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TMI Blog2024 (9) TMI 1458X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired locally in India. It is trite law that accounting treatment in the commercial books is no conclusive indication of treatment in the tax returns, and one must have regard to the legislative stipulation in the tax legislation to ascertain if the expense is allowable as revenue expenditure or is to be capitalised as a capital expenditure. It is in this context that we are of the view that Section 37 (1) must necessarily be dealt with. Positive Mandate of 43A vs. Negative Caveat in 37 (1) - It is apparent that to attract the mandatory obligation to capitalise the expense relating to exchange rate fluctuation under Section 43A, the ingredients of Section 43A have to be attracted. The essential jurisdictional fact for the mandatory capitalisation of such an expense under Section 43A is that the capital asset financed by the foreign currency loan in question, must have been brought into India from a country outside India. To the extent the loan was utilised for such an import, even the Respondent-Assessee has without demur, capitalised the loss on exchange rate fluctuation in servicing the loan, to add to the cost of the asset. Looking at the ingredients of Section 37 (1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end full cooperation to the ITAT by participating in the hearings expeditiously, without seeking unnecessary adjournments, so as to enable the ITAT to deal with the issue at the earliest. We also make it clear that nothing contained in this judgement and order is to be regarded as an expression of our opinion on the merits of the issue being remanded to the ITAT. - G. S. KULKARNI SOMASEKHAR SUNDARESAN, JJ. For the Appellant : Mr. Akhileshwar Sharma, Advocate. For Respondent-Assessee : Mr. Nitesh Joshi, a/w Atul Jasani, Advocates. JUDGEMENT (PER, SOMASEKHAR SUNDARESAN J.) 1. The captioned Appeal is a challenge to an order dated April 3, 2017 ( Impugned Order ) passed by the Income Tax Appellate Tribunal, Mumbai, ( ITAT ) allowing an appeal filed by Galaxy Surfactants Ltd., the Respondent-Assessee, setting aside the concurrent view of the Assessing Officer ( AO ) and the Commissioner of Income Tax Appeal ( CIT-A ) in relation to the interpretation of Section 43A of the Income-tax Act, 1961 ( the Act ), and allowing a certain expense as revenue expenditure. 2. The questions of law raised in the captioned Appeal are as follows: A. Whether in the facts and circumstances of the case, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquiring assets within India, and that there is no scope to capitalize such component of the losses. The ITAT allowed the foreign exchange losses to be broken up in proportion to the value of import of assets and value of assets acquired locally, and allowed the latter component to be treated as revenue expenditure. 5. The following factual matrix would be noteworthy:- a) The assessment year in question is 2009-10; b) The Respondent-Assessee had availed of foreign currency loan in the nature of external commercial borrowings from DBS Bank, Singapore towards capital expenditure; c) As provided for under Accounting Standard (AS) 11 ( AS-11 ), the balance outstanding in respect of such foreign currency loan had to be restated as of March 31, 2009 by marking to market, the exposure denominated in foreign exchange, which resulted in a loss of Rs.5,30,25,000/- owing to change in the exchange rate between the Indian Rupee and foreign currency; d) The Respondent-Assessee broke up such loss amount in the proportion of value of capital goods imported into India and value of capital goods acquired within India such break up led to Rs.51,86,755/- being attributable to capital assets imported ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by the AO and confirmed by the CITA. 6. Aggrieved by the ITAT s deletion of the disallowance, the Revenue has come up in appeal, challenging the Impugned Order. We have heard, at length, Mr. Akhileshwar Sharma, Learned Counsel on behalf of the Appellant-Revenue and Mr. Nitesh Joshi, along with Mr. Atul Jasani, Learned Counsel on behalf of Respondent-Assessee. Section 43A and Section 37 (1): 7. While the questions framed by the Appellant-Revenue simply entailed interpretation of Section 43A of the Act, we were also keen that the parties also address us on Section 37 (1) of the Act, since we are of the view that the issue at hand also involves examining interpreting whether the loss in question, de hors the implications of Section 43A of the Act, could be regarded as revenue expenditure. Both parties have addressed us at length on the issue. 8. Extracts from Section 43A, relevant to the matter at hand, are set out below:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency loan taken for import of an asset from a country outside India for business of profession. That positive obligation, introduced with a nonobstante provision, would have to be met where the loan is intended to finance import of a capital asset. The jurisdictional fact for attracting Section 43A is that the territory from which the asset is acquired is outside India and the asset is brought into India. To that extent, there can be, and there is, no quarrel between the parties about the need to capitalise the amount of Rs. 51,86,755/- which is the proportionate component of the losses when they are broken up in the ratio of the value of assets acquired from outside India and from within India. 10. As regards the balance component of the foreign exchange losses, the question that emerges is whether, by default, such component would automatically be treated as revenue expenditure under Section 37 (1) of the Act. Relevant extracts from the said provision (shorn of the Explanations to the provision, which are not relevant to the matter at hand), for felicity, are set out below:- General. 37 (1). Any expenditure (not being expenditure of the nature described in sections 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of Changes in Foreign Exchange Rates . Such amendment provided an option to the reporting enterprise to irrevocably, for the period between December 7, 2006 and March 31, 2011, treat exchange rate differences, insofar as they relate to acquisition of a depreciable capital asset, to be added to or deducted from the cost of the asset, and thereby be depreciated over the balance life of the asset. Alternatively, the difference arising out of exchange rate fluctuation could be accumulated in a Foreign Currency Monetary Item Translation Difference Account , to be amortised over the balance period of such long-term asset or liability, but not beyond March 31, 2011. 15. Since the notification was issued on March 31, 2009, any difference pertaining to the accounting period that had commenced after December 7, 2006 and already previously recognized in the profit and loss account before the exercise of the option enabled on March 31, 2009, could also be reversed to the extent such exchange rate fluctuation related to the acquisition of a depreciable capital asset. The reporting enterprise was required to state the fact of exercise of such option in its financial statements. 16. In the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate fluctuation relating to foreign currency loan connected to acquisition of plant and machinery for purposes of determining the nature of expenditure. Section 43A of the Act had no relevance for Wipro. The Karnataka High Court had taken a view that the expense arising out of foreign exchange fluctuation ought to be treated as capital expenditure, inter alia on the premise that there was no direct link between the loan availed of and the title to the assets acquired by the Assessee. The High Court had taken the view that the ITAT had been wrong in allowing the losses as revenue expenditure by stating that the ITAT s decision to allow the losses as revenue expenditure was not a reasoned order, when it reversed the view taken by the CIT-A. In contrast, the Supreme Court had held that it was the analysis of the ITAT and the conclusion of the ITAT that was relevant and accurate. 20. In Wipro, the ITAT had stated that the foreign currency loan was not an asset , and it was in fact a liability . Therefore, the ITAT held that the objective for which the loan was taken was irrelevant for determining whether the exchange rate fluctuation led to a revenue expenditure. The ITAT had stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our jurisdiction is a jurisdiction on deciding substantial questions of law, not having the benefit of a detailed articulation of the issue with particular regard to the facts involved, we believe it would be just and fair to request the ITAT to specifically return findings on this facet of the matter, applying its mind to Wipro, and also to the case law cited by the Revenue. 24. We find that the Impugned Order simply records the contentions and the case law cited by both sides, and deals with the issue on the premise that the accounting method followed by the Assessee consistently in the past has to be presumed to be correct unless the AO comes to the view that the accounts do not present a true and fair view of the state of affairs. The AO had accepted, the ITAT ruled, the book results of the Assessee and adopted the returned income, without finding any defects in the books of accounts. 25. We are afraid, that the articulation on what is essentially a mixed question of fact and law, with a requirement to delve deep into the factual and qualitative facets of the matter (on the lines articulated by the ITAT and endorsed by the Supreme Court in Wipro) would be necessary, for a High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into India from abroad. 30. It is made clear that the relevance of whether the fluctuation results in erosion of an asset s value or in enhancement of a liability s size, can also be fully articulated by the parties before the ITAT this was a facet hotly contested before us. 31. To be clear, the question to be answered by the ITAT on remand is as follows:- Whether the expenditure in the sum of Rs. Rs.4,78,38,245/- that has been disallowed by the AO and the CIT-A, and allowed by the ITAT, would on its own showing (de hors Section 43A that contains a positive enjoinment of treating such exchange rate losses relating to foreign currency loan deployed to import assets as capital expenditure), qualify as not being capital expenditure, so that it can be considered towards allowance as revenue expenditure under Section 37 (1). 32. We are deeply conscious that this Appeal pertains to the Assessment Year 2009-10. By the time this litigation came to be filed in the High Court, after traveling through two rounds of appeal, it was October 2017. Final hearing of this appeal took place in 2024. The scope of remand being limited, as articulated above, we trust the ITAT would deal with the remand ..... X X X X Extracts X X X X X X X X Extracts X X X X
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