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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI C.N. PRASAD, JM & SHRI RAJESH KUMAR, AM Shri Tanmay Phadke Shri G Nantha Kumar
आदेश / O R D E R PER RAJESH KUMAR, A. M:
This is an appeal filed by the assessee challenging the order dated 6.2.2015 passed by the ld.CIT(A)-14, Mumbai for the assessment year 2009- 10.
The sole issue raised in the various grounds of appeal is against the confirmation of disallowance of loss on Forex Fluctuation of Rs.12,37,512/- on ECB loan by the ld.CIT(A) as made by the AO by considering the same as notional loss and further the ld.CIT(A) erred in applying the provisions of section 43A of the Income Tax Act, 1961 while upholding the order of the AO, whereas as a matter of facts the loss is neither notional nor provisions of section 43A of the Act are applicable as the assets were acquired in India and not outside the country.
Brief facts of the case are that the assessee filed return of income on 26.09.2009 declaring a total loss of Rs.19,46,456/-. The same was processed under section 143(1) of the Act and thereafter the case was selected for scrutiny and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO observed from the profit and loss account that the assessee has debited an amount of Rs.12,37,512/- under the head Forex Variance Loss. The AO asked the assessee to give basis for claiming the said loss as expenses in profit and loss account. In reply, the assessee submitted that it has received ECB loan in financial year 2004-05 from (1) ZMG Signium Ward Howell 67,000 US$ and (2) Argosy Partner Inc 33,000 US$, which in terms of Indian currency at the time of taking of loan worked out to Rs.30,89,930/- and Rs.5,13,450/- aggregating to Rs.46,03,380/-. The said loans were partly used for the purpose of purchase of fixed assets in India and also used for the routine business of the assessee. Since the loans were coming over all along from the earlier years and outstanding at the year end, the assessee restated the loan liability in terms of foreign exchange rate prevalent on the close of the year and accordingly the difference on account of increased liability was written off amounting to Rs.12,37,512/- under the head forex variance loss and the loan was shown at Rs.52,17,000/- in the balance sheet at the close of the year. The AO not convinced with the replies and contentions of the assessee, disallowed and added the same to the total income of the assessee for the reasons that the same was not revenue expenditure as the loans were not repaid and it was a notional loss which was written off in the profit and loss account under the head Forex Variance Loss in the current assessment year i.e 2010-11 by assessing the total income at Rs.7,08,950/- as against returned loss of Rs.19,46,456/- by making various disallowances inter alia Forex variation Loss of Rs.12,37,512/-. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority, who not only upheld the order of the AO but went a step ahead by holding that the loss was not admissible as revenue loss in view of the provisions of section 43A of the Act by observing and holding as under :
―3.3 3 I have gone through the facts and submissions. The loan was taken by the appellant from its sister concern in the year 2004-05 which has remained unpaid till date. The company is a recruitment agency and the loan was taken from its foreign share holders in initial years. It is also not disputed that. the additions made in the fixed assets year after year were met from foreign currency loan as share capital was only Rs 4,95,000/-. On these given facts, the loan is though said to have been utilized partly on revenue account and party on capital account, same is not supported by any fund flow statement. Then the entire loan has remained unpaid and so has been adjusted in the cost due to fluctuation in foreign exchange. On these given facts, it cannot be said that the loss is on revenue account as same was utilized towards purchase of fixed assets in A.Y. 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10 and thus provisions of section 43A are attracted in the case .. I have also gone through Section 43A which says as under.- “43A. Special provisions consequential to changes in rate of exchange of currency— 43A Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment (a) towards the whole or a part of the cost of the asset; (b) Towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from; (i) the actual cost of the asset as defined in clause (1) of section 43 or; (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; (iii) The amount of expenditure of a capital nature referred to in section 35A; or (iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36, or (v) the cost of acquisition of the capital asset(not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature, or as the case may be, the cot of acquisition of the capital asset as aforesaid‖ Provided************‖
The learned AR vehemently submitted before us that the order passed by the ld.CIT(A) suffers from serious legal infirmity as the ld CIT(A) has wrongly upheld the order of the AO by holding that loss written off Rs.12,37,512/- was covered under the provisions of section 43A of the Act and that the fluctuation loss could not be allowed as revenue loss under section 37 of the Act.
The ld. AR stated that the assessee has also recognized the gain on the said loans in the earlier three years on the basis of exchange rate by restating the liability outstanding at the year end also and showing the same as gain of forex variation in profit and loss account which was duly assessed and accepted by the department as per details below:-
AY Forex gain Forex loss 2006-07 140230 2007-08 119342 2008-09 326046 The ld. AR submitted that the loss on account of forex variation resulting from restatement of loan liabilities has occurred due to foreign exchange rate upward fluctuation which was neither the capital expenses nor notional loss but in fact represented the actual loss on the basis of exchange rate at the year end and very much constituted revenue expenses under section 37 of the Act as wholly and exclusively incurred or the business purposes. The ld. AR drew our attention to the provisions of section 43A of the Act by submitting that the section 43A has not application where the assets were purchased within the country and therefore the observations of the ld. CIT(A) were totally against the facts on record and was also contrary to the findings of the AO during the course of assessment proceedings who made the addition on a different footing. It was also submitted by the ld.AR that the assessee has sufficient interest free and other funds whereas the fixed assets purchased by the assessee in all amounted to Rs.13,61,349/- over a period commencing from AYs 2005-06 to 2009-10 which proved that the observation of the ld.CIT(A) was also wrong that forex ECB loan was used for making addition to fixed assets. Finally, the ld.AR prayed before the bench that the order of the ld.CIT(A) be set aside and the AO be directed to allow forex variance loss as revenue expenditure.
The ld. DR on the other hand relied on the orders of authorities below and submitted that it was not clear from the assessment order whether the assets were purchased within or outside India.
We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below. It is undisputed fact that the assessee borrowed ECB loans from two share holders in assessment year 2005-06 which was outstanding till the year end under consideration and the loss on account upward movement in fluctuation rate comes to Rs.12,27,430/-. The comparative chart showing the loans taken and outstanding in terms of foreign exchange are as under: Name of the US$ Amount as on Amount as on Amount as on party 31.3.2005 31.3.2008 31.3.2009 Argousy 33000 1513450 1318578 1724207 Partners Inc ZMG Signium 67000 3089930 2672813 3494614 Ward Howell 4603380 3991391 5218821 Loss booked as 1227430 on 31.3.2009 We also find that during the assessment years 2006-07, 2007-08 and 2008- 09 the assessee had booked the forex fluctuation gain on these loans amounting to Rs.140,230/-, Rs.1,19,342/- and Rs.3,26,046/- respectively on the basis of exchange rate at the respective year end thereby stating the