2017 (10) TMI 476 - AT - Income Tax

Disallowance of premium charges on FC forward contracts/underlying options - Held that - In this case, the assessee is into the business of processing and export of tobacco. The assessee also is into the business of warehousing. The assessee has purchased a software park at Navi Mumbai from M/s. Maharashtra Industrial Development Corporation Limited for which it has borrowed certain term loans from banks. Subsequently, those term loans were converted into foreign currency loans for the purpose of reducing interest cost. The assessee entered into forward exchange contracts to hedge the underlying exposure in the form of external borrowings to mitigate the possible loss in fluctuation of currency. In the process, it has incurred loss, which has been debited to profit & loss account under the head premium charges on FC forward contracts. The total forward contracts entered into with the bankers, does not exceed the value of underlying exposure to foreign currency at any point of time. We further observed that the forward contracts entered by the assessee does not falls within the definition of section 43(5)(d) of the Act. Therefore, we are of the view that the A.O. was erred in disallowing premium charges on FC forward contracts on the ground that the loss incurred by the assessee is a speculative loss, which falls u/s 43(5)(d) of the Act. The CIT(A) after considering the relevant provisions of the Act and also relied upon certain judicial precedents, directed the A.O. to delete additions made towards premium charges. We do not find any error in the order of the CIT(A) Disallowance of foreign exchange fluctuation loss - Held that - In this case, on perusal of the facts available on record, we find that the assessee has acquired the asset in India and the acquisition of such asset has been financed out of term loans borrowed from India banks. Though the assessee subsequently converted Indian currency loan into foreign currency loans for the purpose of reducing cost of interest, these loans cannot be considered as foreign currency loans acquired for the purpose of acquiring an asset from a country outside India. Therefore, we are of the view that the provision of section 43A, of the Act has no application to the facts of the present case. The assessee has incurred exchange loss due to rise in dollar rate, which has been treated as revenue in nature. The assessee has acquired term loans in foreign currency and repaid the said loan in instalments over a period. The difference between opening balance of the loan and closing balance of the loan as on the date of balance sheet has been arrived at by multiplying the rate of exchange as on that date, which results in exchange loss. Similarly, the assessee has converted its working capital loan into foreign currency loan for the purpose of reducing interest cost. In the process, it has incurred exchange loans due to adverse movement of currency, which resulted in exchange loss. Therefore, we are of the view that the A.O. was erred in treating exchange loss incurred by the assessee due to adverse movement of currency as capital in nature, which is not allowable u/s 37(1) of the Act. The CIT(A) after considering the relevant provisions of the Act, has rightly deleted additions made by the A.O. Disallowance of additional depreciation claimed u/s 32(iia) - activity of drying and threshing of tobacco does not amount to manufacture - Held that - The activity of drying and threshing of tobacco leaves amounts to manufacture, which is eligible for additional depreciation as per the provisions of section 32(iia) of the Act, accordingly directed the A.O. to allow additional depreciation claimed by the assessee. See CIT Vs. Premier Tobacco Pakcers Pvt. Ltd. (2006 (2) TMI 101 - MADRAS High Court ) Revenue appeal dismissed.

Issues Involved:
1. Disallowance of premium charges on FC forward contracts/underlying options.
2. Disallowance of foreign exchange fluctuation loss.
3. Disallowance of additional depreciation claimed under section 32(iia) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Premium Charges on FC Forward Contracts/Underlying Options:
During the assessment proceedings, the Assessing Officer (A.O.) disallowed the loss incurred on forward contracts, considering it speculative and therefore not deductible while computing business income. The A.O. believed the transactions were for trading in currency rather than hedging to mitigate currency fluctuation losses. The assessee argued that the forward contracts were entered to hedge foreign currency term loans and mitigate potential losses due to currency movements, and the total value of forward contracts did not exceed the underlying exposure in foreign currency. The CIT(A) accepted the assessee's arguments, noting that the forward contracts were indeed for hedging purposes and did not fall within the speculative transaction definition under section 43(5)(d) of the Act. Consequently, the CIT(A) directed the A.O. to delete the additions made towards premium charges on FC forward contracts. The Tribunal upheld the CIT(A)'s decision, agreeing that the transactions were for hedging and not speculative.

2. Disallowance of Foreign Exchange Fluctuation Loss:
The A.O. disallowed the foreign exchange fluctuation loss, treating it as a capital loss not allowable as a revenue expenditure under section 37(1) of the Act. The assessee contended that the loss arose due to the conversion of Indian currency loans into foreign currency loans to reduce interest costs, and such loss should be treated as revenue in nature. The CIT(A) observed that the provisions of section 43A, which apply to assets acquired from outside India, were not applicable as the asset was acquired in India and the loans were initially in Indian currency. The Tribunal upheld the CIT(A)'s decision, noting that the exchange loss due to currency fluctuation on loans converted to foreign currency for interest cost reduction should be treated as revenue loss and allowable as a business expenditure.

3. Disallowance of Additional Depreciation Claimed Under Section 32(iia):
The A.O. denied additional depreciation on the ground that drying and threshing of tobacco leaves did not constitute manufacturing. The assessee argued that the processing of tobacco leaves amounted to manufacturing, thus qualifying for additional depreciation. The CIT(A) referred to the decision of the Hon'ble High Court of Madras in CIT Vs. Premier Tobacco Packers Pvt. Ltd., which held that drying and threshing of tobacco amounted to manufacturing. The Tribunal upheld the CIT(A)'s decision, agreeing that the activity constituted manufacturing and the assessee was entitled to additional depreciation under section 32(iia) of the Act.

Conclusion:
The appeal filed by the revenue was dismissed, with the Tribunal upholding the CIT(A)'s decisions on all three issues. The Tribunal found no errors in the CIT(A)'s order, thereby rejecting the grounds raised by the revenue.

← Previous Next →