2016 (7) TMI 1264 - AT - Income Tax

Revision u/s 263 - loss on account of foreign exchange fluctuation claimed - conclusion of the CIT in the impugned order that the loss in question is on account capital item - Held that - The assessee gave a detail explanation as to how loss on account of fluctuation of foreign exchange on repatriation of proceeds on issue of FCCB was in the nature of loss and how the claim for deduction made by the assessee was admissible. It is clear from the submissions made by the Assessee that at the time of remittance of money in India, received from issue of FCCB, the dollar value fell from ₹ 45.55 to ₹ 39.37. Due to fall in the rupee value, the amount in the bank account had to be reinstated at the rate of ₹ 39.37. It is also not disputed that the transaction was settled during the year under consideration. As per Accounting Standard -11 The effects of changes in Foreign Exchange Rates , the exchange difference has to be recognized in the profit and loss account. Hence, the above loss being a realized loss was claimed to be allowable as deduction while computing Total Income. As in the case of Mahindra & Mahindra 2009 (10) TMI 639 - ITAT MUMBAI ) though FCCB were convertible into shares at a later point of time, they were in the nature of loan at the time of their issue till conversion and any expenditure incurred in connection with issuing FCCB would be admissible as a revenue expenditure. This principle has been extended to be applicable on account of fluctuation of foreign currency in respect of foreign currency convertible bond FCCB in the case of Mahindra and Mahindra Limited supra . The AO even though has not mentioned the submissions of the assessee in this regard, has nevertheless not made any disallowance of loss on account of foreign exchange fluctuation claimed by the assessee. The conclusion in such circumstances is that AO was satisfied with the claim of the assessee for deduction of the aforesaid sum. It may be that contrary view may also exist on the issue. The view taken by the AO is a possible view and the CIT in exercising of powers cannot seek to substitute his view with that of the AO. - Decided in favour of assessee

Summary

Issues Involved:
1. Allowability of loss on foreign exchange fluctuation as revenue expenditure.
2. Validity of CIT's exercise of power under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Loss on Foreign Exchange Fluctuation as Revenue Expenditure:

The Assessee, a company engaged in manufacturing and executing turnkey projects, claimed a deduction of ?2,97,31,341/- as a loss on foreign exchange fluctuation for the assessment year 2008-09. The significant portion of this loss, ?2,50,94,109/-, was attributed to the fluctuation in the value of Foreign Currency Convertible Bonds (FCCB). The Assessee argued that the loss was a revenue expenditure as it arose due to a fall in the rupee value against the dollar, which was recognized in the profit and loss account as per Accounting Standard-11.

The AO, during the assessment proceedings, issued a notice under Section 142(1) querying the allowability of the said expenditure. The Assessee provided a detailed explanation, referencing judicial pronouncements that supported the treatment of such expenditure as revenue in nature. The AO, after considering the Assessee's submissions, did not disallow the claim, although the assessment order did not explicitly discuss this aspect.

The CIT, however, invoked Section 263, contending that the AO's order was erroneous and prejudicial to the interest of the revenue. The CIT argued that the loss related to capital items and thus should not be allowed as a revenue expenditure. The Assessee countered, citing various judicial decisions, including those from the Supreme Court and High Courts, which supported the view that such losses on FCCB could be treated as revenue expenditure.

2. Validity of CIT's Exercise of Power under Section 263:

The Assessee challenged the CIT's order under Section 263, arguing that the AO had made due inquiries and had taken a possible view supported by judicial precedents. The Assessee cited the principle that if the AO adopts one of the possible views, the CIT cannot invoke Section 263 merely because he disagrees with that view. The Assessee relied on several judicial pronouncements, including Malabar Industrial Co. Ltd vs CIT and CIT vs Gabriel India Ltd., which held that for an order to be revised under Section 263, it must be both erroneous and prejudicial to the interest of the revenue.

The Tribunal observed that the AO had indeed made specific inquiries regarding the loss on foreign exchange fluctuation and had accepted the Assessee's explanation. The Tribunal noted that the AO's acceptance of the Assessee's claim was a possible view, supported by judicial precedents. The Tribunal concluded that the CIT could not substitute his view for that of the AO and that the AO's order was neither erroneous nor prejudicial to the interest of the revenue.

Conclusion:

The Tribunal quashed the CIT's order under Section 263, holding that the AO's assessment order was based on a possible and legally sustainable view. The appeal of the Assessee was allowed, affirming the treatment of the foreign exchange fluctuation loss as revenue expenditure. The Tribunal emphasized that the CIT's disagreement with the AO's view did not justify the invocation of Section 263.