ACIT, CHENNAI vs. CONTINUUM WIND ENERGY (INDIA) PVT. LTD., CHENNAI

Both, the assessee and the Revenue filed the above appeals against the order passed by the Commissioner of Income Tax (Appeals)-1, Chennai, dated 08.11.2016 and pertain to assessment year 2013-14. Therefore, we heard both the appeals together and disposing of the same by this common order.

Let’s first take the assessee’s appeal in I.T.A.

The only issue arises for consideration in this appeal is disallowance of `36,33,334/- being the premium paid on forward contracts to cover the exchange fluctuations on the repayment of loan.

Sh. B. Ramakrishnan, the Ld. representative for the assessee, submitted that the assessee availed loan from State Bank of India for its project at Surajbari. The project was 1.5 MW. According to the Ld. representative, the assessee is admittedly engaged in the business of generation of wind energy. After availing loan from State Bank of India, the assessee requested the bank to convert the said loan in foreign currency in the month of August, 2011. State Bank of India, in fact, converted the said loan in foreign currency at the rate of 44.44 per USD which comes to nearly `50 lakhs. According to the Ld. representative, the assessee has also entered into forward contracts in order to guard itself from foreign exchange fluctuations. The assessee has paid `1.9 lakhs towards premium on forward contracts. The assessee amortized the premium paid in the books of account over a period of three years.

The Ld. representative for the assessee further submitted that in the year under consideration, a sum of `36,33,333/- was claimed as revenue expenditure. The Assessing Officer disallowed the claim of the assessee which was also confirmed by the CIT(Appeals). Both the authorities, according to the Ld. representative, submitted that hedging loss on account of foreign exchange fluctuation cannot be a revenue expenditure, but it was a capital expenditure. According to the Ld. representative, in fact, the assessee suffered a loss, therefore, in case the loss suffered on account of foreign currency could not be taken as revenue loss, the same has to be taken as capital loss and it has to be added to the cost of the capital asset. Hence, according to the Ld. repreuusentative, depreciation has to be allowed on the enhanced value of capital asset. The Ld. representative has also placed his reliance on the decision of Bangalore Bench of this Tribunal in JSW Steel Ltd. v. ACIT (2010) 133 TTJ 742.

On the contrary, Shri Sreenivasan, the Ld. Departmental Representative, submitted that he is placing his reliance on the order of the CIT(Appeals). The Ld. D.R. further submitted that in view of Section 43A of the Income-tax Act, 1961 (in short 'the Act'), the CIT(Appeals) has rightly found that the loss suffered by the assessee in foreign exchange contracts was in the course of setting up of the plant, therefore, the loss has to be treated as capital loss, hence, it cannot be allowed.

We have considered the rival submissions on either side and perused the relevant material available on record. The assessee admittedly borrowed loan in Indian currency from State Bank of India for the purpose of setting up of plant / project, namely, Surajbari I Project. The said loan was converted into foreign currency loan and the assessee has paid premium of `1.9 lakhs.

The assessee now claims alternatively that if it is capital loss, it will definitely go to increase the cost of the project, hence, the assessee shall be given depreciation on the enhanced value of asset. Admittedly, the loan was borrowed for setting up of plant for generation of wind energy, therefore, the loss suffered in foreign exchange fluctuation would definitely go to increase the cost of the project to the extent of loss suffered by the assessee. Hence, as rightly found by the Bangalore Bench of this Tribunal in JSW Steel Ltd. (supra), the assessee is entitled for depreciation on the enhanced value. Accordingly, while confirming the orders of the lower authorities that the loss suffered by the assessee is capital loss, the Assessing Officer is directed to grant depreciation to the assessee as applicable on the enhanced value of the project after commencement of its business.

Now, coming to Revenue’s appeal in the only issue arises for consideration is disallowance of expenditure in earning the exempt income under Section 14A of the Act along with Rule 8D of Income-tax Rules, 1962.

Shri Sreenivasan, the Ld. Departmental Representative, submitted that the Assessing Officer disallowed `7,41,93,117/- under Section 14A of the Act. The CIT(Appeals) allowed the claim of the assessee on the ground that the assessee has not earned any exempt income. Referring to Rule 8D, the Ld. D.R. submitted that Income-tax Act does not say when there was no exempt income, the expenditure need not be disallowed. According to the Ld. D.R., irrespective of income earned by the assessee, when the assessee incurred the expenditure for investing in the shares which would result in exempted income, the same has to be disallowed under Section 14A of the Act read with Rule 8D.

On the contrary, Sh. B. Ramakrishnan, the Ld. representative for the assessee, submitted that the assessee has not earned any exempt income, therefore, there cannot be any disallowance on vacuum as held by Madras High Court in Redington (India) Ltd. v. Addl. CIT (2017) 77 taxmann.com 257.

We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the investments were made in subsidiary companies.

In the result, the appeal filed by the assessee is partly allowed while the Revenue’s appeal is dismissed.