capital goods from overseas suppliers. It was held that such loss, being directly relatable to acquisition of capital assets, was required to be capitalised under section 43A of the Act. The assessee's contention that the payments were made in advance and hence section 43A was not applicable was not accepted by the appellate authority. Lastly, the claim of the assessee for deduction of education cess of Rs.12,63,048/- under section 37(1) was also rejected by the CIT(A), following the Revenue's stand that such cess was not allowable as deduction from business income under the prevailing interpretation of the law.

at the time of or before the hearing.

6. On the other hand, the assessee has filed a cross-appeal challenging the action of the CIT(A) in confirming the following disallowances. The grounds raised by the assessee are:

Ground No.1: Disallowance of Consultancy fees - Rs.2,18,58,050/-:

1.1. The Appellant is engaged in the business of development and manufacture of pharmaceutical products.

1.2. In relation to the manufacture of pharmaceutical products, the Appellant also undertakes export of products across the globe to commercially exploit the target markets. As per the technical requirements of the Regulatory Authorities (e.g.: US FDA in USA), the Appellant is required to submit detailed dossiers I Drug Master Files (DMF) | Abbreviated New Drug Applications (ANDAs) for approval of the products by the regulatory authorities. The DMFs | ANDAs contain the complete technical specifications of the various raw materials used for the manufacture of the product, the manufacturing process, the test results, etc.

1.3. Further, as part of the approval process, the Regulatory Authority usually requires various additional technical compliances to be carried out. Only after the Appellant fulfils all the technical requirements, the approval for the product is granted. Unless the product is approved by the Regulatory Authority, the Company cannot market this product in the specified market. Further, if the approval is not provided, then the Company is required to undertake research and evolve the product to make it fit for receiving the approval from the Regulatory Authority and thereby marketing it. Thus, unless the approval of the Regulatory Authority is received the phase of research does not get completed. 1.4. It is imperative to note that expenditure incurred on research and approval process are debited to the Statement of Profit and Loss account being of revenue nature and that any expenditure incurred on development is capitalized. This treatment is also in accordance with the principles laid down in accounting standards.

1.5. The Appellant, to comply with these regulatory requirements, has taken assistance of professional consultants being Quality Executive Partners Inc, USA that help in obtaining these approvals for Appellant's manufacturing facility situated at Baska for a professional fee of Rs. 1,88, 13, 146/-

1.6. The nature of consultancy fees is majorly towards on-site visit charges, reimbursements of travelling expenses, etc. The intention of hiring a consultant was to assist in obtaining approvals in order to conduct business operations smoothly. It is very common to see such services being procured by numerous entities across industries in their normal course of business. The said expenditure has been incurred wholly for the purpose of business and at the same time has not resulted in the creation of any asset or an enduring benefit in the capital field.

1.7. The Hon'ble CIT(A) however confirmed the disallowance carried out by the Assessing Officer of treating said expenditure as capital in nature on the assumption that the expenditure incurred by the Appellant resulted in enduring benefits.

Ground No. 2: Disallowance of foreign exchange fluctuation loss - Rs. 2,78,31,758:

2.1 During the year under consideration, the Appellant had imported certain raw materials, capital goods and other items from various foreign countries. As a matter of practice, the Appellant generally makes advance payment in foreign currency and then receives the delivery of the said raw materials or capital assets. Any foreign exchange gain / loss arising on account of different exchange rates prevailing as on the date of payment and date of booking the goods / asset is debited to the profit and loss account by the Appellant which is in accordance with the accounting system regularly employed by it as well as the Accounting Standard - 11 issued by the ICAI.

2.2 In the instant case, the Appellant had made advance payment, hence the liability of the Appellant towards the capital asset or the vendor was fixed and did not change after the acquisition of asset. The Appellant merely as part of the accounting framework was required to undertake to mark-to- market exercise and consequently there arose the forex loss which was debited to the Statement of Profit and Loss and was claimed as deductible. Accordingly, the Appellant has recognized foreign exchange loss in its Statement of Profit and Loss account out of which Rs.2,78,31,758/- pertains to imported items (raw materials, capital goods etc).

2.3 During assessment proceedings, the Assessing Officer sought details as well as justification in respect of the allowability of foreign exchange fluctuation loss (net) incurred on capital goods. Under misconception of law and facts, the Appellant wrongfully worked out an amount of Rs. 20,71,664/- and furnished the same to the Assessing Officer as being related to capital goods which may be disallowed as per section 43A of the Act.

2.4 However, the Assessing Officer who is duty bound to compute and assess the correct income, accepted the amount so wrongfully determined by the Appellant. Not only this, but the Assessing Officer also went on to further disallow the entire foreign exchange loss arising in relation to purchase of capital goods amounting to Rs. 2,78,31,758/- without providing any explanation under the Act authorizing such erratic action. Thus, a total disallowance of Rs. 3,17,88,107/- (Rs. 2,78,31,758/- + Rs.20,71,664/-) was made by the Assessing Officer which led to a double disallowance of Rs. 20,71,664/- as the said amount is already included in Rs.2,78,31,758/- being amount debited to the Statement of Profit and Loss.

2.5 In doing so, the Assessing Officer conveniently overlooked the fact that payments towards purchase of capital goods from outside India were made in advance and hence, the provisions of section 43A mandating capitalization of foreign exchange fluctuation loss would not be attracted.

2.6 On further appeal, the Hon'ble CIT(A) upheld the disallowance made by the Assessing Officer only to the extent of Rs. 2,78,31,758/- by treating loss of foreign currency fluctuation on capital goods as capital loss without appreciating that payments were made in advance thereby disregarding that provisions of section 43A are not applicable on account of non-fulfillment of specified conditions.

For the sake of adjudication, the following substantive grounds of the assessee are considered:

(i) The CIT(A) has erred in confirming the disallowance of Rs. 2,18,58,050/- being consultancy fees paid to Quality Executive Partners Inc., USA, for obtaining regulatory approvals from USFDA for the Baska plant. It is contended that the expenditure was wholly incurred for business purposes, in the normal course of regulatory compliance, and did not result in acquisition of a capital asset or enduring benefit. (ii) The CIT(A) has further erred in upholding the disallowance of Rs. 2,78,31,758/- on account of foreign exchange fluctuation loss pertaining to capital goods, without appreciating that payments were made in advance and hence section 43A of the Act was not applicable. It is contended that the disallowance was erroneously sustained, despite the assessee following AS- 11 for forex accounting, and that a portion of the disallowed amount had already been wrongly offered during assessment, resulting in double disallowance.

8. Software expenses of Rs. 31,96,245/- 8.1 The first ground pertains to the disallowance Rs. 31,96,245/- made by the Assessing Officer on account of software expenses, which was treated as capital in nature. The Assessing Officer observed that the said amount had been debited by the assessee under the head “software expenses” in the profit and loss account and treated it as revenue expenditure. However, on examination of the details from the copies of the bills, the AO noted that the expenditure comprised items such as rugged computers, barcode scanners, printers, and associated accessories which, in his opinion, were tangible items providing enduring benefit. Accordingly, the AO concluded that the said expenditure was capital in nature and disallowed the same in full under section 37(1) of the Act.

8.2 In appellate proceedings, the assessee contended that the disallowance was made without verifying the nature and description of the software expenditure and that the AO had erroneously clubbed hardware items which were capitalised separately in the fixed asset schedule. It was submitted that the expenditure actually pertained to software license fees, annual renewals, upgrades, and user access costs relating to quality control and inventory systems, and the same were incurred recurrently in the normal course of business. The CIT(A) accepted the assessee’s explanation and held that the expenditure, being incurred towards application software that did not create any asset of enduring nature, was rightly allowable as revenue expenditure. It was further observed that the AO had not brought any conclusive evidence on record to establish the capital nature of the expenditure or any error in the assessee’s claim.

8.3 Before us, the learned Departmental Representative (DR) reiterated the findings of the AO. The learned Authorised Representative (AR), on the other hand, supported the order of the CIT(A) and pointed out the submission made before CIT(A) according to which the sole purpose of obtaining the software licenses was improvement and increase in the efficiency of business operations. It was also pointed out that the software licenses were only for a period of 12 months and therefore the said expenditure is of routine nature. The AR placed reliance on the judgement of Hon’ble High Court of Madras in case of CIT, Chennai Vs. Danfos Industries (P.) Ltd. [2022] 284 taxman 475.

10. Interest Expenses of Rs. 1,76,03,597/- 10.1 The second ground raised by the Revenue relates to the disallowance of Rs.1,76,03,597/- made by the Assessing Officer on account of interest expenditure, by attributing a notional proportion of interest towards capital work-in-progress and capital advances. The Assessing Officer noted that the assessee had capital work-in-progress and capital advances aggregating to Rs. 26.38 crores as on the balance sheet date. He further noted that the assessee had not capitalised any portion of interest expenditure to such assets. Without establishing any direct nexus, the AO allocated interest proportionately and disallowed 9% of the balance, resulting in a disallowance of Rs. 1.76 crores.

10.2 In appellate proceedings, the assessee submitted that the entire interest expenditure had been incurred on borrowings utilised for working capital requirements and meeting routine business obligations, and not for acquiring capital assets or making capital advances. It was pointed out that there was no direct nexus established by the Assessing Officer between any specific borrowing and the acquisition of capital assets. The assessee further demonstrated, with reference to its financial statements, that it had sufficient own funds aggregating to Rs. 51.48 crores as on 31.03.2016— comprising share capital, reserves and surplus—and had earned a post-tax profit of Rs. 12.97 crores during the year. In contrast, the capital work-in- progress and capital advances stood at Rs. 23.34 crores and Rs.3.04 crores, respectively. Based on this comparison, it was contended that the investments in capital assets were well within the assessee’s own funds. The Ld. CIT(A) accepted the assessee’s explanation and recorded a categorical finding that, in the absence of any positive material brought on record by the Assessing Officer to demonstrate a nexus between borrowed funds and capital expenditure, the notional allocation of interest was unsustainable in law. The CIT(A) further held that, where both interest-free own funds and borrowed funds are available, and the amount of own funds exceeds the investments, a presumption arises that the investments are made out of the own funds. For this proposition, reliance was placed on the judgment of the Hon’ble Bombay High Court in CIT v. Reliance Utilities and Power Ltd. [(2009) 313 ITR 340 (Bom)], as well as several subsequent decisions affirming the same legal principle, including HDFC Bank Ltd. v. DCIT [(2016) 383 ITR 529 (Bom)] and PCIT v. Midday Multimedia Ltd. [(2018) 89 taxmann.com 184 (Bom)]. The CIT(A) also took note of the decisions of various coordinate benches of the Tribunal and observed that in view of the adequacy of own funds and the absence of any direct nexus, the disallowance under section 36(1)(iii) was not justified. Accordingly, the disallowance of Rs. 1,76,03,597/- was deleted in full and the ground raised by the assessee was allowed.

10.3 During the course of hearing before us, the learned Departmental Representative (DR) invited our attention to Note 25 of the financial statements for the year ended 31.03.2016, which disclosed the finance cost incurred by the assessee. It was pointed out that the assessee had debited interest expenditure amounting to Rs.19,54,99,979/- for the year ended 31.03.2016, as against Rs.4,55,97,389/- in the immediately preceding financial year, i.e. 2014–15, reflecting a sharp increase of approximately 329% in the finance cost. Reference was also made to Note 7 of the financial statements, showing short-term borrowings of Rs.1,44,58,70,424/- as on 31.03.2016 and Rs.1,55,65,57,652/- as on 31.03.2015. It was contended that although the short-term borrowings had in fact decreased by approximately 7.12%, the interest cost had increased manifold during the same period. This, according to the DR, raised serious doubts regarding the nature and utilisation of borrowings, and warranted a deeper investigation to verify whether borrowed funds were indeed used wholly for business purposes or diverted, directly or indirectly, towards acquisition of capital assets or other non-revenue expenditures. The DR thus submitted that the presumption drawn by the CIT(A) in favour of the assessee required reconsideration in light of the disproportionality between the increase in finance cost and the marginal decline in borrowings.

We shall now take up for adjudication the substantive grounds raised by the assessee in its cross-appeal (ITA No. 623/Ahd/2024). Two principal issues arise for our consideration are the disallowance of Rs.2,18,58,050/- towards consultancy fees paid for regulatory approvals, and the disallowance of Rs.2,78,31,758/- representing foreign exchange fluctuation loss in respect of capital goods.

15.2 The Assessing Officer, however, treated the expenditure as capital in nature on the ground that the regulatory approvals facilitated by the consultancy services conferred upon the assessee a benefit of enduring nature. The CIT(A) upheld the disallowance by accepting the view that the expenditure resulted in an enduring benefit in the form of US FDA’s approval of assessee’s manufacturing facility situated at Baska and was therefore capital in character.

15.3 During the course of hearing before us, the learned AR reiterated that the consultancy fees of Rs.2,18,58,050/- were incurred for obtaining USFDA approval for the already established manufacturing facility at Baska, Gujarat. It was clarified that the expenditure was not towards setting up the manufacturing unit per se, but for obtaining product-wise and facility-specific regulatory approvals, which are essential for exports to regulated markets such as the United States. It was further pointed out that the CIT(A) had wrongly proceeded on the assumption that the expenditure was for setting up the facility, whereas the facility was already operational, and the approvals pertained only to allowing products manufactured therein to be accepted for export in the U.S. market. The AR also contended that no enduring benefit or capital asset was created as a result of such regulatory consultancy, which was incurred in the normal course of business to comply with mandatory legal and regulatory requirements.

15.3 In support of the above, the AR placed reliance on the decisions of the coordinate benches of the Tribunal in Aarti Drugs Ltd. v. ACIT, and (Paras 15–21), wherein identical expenditure towards USFDA consultancy fees was held to be revenue in nature. Further reliance was placed on the judgment of the Hon’ble Gujarat High Court in Torrent Pharmaceuticals Ltd. v. DCIT [(2013) 29 taxmann.com 405 (Guj)], where the Hon’ble Court held that expenditure incurred for obtaining product approvals from international agencies does not result in the creation of a capital asset. Reference was also made to the decision of the Hon’ble Karnataka High Court in CIT v. Telco Construction Equipment Co. Ltd. [(2021) 127 taxmann.com 488 (Kar)], where expenditure incurred for technical consultancy in relation to regulatory compliance was allowed as revenue expenditure. It was further submitted that in assessee’s own case for A.Y. 2017–18, the CIT(A) had accepted a similar claim and allowed the deduction.

15.4 The DR relied on the order of lower authorities.

16.1 In light of the above discussion, we hold that the expenditure incurred by the assessee was revenue in nature, incurred wholly and exclusively for the purposes of business, and is therefore allowable under section 37(1) of the Income-tax Act. The order of the CIT(A) to the contrary is not sustainable. We accordingly set aside the disallowance of Rs. 2,18,58,050/- and allow this ground of appeal of the assessee in full.

17. Disallowance of Foreign Exchange Fluctuation Loss Rs.2,78,31,758/- 17.1 During the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish detailed justification and supporting documents in respect of the exchange fluctuation loss debited to the profit and loss account. Specifically, the assessee was required to provide party- wise details of foreign remittances, the purpose and nature of such payments, and the corresponding tax compliance under section 195. In response, the assessee, submitted that out of the total amount of Rs.2,78,31,758/- claimed as exchange fluctuation loss, an amount of Rs.20,71,664/- pertained to capital goods, and therefore, to that extent, the said loss was suo motu offered as capital in nature and not claimed as revenue expenditure. However, upon verification of the assessee’s reply and the accompanying remittance ledger and capital goods purchase details (Annexure 2 to the reply), the Assessing Officer found that apart from Rs.20,71,664/-, there were several other instances where foreign currency fluctuation loss and bank charges were attributable to remittances made for capital items, as corroborated by the assessee’s own submissions. These included remittances to parties such as Fedegari Asia PTE Ltd, CAMAG, Agilent Technologies Singapore, Groninger & Co. GMBH, and others, where the remittances were clearly made for capital goods, as reflected in the records. The Assessing Officer tabulated the details of such remittances, including the foreign vendors, dates of transaction, gross amounts remitted, and the related fluctuation losses and bank charges. The AO observed that the assessee had not offered these additional losses as capital in nature, despite the transactions relating to the acquisition of capital assets. The AO, therefore, held that the entire foreign exchange fluctuation loss amounting to Rs. 2,97,10,643/- and bank charges of Rs. 5,800/- aggregating to Rs. 2,97,16,443/- were incurred in relation to acquisition of capital goods and hence liable to be capitalised in accordance with section 43A of the Act and judicial precedents including the Supreme Court judgment in CIT v. Woodward Governor India (P.) Ltd. [(2009) 312 ITR 254 (SC)]. Adding the above to the assessee’s own suo motu capitalisation of Rs.20,71,664/-, the AO held that the total capital loss on account of foreign currency fluctuation and related bank charges amounted to Rs.3,17,88,107/-. The AO disallowed the same as inadmissible under section 37(1), holding that these were capital in nature.

17.2 Based on the detailed submissions of the assessee the CIT(A) noted that the foreign exchange fluctuation loss incurred by the assessee pertained to remittances made for import of capital goods, and accordingly held, following the decision of the Hon’ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [(2009) 312 ITR 254 (SC)], that such loss was capital in nature and not allowable as a deduction under section 37(1) of the Act. The CIT(A) observed that the nature of the expenditure was clearly capital, as the payments related to acquisition of fixed assets from foreign suppliers. The assessee had suo motu offered an amount of Rs.20,71,684/- as capital loss on account of forex fluctuation in respect of certain such transactions; however, the CIT(A) noted that the balance foreign exchange loss amounting to Rs.2,78,31,758/- had also been debited to the profit and loss account by the assessee.

17.3 While confirming the legal position taken by the Assessing Officer that the entire foreign exchange fluctuation loss linked to acquisition of capital goods was required to be treated as capital in nature, the CIT(A) took cognizance of the assessee’s contention that the amount actually debited to the profit and loss account was Rs.2,78,31,758/-, and not Rs.3,17,88,107/- as disallowed by the Assessing Officer. The CIT(A), therefore, directed the Assessing Officer to verify the assessee’s claim with reference to the books of account and financial statements, and if found to be correct, to restrict the disallowance to Rs.2,78,31,758/- only. Thus, the CIT(A) partly allowed the ground by upholding the capital nature of the foreign exchange fluctuation loss in principle but directed the disallowance to be limited to the actual amount debited to the profit and loss account. The assessee’s alternate claim for depreciation under section 32 in respect of such capitalised expenditure was not specifically adjudicated in the CIT(A)’s order.

17.4 The learned AR, reiterating the detailed submissions made before the lower authorities, submitted that the appellant had incurred a net foreign exchange fluctuation loss of ₹2.71 crores during the year under and 632/Ahd/2024 18 consideration, out of which ₹2.78 crores pertained to imported items such as raw materials, capital goods, etc. The AR pointed out that the said amount had been debited to the profit and loss account in accordance with the appellant’s consistent accounting policy and in conformity with Accounting Standard–11 (AS-11) issued by the Institute of Chartered Accountants of India (ICAI). It was contended that the treatment accorded was a routine and settled accounting practice regularly followed by the assessee in earlier years as well.

17.5 It was further submitted that the Assessing Officer had erroneously invoked section 43A of the Act to disallow the foreign exchange fluctuation loss by wrongly treating the same as liable to be capitalised. The AR clarified that the said forex loss had arisen on account of advance payments made in foreign currency for the purpose of acquiring capital goods and not on account of any fluctuation occurring after the acquisition of such assets. Accordingly, it was contended that the conditions stipulated under section 43A of the Act, which apply only where the liability changes on account of foreign exchange fluctuation after the acquisition of the asset, were not satisfied in the facts of the present case.

17.6 The AR specifically argued that where payments for acquisition of capital assets are made in advance and the exchange fluctuation arises on such advances, section 43A of the Act does not apply. Instead, the resulting loss is to be treated as a business loss allowable under section 37(1) of the Act, being incidental to the carrying on of business.

17.7. The DR relied on the order of lower authorities.

18.1 The core argument advanced by the learned AR is that section 43A applies only when the payment is made after the acquisition of the asset and not when advances are made prior to acquisition. It is contended that the phrase "after the acquisition of such asset" in section 43A restricts its applicability to post-acquisition liabilities, and that the advance payment made prior to acquisition falls outside its purview.

18.2 We are unable to accept the interpretation so canvassed. For the sake of clarity we reproduce here the relevant part of Section 43A –

Special provisions consequential to changes in rate of exchange of currency.

43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment- (a)towards the whole or a part of the cost of the asset; or (b)towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from- (i)the actual cost of the asset as defined in clause (1) of section 43; or (ii)the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or (iii)the amount of expenditure of a capital nature referred to in section 35-A; or (iv)the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36; or (v)the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid:

18.3 Section 43A(1) opens with a non obstante clause and applies “where an assessee has acquired any asset...from a country outside India...and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability...at the time of making payment (a) towards the whole or a part of the cost of the asset”. Thus, the emphasis is not merely on the timing of acquisition vis-à-vis payment but on the nature of the liability and the purpose of the payment.

18.4 The term “towards the whole or a part of the cost of the asset” appearing in clause (a) of section 43A clearly contemplates situations where payments, including advance payments, are made in relation to the cost of acquisition of a capital asset. The fluctuation in the rate of exchange, if resulting in an increase or reduction in such liability at the time of making payment, is required to be added to or deducted from the actual cost of the asset, irrespective of the method of accounting adopted by the assessee.

18.5 In the present case, the assessee has not disputed that the payments were made as advances for acquisition of capital goods. The change in exchange rate during the relevant previous year has impacted the liability in Indian currency at the time of such payments. It is also not the case of the assessee that the capital goods so ordered were not eventually acquired. Therefore, even though the payments were made before booking the assets in the books of account, they were clearly towards the cost of the asset and hence fall within the ambit of clause (a) to section 43A.

18.6 The Hon’ble Supreme Court in Woodward Governor India Pvt. Ltd. (supra) has laid down the principle that exchange fluctuation loss is to be treated in accordance with the nature of the underlying liability. In cases where the liability pertains to acquisition of capital assets from outside India, such exchange difference is capital in nature and not allowable under section 37(1). The Court further held that accounting entries based on Accounting Standard-11 cannot override the specific mandate of section 43A.

18.7 We further note that the AR could not place on record any specific evidence or material to demonstrate the timing of acquisition of the capital assets vis-à-vis the payment of advance, nor was any documentary evidence produced to establish that the fluctuation loss was not relatable to capital goods. In the absence of such details, and in view of the admitted position that the payments were made for capital assets, the assessee’s reliance on the distinction between pre- and post-acquisition payments is misplaced.

18.8 In this view of the matter, we find no infirmity in the conclusion drawn by the learned CIT(A) that the foreign exchange fluctuation loss debited to the profit and loss account, being relatable to acquisition of capital assets, is capital in nature and liable to be capitalised under section 43A. The direction issued by the CIT(A) to restrict the disallowance to ₹2,78,31,758/- , being the actual amount debited to the profit and loss account, is also fair and reasonable. The ground raised by the assessee lacks merit and is accordingly dismissed.

18.9 Based on the findings and conclusions set out hereinabove, the appeal filed by the Revenue stands dismissed, whereas the appeal filed by the assessee is partly allowed.

Order pronounced in the Court on 24th July, 2025 at Ahmedabad.