2022 (4) TMI 856 - AT - Income Tax

Disallowance of loss on claim of Foreign Exchange loss - whether notional loss in Foreign Exchange rate claimed by the assessee in the instant case was not incurred in connection with loan for revenue purposes so as to allow the deduction as revenue expenditure - whether investment made in a foreign subsidiary company as advance is only capital in nature and hence loss due to fluctuation in Foreign Exchange rate is only a capital loss on investment? - CIT-A deleted the addition - HELD THAT - High Court of Madras in the case of CIT Vs. Celebrity Fashion Ltd. 2020 (9) TMI 1022 - MADRAS HIGH COURT had considered an identical issue and held that in case of the assessee, not being dealer in foreign exchange, but exporter of cotton, loss incurred on account of cancellation of forward contract would not be speculative losses falling within the provisions of section 43(5) of the Act and the assessee would be entitled to claim deduction in respect of loss suffered by it as business loss. The sum and substance of ratio laid down by various courts, including the Hon'ble Supreme Court is that if loss incurred on account of fluctuation of foreign currency, whether it is on account of revenue account or capital account, same needs to be allowed as deduction, unless loss comes under provisions of section 43(5) of the Act. In this case, the revenue fails to bring on record any evidence to prove that loss incurred by the assessee on account of restatement of loan liability is capital in nature and further, it comes under the provisions of section 43A - Therefore, we are of the considered view that there is no reason to interfere with the findings of the learned CIT(A) to delete additions made by the Assessing Officer towards disallowance of forex loss. Hence, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the revenue.

Summary

Issues:
- Disallowance of loss on claim of Foreign Exchange loss
- Nature of loan liability and its utilization

Analysis:

1. Disallowance of loss on claim of Foreign Exchange loss:
The appeal filed by the Revenue challenged the order passed by the Commissioner of Income Tax (Appeals) regarding the disallowance of loss on the claim of Foreign Exchange loss for the assessment year 2011-12. The Revenue contended that the loss claimed by the assessee on restatement of loan liability was not incurred in connection with a loan for revenue purposes, and hence, should not be allowed as a revenue expenditure. The Revenue argued that the investment made in a foreign subsidiary company as an advance is capital in nature, and therefore, the loss due to fluctuation in Foreign Exchange rate should be considered a capital loss. However, the learned Commissioner of Income Tax (Appeals) deleted the additions made by the Assessing Officer, stating that the loss incurred by the assessee for restatement of its loan liability is revenue in nature. The Commissioner relied on judicial precedents, including the decision of the Hon'ble Supreme Court, and concluded that the loss claimed by the assessee is on revenue account and should be allowed as a deduction. The Commissioner highlighted that the external commercial borrowings availed by the assessee were for working capital requirements, not for the acquisition of any asset, and hence, the loss was revenue in nature.

2. Nature of loan liability and its utilization:
The Revenue contended that the assessee did not provide evidence to prove that the loan availed from external borrowings was not for the acquisition of any asset. The Revenue argued that the loss incurred by the assessee did not fall under the provisions of section 43A of the Income Tax Act, 1961. On the other hand, the assessee submitted various details, including financial statements, to prove that the external commercial borrowings were utilized for working capital requirements and not for the acquisition of any asset. The learned Commissioner of Income Tax (Appeals) upheld the assessee's claim, stating that the restatement of the loan liability as on the balance sheet date based on the prevailing exchange rate was revenue in nature. The Commissioner emphasized that the loss claimed by the assessee was on revenue account and not for the purchase of any capital goods. The Commissioner's decision was supported by the Hon'ble Supreme Court's ruling in M/s. Woodward Governor India Pvt. Ltd. and other judicial precedents, which established that the loss incurred on account of fluctuation of foreign currency, whether on revenue or capital account, should be allowed as a deduction unless falling under specific provisions of the Act. The Commissioner's findings were based on the consistent accounting practice of the assessee and the purpose of the external commercial borrowings.

In conclusion, the Appellate Tribunal dismissed the appeal filed by the Revenue, upholding the decision of the Commissioner of Income Tax (Appeals) to delete the additions made by the Assessing Officer towards the disallowance of forex loss. The Tribunal concurred with the Commissioner's findings that the loss claimed by the assessee was revenue in nature, considering the purpose of the external commercial borrowings and the absence of evidence to prove otherwise. The Tribunal's decision was based on established legal principles and judicial precedents, emphasizing the treatment of losses on revenue account and the utilization of borrowings for working capital requirements.