2018 (11) TMI 1790 - AT - Income Tax

Foreign exchange fluctuations on Foreign Currency Convertible Bonds (FCCB) - whether the foreign exchange fluctuation gain/loss on foreign currency loan borrowed to acquire indigenous fixed assets and/or imported fixed assets is chargeable to income tax or is not allowable as a revenue loss? - HELD THAT - We hold that such exchange gain or loss is on capital account and hence it is neither taxable nor a deduction from profits can be allowed on the same. The Ld. Senior Counsel, Mr. J.P. Khaitan was fair enough to submit that the revenue s ground for the Assessment Year 2009-10 has to be allowed in view of this legal position. We reverse the order of the ld. First Appellate Authority and uphold the finding of the Assessing Officer for the Assessment Year 2009-10 that the assessee is not eligible for claim of deduction on account of exchange fluctuation loss. Similarly, the exchange fluctuation gain for the Assessment Year 2010 -11, cannot be brought to tax as the same is on capital account, by applying the same principles of law. This claim of the assessee can be entertained by the ITAT in view of the judgment of the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. vs Commissioner Of Income Tax 1996 (12) TMI 7 - SUPREME COURT . Hence this additional ground of the assessee is allowed. Disallowance of foreign exchange loss - HELD THAT - We find that this issue is covered in favour of the assessee by the decision of the ITAT, Kolkata B Bench of the Tribunal in the case of Hindustan Gum Chemicals Pvt. Ltd. 2017 (3) TMI 1173 - ITAT KOLKATA . Applicability of Section 40(a)(i) - HELD THAT - Gains/loss is on capital account and no deduction is admissible for the Assessment Year 2009-10, the question of disallowance u/s 40(a)(i) of the Act, does not arise. Allowability of the claim of the assessee for deduction of premium payable on redemption of FCCB bonds - HELD THAT - Liability is not a contingent liability. Deduction is liable on yearly basis as the liability accrues on time basis. The Hon ble Calcutta High Court in the case of National Engg. Industries Ltd. v. Commissioner of Income-tax 1998 (9) TMI 65 - CALCUTTA HIGH COURT is relied in this regard. The Hon ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. 1997 (4) TMI 5 - SUPREME COURT laid down the principle that, deduction should be allowed on pro-rata basis over the terms of the bond. Applying the propositions of law in these case-law to the facts of this case, we hold that the deduction in question is allowable. Applicability of provision of Section 40(a)(i) same is not applicable as only a provision has been claimed as a deduction during the year. The provisions relating to tax deduction at source apply only in the year of redemption. On the issue of applicability of Section 43A of the Act, the assessee submits that the imported assets were put to use by March 31st, 2008. The pro-rata premium for the period up to 31st March, 2008, was capitalized by the assessee. The premium relating to the period after the imported assets were put to use did not form part of the actual cost. Hence Section 43A of the Act, does not apply. Disallowance u/s 14A r.w.r. 8D(2)(ii) - HELD THAT - No disallowance can be made u/s 14A r.w.r. 8D(2)(ii) of the Rules, as the presumption is that interest free funds have been utilized for making investments. These principles were laid down by the Hon ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . The Jurisdictional High Court in the case of Principal Commissioner Of Income vs Rasoi Limited, 2017 (2) TMI 863 - CALCUTTA HIGH COURT took the same view.

Summary

Issues Involved:

1. Disallowance of Foreign Exchange Fluctuation Loss.
2. Applicability of Section 43A of the Income Tax Act.
3. Deduction of Premium on Redemption of FCCBs.
4. Disallowance under Section 14A read with Rule 8D.
5. Applicability of Section 40(a)(i) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss:

The assessee claimed a foreign exchange fluctuation loss of ?64,99,577/- for the Assessment Year 2009-10, which was disallowed by the Assessing Officer (AO) on the grounds that it was a notional loss and contingent in nature. The CIT(A) confirmed this disallowance. However, the Tribunal found that the issue was covered in favor of the assessee by a prior decision of the ITAT Kolkata Bench, which allowed such losses as business expenditure. Consequently, the assessee's grounds on this issue were allowed.

2. Applicability of Section 43A of the Income Tax Act:

The assessee issued FCCBs and utilized the proceeds for acquiring capital assets. The AO disallowed the foreign exchange fluctuation loss on the grounds that it was a contingent liability, capital expenditure, and applicable under Section 43A of the Act. The CIT(A) partially upheld the AO's decision but allowed the loss on foreign exchange fluctuations as revenue expenditure for assets acquired within India. The Tribunal upheld that Section 43A applies only to assets acquired outside India and allowed the assessee's claim for assets acquired within India, rejecting the AO's disallowance.

3. Deduction of Premium on Redemption of FCCBs:

The assessee claimed a deduction for the premium payable on redemption of FCCBs on a pro-rata basis over the bond's term. The AO disallowed this claim, considering it contingent and non-debited in the profit and loss account. The CIT(A) allowed the deduction, stating the liability was not contingent and deductible on a yearly basis. The Tribunal upheld this view, relying on the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. v. CIT, which allows such deductions on a pro-rata basis.

4. Disallowance under Section 14A read with Rule 8D:

The AO made disallowances under Rule 8D(ii) for both Assessment Years 2009-10 and 2010-11. The CIT(A) deleted these disallowances, stating that the assessee had sufficient interest-free funds to cover the investments. The Tribunal upheld the CIT(A)'s decision, citing the presumption that interest-free funds were used for investments, as per the Bombay High Court's decision in CIT vs. HDFC Bank Ltd. and the jurisdictional Calcutta High Court's decision in Principal Commissioner Of Income vs. Rasoi Limited.

5. Applicability of Section 40(a)(i) of the Income Tax Act:

The AO contended that the assessee's claim should be disallowed under Section 40(a)(i) due to non-deduction of tax at source. The CIT(A) rejected this, stating that the provision applies only in the year of redemption. The Tribunal agreed, noting that no deduction was admissible for the Assessment Year 2009-10 as the gain/loss was on capital account, making Section 40(a)(i) inapplicable.

Conclusion:

The Tribunal dismissed the revenue's appeals for both Assessment Years 2009-10 and 2010-11, while allowing the assessee's appeals in part. The Tribunal upheld the CIT(A)'s decisions on the key issues, providing relief to the assessee on the disallowance of foreign exchange fluctuation loss and the deduction of the premium on FCCBs. The Tribunal also confirmed the non-applicability of Section 40(a)(i) and upheld the deletion of disallowances under Section 14A read with Rule 8D.