Rasandik Engineering Industries India Ltd., New Delhi V. DCIT, New Delhi

ITA 1997/DEL/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5062 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 16-05-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 21-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: F R MEENA
• Keywords: Capital asset; Depreciation; Question of law; Cost of acquisition; Capital expenditure
• Section: 143(3)

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI BHAVNESH SAINI , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 1997/DEL/2011 (ASSESSMENT YEAR: 2007 - 08 ) RASANDIK ENGINEERING INDUSTRIES INDIA LTD, C - 4& 5, FIRST FLOOR, C - BLOCK COMMERCIAL COMPLEX, NEW DELHI PAN:AAACR3381A VS. DCIT, LTU, NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. K SAMPATH, ADV REVENUE BY: SH. FR MEENA, SR. DR DATE OF HEARING 16/05/ 2017 DATE OF PRONOUNCEMENT 10 / 0 8 / 2017 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT(A) - LTU, NEW DELHI DATED 24.02.2011 FOR THE ASSESSMENT YEAR 2007 - 08. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THAT THE APPELLATE ORDER OF THE LD CIT(A) - LTU, NEW DELHI (HERE - IN - AFTER REFERRED TO AS THE CIT(APPEALS) IS BAD IN LAW AND WRONG ON FACTS AND MUST BE QUASHED. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD CIT(APPEALS) HAS ERRED IN UPHOL DING THE ADDITION OF RS. 12211189/ - ON ACCOUNT OF EXCHANGE FLUCTUATION GAIN CAPITALIZED BY THE ASSESSEE TOWARDS CAPITAL ASSETS PURCHASED BY RAISING FUNDS THROUGH FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB) BY HOLDING THE EXCHANGE FLUCTUATION GAIN TO BE REVEN UE IN NATURE WITHOUT APPRECIATING THE FACT THAT THE ASSESSING OFFICER HAS HIMSELF ALLOWED THE ADJUSTMENT OF RS. 843782/ - IN THE CARRYING AMOUNT OF FIXED ASSETS ON ACCOUNT OF PREMIUM ON FORWARD CONTRACTS. 3. THE BRIEF FACT OF THE CASE IS THAT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING THE AUTO PARTS AND FILED ITS RETURN OF INCOME ON 15.11.2007 AT RS. 24630233/ - . DURING THE COURSE OF ASSESSMENT PROCEEDINGS LD ASSESSING OFFICER NOTED THAT ASSESSEE HAS CAPITALIZED GAIN ON PAGE 2 OF 11 EXCHANGE RATE FLUCT UATION AMOUNTING TO RS. 12211189/ - . THEREFORE, AFTER EXAMINATION OF THE CLAIM HE MADE AN ADDITION OF THE ABOVE SUM TO THE TOTAL INCOME OF THE ASSESSEE AS UNDER WHILE FRAMING ASSESSMENT ORDER U/S 143(3) OF THE ACT ON 29.12.2009 AT RS. 36930338/ - : - (A) ADDITION ON ACCOUNT OF GAIN ON EXCHANGE RATE FLUCTUATION AS PER NOTE NO. 10 TO SCHEDULE 21, THE FOLLOWING REMARK IS APPENDED: (A) NET LOSS OF RS,528,456/ - FOR THE YEAR ON ACCOUNT OF EXCHANGE' DIFFICULT SUN, TWIT NIUTUKD IN 'MISCELLANEOUS EXPENSE* ' UNDER S CHEDULE - 16. (B) NET GAIN OF RS.12,211,189/ - FOR THE I/EUR ON ACCOUNT OF EXCHANGE DIFFERENCE IMS BEI'II CAPITALIZED AS AN SI1 - 1 MARCH, 2007. (C) NET LOSS CF RS.843,782/ - FOR THE YEAR AN ACCOUNT OF PREMIUM ON CONTRACT HAS BEEN ADJUSTED IN THE CARRYING A MOUNT OF FIXED ASSETS ON 31' - ' MARCH, 2007. THE ASSESSEE WAS REQUIRED TO GIVE EXPLANATION WHY NET GAIN OF RS 1,22,11189/ - ON FOREIGN EXCHANGE FLUCTUATION SHALL NOT BE BROUGHT TO TAX. IN RESPONSE THERE TO THE ASSESSEE HAS GIVEN THE FOLLOWING SUBMISSION: 'AS PER ACCOUNTING POLICY, TRANSACTIONS DENOMINATED IN FOREIGN CURRENCIES - ARE NORMALLY RECORDED AT THE EXCHANGE RATE PREVAILING ON THE DATE OF TRANSACTION. MONETARY ITEMS IN FOREIGN CURRENCY, OTHER THAN THOSE COVERED BY FORWARD EXCHANGE CONTRACTS AND REAMING UNSETTLED AS AT THE BALANCE SHEET DATE ARE RESTATED AT THE YEAREND RATES AND THE RESULTANT NET GAIN/LOSS IS ADJUSTED IN THE PROFIT & LOSS ACCOUNT. LONG TERM LIABILITIES SIN FOREIGN CURRENCY INCURRED FOR THE PURCHASE OF FIXED ASSETS ARE RESTATED AT THE YE AREND EXCHANGE RATE ARID ANY FLUCTUATIONS ARISING OUT OF IT ARE ADJUSTED IN THE RELEVANT CARRYING COST OF ASSETS. EXCHANGE DIFFERENCE ON ACCOUNT OF FORWARD EXCHANGE CONTRACTS ON LONG TERM LIABILITIES IN FOREIGN CURRENCY INCURRED FOR PURCHASE OF FIXED ASSET S ARE ADJUSTED TO THE RELEVANT CARRYING COST OF ASSETS. AS AT 31SR MARCH 07, THERE WAS INCREASE IN LIABILITIES FOR COST OF MATERIAL AMOUNTING TO RS.5,28,456/ - WHICH HAS BEEN CHARGED TO REVENUE ACCOUNT AND CLUBBED UNDER MISCELLANEOUS EXPENSES DURING THE YEAR THE COMPANY HAD ISSUED 10000 FCCBS OF U5$ WOO EACH AGGREGATING TO US$ 10 MILLION OF CAPITAL EXPENDITURE ON EXPANSION THE GAIN OF KS.16968381/ - ON EXCHANGE FLUCTUATION OF FCCB (DOLLARS) HAS BEEN CAPITAL/ZED, I.E., ADJUSTED TO THE CARRYING COST OF ASSET S. PAGE 3 OF 11 SIMILARLY THE TOSS OF RS.4757L9Z/ - OR, SUPPLIER CREDIT FROM ZK8 ;M;R M/< - IRM IS FOHPIVED BY THE ASSESSED FROM THE WRY BEGINNING AND IF THERE UNIT A CHANGE TN THE SYSTEM, WHETHER THE CHANGE WT& HONA FIDE; (HI) WHETHER THE ASSTSSEE HAS GIVEN TLIE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE LO IT: (IN) WHETHER THE ASSESSEE HN> BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF TOSSES AND GAMS: (V) WHETHER THE METHOD ADOPTED BY THE ASSESSES FOR MAKING ENTRIES IN THE, BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (IN) WHET HER THE SYSTEM ADOPTED BY THE ASSESSES IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A TMW TO REDUCING TIN - INCIDENCE OF TAXATION' IF THE RATIO, AS MENTIONED SUPRA, IS APPLIED IN THE CASE OF THE ASSESSEE, IT IS EVIDENT THAT GAIN ON FOREIGN EXCHANGE OF RS.1,22,11,189/ - IS TO BE BROUGHT TO TAX SINCE THE ASSESSEE HAS CLAIMED EXPENDITURE IN RESPECT OF LOSS ON EXCHANGE FLUCTUATION. THE ASSESSEE LIAS ACCOUNTED FOR NET LOSS OF RS. 5,28,456/ - ON EXCHANGE RATE FLUCTUATION IN THE P&L ACCOUNT. AS SUCH GAIN OF RS.L , 22,11, 189/ - IS NOT ALLOWED TO BE CAPITALIZED. ON THE OTHER HAND IT IS BROUGHT TO TAX. IN VIEW OF THE ABOVE DISCUSSION, ADDITION OF RS. 12211189/ - IS MADE. 4. T HE ASSESSEE PREFERRED APPEAL BEFORE THE LD CIT(A) WHO CONFIRMED THE ABOVE ADDITION HOLDING AS UNDER: - PAGE 5 OF 11 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT, THE FINDINGS OF THE AO AND THE FACTS ON RECORD. SECTION 43 A AS AMENDED W.C.F 1ST DAY OF APRIL, 2003STATES AS UNDER: - 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 OF HIS BUSINESS 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, DEDU CTED FROM - (I) THE ACTUAL COST OF THE ASSET AS DEFINED IN CLAUSE (1) OF SECTION 43, OR (LI) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUB - SECTION (I) OF SECTION 35; OR (III) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE R EFERRED TO IN SECTION 35A; OR (IV) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IX) OF SUB - SECTION (1) OF SECTION 36; OR (V) THE COST OF ACQUISITION OF A CAPITAL ASSET (NOT BEING A CAPITA! ASSET REFERRED TO IN SECTION 50) FOR THE P URPOSES 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 AFO RESAID. 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 REDU CTION 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 ADD ED 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. EXPLANATION 1 . - IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUIRES, PAGE 6 OF 11 (A) 'RATE OF EXCHANGE' MEANS THE RATE OF EXCHANGE DETERMINED OR RECOGNISED BY THE CENTRAL GOVERNMENT FOR THE CONVERSION OF INDIAN CURRENCY INTO FOREIGN CURRENCY OR FOREIGN CURRENCY INTO INDIAN CURRENCY; (B) 'FOREIGN CURRENCY' AND 'INDIAN CURRENCY' HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN SECTION 2 OF THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999. EXPLANATION 2. - WHERE THE WHOLE OR ANY PART OF THE LIABILITY AFORESAID IS MET, NOT BY THE ASSESSEE, BUT, DIRECTLY OR INDIRECTLY, BY ANY OTHER PERSON OR AUTHORITY, THE LIABILITY SO MET SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS SECTION. EXPLANATION 3. - WHERE THE ASSESSEE HAS ENTERED INTO A CONTRACT WITH AN AUTHORISED DEALER AS DEFINED IN SECTION 2 OF THE FOR EIGN EXCHANGE MANAGEMENT ACT, 1999, FOR PROVIDING HIM WITH A SPECIFIED SUM IN A FOREIGN CURRENCY ON OR AFTER A STIPULATED FUTURE DATE AT THE RATE OF EXCHANGE SPECIFIED IN THE CONTRACT TO ENABLE HIM TO MEET THE WHOLE OR ANY PART OF THE LIABILITY AFORESAID, THE AMOUNT, IF ANY, TO BE ADDED TO. OR DEDUCTED FROM, 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 UNDER THIS SECTION SHALL, IN RESPECT OF SO MUCH OF THE SUM SPECIFIED IN THE CONTRACT AS IS AVAILABLE FOR DISCHARGING THE LIABILITY AFORESAID, BE COMPUTED WITH REFERENCE TO THE RATE OF EXCHANGE SPECIFIED THEREIN. THE ABOVE AMENDED PROVISIONS OF SECTION 43A,SHOW THAT THE INCREASE OR DECREASE IN LIABILITY ON ACCO UNT OF FOREIGN EXCHANGE FLUCTUATION IS TO BE RECOGNIZED ON PAYMENT BASIS ONLY. THIS HAS BEEN HELD IN THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD. (312 - ITR - 254) ALSO. BRIEF FACTS IN THE INSTANT CASE ARE THAT THE APPELLANT HAD RAISED FUNDS OF TEN MILLION DOLLARS THROUGH FCCB FACTS ON RECORD SHOW THAT THE APPELLANT WAS SETTING UP A PLANT FOR WHICH MACHINERY WAS IMPORTED FROM OUTSIDE THE COUNTRY. THE APPELLANT HAS CAPITALIZED THE FLUCTUATION GAIN ON EXCHANGE RATE IN THE COST OF ASSET AND THIS WAS REFLECTED IN THE WORK IN PROGRESS ACCOUNT. THE ASSET HAS NOT BECOME OPERATIONAL AND NO DEPRECIATION ON THE ABOVE WAS CLAIMED BY THE APPELLANT. THE GAIN I N EXCHANGE RATE HAD BEEN REDUCED FROM THE COST OF ASSET ON THE BALANCESHEET DATE AND THE WORK IN PROGRESS ACCOUNT HAS BEEN REDUCED BY THE EXCHANGE FLUCTUATION GAIN. THE HONOURABLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. 312 ITR 254 H AS HELD AS UNDER : - 'LASTLY, WE ARE OF THE VIEW THAT AMENDMENT OF SECTION 43A BY THE FINANCE ACT 2002 W.E.F. 1.4.2003 IS AMENDATORY AND NOT CLARIFICATORY. THE AMENDMENT IS IN COMPLETE SUBSTITUTION OF THE SECTION AS IT EXISTED PRIOR THERETO. UNDER THE UNAME NDED SECTION 43A ADJUSTMENT TO THE ACTUAL COST TOOK PLACE ON THE HAPPENING OF CHANGE IN THE RATE OF EXCHANGE WHEREAS UNDER THE AMENDED SECTION 43A THE ADJUSTMENT IN THE ACTUAL COST IS MADE ON CASH BASIS. THIS IS INDICATED BY THE WORDS 'AT THE TIME OF MAKIN G PAYMENT.' IN OTHER WORDS, UNDER THE UNAMENDED SEC. 43A, PAGE 7 OF 11 'ACTUAL PAYMENT' WAS NOT A CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CARRYING COST OF THE FIXED ASSET ACQUIRED IN FOREIGN CURRENCY, HOWEVER, UNDER AMENDED SEC. 43SA W.E.F. 1.4.2003 SUCH ACTUAL PAYMENT OF THE DECREASED/ENHANCED LIABILITY IS MADE A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSET. THIS INDICATES A COMPLETE STRUCTURAL CHANGE BROUGHT ABOUT IN SEC. 43AVIDE FINANCE ACT 2002. THEREFORE, TH E AMENDED SECTION IS AMENDATORY AND NOT CTARIFICATORY IN NATURE.' PERUSAL OF THE AMENDED PROVISIONS OF SECTION 43A W.E.F. 1.4,2003 AND THE DECISION OF THE HONOURABLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. DISCUSSED ABOVE SHOWS THAT ADDITION TO AND DEDUCTION FROM THE 'ACTUAL COST' OF A CAPITAL ASSET ON ACCOUNT OF EXCHANGE FLUCTUATION WILL ONLY BE ON ACTUAL DISCHARGE OF THE LIABILITY AND NOT TO BE ADJUSTED AS WAS POSSIBLE WITH REFERENCE TO AMOUNT PAYABLE AND OUTSTANDING AT THE END OF E ACH YEAR AS IS REQUIRED UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. THE PROVISION FURTHER PROVIDES THAT THE METHOD OF ACCOUNTING ADOPTED BY THE APPELLANT WILL NOT BE RELEVANT. IN VIEW OF THE ABOVE FACT THE ADJUSTMENT MADE BY THE APPELLANT IS NOT AS PER LA W SINCE ACTUAL PAYMENT OF THE DECREASED/ENHANCED LIABILITY IS MADE CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSET. IN THE INSTANT CASE, THE APPELLANT HAS EARNED FOREIGN EXCHANGE FLUCTUATION GAIN OF RS.12211189/ - ON ACCOUNT OF THE FLUCTUATION IN THE RATE OF FOREIGN CURRENCY CONVERTIBLE BONDS. SINCE NO ACTUAL PAYMENT HAS BEEN MADE FOR THE ASSETS THEREFORE THE APPELLANT CANNOT ADJUST THE GAIN TOWARDS THE COST OF THE ASSET. THE GAIN IS ON ACCOUNT OF THE FLUCTUATI ON IN THE RATES OF THE BONDS AND SINCE NO ACTUAL PAYMENT HAS BEEN MADE FOR THE ASSETS THEREFORE THE GAIN IS REVENUE IN NATURE. IN VIEW OF THE FINDINGS ABOVE THE ACTION OF THE AO IN TAXING THE FOREIGN EXCHANGE FLUCTUATION GAIN OF RS.1,22,11,189/ - IS AS PER LAW. THIS GROUND OF APPEAL IS DISMISSED. THEREFORE THE ASSESSEE AGGRIEVED BY THE ORDER HAS PREFERRED APPEAL BEFORE US. 5. THE LD AR REFERRED TO PAGE NO. 5 OF THE ASSESSMENT ORDER AS WELL AS PAGE NO. 13 OF THE CIT(A) ORDER AND VEHEMENTLY CONTESTED THAT THE ADDITION MADE BY THE LD ASSESSING OFFICER IS NOT SUSTAINABLE. HE FURTHER SUBMITTED THAT THERE IS NO LAW ASSESSEE HAS TO REDUCE THE COST OF THE ASSETS AND THE GAIN IS NOT REVENUE IN NATURE. HE FURTHER SUBMITTED THAT MERELY AN ACCOUNTING ENTRY CANNOT RESULT INTO INCOME. HE THEREFORE, SUBMITTED THAT THE LOWER AUTHORITIES ARE INCORRECT IN MAKING THE ABOVE ADDITION. 6. THE LD DR VEHEMENTLY SUBMITTED THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THERE IS NO ERROR IN THEIR ORDERS. HE FURTHER SUBMITTED GAIN IS PAGE 8 OF 11 REQUIRED TO BE ADJUSTED IN VIEW OF THE LESSER LIABILITY OF FCCB TO THE COST OF THE CAPITAL ASSETS AND NOT IN THE PROFIT AND LOSS ACCOUNT AS INCOME. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . THE BRIEF FACTS OF THE ISSUE IS THAT COMPANY HAS I SSUED 10000 FOREIGN CURRENCY CONVERTIBLE BONDS OF 1000 US$ EACH FOR CAPITAL EXPENDITURE ON EXPANSION WHICH RESULTED AS ON 31.03.2007 ON A FOREIGN EXCHANGE GAIN OF RS. 16968381/ - . SIMILARLY, FOR OTHER FOREIGN EXCHANGE TRANSACTIONS ASSESSEE HAS INCURRED LOS S OF RS. 4757192/ - . IN VIEW OF THIS THE NET GAIN OF RS. 12211 189 / - WAS RECEIVED AND SAME WAS CAPITALIZED TO THE CARRYING COST OF THE FIXED ASSETS. IT WAS THE CLAIM OF THE ASSESSEE THAT ABOVE TREATMENT IS IN ACCORDANCE WITH THE DECISION OF THE HON'BLE SUPRE ME COURT IN CIT VS. WOODWORD GOVERNANCE INDIA PVT. LTD 312 ITR 254. THE LD ASSESSING OFFICER HAS CHALLENGED THE TREATMENT GIVEN BY THE ASSESSEE BY CAPITALIZING THE FOREIGN EXCHANGE TO THE COST OF CAPITAL HOLDING THAT UNLESS A ASSET HAS BEEN ACQUIRED FROM THE COUNTRY OUTSIDE INDIA THE GAIN OR LOSS CANNOT BE ADJUSTED TO THE CARRYING COST OF THE ASSET. THE LD AO HAS INTERPRETED THE SECTION 43A OF THE INCOME TAX ACT DEALING WITH SPECIAL PROVISION CONSEQUENT TO CHANGES IN RATE OF EXCHANGE OF CURRENCY FOR THE AB OVE TREATMENT. THE LD CIT(A) CONFIRMED THE ABOVE FINDING APPLYING THE PROVISIONS OF SECTION 43A OF THE ACT HOLDING THAT ADJUSTMENT TO THE ACTUAL COST OF THE ASSETS ON ACCOUNT OF INCREASE AND DECREASE IN THE LIABILITY OF THE ASSESSEE ON FOREIGN EXCHANGE FLUCTUATION AT THE TIME OF MAKING THE PAYMENT SHALL BE ADDED TO THE COST OF ACQUISITION OF A CAPITAL ASSET. HE FURTHER HEL D THAT METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE IS NOT RELEVANT. BEFORE US THE ASSESSEE SUBMITTED THAT PLANT HAS BEEN IMPORTED DURING 2006 - 07 AND FOR WHICH FCCB FUNDS HAVE BEEN UTILIZED. THE DETAILS OF SUCH FLUCTUATION IS ALSO PLACED AT PAGE 73 TO 77 OF THE PAPER BOOK. AT PAGE NO. 78 THE ASSESSEE SUBMITTED THE NOTE ON TREATMENT IN FOREIGN EXCHANGE FLUCTUATION IS ALSO PLACED. FURTHER THE CONTRADICTORY FACTS ARE RECORDED IN THE ORDERS OF LOWER AUTHORITIES ABOUT WHETHER THE MACHINERY IS IMPORTED OR N OT. NOW THE CLAIM OF THE ASSESSEE NEEDS TO BE ANALYZED IN VIEW OF THE PROVISION OF SECTION 43 A OF THE ACT WHICH PROVIDES AS UNDER : - SPECIAL PROVISIONS CONSEQUENTIAL TO CHANGES IN RATE OF EXCHANGE OF CURRENCY PAGE 9 OF 11 NOTWITHSTANDING ANYTHING CONTAINED IN ANY O THER PROVISION OF THIS ACT, WHERE AN ASSESSEE HAS ACQUIRED ANY ASSET IN ANY PREVIOUS YEAR FROM A COUNTRY OUTSIDE INDIA FOR THE PURPOSES OF HIS BUSINESS 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 (II) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUB - SECTION (1) OF SECTION 35 ; OR (III) THE A MOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN SECTION 35A ; OR (IV) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IX) OF SUB - SECTION (1) OF SECTION 36 ; OR (V) THE COST OF ACQUISITION OF A CAPITAL ASSET (NOT BEING A 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 SH ALL 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 PAYME NT. PAGE 10 OF 11 8. HON DELHI HIGH COURT HAS OCCASION TO CONSIDER THE AMENDMENT U/S 43A WITH EFFECT FROM A Y 2003 - 04 IN [2017] 78 TAXMANN.COM 293 (DELHI) PRINCIPAL COMMISSIONER OF INCOME - TAX (CENTRAL) - 3 V. SEAGRAM MANUFACTURING (P.) LTD AFTER CONSIDERING THE DECISION OF HON SUPREME COURT CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 AND HELD THAT 4. IN THE PRESENT CASE , THE ASSESSEE HAD CLAIMED LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION. THE ASSESSEE HAD AVAILED OF EXTERNAL COMMERCIAL LOANS FROM ITS PARENT COMPANY - SEAGRAM NETHERLANDS ANTILLES NV, THE REPAYMENT OF WHICH WAS TO COMMENCE SIX YEARS FROM THE DATE THE LOAN WAS AVAILED/DRAWN. THE ASSESSING OFFICER (AO), THEREFORE, HELD THAT THE LIABILITY FELL INTO THE CAPITAL STREAM. THE CIT(A) FOLLOWED THE DECISION IN WOODWARD ( SUPRA ) AND HELD IN THE ASSESSEE'S FAVOUR. THE ITAT CONFIRMED THAT DECISION. THIS COURT NOTICE S THAT ELECON ( SUPRA ) UNDOUBTEDLY IS A LATER DECISION. THE COURT EMPHASISED THE PURPOSE OF THE LOAN AND STATED THAT IF IT WAS FOR THE FINANCING OF FIXED ASSET OR WORKING CAPITAL, FOR THE ASCERTAINMENT OF IT, ALL RELEVANT CIRCUMSTANCES AND MATERIALS OUGHT T O BE GONE INTO. THE ASSESSEE IN THAT CASE HAD NOT PRODUCED ANY WORTHWHILE MATERIAL. IN THE CIRCUMSTANCES, THE SUPREME COURT HELD THAT THE REVENUE'S CONTENTIONS WERE CORRECT. 5. THIS COURT IS OF THE OPINION THAT THE DECISION IN WOODWARD ( SUPRA ) WAS CORRECTL Y APPLIED. SECTION 43A OF THE INCOME TAX ACT, 1961 WHICH APPLIES IN SUCH CIRCUMSTANCES, INTER ALIA REQUIRES THE TREATMENT OF FOREIGN EXCHANGE FLUCTUATION TO FOLLOW THE PURPOSE OF THE BORROWING; YET IT ALSO HIGHLIGHTS THAT, 'THE AMOUNT BY WHICH THE LIABILIT Y AFORESAID IS SO INCREASED OR REDUCED DURING THE PREVIOUS YEAR SHALL BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED FROM, THE ACTUAL COST OF THE ASSET.' THIS COURT NOTICES THAT THERE IS NO FINDING BY THE AO THAT THE COST OF THE ASSET HAD BEEN REDUCED OR IN CREASED, AS THE CASE MAY BE, ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION. IN THE CIRCUMSTANCES, THE FINDINGS RENDERED ARE NOT ONLY FACTUAL BUT, IN OUR OPINION, IN CONFORMITY WITH THE PREVIOUS RULE IN WOODWARD ( SUPRA ). THE QUESTION OF LAW SOUGHT TO BE URGED BY THE REVENUE IS ANSWERED AGAINST IT. 9. IN VIEW OF THE JUDICIAL PRECEDENTS AS CITED ABOVE, AMENDMENT WITH EFFECT FROM AY 2003 - 04 IN SECTION 43A OF THE ACT AND ALSO TO ASCERTAIN THE CORRECT FACTS ABOUT THE ACQUISITION OF ASSETS FROM OVERSEAS AND ITS CONSEQUENT LIABILITY AS THE ORDER OF THE LD CIT (A) AND LD AO HAS RECORDED CONTRADICTORY FACTS, THE ISSUES IS SET ASIDE TO THE FILE OF THE LD AO TO DEAL WITH THE CLAIM OF THE ASSESSEE OF GAIN ON ACCOUNT OF FOREIGN EXCHANGE AFRESH AFTER GIVING AN O PPORTUNITY OF HEARING AND TO SET OUT THE COMPLETE FACTS OF ITS CLAIM . PAGE 11 OF 11 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED WITH ABOVE DIRECTION FOR STATISTICAL PURPOSES. 11. ORDER PRO NOUNCED IN THE OPEN COURT ON 1 0 / 08 / 2017 . - S D / - - S D / - ( BHAVNESH SAINI ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 0 / 08 / 2017 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI