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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 ..... , equivalent to the exchange rate difference, on loan liability denominated in foreign exchange, towards payment of capital goods acquired in India, without deciding as to whether the differential amount on account of exchange difference represent the circulating capital or the capital assets? B. Whether in the facts and circumstances of the case, the increase in loan liability in Indian Rupee, equivalent to the exchange rate difference, on loan liability denominated in foreign exchange, towards payment of capital goods, acquired in India, does not represent circulating capital and therefore, not allowable as expenditure u/s 37 (1) of the Income-tax Act 1961? Factual Background and Context: 3. The issue that lies at the heart of these questions is whether losses arising out of fluctuation of exchange rates in servicing a foreign currency loan that is utilized partly for acquiring assets from outside India and partly for acquisition of assets within India, should be entirely capitalised with the value of the assets acquired. According to the Appellant-Revenue, such losses ought to be entirely capitalised regardless of whether the asset is acquired from outside India or from w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the asset) and Rs.4,78,38,245/- being attributed to capital assets acquired within India (which was claimed as revenue expenditure); e) Owing to a steep depreciation in the value of Indian Rupee against the US Dollar, the Government of India, under Section 211 of Companies Act, 1956, issued a notification giving an option to assessees, to either take the entire amount of loss due to exchange rate movement, to the profit and loss account; or to defer the impact of such loss by capitalizing such losses with the cost of the assets so acquired. The Respondent-Assessee, therefore, was of the view that it was for the Respondent-Assessee to decide how it would choose to absorb the impact arising out of exchange rate differences; f) In its commercial books of account, the Respondent-Assessee exercised the option to add the entire exchange rate loss of Rs. 5,30,25,000/- towards the cost of fixed assets i.e. it capitalised this loss amount; g) However, for purposes of Computation of Total Income under the Act, the sum of Rs. 51,86,755/- (attributed to capital assets imported) was capitalized under Section 43A of the Act. The balance Rs. 4,78,38,245/- (attributed to capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment- (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from- (i) the actual cost of the asset as defined in clause (1) of section 43; or (i) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or (iii) the amount of expenditure of a capital nature referred to in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Emphasis Supplied] 11. From a plain reading of the foregoing, it would be clear that the first ingredient of the provision is that the expenditure in question must not be expenditure covered by Section 30 to Section 36 of the Act. The second ingredient of the provision is that the expenditure in question must not be capital expenditure. The third ingredient is that it should have been wholly expended for purposes of the business. 12. The parties are ad idem that the foreign exchange rate-induced losses involved in the matter at hand, are not covered by the aforesaid range of sections of the Act, and that it has to be considered on the touchstone of Section 37 (1) of the Act. The parties are also clear that the losses have been incurred pursuant to the borrowing in foreign exchange and that the borrowings have been deployed entirely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise of such option in its financial statements. 16. In the case at hand, the Respondent-Assessee opted for capitalizing and adding the expense arising out of exchange rate fluctuation on its foreign currency loan to the cost of the capital asset. Such election was under AS-11 and therefore, obviously, regardless of whether the assets financed thereby had been imported from outside India or 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): 17. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange rate fluctuation led to a revenue expenditure. The ITAT had stated that what may be a capital receipt in the hands of a payee would not necessarily become capital expenditure in the hand of a payer. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may be treated as revenue expenditure, and not every advantage of an enduring nature would automatically result in an expenditure being capital expenditure. Specifically, it had been held by the ITAT that what is material to consider is the nature of the advantage in a commercial sense. It is only upon a determination that the advantage is in the capital field that the expenditure would be disallowable as a revenue expenditure. The ITAT had held that what is an outflow of capital and what is an outflow of revenue, was to be assessed from the effect of the outflow with a practical and business point of view, and that question must be viewed in a larger context of business expediency or business necessity. 21. Quoting the aforesaid findings of the ITAT with approval, the Supreme Court held that they were very relevant, which the High Court missed, in wrongly reversing the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITAT and endorsed by the Supreme Court in Wipro) would be necessary, for a High Court adjudicating substantial questions of law, to appropriately exercise its jurisdiction. 26. Findings by the ITAT on these facets would enable us to take a view one way or the other, and unfortunately, such findings are not available on the record. However, the focus of the proceedings below had been simply on the import of Section 43A and we have no benefit of any articulation on applying Section 37 (1) of the Act. The Impugned Order simply deals with the issue on the principle of consistency in accounting without articulating and adjudicating the import of Section 43A and its interplay with Section 37 (1). Moreover, the very fact that AS-11 was amended on March 31, 2009, and the stance in the commercial books of accounts is driven by the option provided by such amended AS-11, underlines the need for a qualitative analysis of the fact of exchange rate losses from the ITAT. We are therefore constrained in adjudicating this Appeal, without having the benefit of an objective finding of fact in the matter. 27. Consequently, we are left with no option but to remand the matter to the ITAT for an ef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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