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Facts
The assessee claimed an expense of Rs. 29,28,908/- on account of forward contract premium expenses for hedging foreign currency liability. The AO disallowed this expense, citing a similar disallowance in AY 2014-15. The CIT(A) upheld the AO's order.
Held
The Tribunal held that Section 43A of the Act is not applicable as it deals with adjustments to the cost of capital assets and not expenses incurred to secure against currency fluctuations. The expense is akin to an insurance policy for business and allowable under Section 37(1). The Tribunal also noted the principle of consistency, as similar claims were allowed in earlier years.
Key Issues
Whether the premium paid for forward contract to hedge foreign currency liability is a revenue expenditure or capital expenditure, and if it is allowable as a deduction.
Sections Cited
43A, 36(1)(iii), 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: Ms. SUCHITRA KAMBLE & SHRI NARENDRA PRASAD SINHA
This appeal is filed by the assessee against the order of the National Faceless Appeal Centre (NFAC), Delhi, (in short ‘the CIT(A)’), dated 06.12.2023 for the Assessment Year 2016-17.
The brief facts of the case are that the assessee had filed its return of income for A.Y. 2016-17 on 30.09.2016 declaring loss of Rs.40,20,66,360/-. The case was selected for complete scrutiny. In the course of assessment, the AO found that assessee Energy Resources Ltd. vs. ACIT] A.Y. 2016-17 - 2 – had claimed expense of Rs.29,28,908/- on account forward contract premium expenses. It was explained by the assessee that forward contract expense was the cost for hedging foreign currency liability to reduce the foreign currency fluctuation premium loss. It was explained that the foreign currency loans were obtained by the assessee to acquire equipment which was used for the purpose of business. The AO, however, disallowed the forward contract premium expenses claimed by the assessee for the reason that identical issue was involved in assessee’s own case in the A.Y. 2014-15 and the claim was disallowed in that year as well. The AO had further noted that the disallowance made in A.Y. 2014-15 was also confirmed by the Ld. CIT(A).
Aggrieved with the order of the AO, the assessee had filed an appeal before the First Appellate Authority, which was decided vide the impugned order and the addition as made by the AO was confirmed.
Now, the assessee is in second appeal before us. The only ground taken by the assessee is as under:
“1. The Ld. CIT (A)-NFAC erred on facts and in law in confirming disallowance of forward contract premium of Rs. 29,28,908/- by treating the same to be capital in nature even though issue has already been adjudicated by jurisdictional Tribunal in appellant's own case in vide order dated 04-01-2017.”
Shri Sakar Sharma, the Ld. AR appearing for the assessee submitted that the AO had made the disallowance following the identical disallowance made in A.Y. 2014-15. He further submitted that the disallowance as made in the A.Y. 2014-15 was Energy Resources Ltd. vs. ACIT] A.Y. 2016-17 - 3 – deleted by Co-ordinate Bench of this Tribunal in dated 04.01.2021. The Ld. AR explained that in the current year, Ld. CIT(A) had upheld the addition on the ground that the loan was taken by the assessee to meet capital obligation i.e. for the purchase of plant and machinery and set up of the power projects and, therefore, the premium paid for forward cover was to be treated as capital in nature. In this regard, the Ld. AR has drawn our attention to provision of Section 36(1)(iii) of the Income Tax Act, 1961 (in short ‘the Act’) and submitted that the interest paid in respect of capital borrowed for the purpose of business or profession was an allowable deduction. The Ld. AR further submitted that similar claim was allowed by the Revenue in assessee’s own case in the earlier assessment years.
Per contra, Shri Santosh Kumar, Ld. Sr. DR supported the orders of the AO & the Ld. CIT(A).
We have carefully considered the rival submissions and perused the materials available on record. The AO had made the disallowance for the reason that identical claim made in the A.Y. 2014-15 was disallowed, which was upheld by the Ld. CIT(A) in that year. The disallowance made in A.Y. 2014-15 was adjudicated by the Co-ordinate Bench of this Tribunal in dated 04.01.2021 and the addition made by the AO was deleted. The findings as recorded by the Tribunal in that order is found to be as under:
Energy Resources Ltd. vs. ACIT] A.Y. 2016-17 - 4 – “9. We have heard the rival contentions of both the parties and perused the materials on record. The provisions of section 43A of the Act deals with the adjustment of the fluctuation in the liability of foreign currency pertaining to the capital assets acquired from outside India. This adjustment on account of change in the rate of exchange is made with respect to the amount/liability actually paid during the year by adding/deducting in the actual cost of imported assets acquired in foreign currency. This adjustment in the liability of foreign currency may result loss or gain to the assessee but the same needs to be adjusted with the capital assets as per the provisions of section 43A of the Act. In other words, such loss arising to the assessee, is not deductible in the profit & loss account. 9.1 Proceedings further, we find that the assessee in the present case has secured such loss with respect to the liability in foreign currency which may arise at the time of payment by way of taking of forward contract. The assessee to secure the loss on account of foreign currency fluctuation has taken a forward contract and for which it has paid the premium which was claimed as revenue expenditure. Now the question arises whether such premium paid by the assessee to secure the fluctuation in the foreign currency is subject matter of the provisions of section 43A of the Act. In our considered view the provisions of section 43A of the Act deals with the loss/gain with respect to the liability in foreign currency for the assets acquired from a country outside India. In other words, it does not deal with respect to the cost incurred by the assessee to secure the loss which may arise at the time of repayment on account of fluctuation in the exchange rate with respect to foreign currency liability which was recorded in the books of the assessee in Indian currency. Thus once the provisions of section 43A of the Act are not applicable on the deduction claimed by the assessee in the given facts and circumstances, there cannot be any disallowance by invoking the provisions of section 43A of the Act. 9.2 It is a very common practice to take the insurance policies for the business assets by the business organization to provide safety/safeguard from any unseen loss. Such insurance policies are taken for various purposes such as to ensure the assets, staff of the assessee etc which does not result any fixed assets coming into existence. Furthermore such insurance policies are taken in the course and for the purpose of the business which are accordingly allowable as deduction under section 37(1) of the Act. Now coming to the case on hand, the assessee incurred the cost to secure the foreign currency liability against the exchange fluctuation is akin to insurance policies. Therefore we are of the view that such expenses incurred by the assessee in the course of business are allowable as deduction under section 37(1) of the Act. 9.2 We also note that the assessee has claimed similar expenses in the earlier years which was allowed by the Revenue. Accordingly, we are of the view that the assessee is also entitled for its claim based on the principle of consistency. 9.3 Accordingly, we are not impressed the finding of the authorities below. Furthermore, the case law referred by the ld. CIT-A is distinguishable from the facts of the present case in terms of the reasoning, the decision in the present case is rendered. Thus we set aside the finding of the learned CIT (A) and direct the Energy Resources Ltd. vs. ACIT] A.Y. 2016-17 - 5 – AO to delete the addition made by him. Hence the grounds of appeal of the assessee is allowed.”
8. Since the disallowance made by the Revenue in the A.Y. 2014-15 stands deleted by the Co-ordinate Bench of this Tribunal and the addition in the current year was made only on the ground that identical addition was made in the A.Y. 2014-15; we do not find any reason to sustain the addition as made by the AO in the current year. However, the Ld. CIT(A) had sustained the addition in the current year on the ground that the assessee had availed the loans for the purpose of buying plant and machinery and thus the premium paid for forward cover was on account of loan taken for capital purposes. According to the Ld. CIT(A), the premium paid for forward cover was required to be capitalized and was not in the nature of revenue expenditure. We do not find any merit in the arguments of the Ld. CIT(A). The provision of Section 36(1)(iii) of the Act categorically stipulates that the interest paid in respect of borrowed capital for the purpose of business is an allowable deduction. Only the interest paid up to the date of acquisition and the date of first put to use of the asset, is required to be capitalized. Once the asset is put to use, the interest claim for the subsequent period is eligible for deduction u/s.36(1)(iii) of the Act. In the present appeal, it is not the case of the AO that the premium paid for forward cover was in respect of interest payment pertaining to the period prior to the use of the asset acquired. In fact, the interest expense incurred by the assessee on the foreign currency loan was already allowed as revenue expenditure by the AO himself. Only premium paid to hedge the exchange fluctuation on its interest expenditure was disallowed, which was not justified. Therefore, the disallowance upheld by Energy Resources Ltd. vs. ACIT] A.Y. 2016-17 - 6 – ld. CIT(A) was on a totally wrong presumption and was not in accordance with the provisions of law.
9. In view of the above facts and respectfully following the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for the A.Y. 2014-15, the addition of Rs.29,28,908/- on account of disallowance of forward contract premium is deleted.
In the result, the appeal of the assessee is allowed.
This Order pronounced on 10/01/2025
Sd/- Sd/- (SUCHITRA KAMBLE) (NARENDRA PRASAD SINHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 10/01/2025 S. K. SINHA True Copy आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT आयकर आयु�त(अपील) / The CIT(A)- 4. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER,