2020 (12) TMI 526 - AT - Income Tax

Disallowance of Forex loss pertaining to reinstatement of outstanding balance of External Commercial Borrowing (ECB) loan - whether the loss arising out of reinstatement of the ECB loan as on date of balance sheet can be added to the actual cost of asset for the purpose of determining the actual cost u/s. 43A? - CIT-A dismissed the appeal of the assessee by holding that in the absence of specific provisions in Income Tax Act, 1961, the same cannot be allowed either as revenue expenditure or cannot be added to the actual cost for the purpose of depreciation - whether such loss can be capitalized to the actual cost of the assets for the purpose of depreciation? - HELD THAT - The principal objection for allowance of claim is that it is only notional loss and therefore the same cannot be recognised either for the purpose of allowance of revenue expenditure or capitalization. This objection is no longer tenable in law in the light of the dictum of the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT wherein the Hon'ble Apex Court had quoted with approval of the decision of M.P. Financial Corporation 1985 (12) TMI 36 - MADHYA PRADESH HIGH COURT as approved by MADRAS INDUSTRIAL INVESTMENT CORPORATION LIMITED 1997 (4) TMI 5 - SUPREME COURT wherein it was held that the term expenditure covers even a case of loss even though the said amount has not gone out from the pocket of the assessee. Whether or not the increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual costs in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange? - Provisions of section 43A have application only in the case of imported assets. In the present case, the assets were acquired in India, therefore, the conditions of making actual repayment foreign currency loan is not a condition for making necessary adjustment in the actual cost of the asset. Therefore, the general principles of law would be applicable. As relying on ARVIND MILLS LIMITED 1991 (12) TMI 1 - SUPREME COURT we hold that the necessary adjustments should be made to the actual cost of assets on account of loss consequent to foreign currency fluctuation rate as there is no dispute that ECB loans are utilized for the purpose of acquisition of asset in India. Accordingly, we direct the Assessing Officer to allow necessary adjustment to the actual cost of the asset.

Summary

Issues:
- Disallowance of Forex loss on ECB loan
- Treatment of foreign exchange difference as an adjustment to interest cost
- Capitalization of forex loss on assets for depreciation

Analysis:
1. The appeals were against the CIT(A)'s orders dated 30.06.2017 for the Assessment Years 2012-13 and 2014-15, involving identical facts and issues.

2. The key issue was the disallowance of a Forex loss on an External Commercial Borrowing (ECB) loan, with the appellant challenging the decision to not treat it as an adjustment to interest cost or allow capitalization for depreciation.

3. The appellant, a subsidiary of a UK-based company, incurred a Forex loss on an ECB loan for asset acquisition in India. The Assessing Officer disallowed the loss claimed as revenue expenditure, which the CIT(A) upheld due to the absence of specific provisions in the Income Tax Act.

4. The appellant argued that the Forex loss should be added to the actual cost of the asset for depreciation, citing legal precedents supporting the inclusion of notional losses. The Assessing Officer and CIT(A) rejected this claim.

5. The Tribunal considered whether the Forex loss could be added to the asset's actual cost for depreciation purposes. Referring to legal decisions, it concluded that adjustments due to Forex fluctuations should be made to the actual cost of assets acquired using ECB loans.

6. Citing the provisions of section 43A of the Act and relevant Accounting Standards, the Tribunal held that adjustments in actual cost due to Forex rate fluctuations should be allowed, even for assets acquired in India using foreign loans.

7. Following the legal principles established by the Hon'ble Supreme Court and High Courts, the Tribunal directed the Assessing Officer to make necessary adjustments to the actual cost of the assets for the Forex losses incurred, allowing the appeal partially.

8. Consequently, both appeals were partly allowed, affirming the inclusion of Forex losses in the actual cost of assets for depreciation calculation.

9. The judgment was pronounced on October 29, 2020, by the Appellate Tribunal ITAT Pune, with detailed reasoning provided for the decision in each issue raised by the appellant.