2020 (10) TMI 1164 - HC - Income Tax

Premium for hedging foreign exchange fluctuations on loans - capital expenditure u/s 43A - depreciation claim - appellant's business is a capital loss by treating it as capital expenditure u/s 43A when an asset was purchased in India - Tribunal having held that the premium on forward contract was not liable as Revenue expenditure, the same is to be added to the cost of the capital assets on which depreciation is to be allowed is not a correct proposition, since there is no provision under the Act which allows such expenses - as contended that the assets was purchased in India based on the loan taken in Indian Currency only and the premium paid on forward contract is not even remotely connected with the cost of the asset and therefore, allowing depreciation does not arise - HELD THAT - Initially the loan was borrowed by the assessee from State Bank of India in Indian Currency, subsequently, the loan was converted into a Foreign Currency loan and the assessee has paid the premium of ₹ 1.9 lakhs and mark the premium paid over a period of three years and one-third of premium to the extent of ₹ 36,33,333/-. It cannot be said that the loan borrowed in Foreign currency is not even remotely connected with the cost of the asset when it is an admitted position that the loan was borrowed for acquiring a capital asset. Therefore, the assessee cannot be put to disadvantage on both grounds. So far as the claim of the assessee that the expenses is Revenue in nature, it was rejected by the Tribunal and we have confirmed the said decision M/S. CONTINUUM WIND ENERGE (INDIA) PVT. LTD. (FORMERLY KNOWN AS M/S. SURAJBARI WINDFARMS DEVELOPMENT PVT. LTD.) 2020 (10) TMI 420 - MADRAS HIGH COURT . So far as the claim for depreciation, the Tribunal rightly took note of the facts of the case and observed that the loss suffered in Foreign Exchange Fluctuations would definitely increase the cost of the project to the extent of loss suffered by the assessee. Tribunal was right in allowing the plea of depreciation raised by the assessee. - Decided against the Revenue.

Summary

Issues Involved:
1. Whether the Tribunal was right in directing the AO to allow depreciation by adding the premium on forward contract to the cost of the asset under Section 43A of the Income Tax Act, 1961.
2. Whether the premium paid on forward contract should be allowed even if it is not connected with the cost of any assets.
3. Whether the benefit provided in Section 43A, which relates to additions made to the cost of assets on account of exchange fluctuation, could be extended where no assets were purchased outside the country.

Issue-wise Analysis:

Issue 1: Allowance of Depreciation by Adding Premium on Forward Contract to the Cost of the Asset
The Tribunal directed the AO to allow depreciation by adding the premium on forward contracts to the cost of the asset, despite the assets not being acquired from outside India. The Tribunal held that the premium paid by the assessee was in the course of setting up a project, making the loss a capital loss. The Tribunal further reasoned that the loss suffered in foreign exchange fluctuation would increase the cost of the project, thus entitling the assessee to depreciation on the enhanced value of the asset. This decision was based on the precedent set by the Bangalore Bench in the case of JSW Steel Ltd.

Issue 2: Premium Paid on Forward Contract
The Revenue contended that the premium paid on forward contracts should not be allowed as it was not connected with the cost of any assets. However, the Tribunal noted that although the loan was initially borrowed in Indian currency, it was later converted into a foreign currency loan. The premium paid, therefore, was connected with the cost of acquiring a capital asset, justifying the allowance of depreciation on the enhanced value.

Issue 3: Application of Section 43A
The Revenue argued that Section 43A, which deals with additions to the cost of assets due to exchange fluctuation, should not apply as no assets were purchased outside the country. The Court, however, referred to previous judgments, including the Supreme Court's decision in Elecon Engineering Co. Ltd., which stated that exchange differences should be capitalized if the liabilities were incurred for acquiring fixed assets. The Court concluded that the exchange difference is required to be capitalized because the liability was incurred for acquiring a fixed asset, namely plant and machinery.

Conclusion:
The Court upheld the Tribunal's decision, agreeing that the loss suffered in foreign exchange fluctuation should be capitalized and added to the cost of the project, thereby allowing depreciation on the enhanced value of the asset. The Court dismissed the Revenue's appeal, answering the substantial questions of law against the Revenue and confirming that the Tribunal's interpretation and application of Section 43A were correct.