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TMI Blog2022 (1) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... ed accordingly. TDS u/s 194I - Disallowance u/s 40(a)(ia) - whether the assessee had claimed depreciation on the leased asset and if so, add back the same to the total income? - HELD THAT:- Lessee shall reimburse all the cost to the lessor for replacing, missing components and repairing of non working components. From reading of the agreement between the assessee and First Leasing, it is clear that the actual owner of the leased asset is the lessor and First Leasing, the lessor, is entitled to claim depreciation The assessee-company has merely taken the assets on lease from the owner and it is accordingly eligible to claim actual rental expenses in the return of income. In the case of Rajshree Roadways v. Union of India [ 2003 (3) TMI 50 - RAJASTHAN HIGH COURT] had held that the lessor being the owner of the trucks, would be eligible for the benefit of depreciation. Further, it was held by the Hon'ble Court that the lessee having not the right to transfer or alienate the vehicle to other parties in any form, the lease rent paid by the assessee in that case (lessee) would be revenue expenditure. In the case of Banashankari Medical Oncology Research Centre Ltd. [ 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and the circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned AO in considering INR 79,27,497 as the foreign exchange loss on account of restatement of EEFC account, whereas the actual amount on account of unrealized foreign exchange difference was a gain of INR 24,30,000 which can be traced in the cash flow and the break-up of forex loss, thus resulting in no disallowance. 2.1. The brief facts of the case are as follows: The assessee is a private limited company engaged in the business of development and providing custom e-business application and platforms. The assessee is registered as a 100% Export Oriented Unit (EOU) and also registered under the Software Technology Park of India (STPI). For the assessment year 2012-2013, the return of income was filed on 27.11.2012 disclosing an income of ₹ 32,82,55,077. The assessment was selected for scrutiny and the assessment was completed u/s. 143(3) r.w.s. 92CA of the I.T. Act vide order dated 28.03.2016 determining the total income at ₹ 35,44,70,726. One of the addition made by the A.O. was ₹ 79,27,497 on account of foreign exchange loss. During the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at foreign currency monetary item should be reported using the closing rate at each balance sheet date. Accordingly, the resultant gain on account of such restatement in the case of assessee was credited to the profit and loss account. Further, the transaction in EEFC account undertaken during the year are trading in nature in order to facilitate to regular business operation of the company. As per the mercantile system of accounting followed by the assessee, the foreign exchange loss arising on account of restatement of EEFC account cannot by any stretch of imagination can be termed as notional or contingent in nature. 2.6. The CIT(A) by referring to section 43A of the I.T. Act had decided the issue against the assessee. The relevant provisions of section 43A of the Act as amended by Finance Act, 2002 reads as follows:- Special provisions consequential to changes in rate of exchange of currency. 43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss suffered by it on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet be allowed as expenditure under s. 37(1) of the Act notwithstanding the fact that the liability had not been actually discharged in the year in which the fluctuation in the rate of foreign exchange had occurred, and (ii) whether on account of fluctuation in the rate of exchange at the end of the previous year, the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency? 11. Having carefully perused the decision of this Court in Woodward's case (supra), we are of the opinion that both the issues stand concluded by the said decision. Dealing with the said issues extensively, speaking for the Bench, S.H. Kapadia J. summarised the following factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates, when the assessee is following mercantile system of accounting, is deductible: (i) whether the system of accounting followed by the assessee is the mercantile system, which brings in the debits of the amount of expenditure for which a legal liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining a US Dollar denominated bank account, in the nature of EEFC (Exchange Earner's Foreign Currency) account, with Citibank. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has credited foreign exchange gain of ₹ 43,94,762, as on 31st March, the assessee has also debited foreign exchange loss of ₹ 28,24,686 on the same date. When the matter was probed further, it was explained by the assessee that the assessee maintains the above account in US Dollars, and every time a transaction takes place, the difference between US Dollar rate then prevailing and the rate at which the account was earlier credited, is taken a foreign exchange gain or loss. As on the year end, since again the value of US Dollar balance is to be taken in the balance sheet at the applicable conversion rate, the loss or gain between the amount so computed vis- -vis the amount already taken to books is taken as foreign exchange loss or gain. The Assessing Officer did not agree with the stand of the assessee. He was of the view that the contentions of the assessee are factually as also legally incorrect. He noted that the amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted by the Assessing Officer. These entries are admittedly in accordance with the Accounting Standards which are binding on the assessee. The method of accounting has been consistently followed by the assessee, it is fair and reasonable, and, as a result of the losses so booked, the accounts of the assessee show true and fair picture of the transactions. It is also noted that similar approach, when it resulted in net gains in subsequent assessment years i.e. 2011-12 and 2012-13, was accepted by the revenue authorities. In the light of Woodward Governor decision (supra) of Hon'ble Supreme Court, as the CIT(A) correctly concludes, the foreign exchange loss was indeed admissible. As regards the loss of ₹ 28,24,686 in respect of US Dollar balance in the EEFC account, if these US Dollars are credited in the books of accounts at x value, whereas the present value is lower amount of y, the loss to the extent of x-y is required to be accounted for due to lower realizable value of these foreign exchange balance. it is one of the most fundamental principles of accounting that while all anticipated losses are taken into account in computing the profits and losses of business, eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve grounds may be reversed and that of the Assessing Officer may be restored. e. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3.1. During the relevant assessment year, the assessee had paid a sum of ₹ 2,36,70,370 to M/s. First Lease Company India Limited towards equipment leasing. Out of ₹ 2,36,70,317, the principal repayment was ₹ 1,77,95,992, the interest and VAT aggregated to ₹ 58,74,325. The assessee had claimed ₹ 2,36,70,317 as a deduction. The A.O. in the impugned order held that the sum of ₹ 1,77,95,992 (i.e. ₹ 2,36,70,317 - ₹ 58,74,325), which was paid towards principal as an expenditure of capital in nature and accordingly added back to the returned income. 3.2. Aggrieved, the assessee preferred an appeal before the first appellate authority. The CIT(A) following his order for assessment year 2007-2008 in assessee's own case, directed the A.O. to verify whether there was violation of TDS provisions u/s. 194-I of the I.T. Act and to make necessary disallowance u/s. 40(a)(ia) of the I.T. Act. Further, the CIT(A) directed the A.O. to verify whether the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause 4 of the agreement between the assessee and the First Leasing (lessor) the asset shall remain the exclusive property of the lessor (First Leasing) at all times. It further provides that the lessee at no time during the lease period can capitalize the assets in its books of account since the ownership of the asset lies with the lessor. Further, as per clause 19 of the said agreement, the assessee company (lessee) shall surrender the leased assets to First Leasing in good condition and working order on expiration of agreement. It is also mentioned that the lessee shall reimburse all the cost to the lessor for replacing, missing components and repairing of non working components. From reading of the agreement between the assessee and First Leasing, it is clear that the actual owner of the leased asset is the lessor and First Leasing, the lessor, is entitled to claim depreciation The assessee-company has merely taken the assets on lease from the owner and it is accordingly eligible to claim actual rental expenses in the return of income. The Hon'ble Rajasthan High Court in the case of Rajshree Roadways v. Union of India reported in (2003) 263 ITR 206 (Raj.) had held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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