2021 (2) TMI 1003 - AT - Income Tax

Addition u/s 37(1) or 43A - forward contract premium expenses disallowed - AO was of the view that such amount of premium paid by the assessee to secure the amount of instalment, representing the principal amount, of the foreign currency loan cannot be allowed as deduction - HELD THAT - The provisions of section 43A of the Act deals with the adjustment of the fluctuation in the liability of foreign currency pertaining to the capital assets acquired from outside India. This adjustment on account of change in the rate of exchange is made with respect to the amount/liability actually paid during the year by adding/deducting in the actual cost of imported assets acquired in foreign currency. This adjustment in the liability of foreign currency may result loss or gain to the assessee but the same needs to be adjusted with the capital assets as per the provisions of section 43A - Such loss arising to the assessee, is not deductible in the profit loss account. In the present case has secured such loss with respect to the liability in foreign currency which may arise at the time of payment by way of taking of forward contract. The assessee to secure the loss on account of foreign currency fluctuation has taken a forward contract and for which it has paid the premium which was claimed as revenue expenditure. Whether such premium paid by the assessee to secure the fluctuation in the foreign currency is subject matter of the provisions of section 43A ? - Provisions of section 43A of the Act deals with the loss/gain with respect to the liability in foreign currency for the assets acquired from a country outside India - it does not deal with respect to the cost incurred by the assessee to secure the loss which may arise at the time of repayment on account of fluctuation in the exchange rate with respect to foreign currency liability which was recorded in the books of the assessee in Indian currency. Thus once the provisions of section 43A of the Act are not applicable on the deduction claimed by the assessee in the given facts and circumstances, there cannot be any disallowance by invoking the provisions of section 43A. As the assessee incurred the cost to secure the foreign currency liability against the exchange fluctuation is akin to insurance policies. Therefore we are of the view that such expenses incurred by the assessee in the course of business are allowable as deduction under section 37(1) of the Act. Assessee has claimed similar expenses in the earlier years which was allowed by the Revenue. Accordingly, we are of the view that the assessee is also entitled for its claim based on the principle of consistency. - Decided in favour of assessee.

Summary

Issues Involved:
- Disallowance of forward contract premium expenses under section 37(1) of the Income Tax Act.

Analysis:
1. The appeal was filed by the Assessee against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of forward contract premium expenses under section 37(1) of the Act for ?64,16,539 incurred to hedge foreign currency loans for the Assessment Year 2014-2015.

2. The Assessee argued that the expenses were incurred to avoid losses due to foreign currency fluctuations on loans used for business purposes. However, the Assessing Officer (AO) disallowed the deduction, stating that the premium paid did not represent foreign exchange loss but was a payment to secure against such losses, and hence, not deductible.

3. The Assessee appealed to the CIT (A) who upheld the AO's decision based on a Bangalore tribunal case precedent, rejecting the Assessee's claim.

4. The ITAT considered the provisions of section 43A of the Act which deal with adjustments for foreign currency liabilities related to capital assets acquired from outside India. The ITAT noted that the Assessee's premium payment to secure against foreign currency fluctuation losses was akin to insurance policies taken for business assets, which are deductible under section 37(1) of the Act.

5. The ITAT found that the Assessee's claim was consistent with past practices and allowed the appeal, directing the AO to delete the disallowed amount. The ITAT distinguished the cited case law and emphasized the deductibility of such expenses under section 37(1) of the Act.

6. The ITAT's decision was based on the view that the provisions of section 43A did not apply to the Assessee's claim, and the expenses incurred were justifiable as business deductions. The principle of consistency in allowing similar expenses further supported the Assessee's claim, leading to the allowance of the appeal.