2022 (4) TMI 382 - AT - Income Tax

Exchange loss on account of foreign currency loan availed from external sources - AO has disallowed total loss incurred on account of exchange fluctuation by holding that it is in the nature of capital loss - As argued assessee has borrowed foreign currency loans for the purpose of acquiring capital asset as well as for general business purpose and thus, if at all, disallowance is required to be made, then proportionate disallowance is required to be made in respect of exchange loss pertains to loans borrowed for acquiring capital asset - HELD THAT - We find that the assessee never disputed fact that foreign exchange loss debited into profit loss account also includes loss pertain to loans borrowed for acquiring capital asset. The only plea raised before us is that the Assessing Officer has considered very same issue for subsequent assessment year 2016-17 and has made proportionate disallowance towards for foreign exchange loss u/s. 43A of the Act, in respect of loss pertaining to loans borrowed for acquiring capital asset. Therefore, considering arguments of the learned A.R for the assessee that the Assessing Officer has considered a similar issue and made proportionate disallowance, we are of the considered view that the issue needs to go back to the file of the Assessing Officer to re-consider the issue in light of the Assessing Officer's subsequent assessment year for 2016-17, keeping in mind rule of consistency and thus, we set aside the appeal and restore the issue to the file of the Assessing Officer and direct the A.O. to reconsider the issue in light of arguments of the assessee that proportionate disallowance is required to be made in line of disallowance made by the Assessing Officer for subsequent assessment year 2016-17. Appeal of assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of foreign exchange fluctuation loss as capital expenditure.

Analysis:
The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15. The assessee, engaged in manufacturing automotive components, declared Nil total income but incurred a loss due to foreign currency fluctuation on advance from customers, loans in foreign currency, and interest payments. The Assessing Officer considered this loss as capital in nature since the loans were taken for acquiring capital assets, leading to disallowance and addition to total income. The assessee's appeal to the first appellate authority was unsuccessful, resulting in the current appeal.

The assessee argued that the foreign exchange fluctuation loss should not be treated as capital expenditure, as it was incurred on loans taken for both capital asset acquisition and general business purposes. The Assessing Officer had allowed proportionate disallowance for a similar issue in the subsequent assessment year, which the assessee requested to be applied in this case. The Department, however, supported the CIT(A)'s decision. After considering both sides, the Tribunal noted that the exchange loss included amounts related to loans for capital assets. As the Assessing Officer had allowed proportionate disallowance in a later assessment year, the Tribunal decided to set aside the appeal and direct the Assessing Officer to reconsider the issue, emphasizing consistency in treatment.

In conclusion, the Tribunal allowed the appeal for statistical purposes, instructing the Assessing Officer to review the disallowance issue in light of the treatment in the subsequent assessment year.