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TMI Blog2023 (1) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts over the income reported in P L account on interest received - HELD THAT:- As submitted assessee is following mercantile system of accounting and has duly filed the reconciliation statement. It is his submission that due to misunderstanding by the AO, he could not appreciate the system of accounting consistently followed by the assessee and made the addition. It is also his submission that given an opportunity, the assessee is in a position to substantiate with evidence to the satisfaction of the AO that such income has already been offered to tax in subsequent years and the method of accounting consistently followed by the assessee has been accepted by the revenue and therefore, no addition should be made in this year. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to verify from the record the method of accounting consistently being followed by the assessee and pass appropriate order as per fact and law. The second additional ground raised by the assessee is accordingly allowed for statistical purposes. Nature of expenses - foreign exchange loss treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition of foreign exchange loss is concerned, the ld.CIT(A) held that such foreign exchange loss is to be treated as capital in nature and to be added back to the value of building and proportionate depreciation to be allowed. 4. Aggrieved with such order of the ld.CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds 1.The Ld.CIT (A) erred both on facts and in law and the order passed by the Ld. CIT(A) in upholding the order of the AO passed u/ s 143(3) of the Act is prejudicial to the interests of the assessee. 2. The Ld CIT(A) ought to have allowed the grounds of appeal with regard to the disallowance of employees contribution towards PF and ESI amounting to Rs.29,12,184/ _ instead of directing the AO to verify further. 3. The Ld CIT (A) ought to have allowed the grounds of appeal in respect of credit for TDS of Rs.3,20,21,101/ - instead of directing the AO to verify further. 4. The Ld. CIT(A) erred in upholding the disallowance made by AO in respect of the claim for disallowing the forex loss amounting to Rs.14,32,814/ - without appreciating the facts of the case. 5. The Ld.CIT(A) erred in upholding the disallowance m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing additional grounds of appeal. 11. The ld.CIT(A) erred in not appreciating the fact that sec 43A of the Act is applicable only at the time of when the assets are acquired from a country outside India and does not apply to the acquisition of indigenous assets. 12. The ld.CIT(A) ought to have considered that AO has erred in making the addition of Rs.42,810/- as per 26AS on account of shortfall of income offered without appreciating the fact that the assessee is following Mercantile system of Accounting. 6. Referring to the decision of Hon ble Supreme Court in the case of NTPC Ltd vs CIT reported in 229 ITR 383, he submitted that since all the necessary facts are available on record and no new facts are required to be investigated, therefore, the additional grounds raised by the assessee should be admitted. 6.1 After hearing both the sides and considering the fact that all material facts necessary for adjudication of the grounds are already available on record and the grounds being purely legal in nature, therefore, the additional grounds raised by the assessee are admitted. 7. Grounds of appeal No.1 and 14 being general in nature are dismissed. Ground of appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipts/contract receipts from M/s. CES Information Systems Pvt.Ltd. and M/s. Magnitude Software India Pvt.Ltd. He, therefore, made addition of Rs.42,810/- being the income underreported and treated the same as income of the assessee for AY 2014-15. The assessee did not challenge the addition before the ld.CIT(A). However, it has raised the ground in the shape of additional ground. 11. After hearing both the sides, we find it is the argument of the ld.counsel for the assessee that the assessee is following mercantile system of accounting and has duly filed the reconciliation statement. It is his submission that due to misunderstanding by the AO, he could not appreciate the system of accounting consistently followed by the assessee and made the addition. It is also his submission that given an opportunity, the assessee is in a position to substantiate with evidence to the satisfaction of the AO that such income has already been offered to tax in subsequent years and the method of accounting consistently followed by the assessee has been accepted by the revenue and therefore, no addition should be made in this year. Considering the totality of the facts of the case and in the intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the assessee referring to a series of decision submitted that foreign fluctuation currency loss arising out of acquiring fixed asset cannot be capitalized and it should be allowed as revenue expenditure. Referring to the decision of Hon ble Supreme Court in the case of CIT vs. Woodward Governor India Ltd. reported in 312 ITR 254, he submitted that the Hon ble Supreme Court in the said decision has held that loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure u/s.37(1) of the I.T.Act. Referring to the Cochin Bench of the Tribunal in the case Baby Memorial Hospital Ltd vs ACIT reported in (2019) 111 taxmann.com 189, he submitted that the foreign exchange loss arising out of foreign currency fluctuations in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure by charging the same to profit and loss account and not as capital expenditure by deducting same from cost of respective fixed assets. 17. Referring to the decision of Pune Bench of the Tribunal in the case of Cooper Corporation Pvt.Ltd. vs DCIT reported in 159 ITD 165, he submitted that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account and not for purchase of any capital asset for which the fluctuation loss has been allowed as revenue in nature. He accordingly submitted that the order of the ld.CIT(A) on this issue be upheld and the grounds raised by the assessee should be dismissed. 21. We have considered rival arguments made by both the sides, perused the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case disallowed an amount of Rs.14,32,814/- being foreign exchange loss on account of restatement of loan taken from Indusind bank for purchase of building at Chennai from M/s. Shirram Venture Ltd on the ground that such loss is in the capital field and therefore, the same is not an allowable revenue expenditure under the provisions of the Income tax Act being notional loss. We find the ld.CIT(A) held that the foreign exchange loss has to be treated as capital in nature and to be added back to the value of building and proportionate depreciation to be allowed. It is the submission of the ld.counsel for the assessee that in view of the various decisions, such foreign exchange f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int has been taken on behalf of the respondents that the Department not having come up in appeal against that decision, must be taken to have accepted the law stated in that decision as correct. Therefore, it should not be allowed to agitate these questions in this Court. Mr. Murthy, learned Senior Counsel appearing on behalf of the Department, has pointed out that we are concerned in this case with assessment for the Assessment Years 1960-61 and 1961-62. The relevant assessment years in the judgment relied upon by the High Court were 1970-71 and 1971-72. The High Court in those cases relied on the provisions of Section 43-A of the Income Tax Act which came into force on 1-4-1967. In the instant case, there is no scope for application of Section 43-A. Therefore, the decision rendered in the case relied upon by the High Court cannot have any bearing to the controversy now raised. We are of the view that Mr. Murthy is right in his contention on this aspect of the matter. Coming to the questions raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loan taken for the construction of new building and additional equipment. Accordingly, this ground of appeal of the assessee is allowed. 26. We find the Pune Bench of the Tribunal in the case of Cooper Corporation Pvt.Ltd. (supra) has observed as under:- 10.5 Before We delineate on the allowability of loss based on generally accepted accountancy principles, it may be pertinent to examine whether the increased liability due to fluctuation loss can be added to the carrying costs of corresponding capital assets with reference to S. 43(1) of the Act. Section 43(1) defines the expression actual cost . As per S. 43(1), actual cost means actual cost of the assets to the assessee, reduced by that portion of the costs as has been met directly or indirectly by any other person or authority. Several Explanations have been appended to S. 43(1). However, the section nowhere specifies that any gain or loss on foreign currency loan acquired for purchase of indigenous assets will have to be reduced or added to the costs of the assets. Thus, viewed from this perspective also, such increased liability cannot be bracketed with cost of acquisition of capital assets save and except in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as the loan is a distinct and independent transaction as in comparison with acquisition of assets out of said loan amount borrowed. Actual cost of the corresponding fixed asset acquired earlier by utilizing the aforesaid loan will not undergo any change owing to such fluctuation. 10.7 The issue is also tested in the light of provision of S. 36(l)(iii) governing deduction of interest costs on borrowals. As stated earlier, manner of utilization of loan amount has nothing to do with allowability of any expenditure in connection with loan repayment. Both are independent and distinct transactions in nature. Similar analogy can be drawn from S. 36(l)(iii) of the Act which also reinforces that utilization of loan for capital account or revenue account purpose has nothing to do with allowablity of corresponding interest expenditure. A proviso inserted thereto by Finance Act, 2003, also prohibits claim of interest expenditure in revenue account only upto the date on which capital asset is put to use. Once the capital asset is put to use, the interest expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure. As also noted, S. 43A specifical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at loss arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in the Profit Loss account in accordance with accounting fiat of AS-11. 10.9 We find that the decision in the case of Sutlej Cotton Mills Ltd. (supra) relied upon by the Ld. Departmental Representative is of no assistance to the Revenue. The Hon ble Supreme Court therein stated the principle of law that where any profit or loss arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading loss if the foreign currency held by the assessee on revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a capital asset, the loss should be capital in nature. The aforesaid principle of law is required to be applied to the facts of case to determine whether the foreign currency is held by the assessee on revenue account or as a part of circulating capital. In the present case, fluctuation loss inflicted upon the assessee bears no nexus or relation to the acquisition to the assets. The action of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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