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TMI Blog2016 (2) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... tment and Finance Activity and deriving interest income. The assessee borrowed interest free loan of USD 2 Crores from its shareholder M/s Asian Tele Communication Investments (Mauritius) Ltd and gave advance of Rs. 94,58,50,000/- to its subsidiary M/s Usha Martin Telematics Ltd. This foreign currency loan was to be repaid on 13.6.2006 as per the terms of the loan agreement. The Loan agreement specifies the purpose of the loan as meant for general corporate purposes. The said foreign currency loan was restated at the exchange rate prevailing at the end of the year in order to comply with the requirements of Accounting Standard (AS 11) issued by the Institute of Chartered Accountants of India (ICAI) which is mandatorily to be followed by the assessee company. This restatement resulted in a foreign exchange gain of Rs. 6,71,12,500/- and the same was credited to the profit and loss account by the assessee in its books of accounts. The assessee however chose to reduce the same in the statement of total income as the resultant foreign exchange gain is only notional gain and not actually realized by the assessee. As only the real income should be taxable for income tax purposes, this red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrongly distinguished loss on unsettled contracts. In fact the referred cases are in favour of the assessee. On the other hand, the case law relied by the AO (viz Coca Cola Exp. Corpn 158 ITR 446) is in favour of the assessee. e. The case on which reliance placed by the AO on the principle of revenue recognition (63 ITR 328) can be distinguished on facts. f. Sutlej Cotton Mills Ltd case (116 ITR 1), the case on which AO placed reliance to distinguish capital account with that of revenue account, the Apex court only laid down the general principles for deciding the nature of 'gain' and the facts can be distinguished. g. Foreign exchange gain is on account of fixed capital and not circulating capital. h. The gain is only contingent and notional as held by Uttarakhand High Court in the case of CIT vs ONGC Ltd (301 ITR 415) and this view is further supported by Hon'ble Kolkata ITAT (EIH Hotels Ltd). i. Foreign exchange gain is only hypothetical in nature and not realized by the assesssee. 5. Aggrieved, the revenue is in appeal before us on the following ground:- On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome earned by the assessee, it could be seen that the assessee has not received any interest income on the advance made to subsidiary company out of borrowings from its shareholder. The Learned AR argued that hence even though the assessee is an investment company, this lending was not made with a view to earn interest income and accordingly cannot be construed as amounts lent in the ordinary course of business of the assessee. Hence he argued that the transaction cannot be treated as loan utilized on revenue account and has to be treated as loan utilized on capital account. b. The Learned AR argued that assessee during the asst year under appeal had derived notional foreign exchange gain on restatement of the foreign currency loan at the end of the year. Similarly it had incurred notional exchange loss in the subsequent assessment years , the details of which are stated in Pg 56 of the paper book. He stated that these notional exchange losses were not claimed as deduction by the assessee in line with the consistent method followed by the assessee for tax purposes. In other words, notional gain is not offered to tax and similarly notional loss is not claimed as deduction. He stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect from 1.4.2003 would have prospective or retrospective application. Admittedly, this is not the issue before us in the asst year under appeal. Hence Woodward Governor case would not cover the matter in the impugned issue. 8. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find that the short point that arises for consideration is as to whether the foreign currency loan has been utilized on revenue account or capital account by the assessee. This is the entire crux of the issue and various arguments of the counsels of both the sides. We find that the Learned AR is trying to assail the issue before us based on certain facts which were mistakenly understood by the Learned AO such as :- (a) interest income has been earned by the assessee out of advances made to subsidiary company (Usha Martin Telematics Ltd) in the ordinary course of business, which is factually incorrect. (b) Similarly the concept of prudence as per AS -1 issued by ICAI further notified u/s 145(2) of the Act has been mistakenly stated by the Learned AO that it states that even the unrealized gains should be recognized in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evailing at the end of the year amounting to Rs. 6,71,12,500/-. f) The assessee had credited the said foreign exchange gain in its profit and loss account as income. But for tax purposes, the assessee had treated the same as unrealized gains and hence not chargeable to tax as it is only notional gain. g) The assessee had similarly restated the loan outstanding in the subsequent years at the end of the year and had incurred foreign exchange loss as below:- Asst Year 2005-06 72,00,000 Asst Year 2006-07 1,72,00,000 Asst Year 2007-08 4,64,00,000 The Learned AR fairly conceded that these foreign exchange losses though booked as loss in the books of accounts had not been claimed as deduction for tax purposes in the subsequent assessment years. 8.1. We agree that Woodward governor case dealt with foreign currency borrowed on capital account from the perspective of prospective applicability of section 43A w.e.f 1.4.2003 and no decision was rendered by the Hon'ble Apex Court in this case with regard to the foreign exchange fluctuations arising out of loan borrowed on capital account. But the said decision duly considered the recognition of foreign exchange gains for tax purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made on capital account is not appreciated. Once this is lost, then the decision of Woodward Governor case (312 ITR 254 -SC) would automatically come into play on which point, the counsels of both the sides are agreeable. The concept of prudence has been considered in the judgement of supreme court in Woodward Governor case. Once the utilization of borrowings are held to be on revenue account, then the resultant exchange gain or loss at the end of the year due to restatement of foreign currency loan would automatically take the revenue receipt / expenditure as the case may be. 8.4. However, we find that the assessee had incurred exchange losses due to restatement of the subject mentioned foreign currency loan at the end of the year in subsequent assessment years and had not claimed as deduction as it is notional in nature in line with the consistent stand taken by the assessee. In this regard, we deem it fit and appropriate in the interest of justice and fair play, to give directions to the Learned AO to grant deduction of notional exchange loss in the subsequent assessment years to be in consonance with our findings hereinabove. Otherwise, it would only result in revenue trying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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