2022 (9) TMI 1539 - HC - Income Tax

Foreign exchange gain on restatement of external commercial borrowings - Whether liable to tax as it is on the capital account? - Assessee s case is, it has borrowed funds for external commercial borrowing to avail capital assets. In the restatement of the account to be made every year, there is bound to be a change in the value of the borrowings in view of fluctuation in the foreign exchange - HELD THAT - ITAT in its order has referred to CIT(A)'s order and rightly recorded that the fluctuation in the rates of foreign exchange can result in either a gain or a loss because of value of the currency which appreciates or depreciates on the date of computation namely 31st March of the relevant accounting year. Placing reliance on CIT vs. Woodward Governor India (P) Limited 2009 (4) TMI 4 - SUPREME COURT ITAT has held that the adjustment on account of foreign exchange rate fluctuation is required to be made to actual cost at the end of every year after amendment of Section 43A with effect from 01.04.2003 and upheld CIT(A)'s order that the gain arising on account of exchange fluctuation are not liable to tax as it is on the capital account. MAT computation - brought forward book loss in computation of income and Section 115JB - HELD THAT - As perused the explanation to Section 115JB of the Act. Clause 2(iii) of Explanation 1 (i) of Section 115JB makes it clear that the amount of loss brought forward or unabsorbed depreciation whichever is less as per the books of accounts must be permitted to be set off. The CIT(A) and the ITAT placing reliance on CBDT Circular No.495 dated September 22, 1987, have rightly held that the cumulative brought forward losses or unabsorbed depreciation should be considered for set off. In view of unambiguous language employed in the statute, no exception can be taken with ITAT s order confirming the CIT(A) s order holding that the assessee is entitled to claim set off. So far as the actual amount is concerned, the ITAT has remitted the matter to the Assessing Officer. However, on principle, the ITAT has rightly held that the assessee is entitled to claim set off. Substantial questions of law are answered in favour of the assessee and against the Revenue.

Summary

Issues:
1. Taxability of foreign exchange gain on restatement of external commercial borrowings.
2. Entitlement of set off of brought forward Book Loss in the computation of income under Section 115JB of the Income Tax Act.

Analysis:

Issue 1: Taxability of Foreign Exchange Gain

The appeal challenged the order regarding the disallowance of a foreign exchange gain of Rs. 29,83,65,068/- by the Revenue. The contention was whether the gain made on restatement of external commercial borrowings is taxable, even when the assessee failed to provide evidence to substantiate the claim. The Revenue argued that since the assessee gained the amount, it should be taxable. Conversely, the respondent argued that such gains or losses should be kept to the capital account and are not taxable. The court referred to the fluctuation in foreign exchange rates, citing the Woodward Governor India case, and held that the gain arising from exchange fluctuation is on the capital account and not liable to tax.

Issue 2: Entitlement of Set Off of Brought Forward Book Loss

The second substantial question revolved around whether the assessee is entitled to set off a Book Loss of Rs. 36,33,40,000/- in the computation of income under Section 115JB of the Income Tax Act. The Revenue contended that the loss claimed was impermissible as the CBDT circular referred to the relevant year and not the previous year. However, the respondent argued that as per the statute, the brought forward losses or unabsorbed depreciation should be considered for set off. The court examined the Explanation to Section 115JB and upheld that the assessee is entitled to claim set off, remitting the actual amount determination to the Assessing Officer.

In conclusion, the court dismissed the appeal, answering the substantial questions of law in favor of the assessee and against the Revenue, with no costs awarded.