2019 (9) TMI 1116 - AT - Income Tax

Disallowance of foreign exchange fluctuation loss arising out of re-statement of External Commercial Borrowings (ECB) at the year end rates in accordance with Accounting Standard 11 (AS-11) prescribed by the Institute of Chartered Accountants of India (ICAI) - disallowance of foreign exchange loss above by holding that it is capital expenditure and cannot be allowed as deduction u/s.37(1) - HELD THAT - This issue is also squarely covered by the decision of Hon ble Supreme Court in the case of Woodward Governor India Ltd. 2009 (4) TMI 4 - SUPREME COURT wherein among other aspects it was also held that compliance to AS-11 of ICAI is mandatory for all companies registered in India. ECB has been utilized for purchase of capital assets in India by the assessee company. Thereafter any change in the ECB value due to exchange fluctuation would not alter the cost of fixed assets. Reliance in this regard is placed on the decision in the case of Tata Iron and Steel Company Ltd. 1997 (12) TMI 5 - SUPREME COURT Hence it could be safely concluded that exchange loss has got absolutely no bearing / link with the cost of fixed asset. In that scenario the only alternative is to treat the said loss as loss incurred on the revenue field and hence to be allowed as revenue expenditure. In view of the aforesaid observations we find that the decisions relied upon by the revenue are not at all applicable to the facts of the instant case and the decisions relied upon by us herein supra hereinabove would rule the field. Hence we hold that the assessee deserves to be granted deduction towards foreign exchange fluctuation loss for more than one reason as detailed hereinabove. Accordingly the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Disallowance of foreign exchange fluctuation loss under Accounting Standard 11 (AS-11).
2. Justification of treating foreign exchange loss as capital expenditure.

Analysis:

Issue 1: Disallowance of Foreign Exchange Fluctuation Loss under AS-11
The primary issue in this appeal was the disallowance of foreign exchange fluctuation loss amounting to ?2,92,79,250 arising from the restatement of External Commercial Borrowings (ECB) at year-end rates in compliance with Accounting Standard 11 (AS-11) prescribed by the Institute of Chartered Accountants of India (ICAI). The contention revolved around whether this loss should be treated as capital expenditure and hence not allowed as a deduction under Section 37(1) of the Income Tax Act, 1961. The tribunal observed that the assessee had restated ECB at year-end exchange rates and incurred the fluctuation loss, which was debited to the profit and loss account under "Finance Charges." Despite the ECB being utilized for capital expenditure, the tribunal held that the exchange fluctuation loss should be treated as interest liability due to the renegotiation with the foreign lender, who did not charge any interest on the ECB. The tribunal emphasized the mandatory compliance with AS-11 and the consistent treatment of exchange gains and losses by the assessee in previous years, concluding that the loss should be allowed as a deduction.

Issue 2: Treatment of Foreign Exchange Loss as Capital Expenditure
The interconnected issue was whether the foreign exchange loss should be considered as capital expenditure, disallowing its deduction under Section 37(1) of the Act. The Assessing Officer (AO) had argued that since the ECB was used for capital purposes, the exchange loss should also be treated as capital expenditure. However, the tribunal disagreed, stating that the fluctuation loss did not affect the cost of fixed assets and should be considered a revenue expenditure eligible for deduction. Citing the principle of consistency upheld by the Supreme Court and the mandatory nature of AS-11 compliance for Indian companies, the tribunal ruled in favor of the assessee, allowing the deduction for the foreign exchange fluctuation loss. The tribunal also highlighted the irrelevance of Section 43A of the Act in the given scenario, as the assets were purchased only in India, not from abroad, further supporting the allowance of the deduction.

In conclusion, the tribunal allowed the appeal of the assessee, emphasizing the consistent treatment of exchange gains and losses, the mandatory compliance with AS-11, and the distinction between capital and revenue expenditure in determining the eligibility for deduction.