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TMI Blog2023 (3) TMI 909X X X X Extracts X X X X X X X X Extracts X X X X ..... er for ease of reference For the aforesaid reasons, in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. No inconsistency with any provision of Act or with any accounting practices been brought to our notice. Otherwise also, in the light of fact that the conversion in foreign currency loans which led to impugned loss, were dictated by revenue considerations towards savings interest costs etc. we have no hesitation in coming to the conclusion that loss being on revenue account is an allowable expenditure under s. 37(1) of the Act. The order of the CIT(A) sustaining the disallowance is not called for and is thus reversed. In the result, the ground no. 1 is allowed. Loss incurred by the assessee in foreign currency exchange is allowable as revenue expenditure and is a revenue loss for which the assessee is entitled to deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to the Transfer Pricing Officer (TPO for short) for computation of arms length price in relation to the international transactions of the assessee and also made an addition on the foreign exchange losses on ECB loan, amounting to Rs.2,28,63,345/-. The A.O. also made an addition of Rs.29,28,34,962/- on account of 'loss on derivative contracts'. The assessee raised an objection before the ld. DRP, challenging the various additions made by the A.O. and after disposing of the objections, the A.O. passed the final assessment order as per the proposal of the ld. DRP. The assessee has challenged the impugned addition before us. 4. Ground no. 1 raised by the assessee is general in nature and ground no. 2 pertains to the disallowance of foreign exchange losses, upward adjustment of Rs.2,28,63,345/- on account of foreign exchange losses on ECB loan. It is observed that the assessee has availed ECB loan from Canara Bank for an amount of USD 40 million (INR Rs.234,54,29,000/-) during FY 2014-15 at an average exchange rate of Rs.58.8 per USD, for the purpose of refinancing the existing rupee borrowings from ICICI Bank, Axis Bank Ltd. and Aditya Birla Group. The assessee has stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further stated that the said expenditure incurred by the assessee are allowable as per section 37 of the Act. The assessee had tabulated the details of the loss on long term monetary item and the amortization of the same which are tabulated as below: Loss on Long Term Monetary Item Loan Amount - Canara Bank ECB USD USD Rate INR New Loan Distributed on 19.05.14 3,00,00,000 58.3983 1,75,19,49,000 New Loan Disbursed on 19.05.14 1,00,00,000 59.3380 59,33,80,000 Total loan 4,00,00,000 58.6332 2,34,53,29,000 Repaid on 30.09.2014 10,00,000 61.5775 6,15,77,500 Repaid on 30.03.2015 10,00,000 62.57500 6,25,75,000 Closing balance 3,80,00,000 62.3355 2,36,87,49,000 Gain /(loss) (14,75,72,500) Amortization of loss on long term monetary item Working as AS-11 as on 31.03.2015 ECB - Canara Bank Op. Balance - Exchange loss for the period ended 31.03.2015 14,75,72,500 Amount to be capitalised - Balance for the period to be amortised 14,75,72,500 Total as on 31.0.32015 14,75,72,500 Total period as on 31.03.2015 71 Remaining period as on 31.03.2015 60 Amortisation in Period ended 31.03.2015 2,28,63,345 Balance as on 31. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l asset was also put to use, prior to the said conversion. 11. From the submission made by both sides, it is evident that the assessee has not utilised the said loan for the purpose of acquisition of the assets and was only for the purpose of saving in interest costs. The AO has not controverted this fact and has merely stated that the assessee has availed loan for the purpose of acquisition of capital assets. There is no material evidence to prove this fact. In the absence of the said proof, we can conclude that the purpose of the loan availed by the assessee was to save the interest costs for the loan received from the banks. On perusal of the decisions cited by the ld. AR, it can be observed that the Hon'ble Apex Court has held that a profit or loss on account of fluctuation in foreign currency held by the assessee would ordinarily be a 'trading loss' or a circulating capital for the purpose of the business activity of the assessing. The Hon'ble Apex Court has also held that for the purpose of allowing any expenditure, it is essential to consider whether the accounting system followed by the assessee is Mercantile system that and whether the said system has been followed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan was availed for the purpose of reducing the cost of interest, which is an allowable expenditure u/s. 37(1) of the Act. The addition made on account of the same is directed to be deleted and, therefore, ground no. 2 and its relevant grounds raised by the assessee are allowed. 14. Ground no. 3 pertains to the adjustment of Rs.29,28,34,962/- on account of loss on derivative contracts. It is observed that the assessee has entered into two derivative contracts amounting to Rs.100 crores (Rs.50 crores each) in the nature of interest and principal currency swap transaction where Rs.100 crores was converted into dollar loan at a fixed rate of USD/INR with ICICI Bank. As per the contract, the assessee has converted three months floating libor into the fixed libor rate pertaining to ECB loan of 20 million dollars from the DBS Bank during the financial year 2011-12. The said loan was to be repaid in 16 quarterly installments after monatorium period of 24 months. As per the accounting standards, the derivative contracts are to be valued at the yearend as and when the interest settlement is made. The resultant impact has to be transferred to the profit and loss account and the necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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