Sec 37 Foreign Exchange Fluctuations allowable as Revenue Expense
IN THE INCOME TAX APPELLATE TRIBUNAL
The Relevant Text of the Order as follows :
9. Regarding the issue involved in Ground No. 7 in A. Y. 2012 – 13 in respect of order of learned CIT (A) in deleting the disallowance made by the AO of Rs. 39,32,28,754/- being Forex Loss by holding that the judgment of Hon’ble Apex Court rendered in the case of Woodward Governor India Pvt. Ltd., 312 ITR 254 is not applicable in this regard, we find that in para 8.5 on page 17 of the assessment order, the AO has observed that the issue involved is loss or gain on reinstatement of capital loans not falling within the ambit of section 43A and has also observed that the issue involved is about forex losses on ECB loans which were utilised for acquiring machinery in India and not abroad. Finally, in para 8.8 on page 18 of the assessment order, the AO disallowed this loss by holding that this loss is ineligible for claim as revenue as neither the Act nor the judicial understandings provide for it. This disallowance was deleted by CIT (A) by following the judgment of Hon’ble apex court rendered in the case of Woodward Governor India Pvt. Ltd. (Supra). Learned CIT (A) has also noted in para 7.10 of the impugned order that in earlier years also, there is no disallowance of forex loss and similar forex gain was also offered to tax by the assessee in various years. We also find that in para 10.8 of the tribunal order in assessee’s own case for A. Ys. 2013 – 14 & 2014 – 15, this issue was decided by the tribunal in favour of the assessee and for ready reference, we reproduce this para of the tribunal order from pages 150 to 151 of the case law paper book filed with written submissions dated 24.08.2020.
10.8 We have heard the rival submissions and perused the record. The Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT reported in (1979) 116 ITR 1 held as under:
“The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee of account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature”.
The ratio of the above decision is whether the gain or loss should be brought to tax or allowed as deduction depends upon whether the foreign currency transactions were carried on account of capital or revenue items. If the foreign currency transactions are undertaken on capital account, the gain made out of such transaction is outside ambit of taxation, of course subject to the application of provisions of section 43A of the Act. If the transactions undertaken are on account of revenue items, the gain is clearly taxable and so the loss also is clearly allowable. In the present case, in the assessment year 2013-2014, Rs.18.12 crore represent the notional forex loss that is reinstatement of loan as on 31st March by marking to marketing rate and the balance amount is incurred on actual payment made during the year. In the assessment year 2014-2015, Rs.25.55 crore represent notional forex loss as above and balance amount is incurred on actual payment during the year. The Assessing Officer except making bald assertion that the transactions were undertaken on account of capital items no evidence was brought on record to establish that the foreign currency transactions were undertaken on capital items.
The Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 had already held that the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions at the end of the closing year. We are, therefore, unable to concur or agree with the view of the Assessing Officer that liability could arise only when the contract would have matured as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Apex Court in the case of Woodward Governor India Pvt. Ltd. (supra). It is also not in dispute that assessee is following the mercantile system of accounting consistently. The foreign exchange loss is due to the reinstatement of the accounts at the end of the financial year as well as loss incurred on account of exchange fluctuation on repayment of borrowings is similar to the interest expenditure and it is to be allowed as revenue expenditure u/s 37 of the I.T.Act, as per the accounting standard approved by the Institute of Chartered Accountants of India. Hence, we do not find any infirmity in the finding of the CIT(A) on this issue and confirm the same. This ground of appeals of the Revenue is dismissed.”
10. As per above para, it is seen that the tribunal decided similar issue in favour of the assessee by following the judgment of Hon’ble Apex Court rendered in the case of Woodward Governor India Pvt. Ltd. (Supra). Learned DR of the revenue could not point out any difference in facts in the present year as compared to these two years for which the tribunal order is available.
11. Regarding the applicability of section 43A, we find that this is stated by the AO in the assessment order itself that this section is not applicable. In spite of this, being final fact finding authority, we made efforts to examine the facts and found that although there was import of capital assets in those years when ECB loans were borrowed but there was substantial exports also and the assertion of the assessee is this that such export proceeds were used for import of capital assets and ECB loan was not used for that purpose and the learned DR of the revenue could not bring any evidence on record to show that ECB loans were used for import of capital goods. Under these facts, we have no hesitation in holding that this issue is covered in favour of the assessee by the tribunal order in assessee’s own case for A. Ys. 2013 – 14 & 2014 – 15 (Supra) and respectfully following the same, we decline to interfere in the order of CIT (A) on this issue and accordingly, Ground Nos. 7 in A. Y. 2012 – 13 is rejected. We find that in A. Y. 2011 – 12 also, similar Ground No. 7 is raised by the revenue but in this year, this ground is not arising out of the order of CIT (A) because in this year, there is no similar disallowance made by the AO and hence, this ground in A. Y. 2011 – 12 is rejected for this reason that this ground is not arising out of the order of CIT (A).
12. In the result, both appeals of the revenue are partly allowed.
Pronounced in the open court on the date mentioned on the caption page.