2022 (6) TMI 750 - AT - Income Tax

Nature of loss - loss arising out of foreign currency term loan - revenue or capital loss - HELD THAT - We have perused the case records and noted that foreign currency term loan sanctioned by the bank was by way of conversion of existing rupee term loan and that the FCTL was at concessional rate as compared to the rupee term loan leading to lower interest being debited in the profit loss account. As the assessee has not represented nor made any submission before AO or before CIT(A) or in the statement of facts that in this year, the assessee has claimed forex loss and what is the treatment of any loss or gain arising in future years and whether the Department has accepted the same or not. These facts are not available on record and hence, we presume that the loan taken for purchase of machinery is rightly held by AO as capital loss. We affirm the findings of lower authorities on this issue. Depreciation at the appropriate rate by increasing the cost of the machinery - Alternate claim made by assessee is that in case, the effect is to be given for change in foreign exchange rates on FCTL, obtained by conversion of rupee term loan is considered to be a capital expenditure, the same ought to have been considered as the cost of asset purchased and depreciation should have been allowed on the cost of asset including this forex loss. We direct the AO to allow depreciation on this amount at an appropriate rate. Hence, this alternate claim of assessee is allowed.

Summary

Issues:
1. Treatment of loss arising from foreign currency term loan as capital loss instead of revenue.
2. Whether the loss can be considered as part of the cost of the asset for depreciation purposes.

Analysis:
1. The appeal was heard ex-parte as the assessee did not appear despite multiple notices. The main issue was the treatment of the loss from a foreign currency term loan as capital loss instead of revenue. The assessee claimed the loss as revenue expenditure related to financial costs but the AO and CIT(A) considered it as capital expenditure since the loan was used to purchase machinery, a capital asset. The CIT(A) upheld the AO's decision, stating that the loss was capital in nature. The Tribunal affirmed the lower authorities' findings, concluding that the loan for machinery purchase should be treated as a capital loss.

2. The assessee made an alternate claim that if the loss was considered as part of the cost of the asset, depreciation should be allowed on the increased cost. The Tribunal agreed with this alternate claim and directed the AO to allow depreciation on the amount related to the change in foreign exchange rates for the foreign currency term loan converted from a rupee term loan. Therefore, the Tribunal partially allowed the appeal, allowing depreciation on the amount related to the forex loss as part of the asset's cost.

In conclusion, the Tribunal upheld the decision to treat the loss from the foreign currency term loan as a capital loss but allowed depreciation on the amount related to the change in foreign exchange rates as part of the asset's cost. The appeal was partly allowed, and the order was pronounced on June 15, 2022, in Chennai.