2016 (1) TMI 901 - AT - Income Tax

Disallowance of loss of foreign Exchange Fluctuation loss - CIT(A) deleted the addition - Held that - The issue in dispute is squarely covered by the decision of the Hon ble Supreme Court in the case of Wood world Governor India Pvt. Ltd., reported in (2009 (4) TMI 4 - SUPREME COURT) wherein it has been held that increase in liability on revenue account due to foreign exchange fluctuation as per the exchange rate prevailing as on the last day of the financial year was neither notional or a contingent liability and the same, there was allowable as a deduction. We do not find any infirmity in the order passed by the ld.CIT(A) - Decided against revenue Disallowance of depreciation on the opening WDV of P&M in respect of the amount of Custom Duty on import of P&M imported in the year - CIT(A) deleted the addition - Held that - Perusal of the facts on record show that the Hon ble ITAT in the appellant s own case from A. Y. 2003-04 & 2004-05 on identical facts has decided the issue in favor of the appellant stating that the Learned First Appellate Authority is not justified in confirming the disallowance of depreciation. The assessee has capitalized the security deposit by treating it at par with the customs duty. It has waited for 8 long years and when realized that follow up action with the customs department would be a futile exercise only then took a decision of capitalizing this amount on the value of the assets. In case in subsequent years assessee was able to get the amount the it will be offered for taxation or it will be brought to tax under sec. 41(1) of the Act. No prejudice is caused to the revenue if depreciation is allowed by permitting the assessee for capitalizing of this security deposit. - Decided against revenue

Summary

Issues Involved:
1. Deletion of disallowance of foreign exchange fluctuation loss.
2. Deletion of disallowance of depreciation on the opening WDV of Plant & Machinery (P&M) related to customs duty on imported machinery.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Foreign Exchange Fluctuation Loss:

The Revenue challenged the deletion of disallowance of foreign exchange fluctuation loss amounting to Rs. 28,45,070/-, arguing that it was contrary to CBDT Instruction No.3/2010. The assessee had taken a foreign currency loan (ECB) of USD 3 million for working capital, which led to a claimed deduction for notional loss due to foreign exchange fluctuation. The AO disallowed the loss, citing that the loss must be actually suffered in the relevant year, supported by decisions from Indian Overseas Bank and Karam Chand Thapar and Bros.

The CIT(A) reversed the AO's decision, noting that the loan was disbursed and utilized in the relevant financial year, and the devaluation losses were declared in the respective Profit & Loss Accounts. The CIT(A) emphasized the consistency in the assessee's accounting treatment and referenced several judicial decisions, including CIT Vs Woodward Governor India (P) Ltd. and Sutlej Cotton Mills Ltd. Vs CIT, which supported recognizing exchange differences as income or expense in the period they arise.

The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Woodward Governor India Pvt. Ltd., which established that increase in liability due to exchange rate fluctuation as of the financial year-end is neither notional nor contingent and thus allowable as a deduction.

2. Deletion of Disallowance of Depreciation on Opening WDV of P&M:

The Revenue also contested the deletion of disallowance of depreciation amounting to Rs. 5,73,791/- on the opening WDV of P&M related to customs duty paid for machinery imported in 1994-95. The AO disallowed the depreciation, arguing that the assessment by the Customs Department was still pending, and thus the capitalization by the assessee was not in accordance with the law.

The CIT(A) found that the assessee had capitalized the security deposit related to customs duty, treating it as part of the machinery cost, and claimed depreciation accordingly. The CIT(A) noted that the Customs Rules had changed, and the requirement of paying provisional duty and security deposit had been removed. The CIT(A) referenced the ITAT's earlier decision in the assessee's favor for AY 2003-04 and 2004-05, which allowed depreciation on the enhanced value of assets, considering the long wait and futile follow-up with the Customs Department.

The Tribunal agreed with the CIT(A), affirming that the issue was covered by the ITAT's previous decision, and upheld the deletion of the disallowance of depreciation.

Conclusion:

The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s order on both issues. The appeal was pronounced dismissed in the open court on 06.11.2015.