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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) -1, Coimbatore, dated 08.12.2017 and pertains to assessment year 2013-14.
Shri A. Arjunaraj, the Ld. representative for the assessee, submitted that two issues arise for consideration in this appeal. The first issue is with regard to claim of ₹98,98,784/- towards exchange fluctuation loss. The second ground is with regard to additional depreciation of ₹1,24,922/-. According to the Ld. representative, the assessee availed a term loan of ₹2.6 Crores on 31.03.2006 from City Union Bank for acquiring the business of M/s Singaravelar Spinning Mills Private Limited, Sathyamangalam, Erode District. Subsequently, the said loan was converted into foreign currency loan on 11.09.2007. According to the Ld. representative, the interest on the said loan was fully allowed by the Assessing Officer as revenue expenditure. However, the loss claimed by the assessee due to fluctuation in foreign currency was disallowed by the Assessing Officer on the ground that there was no underlying asset or underlying liability. Placing reliance on the decision of Pune Bench of this Tribunal in Cooper Corporation Pvt. Ltd. v. DCIT in dated 29.04.2016, the Ld. representative submitted that on identical circumstances, the Pune Bench of this Tribunal found that the loss claimed by the assessee on account of foreign exchange fluctuation is allowable under Section 37(1) of the Income-tax Act, 1961 (in short 'the Act'). The Pune Bench, according to the Ld. representative, placed its reliance on the judgment of Apex Court in CIT v. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285. The Ld. representative has also placed his reliance on the judgment of Apex Court in CIT v. Woodward Governor India (P.) Ltd. (2009) 312 ITR 254 and submitted that this judgment relates to assessment year 1998-99. According to the Ld. representative, Accounting Standard – 11 came into effect from the year 2013, therefore, the Apex Court had no occasion to consider the Accounting Standard – 11. Hence, according to the Ld. representative, this judgment of Apex Court in Woodward Governor of India (P.) Ltd. (supra) may not be applicable to the facts of this case.
On the contrary, Shri Nandakumar, the Ld. Departmental Representative, submitted that the assessee borrowed loan for acquiring a capital asset, namely, the business of M/s Singaravelar Spinning Mills Private Limited, Sathyamangalam. According to the Ld. D.R., in the case before the Apex Court in Woodward Governor of India (P.) Ltd. (supra), the loan was borrowed for revenue purpose. Therefore, the Apex Court found that when the loan was taken for revenue purpose, the loss arising out of fluctuation in the rate of foreign currency is allowable as business expenditure under Section 37(1) of the Act. In the case before us, according to the Ld. D.R., the loan was borrowed for the purpose for acquiring an capital asset, therefore, the loan was taken for capital purpose and not for revenue purpose. Hence, the judgment of Apex Court in Woodward Governor of India (P.) Ltd. (supra) may not be applicable to the facts of this case. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly found that the loss due to exchange rate fluctuation to the extent of ₹98,98,784/- is not allowable expenditure.
We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee borrowed loan in Indian rupee from City Union Bank Ltd. for acquiring the business of M/s Singaravelar Spinning Mills Private Limited, Sathyamangalam. Subsequently, the loan was converted into foreign currency loan on 11.09.2007. The assessee claims the loss suffered in exchange rate fluctuation as revenue loss. The interest on payment of such loan was also claimed as revenue expenditure. The Assessing Officer allowed the interest on such loan as revenue expenditure. However, she disallowed the claim of the assessee in respect of loss due to exchange rate fluctuation.
We have carefully gone through the judgment of Apex Court in Tata Iron And Steel Co. Ltd. (supra). The issue arose before the Apex Court was whether the fluctuation in the rate of foreign exchange, while repaying the instalments of foreign loan, would go to reduce / increase the cost of depreciable assets for computing depreciation? The Apex Court found that the manner or mode of repayment of the loan has nothing to do with the cost of asset acquired by the assessee for the purpose of business. The Apex Court has also found that even if the borrowed funds were not repaid, it will not alter the cost of the asset. The Apex Court further found that the cost of raising money for purchase of the asset and the cost of the asset are two different and independent transactions.
Therefore, for the purpose of depreciation, the cost of asset cannot be reduced or increased due to exchange rate fluctuation.
This issue was also considered by the Pune Bench of this Tribunal in Cooper Corporation Pvt. Ltd. (supra). After referring to Section 43A of the Act which provides for capitalization of such losses arising out of fluctuation in foreign currency on acquisition of capital asset outside India, the Pune Bench found that it may not be applicable for acquisition of asset in India. Referring to Accounting Standard – 11, the Pune Bench found that the loss or gain arising from conversion of liability at the closing rate should be recognized in the Profit & Loss account for the reporting period. The Pune Bench has placed its reliance on the CBDT notification S.O.892(E) dated 31.03.2015. Ultimately, the Pune Bench recorded its finding at paragraphs 10.9 and 11 as follows:-
“10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. (supra) relied upon by the Ld. Departmental Representative is of no assistance to the Revenue. The Hon'ble Supreme Court therein stated the principle of law that where any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading loss if the foreign currency held by the assessee on revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The aforesaid principle of law is required to be applied to the facts of case to determine whether the foreign currency is held by the assessee on revenue account or as a part of circulating capital. In the present case, fluctuation loss inflicted upon the assessee bears no nexus or relation to the acquisition to the assets. The action of the assessee is tied up to its underlying objective i.e. saving in interest costs, hedging its revenue receipts etc. which are undoubtedly on revenue account. Thus, the loss generated in impugned action bears the character of revenue expenditure. Similarly, decision of the Apex Court in the case of Tata Iron and Steel Co. Ltd. (supra) also weighs in favour of the assessee. We also note that reliance placed by the CIT(A) on Elecon Engineering Co. Ltd. (supra) is misplaced. The decision concerns applicability of S. 43A in the facts of that case and thus clearly distinguishable.
For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices has been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards saving interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under S. 37(1) of the Act. The order of the CIT(A) sustaining the disallowance is not called for and is thus reversed. In the result, the Ground No.1 is allowed.”
In view of the above finding of co-ordinate Bench of this Tribunal at Pune, we do not find any reason to disallow the claim of the assessee. Accordingly, for the reasons stated by the Pune Bench of this Tribunal in Cooper Corporation Pvt. Ltd. (supra), more specifically at paragraphs 10.9 and 11 as reproduced above, the orders of both the authorities below are set aside and the Assessing Officer is directed to allow the loss suffered in exchange rate fluctuation on foreign currency loan as revenue expenditure.
In the result, the appeal filed by the assessee is allowed.