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2020 (10) TMI 420 - HC - Income TaxPremium for hedging foreign exchange fluctuations on loans taken for the purpose of appellant's business - whether a capital loss by treating it as capital expenditure u/s 43A - asset was purchased within India - HELD THAT - The findings/observations made ELECON ENGINEERING CO. LTD. 2010 (2) TMI 23 - SUPREME COURT would squarely cover the case of the assessee - nature of transaction in the said judgment was identical to that of the transaction done by the assessee herein - exchange difference is required to be capitalized because liability has been incurred by the assessee for the purpose of acquiring fixed asset namely plant and machinery. The decision of the Hon'ble Supreme Court in the case of Elecon Engineeing Co. Ltd., was followed in the case of CIT Vs. Indian Rayon Industries Ltd. 2010 (3) TMI 299 - BOMBAY HIGH COURT . The decision of the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. Vs. CIT 1996 (12) TMI 6 - SUPREME COURT would also support the stand taken by the Revenue by treating the expenditure as capital expenditure. In the decision of this Court in the case of Tube Investments of India Vs. JCIT 2014 (3) TMI 731 - MADRAS HIGH COURT the question was as to whether the Tribunal was right in confirming the disallowance of interest and additional expenditure incurred on account of exchange fluctuation. It was held that if any part of the loan was not used for purchase of a capital asset, the corresponding loss had to be treated as a capital expenditure - Decided against assessee.
Issues Involved:
1. Disallowance of premium paid towards hedging foreign exchange fluctuations on loans. 2. Classification of the premium as capital or revenue expenditure under Section 43A of the Income Tax Act, 1961. 3. Applicability of Section 43A when the asset is purchased within India. 4. Entitlement to depreciation if the premium is treated as capital loss. Issue-wise Detailed Analysis: 1. Disallowance of Premium Paid Towards Hedging Foreign Exchange Fluctuations on Loans: The primary issue revolves around the disallowance of ?36,33,333/- paid by the assessee towards the premium for hedging foreign exchange fluctuations on loans taken for business purposes. The Tribunal treated this amount as capital expenditure under Section 43A of the Income Tax Act, 1961, leading to its disallowance as a revenue expense. 2. Classification of the Premium as Capital or Revenue Expenditure Under Section 43A: The assessee argued that the foreign exchange fluctuation on the loan taken for business purposes could not be brought under Section 43A, which applies when an asset is acquired from outside India. However, the Tribunal concluded that the loss suffered was a capital loss. The assessee's alternate submission was that if treated as a capital loss, the benefit of depreciation should be allowed. 3. Applicability of Section 43A When the Asset is Purchased Within India: The court noted that the assessee availed a loan in Indian currency, which was later converted into a foreign currency loan to save interest, resulting in the premium payable on the forward contract. The Supreme Court's decision in ACIT Vs. Elecon Engineering Co. Ltd. was cited, emphasizing that exchange differences should be capitalized if the liabilities are incurred for acquiring fixed assets. The purpose of the loan, whether for financing fixed assets or working capital, is crucial. 4. Entitlement to Depreciation if the Premium is Treated as Capital Loss: The court held that the exchange difference must be capitalized as the liability was incurred for acquiring fixed assets. The Supreme Court's decisions in Elecon Engineering Co. Ltd. and Punjab State Industrial Development Corporation Ltd. supported the view that such expenditure should be treated as capital expenditure. The court also referenced the decision in Tube Investments of India Vs. JCIT, which reinforced that exchange fluctuations related to capital assets should be capitalized. Conclusion: The court concluded that the substantial question of law must be answered against the appellant-assessee. The appeal was dismissed, affirming the Tribunal's decision to treat the premium paid towards hedging foreign exchange fluctuations as capital expenditure under Section 43A, and thus, disallowing it as a revenue expense. The assessee was not entitled to treat the premium as a revenue expenditure or claim depreciation on it as a capital loss.
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