2014 (8) TMI 901 - HC - Income Tax

Allowability of amount u/s 43A - foreign exchange fluctuation - Whether ₹ 49,98,072/- debited in the Profit and Loss Account were covered by Section 43A of Income Tax Act, 1961 and/or was otherwise expenditure of capital nature Held that - Reference to Section 43A would be redundant and not necessary as the revenue has not been able to state and point out that the loan taken under the heading FCNR(B) loan was for purpose of acquisition of any capital asset - AO has accepted that the loan was not for acquisition of an asset but he observed that assets had been acquired in the earlier period - He did not specify or hold that an asset was acquired - Finding of the CIT(A) is clear and categorical that the loan was not for acquisition of an asset, payment for which was to be made in foreign currency - ₹ 49,98,072/- was the actual expenditure incurred by the assessee as per the terms negotiated - The payment was to save and protect the assessee from foreign exchange fluctuation loss thus, the payment of ₹ 49,98,072/- would be of revenue nature i.e. virtually in nature of payment of interest for the loan taken having regard to the nature and type of loan which was taken i.e. FCNR(B) Loan Account. Allowability of foreign exchange loss Held that - Following the decision in CIT vs Woodward Governor India (P) Ltd. 2009 (4) TMI 4 - SUPREME COURT - exchange fluctuation arising on revenue account transaction should be allowed as deductible, expenditure - the expenditure is an allowable expenditure - the expression expenditure in Section 37(1) of the Act connotes what is paid out and what has gone irretrievably - But the word expenditure used in context of Section 37(1) would also cover loss even though the said amount had not gone out from the pocket of the assessee - Decided against revenue.

Summary

Issues:
1. Applicability of Section 43A of the Income Tax Act, 1961 on foreign exchange fluctuation loss.

Analysis:
The case involved a singular issue regarding the treatment of a loss of &8377; 49,98,072 on account of foreign exchange fluctuation in the Profit and Loss Account for Assessment Year 2003-04. The respondent-assessee had incurred this loss due to fluctuations in the Foreign Currency Non Resident Loan Account (FCNR(B) Loan). The Assessing Officer initially applied Section 43A of the Income Tax Act to consider the loss as capital expenditure. However, the Commissioner of Income Tax (Appeals) reversed this decision, emphasizing that the loan was not for acquiring any capital asset, but rather for debt servicing, and hence the loss was of revenue nature.

The Commissioner of Income Tax (Appeals) highlighted that the FCNR(B) Loan was taken to repay debentures, resulting in reduced financial expenditure due to lower interest rates. The loan was for short term, and forward contracts were entered into to hedge against foreign exchange fluctuations. The loss incurred was a genuine expense paid during the year, following accounting standards. It was clarified that the purpose of the loan was to reduce funding costs, not for acquiring assets. The Commissioner's decision was based on a thorough examination of the facts and submissions provided by the appellant.

The Income Tax Appellate Tribunal affirmed the Commissioner's decision, emphasizing that the loss was a revenue expenditure related to debt servicing, not capital in nature. The Supreme Court's decision in Commissioner of Income Tax, Delhi Vs. Woodward Governor India Pvt. Ltd. was cited to support the allowability of exchange fluctuation losses as deductible expenditure. The Court held that the expenditure had gone irretrievably from the assessee and should be considered under Section 37(1) of the Act, covering business expenditures not specified in other sections.

The judgment concluded that the loss incurred by the respondent-assessee was a revenue expense akin to interest payment for debt servicing, not capital in nature. The payment was made to safeguard against foreign exchange fluctuations and was a legitimate deduction. Therefore, the appeal by the revenue was dismissed, emphasizing the revenue nature of the expenditure and upholding the Commissioner's decision.

In summary, the judgment clarified the treatment of foreign exchange fluctuation losses in the context of debt servicing, emphasizing the revenue nature of the expense and highlighting the applicability of relevant provisions of the Income Tax Act and judicial precedents in determining the allowability of such losses as deductible expenditures.