2014 (2) TMI 1030 - AT - Income Tax

Disallowance of foreign exchange loss Held that - The assessee has taken FCNR (B) loan from banks on 27.01.2000 and the same was utilized for repayment of 15% Unsecured Redeemable Non-Convertible Debentures of Rs.10 crores - The amount was an actual expenditure incurred by the assessee for the purchase of forward contracts for repayment of FCNR (B) loan thus, it was not a notional or contingent but actual expenditure - by taking FCNR (B) loan, the assessee has not acquired any fixed asset in foreign currency either in earlier years or in the current years - The provisions of section 43A of the Act could not apply to the facts of the case as the provisions can be invoked only when assets are acquired by raising the FCNR (B) loan by taking the payment in foreign currency on acquisition of capital assets on account of these borrowings Relying upon Radhasoami Satsang vs CIT 1991 (11) TMI 2 - SUPREME Court the amount has been utilized for repayment of debentures - The purpose of loan was to swap the costlier loan with the cheaper loan - similar expenditure has been allowed in the preceding and succeeding years Decided against Revenue.

Summary

Issues:
1. Addition of foreign exchange loss as revenue expenditure.
2. Applicability of section 43A of the Income-tax Act.
3. Allowability of foreign exchange loss as a deductible expenditure.
4. Consistency in treatment of similar expenditures in preceding and succeeding years.

Issue 1: Addition of Foreign Exchange Loss as Revenue Expenditure

The appeal filed by the revenue challenged the deletion of an addition of Rs. 49,98,072/- made on account of disallowance of foreign exchange loss. The CIT (A) set aside the original assessment for examination of the expenditure related to "currency fluctuation on short term loan." The CIT (A) deleted the addition after considering additional documents filed by the appellant, which evidenced the utilization of the loan for repayment of debentures and not for acquiring fixed assets. The CIT (A) concluded that the foreign currency fluctuation loss was an actual expenditure incurred during the year, not notional or contingent, and allowed the appeal based on the facts presented.

Issue 2: Applicability of Section 43A of the Income-tax Act

The CIT (A) found that the provisions of section 43A of the Act were wrongly applied by the Assessing Officer as no assets were acquired using the FCNR(B) loan for which the provisions could be invoked. The loan was utilized for the repayment of debentures, not for acquiring capital assets. The purpose of the loan was to swap a costlier loan with a cheaper one, reducing revenue expenditure for the appellant. The CIT (A) emphasized that the provisions of section 43A could only be applicable when assets are acquired using the foreign currency loan for capital assets, which was not the case here.

Issue 3: Allowability of Foreign Exchange Loss as a Deductible Expenditure

The CIT (A) cited the decision of the Apex court in the case of CIT vs. Woodward Governor India (P) Ltd., where it was held that exchange fluctuation arising on revenue account transactions should be allowed as deductible expenditure. The CIT (A) concluded that the expenditure in question was allowable based on this decision, and the argument that the Department had preferred an appeal in the Supreme Court against a previous decision was not valid after the Apex court upheld the decision of the Delhi High Court. The CIT (A) also noted that no disallowance had been made for the subject expenditure in earlier or subsequent years, supporting the allowability of the expenditure.

Issue 4: Consistency in Treatment of Similar Expenditures

The Tribunal dismissed the revenue's appeal, noting that similar expenditures had been allowed in preceding and succeeding years. The Tribunal found no merit in the revenue's appeal when a consistent view had been taken in favor of the assessee on the question raised in the current year. Therefore, the appeal of the revenue was dismissed based on the consistent treatment of similar expenditures in previous and subsequent years.

In conclusion, the judgment addressed the issues of addition of foreign exchange loss as revenue expenditure, the applicability of section 43A of the Income-tax Act, the allowability of foreign exchange loss as a deductible expenditure, and the consistency in treatment of similar expenditures. The decision provided detailed analysis and legal reasoning for each issue, ultimately leading to the dismissal of the revenue's appeal.