LEO FASTENERS,PONDICHERRY vs. DCIT, PONDICHERRY

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), Puducherry, dated

23.01.2017 and pertains to assessment year 2012-13.

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expenditure due to foreign exchange fluctuation loss. According to the Ld. Sr. counsel, the Assessing Officer, by referring to Section

43A of the Income-tax Act, 1961 (in short 'the Act'), disallowed the claim of the assessee on the ground that the loss has to be capitalized. The CIT(Appeals) also confirmed the order of the

Assessing Officer. However, according to the Ld. Sr. counsel, the CIT(Appeals) agreed with the assessee that Section 43A of the Act is applicable only in respect of the asset which was acquired outside India, therefore, the CIT(Appeals) has rightly found that Section 43A

of the Act is not applicable at all. The CIT(Appeals) also found that the loan was originally borrowed in Indian rupee for the purpose of acquiring capital asset. Subsequently, according to the Ld. Sr.

counsel, the loan was converted into foreign currency, hence, the fluctuation in foreign currency has to be considered only as revenue loss.

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claim of the assessee on the ground that there was a loss. Referring to the decision of Pune Bench of this Tribunal in Cooper Corporation (P.) Ltd. v. DCIT (2016) 159 ITD 165, the Ld. Sr.

counsel submitted that in the case before the Pune Bench, the assessee, a private limited company, is engaged in foundry business, besides generation of electricity through windmills. The assessee claimed deduction of ` 1,39,98,948/- on account of

devaluation of Indian currency qua foreign currency on outstanding

foreign currency loans as revenue expenditure under Section 37(1) of the Act. The assessee before the Pune Bench availed loan for acquisition of assets for expansion of project. Initially the loan was

availed in Indian rupee. However, the existing Indian rupee loan was converted into foreign currency loan in order to take benefit of lower rate of interest on such foreign currency loan. The assessee

while reducing the interest costs, however, unfortunately suffered loss due to foreign exchange fluctuation. In those factual

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circumstances, the Pune Bench, after referring to Accounting

Standard 11 of the Institute of Chartered Accountants of India,

found that the loss arising on foreign exchange fluctuation has been

rightly accounted as revenue expenditure in the Profit & Loss

account. Accordingly, the claim of the assessee was allowed under

Section 37(1) of the Act. The Ld. Sr. counsel has also placed her

reliance on the decision of this Bench of the Tribunal in Hyundai

Motor India Ltd. v. DCIT (2017) 81 taxmann.com 5 and submitted

that this Tribunal after referring to the judgment of Apex Court in

Woodward Governor India (P) Ltd. (supra), found that the loss due

to fall in value of foreign exchange cannot be adjusted in the value

of asset and it has to be allowed as revenue expenditure under

Section 37(1) of the Act. The Ld. Sr. counsel has also placed her

reliance on the judgment of Delhi High Court in Principal CIT v.

Nitrex Chemicals India Ltd. (2016) 243 ITR 371.

Representative also. The Ld. D.R. submitted that he is placing

reliance on the observation made by the Assessing Officer and the

CIT(Appeals).

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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.

in CIT v. Woodward Governor India (P) Ltd. (2009) 312 ITR 254. In the case before the Apex Court, the assessee borrowed loan in Indian currency for acquisition of windmill for expansion of its existing business in generation of electricity. The assessee before

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the Apex Court offered the gain on foreign exchange fluctuation for

taxation and wherever there was loss due to foreign exchange

fluctuation, the same was claimed as revenue expenditure. The

Revenue also taxed the gain on foreign exchange fluctuation as

revenue receipt. However, the loss was disallowed. Referring to

this stand of the Department, the Apex Court found that the

Revenue is adopting double stand. In fact, the Apex Court has

observed as follows at para 10 of its order:-

“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.”

“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:-

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“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 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

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which is really a " loss" even though the said amount has not gone out from the pocket of the assessee.”

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.

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Order pronounced on 31st July, 2017 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 31st July, 2017.

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.