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TMI Blog2012 (11) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The act of lower authorities to treat the revenue expenditure as capital in nature is contrary to the AS-11. The action of the lower authorities being contrary to law is to be disregarded. 2.3. On the facts and circumstances of the case, the disallowance being contrary to the facts and law is to be deleted. 3. The appellant denies the liability to pay the interest u/s 234B of the IT Act, 1961. The interest having been levied erroneously is to be deleted. 3. The assessee is a company engaged in the business of manufacture of plywood, block board laminates and ventures. The assessee had debited a sum of Rs.12,53,860/- to the profit & loss account under the head exchange fluctuation loss. Out of this sum of Rs.10,00,941/- represents the forward contract premium for conversion of rupee term loan into foreign currency loan. The Assessee had availed of a term loan for the purpose of buying plant & machinery for Mysore Unit. The outstanding balance of term loan at the time of conversion into foreign currency loan(FCL) was Rs.2,91,75,000/-. The rupee term loan was converted to FCL to take the benefit of lower interest in case of FCL compared to rupee term loan. The rate of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to follow as per sec.211 of the Companies Act, 1956. 6. The CIT(A) did not agree with the submissions of the assessee and held as follows; "7. I have considered the above. Adoption of AS-II may be mandatory for the purpose of accounting under the company law but the same is not mandatory for determination of taxable income under the IT Act. The IT Act provides a scheme to compute the taxable income and it also empowers its authorities to amend if they find any error in the computation adopted by the assessee. The ratio of Apollo Tyres is very specific to provisions of sec.115JB of the IT Act and does not affect the computation under normal provisions of the Act. Therefore, I see no merit in the contention of the AR. On the other hand I observe the loan was intend to purchase plant and machinery for its Mysore Unit and therefore exchange fluctuation loss has close nexus with the acquisition of capital assets. The expenditure, if at all, hat be termed so, is therefore, has to be held as capital in nature and hence disallowable. The addition is upheld. Appeal dismissed. Conclusion: 8. AS-II nowhere prescribes that foreign exchange loss debited to profit & loss account sac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure under section 37(1) of the IT Act, 1961. The expression "any expenditure" has been used in section 37 of the IT Act, 1961 to cover both "expenses incurred" as well as an amount which is really a "loss" even though such amount has not gone out from the pocket of the assessee. This was the view held by the Supreme Court in CIT v Woodward Governor India Pvt. Ltd.,(2009) 312 ITR 254. The unrealized loss due to foreign exchange fluctuation on the last date of the accounting year in respect of loans taken for revenue purposes was allowed as deduction u/s 37 of the IT Act in the above decision. It was also submitted that provisions of sec.43A of the IT Act are applicable only when there is import of machinery outside India and therefore, the expenditure in question cannot be capitalized as part of the cost of the machinery for allowing depreciation. 8. The learned DR on the other hand relied on the provisions of sec.43A of the IT Act, 1961 and submitted that the principle based on which the aforesaid section has been incorporated in the Act, will apply to the case of the assessee. His submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n foreign exchange and not loss on account of fluctuation of foreign exchange currency. 11. The learned counsel for the Assessee placed strong reliance on AS-11 issued by Institute of Chartered Accountants of India (ICAI) which lays down as to how the effects of changes in foreign exchange rates have to be reflected in the Financial Statements. Para-36 of AS-11 on which he relied, deals with premium paid on forward exchange contract and it lays down that the premium paid at the inception of such a forward exchange contract should be amortized as expense over the life of the contract. It does not say that it has to be recognised in the statement of profit and loss. Apart from the above, the life of the forward contract in the present case extents to the period beyond the previous year relevant to AY 08-09. In the present case the instalments that are payable in foreign currency in respect of which forward contracts were entered into by the Assessee, are from 16.7.2007 to 27.6.2008 as per the letter of Union Bank of India dated 29.6.2007 converting rupee term loan into FCL. The monthly instalments payable for the period from 16.7.2007 to 14.3.2008 will be relevant for the present ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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