2021 (1) TMI 89 - AT - Income Tax

Disallowance of foreign exchange fluctuation under the head finance cost - CIT-A held that in the absence of applicability of section 43A to the foreign exchange loss arising out of foreign currency loans for acquisition of indigenous assets, the claim of exchange fluctuation loss in revenue account by assessee is in accordance with generally accepted accounting practices and mandatory accounting standards notified by ICAI and also in conformity with CBDT notification cannot be faulted - HELD THAT - Tribunal in the case of M/s.Hyundai Motor Company Ltd. Vs. DCIT 2017 (4) TMI 1193 - ITAT CHENNAI where the Tribunal considering ratio laid down by the Supreme Court in the cases of CIT vs. Tata Iron Steel Co.Ltd. 1997 (12) TMI 5 - SUPREME COURT and M/S WOODWARD GOVERNOR INDIA P. LTD 2009 (4) TMI 4 - SUPREME COURT held that in absence of applicability of section 43A and in the absence of any other provision of the Income Tax Act dealing with the issue of forex loss, the claim of exchange fluctuation loss taken by the assessee cannot be treated as capital in nature and added back to cost of assets. Thus we are of the considered view that there is no error in the findings recorded by the learned CIT(A) that in absence of applicability of section 43A of the Act, loss claimed by the assessee on account of exchange fluctuation loss on ECB loan availed for acquisition of indigenous assets revenue in nature deductible u/s.37(1) of the Act cannot be considered as capital in nature and added back to the cost of assets. Hence, we are inclined to uphold the findings of the learned CIT(A) and reject the grounds taken by the Revenue for both the assessment years. Admission of additional claim made by the assessee - Disallowance of deduction against interest expenses which was voluntarily added in the statement of total income - HELD THAT - The failure to advert to claim in original return or revised return cannot denude the appellate authorities of their power to consider their claim, if the relevant materials available on record and the claim is otherwise tenable in law. The learned CIT(A) after considering case of M/s. Goetz (India) Ltd Vs. CIT 2006 (3) TMI 75 - SUPREME COURT and the decision of CIT vs Abhinitha Foundation Pvt Ltd 2017 (6) TMI 604 - MADRAS HIGH COURT has rightly admitted the additional claim made by the assessee regarding deduction for interest expenditure on forex loan and remitted the issue back to the file of the Assessing Officer for verification of facts to decide in accordance with law. We do not find any error or infirmity in the findings recorded by the learned CIT(A) and hence, we are inclined to uphold the findings of the learned CIT(A) and reject the grounds taken by the Revenue.

Summary

Issues Involved:
1. Disallowance of foreign exchange fluctuation loss under the head finance cost.
2. Deduction of interest expenses voluntarily offered in the original return of income.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss:

The primary issue is whether the foreign exchange fluctuation loss incurred due to the restatement of an External Commercial Borrowing (ECB) loan for acquiring indigenous assets should be treated as a revenue expense deductible under Section 37(1) of the Income Tax Act or as a capital expense.

The assessee, engaged in manufacturing phosphatic fertilizers, acquired a business through a slump sale and financed this acquisition using an ECB loan. The forex loss from restating this loan was claimed as a revenue expense. The Assessing Officer disallowed this, treating it as a capital expense, not deductible under Section 37(1).

The CIT(A) reversed this decision, relying on the Supreme Court's rulings in CIT vs. Tata Iron & Steel Co. Ltd. and CIT vs. Woodward Governor India P. Ltd., which support treating such forex losses as revenue expenses when Section 43A is not applicable. The CIT(A) also referenced ITAT Chennai's decision in M/s. Hyundai Motor Company Ltd. vs. DCIT, which upheld the revenue nature of such forex losses.

The Tribunal upheld the CIT(A)'s decision, reiterating that in the absence of Section 43A's applicability, the forex loss on ECB loans for indigenous assets should be treated as revenue in nature and deductible under Section 37(1). The Tribunal emphasized that the loss was not contingent but an accrued liability, and the accounting treatment under AS-11 and CBDT notifications supported this view.

2. Deduction of Interest Expenses Voluntarily Offered:

The second issue concerns the deduction of interest expenses on the forex loan, which the assessee had inadvertently added to its total income in the original return. The assessee later sought to rectify this during the assessment proceedings without filing a revised return.

The Assessing Officer rejected this claim, citing the Supreme Court's decision in Goetz (India) Ltd., which restricts the Assessing Officer from entertaining fresh claims without a revised return.

However, the CIT(A) allowed the claim, noting that the appellate authorities are not bound by this restriction and can admit new claims if the facts are already on record. The CIT(A) referenced the ITAT Chennai's decision in R. Natarajan vs. ACIT and the Madras High Court's ruling in CIT vs. Abhinitha Foundation Pvt Ltd., which support the appellate authorities' power to consider such claims.

The Tribunal upheld the CIT(A)'s decision, agreeing that the claim was not a fresh one but a correction of an inadvertent mistake. The Tribunal directed the Assessing Officer to verify the claim and allow the deduction if found correct.

Conclusion:

The Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s decisions on both issues. The forex loss on ECB loans for acquiring indigenous assets was deemed a revenue expense deductible under Section 37(1), and the interest expense claim was admitted for verification and potential deduction.