2014 (8) TMI 1192 - AT - Income Tax

Allowability of foreign exchange loss - CIT(A) held that the unrealized foreign exchange loss had resulted on capital account - as per assessee ECB borrowings are on general account of expansion of three existing industrial unit and hence the ECB borrowings are not on capital account - HELD THAT - As during the assessment year 2009-10 the assessee company has claimed foreign exchange loss which consist of loss of reinstatement of outstanding liability on account of ECB loans in foreign currency and the same has been accepted by the department. It is also pertinent to mention that during the previous AYs from 2001-02 to 2006-07 the department has accepted the gain offered by the assessee as income on account of similar foreign exchange fluctuation. When the facts are being we do not find any justification on the part of the authorities below to disallow the loss claimed by the assessee during the year under consideration. AO is directed to verify the correct computation and allow the claim of the assessee accordingly. Appeal filed by the Assessee is treated as allowed.

Summary

Issues Involved:
Allowability of foreign exchange loss incurred by the assessee.

Analysis:
1. The appeal was filed by the assessee against the order of the Ld.CIT(A)-19, Mumbai dated 22.11.2011 for the Assessment Year 2007-08, specifically challenging the disallowance of unrealized foreign exchange loss.

2. The Assessing Officer (AO) disallowed the claim of unrealized foreign exchange loss as a deduction under the Income Tax Act, which was added to the total income of the assessee. The Ld.CIT(A) upheld this decision, stating that the loss resulted on capital account based on previous court decisions and directed the AO to verify the correct computation of the loss.

3. The assessee contended that the ECB borrowings were for the general account of expanding existing industrial units and not on capital account. They argued that the foreign exchange loss should be treated as borrowing cost, not as foreign exchange loss, as per accounting standards. The assessee also highlighted the specific components of the foreign exchange loss.

4. The Tribunal observed that in previous assessment years, similar foreign exchange gains were accepted by the department as income. Considering this, the Tribunal found no justification to disallow the loss claimed by the assessee in the current year. The AO was directed to verify the correct computation and allow the claim accordingly.

5. Ultimately, the Tribunal allowed the appeal filed by the assessee, indicating a favorable decision in favor of the assessee regarding the allowability of the foreign exchange loss incurred during the assessment year.

In conclusion, the judgment revolved around the issue of the allowability of foreign exchange loss incurred by the assessee. The Tribunal overturned the decisions of the lower authorities and directed the AO to verify and allow the claim of the assessee, citing past acceptance of similar gains by the department in previous years. The detailed analysis provided insights into the contentions of both parties and the legal interpretations applied in reaching the final decision.