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TMI Blog2023 (2) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... site security management consultancy services relating to development of software products. During the assessment proceedings, Assessing Officer observed that assessee had claimed foreign exchange loss amounting to Rs..42,80,768/- on account of outstanding ECB loan. When the assessee was show caused as to why the same must not be disallowed on account of paying capital in nature. In response assessee submitted as under: - "6.2. Assessee vide his letter dated 19/12/2016 submitted the following "The ECB loan outstanding during year were borrowed money from outside India in foreign currency either to acquire capital asset or to repay earlier ECB loan is 5.25% pa. which is quite low compare to similar domestic loans. The assets bought from these funds were indigenous assets. A similar facts case [TS-265-ITAT-2016(Pune)] was decided by Pune Bench of Income-tax Appellate Tribunal. The Pune bench of the Income-tax Appellate Tribunal (Tribunal) upheld the taxpayer's claim that foreign exchange fluctuation loss has a direct nexus with savings in interest costs and no new capital asset was brought into existence. The Tribunal observed that foreign exchange fluctuation loss utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant craves leave to add, amend, alter or delete any of the above grounds of appeal." 7. At the time of hearing, Ld. AR brought to our notice the facts in this case and submitted that issue involved in this appeal is squarely covered in favour of the assessee. He filed the decision of Cooper corporation (P.) Ltd. v. DCIT (2016) 69 taxmann.com 244 (Pune-Trib.) and decision of the Hueco Electronics (I) Pvt. Ltd., v. DCIT in ITA.No. 02/PUN/2017 dated 20.01.2020. 8. On the other hand, Ld. DR relied on the orders of the lower authorities. 9. Considered the rival submissions and material placed on record, we observe that assessee has borrowed funds from ECB and incurred forex loss of Rs..42,80,768/- on account of outstanding ECB loan. This fact is also accepted by the tax authorities that assessee has borrowed funds from ECB and utilized the same to purchase the assets out of these funds were indigenous assets. Since borrowing for the purpose of business and incurring expenditure and loss is also the part of the business expenditure. It is also admitted fact that assessee has borrowed ECB to reduce the interest expenditure. On similar facts on record, we observe that ITAT bench of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such conversion of the liability at the closing rate should be recognized in the profit & loss account for the reporting period. In the same vain, CBDT notification S.O. 892(E) dated 31-03-2015 referred to also inter alia deals with recognition of exchange differences. The notification also sets out that the exchange differences arising on foreign currency transactions have to be recognized as income or business expense in the period in which they arise subject to exception as set out in Section 43A or Rule 115 of the Income Tax Rules, 1962 as the case may be. 10.3 The contention of the revenue that the loss is only contingent and notional and subsisting has been examined. As per section 209 of the Companies Act, 1956, the Assessee being a company is required to compulsorily follow mercantile system of accounting. S. 211 of the Companies Act, 1956 also, in terms, mandates that accounting standards as applicable is required to be followed while drawing statement of affairs. S. 145 of the Income Tax Act,1961 similarly casts obligation to compute business income either by cash or mercantile system of accounting. Thus, in view of the various provisions of the Companies Act and Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment A bare reading of the aforesaid provision of Section 43A, which opens with a non-obstante and overriding clause, would show that it comes into play only when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with non-repayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned fluctuation loss therefore has a direct nexus to the saving in interest costs without bringing any new capital asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. The argument that the act of conversion has served a hedging mechanism against revenue receipts from export also portrays commercial expediency. Thus, We are of the opinion that the plea of the assessee for claim of expenditure is attributable to revenue account has considerable merits. 10.8 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter-alia has to be computed in accordance with cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify accounting standards to be followed for determination of business income. Section 211 of the Companies Act also similarly casts a duty on a company to give a true and fair view of the profit and loss of the company for the financial year. It also requires the company to adhere the accounting standards for preparation of profit in the Profit & Loss Account and the Balance Sheet. A conjoint reading of section 145 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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