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TMI Blog2018 (3) TMI 1821X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed as revenue expenditure in view of amended AS-11 (2003). It may be noted that apex court had followed treatment of exchange loss or gain as per AS-11 (1994). In view of revision made in AS-11, now treatment shall be as per revised AS-11 (2003). Exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. However, in the Preamble of AS-11 (Revised 2003), it was stated that the Revised Standard supersedes AS-11 (1994) except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise before the date of AS-11 (2004) comes into effect, AS 11 (1994) will continue to be applicable. In the present case, though the assessee took the plea before the lower authorities that AS-11 is applicable, the lower authorities has not at all examined it and straightaway applied the provisions of sec. 43A. In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the assets acquired from outside India need to be applied for the assets acquired locally, needs to be reconsidered. iv) Foreign exchange rate fluctuations are notional figures for reinstating the foreign exchange loans on the date of reporting, to comply with the accounting standard, which has no relevance to the actual value of fixed assets for taxation purposes and hence the same has not been added or reduced from the original value of fixed assets for the computation of depreciation under the Act. v) The section 43A considered by the learned assessing officer is having no relevance in the case of the appellant, since the loan availed is not for the purpose of import of equipment's alone, but for part financing the entire hotel project. Therefore it is requested that the deletion of notional amount from the value of fixed assets for the purpose of computation of depreciation under the Income Tax Rules, may please be reversed. 2. The facts of the case are that the assessee-company is engaged in the business of running Hotel and Convention Centre at Maradu, Kochi. The return of income for the assessment year 2006-07 was filed declaring NIL income after setti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandards. Therefore, based on the above discussion, the depreciation allowed on the following blocks are recomputed as under: Assets WDV as on 10.04.05 Addition Deletion Deprn. Allowed Deprn. allowable Above I80 days Below 180 days Hotel Buildings 214600295 - 12468769 619334 22954212 22021535 Equipments 61428961 699830 8955004 476980 10475823 9919396 EL Fittings 4222910 45000 1005234 - 598901 477055 Furniture 3363050 74301 1746600 85714 3578166 3449239 Computer 694454 291488 1751130 26727 1271688 1100869 38878790 36968094 Total income as assessed u/s 143(3) Add; Excess deprn. Allowed ₹ 21,06,22,464 ₹ 19,10,696" 3. The CIT(A) observed that the assessee had taken foreign currency loan for the whole project in 2001 and its repayment schedule started from 01/09/2004. According to the CIT(A), the term loan of NBO was transferred to UBI term loan of $35,35,309 on 05/10/2005. The CIT(A) observed that the interest payment on this loan which was shown from A.Y. 2008-09 was not allowed to the assessee as it was in the nature of pre-acquisitional interest, as the assessee's project was completed only in February 2013 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere of a revenue nature. Thus the Delhi High Court held that the loss on account of foreign exchange rate difference was an actual loss on revenue account, allowable as a deduction, and not a contingent loss. 3.3 The CIT(A) noticed that the Assessing Officer had added the loss on account of the deferred payment liability to the cost of the asset by applying s. 43A as the loss in respect of foreign currency on account of reduction in value of such currency has effect on the cost of the assets. In this context, the CIT(A) referred to the detailed working of depreciation computation and WDV adopted by the assessee for A.Y.s 2004-05, 2005-06 and 2006-07 showing that based on the fluctuation in the exchange rate, its effect on every block of asset is recognized on a year to year basis, and accordingly correct deletions and additions were made in the value of fixed assets including Hotel building, Equipments, Electrical fittings, furniture etc. However, it was observed by the CIT(A) that such variation in the cost of assets on account of foreign exchange fluctuation was accounted in one year, but in the next year such notional deletion was added back. For the subsequent year, it was obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention that the Assessing Officer was not correct in making such adjustment in the cost of assets as repayment of loan is made and hence the deletion in the value of assets made in the previous years is not notional and the same could not be added back for arriving at the revised WDV of these assets. Accordingly, the CIT(A) confirmed the addition of ₹ 19,10,696/- on account of excess depreciation made by the Assessing Officer. 4. Against the order of the CIT(A) , the assessee is in appeal before us. The Ld. AR submitted that the issue to be considered is whether depreciation is allowable under Income Tax Act on notional exchange rate fluctuation capitalized in the books of accounts in accordance with Accounting Standards 11 (prior to its revision), for the assets purchased locally for setting up a Hotel Project for which the amount involved was 19,10,696/-. The Ld. AR submitted that the assessee had not considered the exchange rate fluctuation for the purpose of computation of depreciation as per the Provisions of the Income Tax Act, though the same was considered as addition/deletion to fixed asset as per books of accounts which was done considering the definition of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al cost of assets for computing depreciation. Hence, it restricted assessee's right to add such loss incurred on account of currency fluctuations to the cost of asset. Thereby, the decision given by Sutlej and Tata Iron and Steel (supra) are contrary in view. In former mentioned case it restricted the assessee's right to claim such loss on currency fluctuations considering the same as attributable to capital account transactions and at the same time does not allow to add the same to cost of the asset by following principle laid down in Tata Iron and Steel (supra).. 6.2 Schedule VI of Companies Act, suggests treatment of the 'gain/loss' as capital in nature and should be adjusted to the cost of relevant asset, whereas Accounting Standards 11 suggests that treatment of 'gain/loss' attributable to foreign borrowings should be reflected in profit and loss account. However, said conflict was resolved by MCA Circular it was clarified by MCA that accounting treatment of exchange differences will be made as per AS 11 and further categorically mentioned that provisions of AS-11 is required to be followed irrespective of the relevant provision of Schedule-VI to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking funds. Hence it cannot be said as capital expenditure. The liability to pay or to provide for foreign currency fluctuation arises only on devaluation of currency and there may not be any liability to pay for loss on currency fluctuation if currency value is inflated subsequently. 6.5 One of the issue involved in the case of CIT vs. Woodward Governor India (P) Ltd. 312 ITR 254 (SC) was "Whether the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability?" The above mentioned decision had considered the implication of Para 10 of AS- 11 along with section 43A of the Act. While deciding the issue, it was observed by Hon'ble apex court at para 17: "Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under section 37(1) on the basis of ordinary principle of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard mandatory, we are now required to exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revised AS-11 (2003). Exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. However, in the Preamble of AS-11 (Revised 2003), it was stated that the Revised Standard supersedes AS-11 (1994) except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise before the date of AS-11 (2004) comes into effect, AS 11 (1994) will continue to be applicable. 6.9 In the present case, though the assessee took the plea before the lower authorities that AS-11 is applicable, the lower authorities has not at all examined it and straightaway applied the provisions of sec. 43A. In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out of foreign currency loans. Hence, the Assessing Officer has to bifurcate the foreign exchange fluctuation in respect of foreign currency loan used for assets acquired outside India and the indigenous assets and apply provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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