LEO FASTENERS,PONDICHERRY vs. DCIT, PONDICHERRY CIRCLE , PONDICHERRY

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

Both the appeals of the assessee are directed against the

common order passed by the Commissioner of Income Tax

(Appeals), Puducherry, dated 19.06.2017 and pertain to

assessment years 2013-14 and 2009-10. Since common issue

arises for consideration in these appeals, we heard both the

appeals together and disposing of the same by this common order.

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submitted that the CIT(Appeals) by following his own order for the assessment year 2012-13, confirmed the disallowance made by the Assessing Officer. Placing reliance on the order of this Tribunal in

I.T.A. No.508/Mds/2017 dated 31.07.2017, the Ld.counsel submitted that the order of the CIT(Appeals) for assessment year 2012-13 was reversed by this Tribunal by placing reliance on the judgment of Apex Court in CIT v. Woodward Governor India (P) Ltd.

(2009) 312 ITR 254. In view of the above, according to the Ld. counsel, the loss on foreign exchange fluctuation has to be allowed as revenue expenditure under Section 37(1) of the Income-tax Act,

1961 (in short 'the Act').

Representative also. As rightly submitted by the Ld.counsel for the assessee, the issue of loss on foreign exchange fluctuation was examined by this Tribunal for assessment year 2012-13 in the assessee's own case. Placing reliance on the judgment of Apex

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Court in Woodward Governor India (P) Ltd. (supra), this Tribunal

found that the loss suffered by the assessee on foreign exchange

fluctuation has to be allowed under Section 37(1) of the Act. In fact,

this Tribunal observed as follows:-

“6. We have carefully gone through the orders of both the authorities below in the light of submissions made by the Ld. Sr. counsel for the assessee and the Ld. Departmental Representative. The assessee in order to expand business of generation of electricity purchased new windmills by borrowing loan in Indian currency. Subsequently, in order to reduce the interest liability, the assessee converted the Indian currency loan into foreign currency. Wherever there was a loss, the assessee claimed the same as revenue loss and wherever there was profit, the assessee offered the same as income for taxation. For the year under consideration, the assessee has suffered a loss. The CIT(Appeals) found that the loan was borrowed for the purpose of acquisition of capital asset. Therefore, the interest payable by the assessee has to be capitalized. Similarly, the fluctuation in foreign exchange also needs to be capitalized.

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“10. As stated above, on the facts in the case of M/s. Woodward Governor India P. Ltd., the Department has disallowed the deduction/debit to the profit and loss account made by the assessee in the sum of Rs. 29,49,088 being unrealised loss due to foreign exchange fluctuation. At the very outset, it may be stated that there is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department.” 8. The Apex Court finally found that the expression “expenditure” used in Section 37 of the Act in the circumstances of particular case, cover an amount which is really a “loss” even though the said amount has not gone out of the assessee. In fact, the Apex Court observed as follows at para 13 of its order:- “13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word "expenditure" in section 37(1) connotes " what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this court in the case of Indian Molasses Company P. Ltd. [1959] 37 ITR 66. Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of “expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was

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considering the meaning of the expression “expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word “expenditure" is not defined in the 1961 Act. The word “expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in sections 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head " Profits and gains of business" . In sections 30 to 36, the expressions “expenses incurred" as well as “allowances and depreciation" have also been used. For example, depreciation and allowances are dealt with in section 32. Therefore, Parliament has used the expression " any expenditure" in section 37 to cover both. Therefore, the expression " expenditure" as used in section 37 may, in the circumstances of a particular case, cover an amount which is really a " loss" even though the said amount has not gone out from the pocket of the assessee.” 9. This judgment of Apex Court was subsequently followed by this Tribunal in Hyundai Motor India Ltd. (supra). In the case on our hand, the assessee admittedly borrowed loan in Indian currency for the purpose of acquiring new windmill in order to expand its business. Subsequently, the loan was converted into foreign currency. The assessee offered the profit due to foreign exchange fluctuation in all the earlier years. During the year under consideration, the assessee suffered loss, therefore, by respectfully following the judgment of Apex Court in Woodward Governor India (P) Ltd. (supra), we hold that the loss suffered by the assessee has to be allowed under Section 37(1) of the Act. Accordingly, the orders of both the authorities below are set aside and the addition made by the Assessing Officer is deleted.”

the lower authority. We hold that the loss suffered by the assessee

on foreign exchange fluctuation has to be allowed under Section

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37(1) of the Act. Accordingly, orders of both the authorities below are set aside and the addition made by the Assessing Officer for both the assessment years under consideration is deleted.

Order pronounced on 8th February, 2018 at Chennai.

sd/- sd/- (एस जयरामन) (एन.आर.एस. गणेशन) (S. Jayaraman) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 8th February, 2018.

Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A), Puducherry 4. Principal CIT, Puducherry 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.