2017 (1) TMI 947 - AT - Income Tax

Loss on exchange rate fluctuation - AO disallowing a loss resulting on account of fluctuation in foreign exchange rate on the closing date of the year under consideration primarily on the ground that it was a contingent liability and notional in nature - Held that - The aforesaid stand of the Assessing Officer is clearly in contrast to the decision of the Special Bench of the Tribunal in the case of Oil & Natural Gas Corporation Ltd. vs. DCIT (2002 (8) TMI 802 - ITAT DELHI). Moreover the CIT(A) has also relied upon the judgment of the Hon ble Supreme Court in the case Woodward Governor India Ltd., (2007 (4) TMI 118 - DELHI HIGH COURT) to say that loss arising on reinstatement of foreign currency loss utilized for the purposes of business could not be construed as contingent or notional in nature. In the present case assessee is following mercantile system of accounting and under these situation in our view the CIT(A) made no mistake in treating such loss as revenue in nature. The other plea of the Assessing Officer that since loss related to raising of foreign currency loans for acquiring an asset such loss on account of rate fluctuation should go to add to the cost of the asset in terms of section 43A of the Act is also not tenable. Quite clearly section 43A of the Act deal with an asset acquired by the assessee from a country outside India and in the present case it has been found by the CIT(A) that the asset acquired by the assessee by utilizing the foreign currency loans was from within India. Therefore the CIT(A) made no mistake in allowing the claim of the assessee - Decided in favour of assessee Determination of deduction under section 10A of the Act in relation to the STPI unit - Held that - Having regard to the judgments of the Hon ble Bombay High Court in the cases of Black And Veatch Consulting Pvt. Ltd. (2012 (4) TMI 450 - BOMBAY HIGH COURT ) and Techno Trap and Polymers Pvt. Ltd.(2015 (12) TMI 909 - BOMBAY HIGH COURT) we find no error on the part of the CIT(A) in directing the Assessing Officer to determine the deduction under section 10A of the Act before reducing the loss of the other unit. Thus Revenue fails on this Ground also. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of unrealized foreign exchange loss for SEZ unit.
2. Disallowance of unrealized foreign exchange loss for STPI unit.
3. Deduction of foreign exchange loss for STPI unit as revenue expenditure.
4. Set-off of SEZ unit loss against STPI unit profit before allowing deduction under section 10A.

Issue-wise Detailed Analysis:

1. Disallowance of Unrealized Foreign Exchange Loss for SEZ Unit:
The Revenue contested the CIT(A)'s decision to delete the disallowance of ?1,35,46,050/- of unrealized foreign exchange loss for the SEZ unit. The Assessing Officer (AO) had disallowed this loss, considering it contingent and notional since it was based on the reinstatement of the ECB loan in foreign currency. The CIT(A) referenced the Supreme Court's judgment in CIT vs. Woodward Governor India Ltd., which established that such losses are not contingent or notional but real and allowable. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to provide a cogent distinction in law or facts to counter this precedent.

2. Disallowance of Unrealized Foreign Exchange Loss for STPI Unit:
The AO disallowed ?73,83,330/- of foreign exchange loss for the STPI unit, arguing it was capital in nature since the ECB loan was used for asset acquisition, thus falling under section 43A. The CIT(A) rejected this, stating section 43A applies only to assets acquired from outside India, whereas the assets in question were acquired domestically. The Tribunal concurred with the CIT(A), noting the AO's failure to contest the factual matrix that the assets were purchased within India.

3. Deduction of Foreign Exchange Loss for STPI Unit as Revenue Expenditure:
The AO had disallowed the foreign exchange loss on the grounds that it was capital in nature, related to the acquisition of assets. The CIT(A), however, treated the loss as revenue expenditure, relying on the Supreme Court's judgment in Woodward Governor India Ltd., which supports the treatment of such losses as revenue in nature under the mercantile system of accounting. The Tribunal agreed with the CIT(A), emphasizing that the loss was not contingent or notional and should be treated as revenue expenditure.

4. Set-off of SEZ Unit Loss Against STPI Unit Profit Before Allowing Deduction Under Section 10A:
The AO had restricted the deduction under section 10A by setting off the SEZ unit's loss against the STPI unit's profit. The CIT(A) ruled that each unit should be treated independently, and the SEZ unit's loss should not be set off against the STPI unit's profit for computing the deduction under section 10A. The Tribunal upheld this view, citing the Bombay High Court judgments in CIT vs. Black And Veatch Consulting Pvt. Ltd. and CIT vs. Techno Trap and Polymers Pvt. Ltd., which clarified that deductions under section 10A should be computed before applying provisions for set-off and carry forward of losses under Chapter VI-A.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all grounds. The foreign exchange losses for both SEZ and STPI units were to be treated as revenue expenditure, and the SEZ unit's loss should not be set off against the STPI unit's profit when computing deductions under section 10A. The judgments of the Bombay High Court were pivotal in these determinations.