2012 (11) TMI 544 - AT - Income Tax

Revenue expenditure versus capital expenditure - application of AS-11 - foreign exchange loss on conversion of rupee term into foreign currency loan - Held that - Foreign Exchange Loan was taken in connection with conversion of a rupee term loan into a foreign currency loan. The purpose of the loan was for purchase of machinery which is on capital account. Therefore, the sum in question cannot be claimed as deduction. The sum in question cannot also be capitalised to the value of the machinery for the reason that the machinery has already been put to use - Decided against the assessee. The decision of the Hon ble Supreme Court in the case of Woodward Governor India Pvt.Ltd. 2009 (4) TMI 4 - SUPREME COURT would apply only in respect of exchange fluctuation on loans taken for revenue purposes.

Summary

Issues Involved:
1. Disallowance of foreign exchange loss on conversion of rupee term loan into foreign currency loan.
2. Liability to pay interest under section 234B of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Foreign Exchange Loss on Conversion of Rupee Term Loan into Foreign Currency Loan

Background:
The assessee, a company engaged in the manufacture of plywood and other products, had debited a sum of Rs.12,53,860/- to the profit & loss account under the head "exchange fluctuation loss." Out of this, Rs.10,00,941/- represented the forward contract premium for converting a rupee term loan into a foreign currency loan (FCL) to benefit from lower interest rates. The rupee term loan was initially taken for purchasing plant and machinery.

Assessing Officer's (AO) Stand:
The AO disallowed the foreign exchange loss, considering it capital in nature, not revenue expenditure. The AO's rationale was that repayment of the loan is capital in nature, thus the exchange loss on the loan amount is also not allowable as an expenditure.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, stating that while accounting standards (AS-11) may be mandatory for accounting purposes under company law, they are not binding for determining taxable income under the Income Tax Act. The CIT(A) observed that the loan was intended for purchasing capital assets (plant and machinery), and hence, the exchange fluctuation loss is capital in nature and disallowable.

Tribunal's Analysis:
- The Tribunal noted that the sum of Rs.10,00,941/- was a premium paid on a forward contract to secure against adverse foreign exchange fluctuation, not an actual exchange fluctuation loss.
- The Tribunal highlighted that Section 43A of the Income Tax Act, which deals with adjustments to the cost of assets due to foreign exchange fluctuations, was not applicable as the machinery was not purchased from outside India and the sum in question was a premium, not a loss due to fluctuation.
- The Tribunal referred to AS-11 and AS-16 and concluded that neither standard supported the assessee's claim for deduction. AS-11 deals with actual exchange differences, not premiums on forward contracts, and AS-16 pertains to borrowing costs, which were not applicable in this context.
- The Tribunal also referenced the Supreme Court's decision in Woodward Governor India Pvt. Ltd., which allows for exchange fluctuation losses on revenue account loans, but found it inapplicable as the loan in question was for capital purposes.

Conclusion:
The Tribunal confirmed the order of the CIT(A), disallowing the foreign exchange loss on the grounds that it was capital in nature, related to the purchase of capital assets, and not allowable as a revenue expenditure.

2. Liability to Pay Interest Under Section 234B of the Income Tax Act, 1961

Assessee's Claim:
The assessee denied the liability to pay interest under section 234B, arguing that the interest was levied erroneously.

Tribunal's Analysis:
- The Tribunal did not provide a detailed separate analysis on this issue within the judgment text, implying that the primary focus was on the disallowance of the foreign exchange loss.
- Given the confirmation of the CIT(A)'s order on the main issue, it can be inferred that the Tribunal also upheld the interest liability under section 234B as a consequence of the primary disallowance.

Conclusion:
The appeal by the assessee was dismissed, and the liability to pay interest under section 234B was implicitly upheld.

Final Judgment:
The appeal by the assessee was dismissed, confirming the CIT(A)'s order that disallowed the foreign exchange loss as capital in nature and upheld the liability to pay interest under section 234B.