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Income Tax Appellate Tribunal, KOLKATA
Before: DR. MANISH BORAD & SHRI SONJOY SARMA
आदेश /O R D E R
PER MANISH BORAD, ACCOUNTANT MEMBER:
The captioned appeals at the instance of assessee for AY 2012-13 and revenue for AY 2014-15 are directed against the separate orders dated 30/09/2019 and 21/02/2019 of the Ld. Commissioner of Income- tax, Appeals [hereinafter referred to as ‘CIT(A)’], Guwahati-2, Guwahati passed u/s. 250 of the Income-tax Act, 1961 hereinafter referred to as ‘the Act’ .
On perusal the grounds raised by the assessee and revenue we notice that common issue relating to disallowance of foreign exchange fluctuations loss has been raised. Assessee has raised this issue for the AY 2012-13 for the disallowance of Rs.70,31,000/- and Revenue has raised this issue for the AY 2014-15 for the disallowance of Rs.1,95,47,000/-.
For the purpose of adjudication, we first take up the facts of the revenue’s appeal for AY 2014-15 and our decision to this shall apply mutatis and mutandis on the assessee’s appeal also.
Brief facts of the case are that the assessee is a limited company, engaged in manufacturing process of electrical carbon and mechanical
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 3 carbon products. Loss of Rs.5,92,860/- declared in the e-return filed for the AY 2014-15 on 30-09-2014. Case selected for scrutiny through CASS followed by serving of valid notices u/s. 143(2) and 142(1) of the Act. After examining the details filed by the assessee the ld. AO apart from making disallowances of computer maintenance accessories at Rs.6,17,000/- made disallowance of loss on foreign exchange fluctuations at Rs. 195,47,000/- claimed by the assessee due to increase in value of foreign currency such as GBP(Pound Sterling). US Dollar and EURO after re-statement of closing outstanding forex payable as per Accounting Standard-AS 11. Income assessed at Rs. 19,571,140/-.
The assessee has challenged the disallowances/additions before the ld. CIT(A) and partly succeeded.
Aggrieved, the revenue is now in appeal before this Tribunal challenging the addition/disallowance of foreign exchange fluctuation loss of Rs. 1,95,47,000/-.
The ld. DR vehemently argued supporting the order of the ld. AO.
Per contra, the Ld. Counsel for the assessee vehemently argued supporting the impugned findings of the ld. CIT(A).
We have heard the rival contentions and perused the material placed before us. The grounds raised by the revenue is that the ld. CIT(A) erred in facts as well as in law in quashing the assessment order. We find that the ld. CIT(A) has not quashed the assessment order, but deleted the addition made by the ld. AO. As far as disallowance for foreign exchange fluctuation loss is concerned, the disallowance is
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 4 deleted by the ld. CIT(A) relying on various judgments including that of Hon’ble Apex Court in the case of M/s. Honda Siel Power Products Ltd in Civil Appeal arising out of SLP ( C ) No. 7632/08 dated 3/4/2009, wherein Hon’ble Apex Court held as follows:
“22. The main issue which arises for determination in this batch of civil appeals is: whether the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date pending actual payment of the varied liability. In this batch of civil appeals, we are concerned with increase in the existing liability on account of foreign exchange fluctuations on "capital account". 23. Before coming to the arguments, we quote herein below Section 43A, as it stood prior to 1.4.2003:
"43A. Special provisions consequential to changes in change of currency--{l) Notwithstanding anything contained in any 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 such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for 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 (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in clause (1) of section 43 or the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35 or in section 35A or in clause (ix) of sub-section (1) of section 36, or, in the case of a capital asset (not being a capital asset referred to in section 50), the cost of acquisition thereof 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
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 5 nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid. "
We also quote herein below Section 43A, as it stands in the Statute book after substitution by the Finance Act 2002 w.e.f. 1.4.2003: "43A. Notwithstanding anything contained in any other provision of the Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment. " (emphasis supplied) 25. We also quote herein below provisions of Section 43(1): "43. In sections 28 to 41 and in this section, unless the context otherwise requires (1) "actual cost" means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. " 26. Shri Parag Tripathi, learned Additional Solicitor General appearing on behalf of the Department, submitted that in Section 43A (as it stood prior to Finance Act, 2002) the expression ''for making payment” is in the context of increase or decrease of liability and the same hinges on “making payment towards the whole or a part of ... ". According to the learned counsel, the expression "towards the whole or a part of" makes it clear that Section 43A as it stood referred to whole or a part of the payment and therefore to the point of payment. According to the learned counsel, under the pre-amended Section 43A, the effect of increase or decrease of liability arose only at the point of payment because the point of accrual shifted to the payment. In this connection, learned counsel urged that the difference between accrual and payment of a liability is that normally the point of accrual and the point of payment represent two different time milestones. However, according to the learned counsel, in the case of a contingent liability, like. that of foreign exchange fluctuations, the point of accrual and the point of payment become the same. According to the learned counsel, under the pre-amended
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 6 dispensation of Section 43A, the effect of increase or decrease of liability could only arise at the point of payment, as the point of accrual shifts to the point of payment. 27. Learned counsel next contended that on a proper and true interpretation of the amendment to Section 43A, introduced by Finance Act, 2002, Section 43A is clarificatory. According to the learned counsel, the occasion for the clarificatory amendment arose in view of the judgments of the various High Courts, which interpreted the unamended provision as laying down the proposition that in case of increase or decrease of liability due to foreign exchange fluctuations, the same is to be recognized at the end of each financial year, irrespective of whether such "incremental liability" had accrued and had been paid or not. According to the learned counsel, Section 43A, as amended, recognizes the fact that in case of foreign exchange fluctuations, the accrual of liability is co- terminus with the payment of liability and therefore the amendment to Section 43A is clarificatory and not amendatory, notwithstanding the fact that the amendment operates w.e.f. 1.4.2003. 28. In reply, Shri Ajay Vohra, learned counsel appearing on behalf of the assessee, submitted that Section 43A (even prior to the amendment) was inserted to provide for adjustment in the actual cost of assets pursuant to change in foreign currency exchange rates. As a consequence of Section 43A (unamended), it became possible to adjust to increase/decrease in liability relating to acquisition of capital assets on account of exchange rate fluctuation in the actual cost of the assets acquired in foreign currency and for depreciation to be allowed with reference to such increased/decreased cost. According to the learned counsel, the provisions of Section 43A (unamended) are pari materia with para 10 of AS-ll which inter alia provides for adjustment in the carrying cost of fixed assets acquired in foreign currency, due to foreign exchange fluctuation at each balance sheet date. In this connection, learned counsel has placed reliance on the judgment of this Court in the case of CIT v. Arvind Mills Ltd. reported in 193 ITR 255. 29. To answer the controversy, we need to analyse Section 43 (unamended). The period in question in the batch of Civil Appeals is prior to Finance Act, 2002, therefore, we are required to consider the scope of Section 43A (unamended). 30. Section 43A starts with a non obstante clause. Section 43A(1) overrides the other provisions only as regards cases falling under
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 7 that sub-section. For instance, in a case where the asset is acquired, or the liability to pay in foreign exchange arises, after the change in the rate of exchange, the said sub-section has no application and the general principles of law must be applied in deciding whether the actual cost is increased or reduced as a result of such change. In other words, Section 43A(1) applies only where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring the asset. Section 43A(1), therefore, has no application unless the asset is acquired and the liability existed, before the change in the rate of exchange takes effect. In such a case, Section 43A contemplates recomputation of the cost of the assets for the purposes of depreciation [Sections 32 and 43(1), and also as regards capital assets for scientific research [Section 35{1}{iv}} and also regarding patent rights or copyrights [Section 35A]. 31. As held in Arvind Mills case (supra) increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. Thus, the adjustments in the actual cost are to be made irrespective of the date of actual payment in foreign currency made by the assessee. This position also finds place in the clarification issued by the Ministry of Finance dated 4.1.1967 which inter alia reads as under: "2. The Government agrees that for the purposes of the calculation of depreciation allowance, the cost of capital assets imported before the date of devaluation should be written off to the extent of the full amount of the additional rupee liability incurred on account of devaluation and not what is actually paid from year to year. The proposed legal provision in the matter is intended to be framed on his basis. " (emphasis supplied)
One more aspect needs to be mentioned. Section 43(1) defines actual cost for the purpose of grant of depreciation etc. to mean "the actual cost of the assets to the assessee". Till the insertion of the unamended Section 43A there was no provision in the Income-tax Act for adjustment of the actual cost which was fixed once and for
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 8 all, at the time of acquisition of the asset. Accordingly, no adjustment could be made in the actual co of the assets for purposes of grant of depreciation for any increase/decrease of liability subsequently arising due to exchange fluctuation. Consequently, Section 43A was introduced in the Act by Finance Act, 1967 w.e.f. 1.4.1967 in the above terms to provide for adjustment in the actual cost of assets pursuant to change in the foreign currency exchange rates. As a consequence of the insertion of the said section, it became possible to adjust the increase/decrease in liability relating to acquisition of capital assets on account of exchange rate fluctuation, in the actual cost of the assets acquired in foreign currency and for, inter alia, depreciation to be allowed with reference to such increased/decreased cost. This position is also made clear by Circular No. 5-P dated 9.10.1967 issued by CBDT. One more point needs to be mentioned. Section 43A (unamended) corresponds to para 10 of AS-11 similarly providing for adjustment in the carrying cost of fixed assets acquired in foreign currency, due to foreign exchange fluctuation at each balance sheet date. The relevant para reads as follows: "10. Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for. making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies bordered by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets. "
As stated above, what triggers' the adjustment in the actual cost of the assets, in terms of unamended Section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for Section 43A which corresponds to para 10 of AS-11 such adjustment in the carrying
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 9 amount of the fixed assets was not possible, particularly in the light of Section 43(1). The unamended Section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended Section 43A were ''for making payment" and not "on payment" which is now brought in by amendment to Section 43A vide Finance Act, 2002. 34. Lastly, we are of the view that amendment of Section 43A by the Finance Act, 2002 w.e.f. 1.4.2003 is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended Section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended Section 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words "at the time of making payment". In other words, under the unamended Section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended Section 43A w.e.t 1.4.2003 such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in Section 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature. Conclusion: 35. For reasons given hereinabove, we find no infirmity in the impugned judgments of the Delhi High Court and accordingly the Civil Appeals filed by the Department stand dismissed with no order as to costs."
Relying on the ratio of the Hon’ble Apex Court referred herein above the ld. CIT(A) deleted the said disallowance observing as follows:- “In view of the above discussion and relying on the provisions of the law and the judicial pronouncements referred, it is held that the foreign exchange fluctuation loss of Rs. 1,95,47,000/- was correctly claimed' by the appellant on the strength of the provisions contained
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 10 in AS-ll issued by the ICAI and that the AO has incorrectly invoked the provisions of Section 43A which are applicable to capital assets to revenue account transactions. Accordingly, the disallowance of Rs.95,47,000/-made by the AO is, hereby, deleted and this ground of appeal is allowed.
The above findings of the ld. CIT(A) remains uncontroverted by the ld. DR. We, therefore, find no infirmity in the impugned findings of the ld. CIT(A) and hold that alleged foreign exchange fluctuation loss was correctly claimed by the assessee following the Accounting Standard (AS) 11 issued by Institute of Chartered Accountants of India (ICAI). This loss is notional in nature as the assessee has actually not incurred such loss and has been provided in the books to show the true and fair picture of the financial statements. Thus finding of ld. CIT(A) is confirmed and all the grounds raised by the revenue for AY 2014-15 are dismissed. 12. Now we take up the assesee’s appeal for the AY 2012-13 in ITA No. 463/Gau/2019. 13. The sole grievance by the assessee is against the finding of the ld. CIT(A) confirming the disallowance of foreign exchange fluctuation loss at Rs.70,31,000/-. We find that similar issue was raised by the revenue for the AY 2014-15, which we have already adjudicated confirming the finding of the ld.CIT(A) and held that such claim of foreign exchange fluctuation loss on outstanding forex payable for sundry creditors, which are notional in nature are allowable as they are provided in the books of account in order to prepare true and fair financial statements by applying Accounting Standard(AS)-11. We thus apply our decision mutatis and mutandis on the sole issue raised in the assessee’s
ITA No.463.Gau/2019 AY 2012-13 ITA No. 211/Gau/2019 AY 2014-15 Assam Carbon Products Ltd Page 11 appeal for the AY 2012-13 in ITA No. 463/Gau/2019 and reverse the finding of ld. CIT(A) and delete the alleged disallowance. 14. In the result, the revenue’s appeal for the AY 2014-15 is dismissed and that of assessee’s appeal for the AY 2012-13 is allowed आदेश खुले �यायपीठ म� �दनांक -11- 2022 को उ�घो�षत। Order pronounced in open court on 30 -11-2022
Sd/- Sd/- (SONJOY SARMA) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Kolkata/ कोलकाता �दनांकः- 30 /11/2022
**PP/Sr.PS आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant/Department- I.T.O Ward 3(1),Guwahati/DCIT, Cir-3,Guwahati Guwahati,Room No. 710, 7th Fl., Aaykar Bhawan, G.S Road, Guwahati-781005 Mukand Poly Products,3rd Fl., Royal Arcade, B. Baruah Road, Ulubari, Guwahati, Kamrup, Assam-781 007. 2. ��यथ�/Respondent/Assessee-M/s. Assam Carbon Products Ltd, Bikruchi, Narengi, Chandrapur, Guwahati-781026 3.. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT,Guwahati. 6. गाड� फाइल / Guard file. /True Copy/ By order/आदेश से, सहायक पंजीकार आयकर अपील�य अ�धकरण,कोलकाता ।