2022 (6) TMI 1278 - AT - Income Tax

Disallowance with regard to foreign exchange loss arising on restatement / revaluation of foreign currency loans due to adverse foreign exchange fluctuations claimed u/s 37(1) - HELD THAT - We infer that the assessee has extended loans / advances facility to its subsidiaries only for the purpose of business, as the nature of assessee s business relates to constructions and development of real estate properties. The contention of the Revenue that the impugned loss was only notional loss does not hold good. The reasoning that since there was no settlement of loan as on 31/03/2017 will not entitle the assessee to claim as per method of accounting followed and the provisions of section 43AA read with Income Computation Disclosure Standard (ICDS)-VI has been countered by the assessee stating that assessee has been following AS-11 which states that unrealised foreign exchange gain / loss should be booked at the year end. Though the principle of res judicata does not apply to taxing statute, principle of consistency does apply wherein the income from gain in forex fluctuation of the impugned loan in earlier year was considered by the Revenue and as such the method of accounting as per section 145 followed by the assessee was also not disputed earlier, by placing reliance on the decision of Hon ble Apex Court CIT vs M/s Woodward Governor India P. Ltd ( 2009 (4) TMI 4 - SUPREME COURT , we hold that the addition made on account of foreign exchange fluctuation loss claimed as deduction under section 37(1) is disallowable, is not tenable. Assessee appeal allowed.

Summary

Issues Involved:
Disallowance of foreign exchange loss claimed under section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Foreign Exchange Loss:
The appeal was filed against the order of Ld.CIT(A)-49, Mumbai concerning the disallowance of foreign exchange loss of Rs.2,69,59,466/- arising from the restatement/revaluation of foreign currency loans under section 37(1) of the Income Tax Act for the assessment year 2017-18. The assessee, engaged in real estate development, had revised its return of income, declaring a total loss and book profit under section 115JB. The dispute revolved around the treatment of the foreign exchange loss incurred due to adverse fluctuations in foreign exchange rates on loans given to a foreign subsidiary. The Assessing Officer and Ld.CIT(A) disallowed the loss, considering it as capital expenditure, not allowable under section 37(1) as business expenditure. The assessee argued that the loss was revenue in nature, citing the Hon'ble Supreme Court's decision in CIT vs M/s Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC).

2. Arguments and Counter-arguments:
During the appellate proceedings, the Ld.AR contended that the loss on foreign exchange was a revenue expenditure necessary for business expediency, while the Ld.DR argued that the acceptance of income from gain did not mandate the allowance of losses from foreign exchange fluctuations. The assessee highlighted the necessity of providing seed funding to subsidiaries for business purposes, emphasizing that such expenses should be allowed as deductions under section 37(1). The department, however, maintained its stance based on the decisions of lower authorities.

3. Tribunal's Decision:
After considering both sides and examining the facts, the Tribunal noted that the loan to the foreign subsidiary was for business purposes related to real estate development. It was observed that the Assessing Officer did not provide specific reasons for doubting the transaction's business purpose, and the nature of the loan was not disputed earlier. The Tribunal held that the foreign exchange fluctuation loss claimed under section 37(1) was allowable as business expenditure, emphasizing the principle of consistency in accounting treatment and previous acceptance of gain from similar transactions. Citing the decision in CIT vs M/s Woodward Governor India P. Ltd, the Tribunal allowed the appeal, concluding that the disallowance of the foreign exchange loss was not tenable.

4. Conclusion:
In conclusion, the Tribunal allowed the appeal filed by the assessee, holding that the foreign exchange fluctuation loss could be claimed under section 37(1) of the Income Tax Act for the assessment year in question.

This detailed analysis highlights the key aspects of the judgment, focusing on the disallowance of foreign exchange loss and the Tribunal's decision in favor of the assessee.