2014 (10) TMI 846 - AT - Income Tax

Loss on account of exchange fluctuation - Allowable deduction while computing income under the head Profits and gains of business - Held that - On a reading of the assessment order and the letter issued by the Corporation Bank, Credit Division (Sanctions), it is clear that the assessee did not utilise foreign currency term loan for acquiring capital asset in India. The assessee has obtained term loans in Indian currency from the Corporation Bank acquired the assets and later on the outstanding liability of three term loans was converted into foreign currency term loan. The assessee has not acquired assets from outside India, therefore the provisions of section 43A which provides for adjustment of rate of exchange in currency to the actual cost has no application in the assessee s case as the provisions of section 43A applies to an assessee who has acquired any asset in any previous year from the country outside India and increase in liability in consequence of any change in the rate of exchange during that previous year after acquisition of such asset. Even the definition of actual cost in section 43A does not provide for any increase or reduction due to exchange rate fluctuation on account of the assessee converting its Indian term loans into foreign currency term loan. The assessee is consistently following the method of showing gain/loss on account of exchange fluctuation as revenue loss following the Accounting Standard 11. As submitted by the counsel, the assessee had in fact shown gain in exchange fluctuation during the assessment year 2008-09 and also in the assessment year 2010-11. In such circumstances, the loss on account of exchange fluctuation cannot be treated as capital loss - Decided in favour of assessee.

Summary

Issues:
Allowability of deduction for exchange rate fluctuation loss on foreign currency term loan while computing income under "Profits and gains of business".

Analysis:
The appeal was filed against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2009-10. The main contention was regarding the disallowance of the exchange rate fluctuation loss on a foreign currency term loan amounting to Rs. 1,20,69,785 as a capital loss instead of a revenue loss. The Assessing Officer disallowed the loss, stating it was a capital loss, and the Commissioner of Income-tax (Appeals) upheld this decision. The assessee argued that the loss should be considered a revenue loss as it arose from exchange rate fluctuation on term loans converted into foreign currency, which was consistently accounted for as revenue loss following Accounting Standard 11.

The counsel for the assessee referred to section 43A of the Income-tax Act, stating that these provisions apply only when assets are purchased from outside India in foreign exchange, which was not the case for the assessee. The assessee had acquired assets in India using term loans from banks, and later converted these loans into foreign currency loans, accounting for exchange gain/loss as revenue. The Tribunal observed that the assessee did not utilize the foreign currency term loan for acquiring capital assets in India, as the original term loans were in Indian currency. Therefore, section 43A, which deals with adjustments of exchange rates for actual cost, did not apply in this situation.

The Tribunal noted that the assessee consistently treated exchange fluctuation gain/loss as revenue following Accounting Standard 11, and had shown gains in previous assessment years. The Tribunal concluded that since the assessee did not acquire assets from outside India, the exchange rate fluctuation loss could not be treated as a capital loss. Accordingly, the grounds of appeal raised by the assessee were allowed, and the appeal was allowed in favor of the assessee.

In conclusion, the Tribunal held that the exchange rate fluctuation loss on the foreign currency term loan should be considered a revenue loss and allowed as a deduction while computing income under the head "Profits and gains of business" for the relevant assessment year.