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2021 (6) TMI 609 - AT - Income TaxDenial of exchange loss - Unexpalined loss from the income - provisions of section 43A applicability - HELD THAT - Since, asset acquired was not depreciable, therefore, loss cannot be allowed. We find that the learned CIT(A) upheld the action of the AO on the ground that no transaction has taken place during the year, for no payment was made during the year. Further, assets were not acquired during the year. Loss can be allowed in the year in which transaction had taken place. Further, such exchange loss was capital loss and not revenue loss. It is the submission of the learned counsel for the assessee that the stand of the department is inconsistent since in AY 2008-09, foreign exchange gain was taxed as income as the same was not reduced in computing the income. Similarly, in AY 2010-11, the net gain was offered to tax. However, due to inconsistent stand of the department, the gain was claimed as not taxable and the CIT(A) gave certain directions which has been reproduced in the preceding paragraphs. We find some force in the arguments of the learned counsel for the assessee. We find the assessee has prepared its accounts as per AS-11 which deals with effect of changes in foreign exchange rate and such difference is required to be recognized as income or expenditure. The Hon ble Supreme Court in the case of CIT v Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT has held that AS-11 is mandatory and is required to be followed in computing the income as required by section 145(1) read with section 145(2) of the Act. The Hon ble Delhi High Court in the case of CIT v. Virtual Soft Systems Ltd. 2012 (2) TMI 120 - DELHI HIGH COURT has explained the duty of the AO to follow Accounting Standards. In view of the above discussion, following the decision of the Hon ble Supreme Court in the case of CIT v Woodward Governor India P. Ltd. (supra), where it is held that AS-11 is mandatory and required to be followed in computing the income and the decision of the Hon ble Delhi High Court in the case of CIT vs Virtual Soft Systems Ltd.(supra), holding that it is the duty of the AO to follow accounting standards and following the rule of consistency, we hold that the foreign exchange loss of should be allowed as revenue expenditure. Enhancement of the income of the assessee being the depreciation allowed by the Assessing Officer on utilization of FCCB proceeds towards depreciable assets - additional ground relates to the allowability of foreign exchange fluctuation loss as an allowable deduction u/s 37 - HELD THAT - Since, the assessee in the instant case has attributed the increased liability to the cost of the assets and the depreciation was allowed, therefore, although the assessee has a good case to argue that exchange fluctuation loss attributable to depreciable assets acquired in India is an allowable revenue expenditure, however, it would require tedious exercise of modifying assessments for number of year. Therefore, we hold that the assessee is entitled to depreciation on exchange loss and the additional grounds raised by the assessee for AY 2009-10 becomes in-fructuous. It is held in the case of CIT v. Industrial Finance Corp of India Ltd. 2009 (9) TMI 877 - DELHI HIGH COURT that revenue expenditure (loss) is allowable in the year in which it is incurred but where the assessee has spread it over, the Court would allow the benefit. We find merit in the argument of the learned counsel for the assessee that it cannot be held that neither depreciation on enhanced cost due to exchange fluctuation is to be allowed nor the loss itself was to be allowed more so because claim to this effect was raised both before the Assessing Officer as well as the CIT(A). Accordingly, ground no.3 raised by the assessee is allowed and additional ground being infructuous is dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - We find before the AO, the assessee has categorically stated that the assessee has not received any dividend income during the year. This fact was not controverted by the AO or the CIT(A). Even the learned DR also could not bring any material before us to show that the assessee has received any dividend income during the year. We, therefore, following the decision of the Hon ble Delhi High Court in the case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT hold that the learned CIT(A) is not justified in sustaining the disallowance made by the AO u/s 14A r.w.r 8D when assessee has admittedly not received any dividend during the year. Accordingly, ground raised by the assessee on this issue is allowed. Accrual of income - Taxability of discount received on FCCB - HELD THAT - CIT(A) was not justified in holding the discount received through buyback of FCCBs at a discounted price as income of the assessee. Accordingly, the order of the learned CIT(A) is set-aside and the grounds raised by the assessee on this issue are allowed.
Issues Involved:
1. Disallowance of exchange fluctuation loss. 2. Disallowance under Section 14A. 3. Enhancement of income by disallowing depreciation. 4. Taxability of discount on buyback of Foreign Currency Convertible Bonds (FCCBs). 5. Taxability of forex gain. Detailed Analysis: 1. Disallowance of Exchange Fluctuation Loss: The assessee claimed a forex loss of ?12,50,03,577 related to non-depreciable assets. The AO disallowed this, arguing that such loss should be capitalized as per Section 43A and Rule 115 and cannot be claimed as revenue expenditure. The CIT(A) upheld this disallowance, stating that no transaction occurred during the year and the loss pertained to capital assets. The Tribunal, however, allowed the claim, citing the principle of consistency and reliance on AS-11, which mandates recognizing such differences as income or expense. The Tribunal emphasized that the department had treated similar forex gains as taxable in other years, thus the loss should be allowed as revenue expenditure. 2. Disallowance under Section 14A: The AO disallowed ?26,92,582 under Section 14A, which was upheld by the CIT(A). The assessee contended that no dividend income was earned during the year, making Section 14A inapplicable. The Tribunal agreed with the assessee, citing the Delhi High Court's decision in Cheminvest Ltd. vs CIT, which held that no disallowance under Section 14A is warranted if no exempt income is received during the year. 3. Enhancement of Income by Disallowing Depreciation: The CIT(A) enhanced the income by disallowing depreciation of ?1,56,34,104 on the ground that Section 43A was not applicable since the assets were indigenous. The Tribunal noted that Section 43A applies only to assets acquired from abroad and upheld the assessee's claim for depreciation, stating that the increased liability due to exchange fluctuation should be added to the cost of the assets and depreciated accordingly. 4. Taxability of Discount on Buyback of FCCBs: The AO treated the discount of ?45,64,91,290 received on the buyback of FCCBs as taxable income. The CIT(A) upheld this, arguing that the discount received should be treated as revenue receipt. The Tribunal, however, ruled in favor of the assessee, stating that the discount received on the buyback of FCCBs is a capital receipt and not taxable. The Tribunal relied on the Supreme Court's decision in Mahindra & Mahindra Ltd., which held that waiver of loan cannot be taxed under Section 28(iv) or Section 41(1). 5. Taxability of Forex Gain: The CIT(A) excluded the forex gain of ?5,44,92,768 from the total income, following the principle of consistency since the department had treated similar losses as capital in earlier years. The Tribunal reversed this, holding that the forex gain should be treated as income, aligning with the treatment of forex losses as revenue expenditure. Conclusion: The Tribunal allowed the assessee's claims for exchange fluctuation loss and depreciation, disallowed the Section 14A disallowance, and ruled that the discount on FCCBs is a capital receipt. The Tribunal also held that the forex gain should be treated as income.
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