Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2009-10. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-22, Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
filed by the assessee read as under:
1. The CIT(A) erred in confirming the disallowance of foreign exchange loss amounting to Rs.56,89,944/- claimed as revenue loss, without appreciating the facts and circumstances of the case.
2. The CIT(A) and the AO ought to have appreciated the fact that the appellant had been following the said system of debiting or crediting the loss or gain on year and conversion of foreign exchange to its profit & loss account as per mercantile system of accounting, consistently since 2005-06.
3. The CIT(A) and AO were not justified in disregarding the fact that the appellant had to borrow and repay the said loan only within one year as per the guidelines laid down by the Reserve Bank of India.
4. The CIT(A) and the AO also failed to appreciate the fact that the said loan was borrowed for acquiring assets including working capital requirements of the business and that all the assets that were purchased, were put to use during the year itself.
5. The AO erred in determining the foreign exchange loss at Rs.12,44,476/- and also assuming and presuming that the said loss was contingent.
3. Briefly stated, the facts of the case are that the nature of business of the assessee-company was manufacturing and trading in drugs and pharmaceuticals and formulations. It had written off the loss on fluctuations in foreign currency to the profit and loss account. The Foreign Currency Term Loan (FCTL) was granted by the Union Bank of India. The assessee-company had acquired the plant and machinery from local market by availing the above FCTL. The machinery was acquired by the company and put to use in the year 2007. The said loan could not be carried forward for more than one year hence, at the end of one year, the loan was squared off and then it was rolled over in the subsequent year. During the impugned assessment year, the assessee had claimed deduction of Rs. 56,89,944/- on account of loss on FCTL. The Assessing Officer (AO) came to a finding that the said loss is contingent in nature. He was also of the view that the loan was not settled during the year and the loss on account of fluctuation can only be allowed at the time of repayment. The AO further discussed the applicability of AS-11 and AS-16 and provisions of section 43A and finally held that the loss cannot be allowed either u/s 28 or 37(1).
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) having gone through the decision in Woodword Governor India P. Lt.d 312 ITR 254 (SC), CIT vs. V.S. Dempo & Co. Pvt. Ltd. 206 ITR 291 (Bom) and Sutlej Cotton Mills Ltd. vs. CIT (1979) 116 ITR 1 (SC) held as under: “What emerges out of the above decision in that the assessee should be holding & dealing the foreign currency on account of trading and only in such cases depending upon the appreciation or depreciation, the loss or profit can be determined and allowed. In the case before me the appellant is not holding the U.S. dollar and not utilizing the same in business on revenue account or on trading account and hence the claim of the appellant that the above loss arose while carrying on the business cannot be accepted. On application on the tests laid down by the Hon’ble Supreme Court above, I find the appellant had taken Foreign Currency Term Loan (FCTL) in the year 2005 for acquisition of plant and machinery and hence the loss arose on account of fixed capital and it is not on revenue account or trading account. Since the loss is of capital in nature, the claim of loss of Rs,56,89,944/- on account of exchange fluctuation cannot be accepted. In view of the above discussion the action of the AO is upheld and the ground raised
is dismissed.”
5. Before us, the Ld. counsel of the assessee files (i) copy of FCTL statement along with ledger accounts, (ii) copy of extract of section 211 of Companies Act, 1956, (iii) copy of extract of AS-11, the effects of changes in foreign exchange rates, (iv) copy of extract of AS-16, borrowing costs, (v) copy of order in Challapalli Sugars Ltd. 98 ITR 167(SC), (vi) copy of order in Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172(SC), (vii) copy of order in Cooper Corporation Pvt. Ltd. 159 ITD 165, (viii) copy of order in Maddi Lakshmaiah & Company Ltd. 82 taxmann.com 205, (ix) copy of extract section 209 of Companies Act 1956, (x) copy of extract section 145 of Income Tax Act, 1961. 5.1 The Ld. counsel further submits that AS-16 is applicable in accounting for borrowing costs. Borrowing costs attributable to machinery can be capitalized only till the qualifying asset is ready for its intended use and the same ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. It is submitted by him that the assessee-company has debited all the interest and related exchange difference to P&L account at the time of payment itself. Further he submits that as there is no method suggested in the Income Tax, Act, 1961, the assessee-company has followed the treatment as prescribed by Accounting Standard(AS) which states that the expense can be claimed as revenue expenditure because the borrowing costs may include exchange differences arising from currency borrowing to the extent adjusted towards interest costs. So, the assessee did not capitalize the same but considered the same as revenue expenses. The Ld. counsel also refers to AS-11 which deals with the effects of changes in foreign exchange rates. He submits that the accounting treatment of exchange differences contained in AS-11 is required to be followed irrespective of the relevant provisions of Schedule-VI to the Companies Act, 1956. The Ld. counsel also refers to the recognition of exchange differences as per Income Computation and Disclosure Standard (ICDS)- 1 relating to accounting policies which is effective from 01.04.2015 and applicable to the AY 2016-17 and subsequent assessment years.
6. Per contra the Ld. DR submits that the assessee-company in the instant case is not holding the USD and not utilizing the same in business on revenue account or on trading account and hence the claim of the assessee that the above loss arose while carrying on the business cannot be accepted. He supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. The reasons of our decisions are given below. We begin with the decisions relied on by the Ld. counsel. In the case of Challapalli Sugars Ltd. (supra), it has been held that for the purpose of deduction on account of depreciation and development rebate, interest paid before commencement of production on amount borrowed for acquisition and installation of plant and machinery can be considered to be part of actual cost of assets to the assessee. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra), the Hon’ble Supreme Court has held that interest earned on short-term investment of funds borrowed for setting-up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be said that interest income is not taxable on the ground that it would go to reduce interest on borrowed amount which would be capitalized. In the case of Cooper Corporation Pvt. Ltd. (supra), it has been held that where assessee’s act of conversion of Indian currency loan availed for acquisition of assets, etc., into foreign currency loan was dictated by revenue considerations towards saving interest costs, etc., foreign exchange fluctuation loss being on revenue account was an allowable expenditure under section 37(1). In the case of Maddi Lakshmaiah & Company Ltd. (supra) it is held that conversion of Indian currency loans into foreign currency loans for purpose of reducing cost of interest could not be considered as foreign currency loans acquired for purpose of acquiring an asset from a country outside India and, hence, provision of section 43A would not apply.
We make it clear that there is no dispute about the relevance of section 209 of the Companies Act, 1956 which deals with books of account to be kept by company or section 145 of the Income Tax Act which deals with method of accounting. We remind ourselves to the following observation of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.:
It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857 (CA), the Income-tax law does not march step by step in the footprints of the accountancy profession.