DCIT, CHENNAI V. Emerald Resilient Tyre Manufactures Pvt Ltd., CHENNAI

ITA 371/CHNY/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4191 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 05-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 14-02-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUPRIYO PAL
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition; Speculation loss; Commercial expediency; Revenue expenditure
• Section: 143(3); 80HHC; 37(1); 43(5); 147; 145; 148; 6; 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , . , # $ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER A ND SHRI. G. PAVAN KUMAR, JUDICIAL MEMBER ./I.T.A. NO. 371/MDS/2014 /ASSESSMENT YEAR : 2008-09 DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(1), CHENNAI 600 034. VS. M/S. EMERALD RESILIENT TYRE MANUFACTURES PVT LTD., NO. 3, 9 TH LANE, SHASTRI NAGAR, ADAYAR, CHENNAI 600 020. [PAN: AABCT 3770E] ( / APPELLANT) ( /RESPONDENT) &' / APPELLANT BY : SHRI. SUPRIYO PAL, JCIT )*&' /RESPONDENT BY : SHRI. VIKRAM VIJAYARAGHAVAN, ADVOCATE ' /DATE OF HEARING : 06.04.2017 ' /DATE OF PRONOUNCEMENT : 21.06.2017 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER: THE REVENUE HAS FILED AN APPEAL AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, CHENNAI IN ITA NO. 533/2013-14 DATED 28.10.2013 PASSED U/S. 147 AND 250 OF THE INC OME TAX ACT. ITA NO.371/MDS/2014 :- 2 -: 2. THE REVENUE RAISED THE FOLLOWING GROUNDS: 2. THE LD. CIT(A) ERRED IN DELETING THE ADDITION MA DE TOWARDS EXPENDITURE INCURRED ON CURRENCY SWAP TRANSACTIONS AMOUNTING TO RS. 1.82 CRORES. 2.1 THE LD. CIT(A) FAILED TO APPRECIATE THE FACT TH AT THE BOARDS INSTRUCTION NO 3/2010 DATED 23.03.2010 GOVERNING TH E TREATMENT OF LOSS ARISING OUT OF FORWARD CONTRACTS ARE BINDING O N THE DEPARTMENT; 2.2 THE LD. CIT(A) FAILED TO APPRECIATE THAT PROVIS IONS OF SECTION 43(5) DOES NOT INCLUDE SWAP CURRENCY TRANSACTIONS AS A NO N SPECULATIVE TRANSACTION. IN THIS CASE, THE ASSESSEE HAD SWAPPE D THE INR LOAN FOR A CHF LOAN AND HAS SUFFERED LOSSES AS A RESULT OF V OLATILITY OF FOREIGN EXCHANGE MARKET DURING THE YEAR AND THE SAID LOSS C ANNOT BE ALLOWED. 2.3 THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE FA CT THAT IN PAGE 8 OF HIS ORDER, IT WAS HELD THAT THOUGH SWAP CURRENCY TRANSACTIONS ARE AIMED AT PROTECTING FROM THE ADVERSE MOVEMENTS OF T HE FOREIGN CURRENCY EXCHANGE RATES, THEY CANNOT BE TERMED AS B USINESS TRANSACTIONS AS SUCH SINCE THE SAID LOSS HAD NOT AR ISEN OUT OF MANUFACTURING OR TRADING ACTIVITY, WHICH MEANS IT IS A SPECULATIVE LOSS. 2.4 IT IS SUBMITTED THAT THE DECISION RELIED UPON B Y THE CIT(A) IN THE CASE OF MUNJAL SHAWA LTD VS DCIT (94 TTJ 227) (DEL) CANNOT BE APPLIED TO THE FACTS OF THIS CASE SINCE THE ABOVE D ECISIONS WERE RENDERED IN THE CONTEXT AS TO WHETHER FOREIGN CURRE NCY IS A COMMODITY FOR THE PURPOSE OF SEC. 43(5) OF THE ACT. 2.5 IT IS SUBMITTED THAT THE DECISION IN THE CASE O F SHREE CAPITAL SERVICES LTD., VS ACIT (121 ITD 498)(KOL) IS ALSO R ENDERED IN THE CONTEXT AS TO WHETHER DERIVATES WOULD FALL WITHIN T HE DEFINITION COMMODITY IN SEC. 43(5) OF THE ACT. ITA NO.371/MDS/2014 :- 3 -: 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS IN THE BUSINESS OF MANUFACTURE OF SOLID & INDUSTRIAL PNEUMATIC TYRES A ND FILED, THE RETURN OF INCOME ON 23.09.2008 WITH TOTAL INCOME OF RS. 1,20, 98,800/- AND THE RETURN OF INCOME WAS PROCESSED U/S. 143(1) OF THE ACT. SU BSEQUENTLY, NOTICE U/S. 148 OF THE ACT WAS ISSUED. THE ASSESSING OFFICER F OUND THAT THE ASSESSEE HAS DEBITED AMOUNT OF RS. 1,82,66,657/- TOWARDS LOSS ON CURRENCY SWAP TRANSACTION. THE LD. AR EXPLAINED THAT THE ASSESSE E ENTERED INTO CHF (SWISS FRANC) AGREEMENT WITH SBI TO THE EXTENT OF RS. 9 CR ORES AND THE ASSESSING OFFICER FOUND THAT THE COMPANY HAS AGREED TO DELIVE R ON THE CONTRACT MATURITY/SETTLEMENT AND THIS SWAP CONTRACT GIVE PRO TECTION ADVERSE MOVEMENTS IN CURRENCY ON USD/INR, DUE TO VOLATILITY IN THE FOREIGN CURRENCY MARKED TO BREACH POINT. THE ASSESSEE COMPANY IN RE SPONSE TO NOTICE U/S. 148 OF THE ACT FILED LETTER TO TREAT RETURN FILED EARLI ER AS COMPLIANCE AND THE REASONS FOR RE-OPENING WERE COMMUNICATED TO THE ASS ESSEE COMPANY AND SUBSEQUENTLY NOTICE U/S. 143(2) DATED 15.11.2010 WA S ISSUED. THE LD. AR APPEARED FROM TIME TO TIME AND FILED THE DETAILS AN D THE LD. AO HAS VERIFIED THE FINANCIAL ACCOUNTS. THE ASSESSEE HAS FILED THE DETAILED INFORMATION ON THE SWAP TRANSACTIONS AND EXPLAINED THAT THE SWAP TRANS ACTIONS ARE NOT IN NATURE OF SPECULATIVE TRANSACTION AND THE ASSESSING OFFICE R DISCUSSED IN THE PARA 4 OF THE ASSESSMENT ORDER AND CONCLUDED THAT LOSS INCURR ED BY THE ASSESSEE IS A SPECULATIVE LOSS AND DISALLOWED THE CLAIM AND PASSE D ORDER U/S. 143(3) AND 147 OF THE ACT DATED 26.12.2011. ITA NO.371/MDS/2014 :- 4 -: 4. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FILED A N APPEAL WITH THE CIT(A). IN THE APPELLATE PROCEEDINGS, THE LD. AR A RGUED THE GROUNDS ON THE RE-OPENING OF ASSESSMENT AND BUSINESS LOSS OF RS. 1 ,82,66,657/- ON CURRENCY SWAP TRANSACTIONS. THE LD. CIT(A) CONSIDERED THE S TATEMENT OF FACTS AND GROUNDS AND CONFIRMED THE RE-ASSESSMENT PROCEEDINGS AS VALID. ON THE SECOND DISPUTED ISSUE OF TREATMENT OF CURRENCY SWAP TRANSACTION, THE LD. CIT(A) FOUND THAT THE ASSESSEE HAS A CURRENCY SWAP TRANSACTION AND CLAIMED SAME AS A BUSINESS LOSS, WHEREAS, THE ASSESSING OFF ICER HAS TREATED A SPECULATIVE LOSS. THE LD. CIT(A) CONSIDERED THE FI NDINGS OF THE ASSESSING OFFICER, SUBMISSIONS OF THE ASSESSEE AND THE PROVIS IONS OF SECTION 43(5) OF THE ACT AND PROVISIONS OF SECTION 28 TO 41 AND ALSO DIS CUSSED ON SHARES AND STOCKS AND COMMODITIES AND RELIED ON THE JUDICIAL DECISION S REFERRED AT PAGE 9 OF THE ORDER WHICH READ AS UNDER: IN THE PRESENT CASE, THE TRANSACTION IS A SWAP CON TRACT. THE SWAP CONTRACT IS IN RELATION TO THE FOREIGN CURRENCY. T HEREFORE ONE HAS TO SEE WHETHER THE CONTRACT OF FOREIGN CURRENCY AMOUNTS A SPECULATIVE TRANSACTION? ALSO ONE HAS TO SEE WHETHER FOREIGN C URRENCY REPRESENTS A COMMODITY OR A SHARE AND STOCK? SHARES AND STOCKS MEANS THE SHARES OF THE COMPARU. ES. HENCE THE FOREIGN CURRENCY WILL NOT FALL IN TO THE CATEGORY O F 'SHARES AND STOCKS'. COMMODITY MEANS THE ONES WHICH ARE ELIGIBLE TO BE T RADED IN THE RECOGNIZED COMMODITY EXCHANGES. THE CURRENCY, WHETH ER FOREIGN CURRENCY, OR INDIAN CURRENCY, IS NOT ALLOWED TO BE TRADED IN THE COMMODITY EXCHANGES. THEREFORE THE FOREIGN CURRENCY CANNOT BE TREATED AS A COMMODITY. THE DELHI BENCH OF ITAT IN THE CASE OF MUNJAL SHAWA LTD VS DCIT (94 TTJ 2 7) HAS HELD THAT THE FOREIGN CURRENCY IS NEITHER A COMMODITY NOR A SHARE. THE RELEVANT PORTION OF THE DECISION IS AS UNDER: ITA NO.371/MDS/2014 :- 5 -: MUNJAL SHAWA LTD VS DCIT (94 TT J 227)(DEL): 'FOREIGN CURRENCY OR ANY CURRENCY IS NEITHER COMMO DITY NOR SHARES. THE SALE OF GOODS ACT SPECIFICALLY EXCLUDES CASH FR OM THE DEFINITION OF GOODS BESIDES, NO PERSON OTHER THAN AUTHORIZED DEAL ERS AND MONEY CHANGERS ARE ALLOWED IN INDIA TO TRADE IN FOREIGN C URRENCY, MUCH LESS SPECULATE. 5.8 OF THE FOREIGN EXCHANGE 'REGULATIONS ACT, 1973, PROVIDES THAT EXCEPT WITH PRIOR GENERAL OR SPECIAL PERMISSIO N OF THE REI, NO PERSON OTHER THAN AN AUTHORIZED DEALER SHALL PURCHASE, ACQ UIRE, BORROW OR SELL FOREIGN CURRENCY. THE PRESUMPTION OF ANY SPECULATIV E TRANSACTION IS, THEREFORE, DIRECTLY REBUTTED IN VIEW OF THE LEGAL I MPOSSIBILITY AND IN MEW OF THE FACT THAT FOREIGN CURRENCY WAS NEITHER COMMO DITY NOR SHARES'. THE SPECIAL BENCH OF ITAT KOLKATA IN THE CASE OF S HREE CAPITAL SERVICES LTD. V. ACIT (121 ITD 498)(KOL)(SB) HAS HE LD THAT A CURRENCY CANNOT BE TERMED AS A COMMODITY SO AS TO ATTRACT TH E PROVISIONS OF S.43(5). THE RELEVANT PORTION OF THE DECISION IS AS UNDER: SECTION 43(5) OF THE INCOME-TAX ACT, 1961 - SPECUL ATIVE TRANSACTIONS - ASSESSMENT YEAR 2004-05 - WHETHER CLAUSE (D) OF P ROVISO TO SECTION 43(5) IS PROSPECTIVE IN NATURE AND WILL BE EFFECTIVE FROM DA TE ON WHICH LEGISLATURE MADE IT EFFECTIVE, I.E., 1-4-2006 - HELD, YES- WHETHER TERM (DERIVATIVES' IN WHICH UNDERLYING AS SET IS SHARES, WOULD FALL WITHIN MEANING OF (COMMODITY' USED IN SE CTION 43(5) - HELD, YES- WHETHER, THEREFORE, WHERE ASSESSEE SUFFERED A LOSS ON ACCOUNT OF FUTURES AND OPTIONS, I.E., A FORM OF DERIVATIVES, I N WHICH UNDERLYING ASSET WAS SHARES, SAID LOSS WAS RIGHTLY DISALLOWED BY REVENUE AUTHORITIES BY INVOKING PROVISIONS OF SECTION 43(5) - HELD, YES SIMILARLY, THE MUMBAI BENCH OF ITAT IN THE CASE OF DCIT V. INTERGOLD (I) LTD., (124 TTJ 337)(MUM) HAS HELD THAT PROFITS FROM CANCELLATION OF FORWARD EXCHANGE CONTRACTS ARE BUSINESS PROFITS AND NOT SPECULATIVE PROFITS. THE RELEVANT DECISION IS AS UNDER: ITA NO.371/MDS/2014 :- 6 -: SECTION 80HHC OF THE INCOME-TAX ACT, 1961 - DEDUCT IONS - EXPORTERS - ASSESSMENT YEAR 1997-98 - ASSESSEE-COMPANY WAS EN GAGED IN BUSINESS OF CUTTING AND POLISHING OF DIAMONDS AND M ANUFACTURING OF STUDDED GOLD AND THEN EXPORTING IT - IT HAD ENTERED INTO FORWARD EXCHANGE CONTRACT WITH CERTAIN PARTIES - ON CANCELL ATION OF SAID CONTRACTS IT INCLUDED FOREIGN EXCHANGE GAIN REALIZED TO ITS P ROFIT FOR PURPOSE OF DEDUCTION UNDER SECTION 80HHC - ASSESSING OFFICER E XCLUDED THAT AMOUNT ON GROUND THAT SAME WAS A SPECULATIVE BUSINESS INCO ME NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC - WHETHER SINCE DURIN G COURSE OF ITS BUSINESS OF EXPORT ASSESSEE ENTERED INTO SUCH CONTR ACTS FOR SALE OF FOREIGN EXCHANGE WITH BANKS, IT WAS A REGULAR BUSIN ESS INCOME AND NOT SPECULATION INCOME - HELD, YES- WHETHER HOWEVER, 90 PER CENT OF FOREIGN EXCHANGE G AIN ON CANCELLATION OF FORWARD EXCHANGE CONTRACT WOULD BE LIABLE TO BE REDUCED FROM BUSINESS INCOME FOR COMPUTING 'PROFIT OF BUSIN ESS' AS PER CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC - HELD, YES THE CALCUTTA HIGH COURT IN THE CASE OF CIT V. SOOR AJMULL, (129 ITR 169) HAS HELD THAT WHERE IN THE NORMAL COURSE OF BU SINESS OF IMPORT AND EXPORT OF JUTE, THE ASSESSEE ENTERED INTO FOREIGN E XCHANGE CONTRACT TO COVER UP THE LOSSES AND DIFFERENCES IN THE EXCHANGE VALUATION, THE TRANSACTION IS NOT A SPECULATIVE TRANSACTION. THE R ELEVANT PORTION OF THE DECISION IS AS UNDER: EXPLANATION 2 TO SECTION 24{1) OF THE INDIAN INCOM E-TAX ACT, 1922 [CORRESPONDING TO SECTION 43(5) OF THE INCOME-TAX A CT, 1961J - SPECULATIVE TRANSACTIONS - ASSESSEE CARRYING ON IMP ORT AND EXPORT BUSINESS IN JUTE ENTERED INTO FOREIGN EXCHANGE CONT RACT FOR 1 LAKH POUNDS BUT COULD UTILISE THE SAME FOR ONLY 55,000 POUNDS - PAID RS. 80,491 AS DAMAGES REPRESENTING EXCHANGE DIFFERENCE AND INTERE ST - WHETHER TRIBUNAL RIGHT IN HOLDING THAT IMPUGNED SU M WAS NOT SPECULATION LOSS AND WAS INCIDENTAL TO CARRYING ON ASSESSEE'S BUSINESS - HELD, ON FACTS, YES IN VIEW OF THE ABOVE DISCUSSIONS AND JUDICIAL PRON OUNCEMENTS IT IS CLEAR THAT FOREIGN CURRENCY IS NEITHER A SHARE / ST OCK NOR A COMMODITY ITA NO.371/MDS/2014 :- 7 -: 'FOR THE PURPOSE OF SEC. 43(5) OF THE ACT. THEREFOR E: THE TRANSACTIONS OF 'FOREIGN EXCHANGE CONTRACTS' CANNOT BE VIEWED AS SP ECULATIVE - TRANSACTIONS. CONSEQUENTLY, ASSESSEE'S LOSSES FROM THE SWAP TRANSACTION IS NOT A SPECULATIVE LOSSES FOR THE PURPOSE OF SEC. 43(5). THEREFORE THE ASSESSING OFFICER IS NOT JUSTIFIED IN TREATING THE LOSSES FROM THE SWAP TRANSACTION AS SPECULATIVE LOSSES. THE ASSESSING OF FICER IS DIRECTED TO CONSIDER THE LOSSED FROM THE SWAP TRANSACTIONS AS R EGULAR BUSINESS LOSSES AND ALLOW THEIR SER OFF AGAINST OTHER BUSINE SS PROFITS OF THE ASSESSEE. THE ASSESSEE SUCCEEDS IN THIS GROUND. AND THE LD. CIT(A) HAS PARTLY ALLOWED THE APPEAL. 5. AGGRIEVED BY THE ORDER, THE REVENUE HAS FILED AN APPEAL BEFORE THE TRIBUNAL. THE LD. DR ARGUED THAT THE LD. CIT(A) HA S ERRED IN DELETING THE ADDITION ON EXPENDITURE ON SWAP TRANSACTION AND OVE RLOOKING THE BOARD CIRCULAR AND CANNOT BE TREATED AS THE BUSINESS TRAN SACTION AND IT COVERS THE CHARACTER OF SPECULATIVE LOSS AND PRAYED FOR SETTIN G ASIDE THE ORDER OF THE CIT(A) AND ALLOWED THE REVENUE APPEAL. CONTRA, THE LD. AR RELIED ON THE ORDERS OF THE CIT(A) AND EXPLAINED THAT THE TRANSAC TION OF OBTAINING OF TERM LOAN FROM SBI IS TO REDUCE THE INTEREST OF BORROWIN G. THE COMPANY HAS DECIDED TO ENTER INTO A SWAP TRANSACTION WITH SBI A ND THE PREFERRED CURRENCY BEING CHF (SWISS FRANC) AND APPLIED THE RBI GUIDELI NES AND SWAP TRANSACTIONS AND SUPPORTED HIS ARGUMENTS WITH THE DECISIONS OF (I) WOODWARD GOVERNOR INDA LTD (312 ITR 254), (II) EID PARRYS LIMITED VS DCIT (174 ITR 11), (III) ONGC LTD. VS CIT (230 CTR 0313), (IV) CIT VS BADRIDAS GAURIDU PVT LTD (261 IT 256) ITA NO.371/MDS/2014 :- 8 -: (V) M/S. ASHOK LEYLAND LIMITED, ITA NOS. 311/MDS/2 013, 2915/MDS/2014 & 160/MDS/2013 AND (VI) COOPER CORPORATION PVT. LTD., IN ITA NO. 866/ PN/2014 AND PRAYED FOR DISMISSING THE APPEAL. 6. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE ASSESSEE COMPANY HAS ENTER ED INTO SWAP TRANSACTIONS AS SUBMITTED BY THE LD. AR ON OUTSTANDING LIABILITY OF RS. 9 CRORES AND TO REDUCE THE INTEREST COST OF BORROWING WITH CHF SWIS S FRANC AND THESE TRANSACTIONS ARE PERMITTED WITH AN UNDERLYING LOAN LIABILITY TRANSACTIONS AND THE ASSESSEE TRANSACTIONS ARE RECOGNISED AS HEDGING TRANSACTIONS AND NOT SPECULATIVE AND DUE TO THIS SWAP TRANSACTIONS THERE IS INTEREST SAVING OF RS. 14.43 LAKHS PER ANNUM. FOR THE SAID ASSESSMENT YEA R THE CURRENCY RATE HAS BEEN STABLE BUT DUE TO UNFORESEEN CIRCUMSTANCES DUR ING THE CONTRACT WINDOW PERIOD THE USD/CHF RATE FLUCTUATED SIGNIFICANTLY. SINCE, THE ASSESSEE HAS ALREADY CLOSED THE CONTRACT AND HAD TO PAY PRE-PAYM ENT PREMIUM AND THE ASSESSEE HAS INCURRED LOSS OF RS. 182.65 LAKHS. 6.1 WE FIND THE SIMILAR ISSUE IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION OF LOAN LIABILITIES RELATING TO THE ACQUISITION OF ASSETS WAS HELD IN COORDINATE BENCH OF THIS TRIBUNAL IN M/S. GRACE INFRASTRUCTURE PVT. LTD. IN ITA NO. 439/MDS/2017 DATED 12.06.2017 WHERE IT WAS HELD AS UNDER: 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD. ADMITTEDLY, SAME ISSUE CAME FOR CONSIDERATION BEFOR E THIS TRIBUNAL IN THE CASE OF TVS MOTOR COMPANY LTD., IN I.T.A NO.1153/MD S./2016 VIDE ORDER ITA NO.371/MDS/2014 :- 9 -: DATED 30.11.2016 WHEREIN THE TRIBUNAL PLACED RELIAN CE IN THE CASE OF COOPER CORPORATION IN ITA NO.866/PN/2014 VIDE ORDER DATED 29.04.2016 FOR ASSESSMENT YEAR 2008-09WHEREIN HELD AS FOLLOWS: - 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. ORDER OF THE AUTHORITIES BELOW AND CASE LAWS CITED. THE CENTRAL ISSUE INVOLVED IN THE PRESENT CASE IS WHETHER PROVISIONS FOR LOSS IN THE HANDS OF ASSESSEE ON ACCOUNT OF RESTATEMENT OF OUTSTANDING FOREIGN CURRE NCY LOANS NECESSITATED BY FLUCTUATION IN FOREIGN EXCHANGE WOULD BE ALLOWABLE AS BUSINESS LOSS OR A LOSS OF CAPITAL NATURE IN THE FACTS NARRATED ABOVE. WHIL E AS PER THE REVENUE, THE INCREASED LIABILITY DUE TO EXCHANGE FLUCTUATION COR RESPOND WITH CARRYING COSTS OF THE FIXED ASSETS AND THUS CAPITAL IN NATURE, THE ASSESSEE SEEKS TO SUBMIT THAT THE LOSS IS REVENUE IN NATURE. 10.1 ON CONSIDERATION OF FACTS, IT IS NOTICED THAT CERTAIN LOANS WERE HELD IN INDIAN CURRENCY IN THE EARLIER YEARS. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH THE LENDERS TO CONVERT THE LOANS IN FOREIGN CU RRENCY EQUIVALENTS TO TAKE ADVANTAGE OF THE LOWER RATE OF INTEREST RATE APPLIC ABLE TO LATER. THE ASSESSEE HAS FACTUALLY DEMONSTRATED THAT THE CONVERSION INTO FOREIGN CURRENCY LOANS HAVE ACTUALLY BENEFITED THE ASSESSEE IN TERMS OF SA VING OF INTEREST COSTS. WE ALSO NOTICE THAT THERE IS NO DISPUTE ON THE FACT TH AT THE ACQUISITION OF CAPITAL ASSETS / EXPANSION OF PROJECTS ETC. FROM THE TERM L OANS TAKEN ARE ALREADY COMPLETE AND THE ASSETS SO ACQUIRED HAVE BEEN PUT T O USE. AS A CONSEQUENCE, THE LOSS OCCASIONED FROM FOREIGN CURRE NCY LOANS SO CONVERTED IS A POST FACTO EVENT SUBSEQUENT TO CAPITAL ASSETS HAV ING BEEN PUT TO USE. WE SIMULTANEOUSLY NOTICE THAT THERE IS NO ADVERSE FIND ING FROM THE REVENUE ABOUT THE CORRECTNESS OR COMPLETENESS OF ACCOUNTS O F ASSESSEE ON THE TOUCHSTONE OF SECTION 145 OF THE ACT. IN OTHER WORD S, THE PROFITS/GAINS FROM THE BUSINESS HAVE BEEN ADMITTEDLY COMPUTED IN ACCOR DANCE WITH GENERALLY ACCEPTED ACCOUNTING PRACTICES AND GUIDELINES NOTIFI ED. 10.2 THE ASSESSEE HAS INTER ALIA APPLIED AS-II DEAL ING WITH EFFECTS OF THE CHANGES IN THE EXCHANGE RATE TO RECORD THE LOSSES I NCURRED OWING TO FLUCTUATION IN THE FOREIGN EXCHANGE. AS-11 ENJOINS REPORTING OF MONETARY ITEMS DENOMINATED FOREIGN CURRENCY USING THE CLOSIN G RATE AT THE END OF THE ITA NO.371/MDS/2014 :- 10 -: ACCOUNTING YEAR. IT ALSO REQUIRES THAT ANY DIFFEREN CE, LOSS OR GAIN, ARISING FROM SUCH CONVERSION OF THE LIABILITY AT THE CLOSIN G RATE SHOULD BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT FOR THE REPORTING PERI OD. 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 NOTIF ICATION ALSO SETS OUT THAT THE EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENC Y TRANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR BUSINESS EXPENSE IN THE PER IOD IN WHICH THEY ARISE SUBJECT TO EXCEPTION AS SET OUT IN SECTION 43A OR R ULE 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 S ECTION 209 OF THE COMPANIES ACT, 1956, THE ASSESSEE BEING A COMPANY I S REQUIRED TO COMPULSORILY FOLLOW MERCANTILE SYSTEM OF ACCOUNTING . S. 211 OF THE COMPANIES ACT, 1956 ALSO, IN TERMS, MANDATES THAT A CCOUNTING STANDARDS AS APPLICABLE IS REQUIRED TO BE FOLLOWED WHILE DRAWING STATEMENT OF AFFAIRS. S. 145 OF THE INCOME TAX ACT, 1961 SIMILARLY CASTS OBL IGATION TO COMPUTE BUSINESS INCOME EITHER BY CASH OR MERCANTILE SYSTEM OF ACCOUNTING. THUS, IN VIEW OF THE VARIOUS PROVISIONS OF THE COMPANIES ACT AND INCOME TAX ACT, IT WAS MANDATORY TO DRAW ACCOUNTS AS PER AS II. THUS, IN OUR CONSIDERED VIEW, THE LOSS RECOGNIZED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS PER NOTIFIED ACCOUNTING STANDARD AS 11 IS AN ACCRUED AND SUBSIST ING LIABILITY AND NOT MERELY A CONTINGENT OR A I HYPOTHETICAL LIABILITY. A LEGAL LIABILITY ALSO EXISTS AGAINST THE ASSESSEE DUE TO FLUCTUATION AND LOSS AR ISING THEREFROM. ACTUAL PAYMENT OF LOSS IS AN IRRELEVANT CONSIDERATION TO A SCERTAIN THE POINT OF ACCRUAL OF LIABILITY. AS A COROLLARY, THE REVENUE HAS COMMI TTED ERROR IN HOLDING THE LIABILITY AS NOTIONAL OR CONTINGENT. 10.4 COPIOUS REFERENCE HAS BEEN MADE TO S. 43A BY A SSESSEE AS WELL AS REVENUE. THUS, IT WOULD BE PERTINENT TO EXAMINE THE ISSUE ON THE TOUCHSTONE OF S. 43A OF THE ACT. SECTION 43A, TO THE EXTENT RE LEVANT IN THE CONTEXT, READS AS UNDER: NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PR OVISION OF THIS ACT, WHERE AN ASSESSEE HAS ACQUIREDANY ASSET IN ANY PREV IOUS YEAR FROM A ITA NO.371/MDS/2014 :- 11 -: COUNTRY OUTSIDE INDIA FOR THE PURPOSES OF HIS BUSIN ESS OR PROFESSION AND, IN CONSEQUENCE OF A CHANGE IN THE RATE OF EXCH ANGE DURING ANY PREVIOUS YEAR AFTER THE ACQUISITION OF SUCH ASSET, THERE IS AN INCREASE OR REDUCTION IN THE LIABILITY OF THE ASSESSEE AS EXPRE SSED 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 REPMMENL OF THE WHOLE OR A PART OF TH E MONEYS BORROWED BY HUN FROM AM PERSON, DIRECT/V OR INDIRECT/V. 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 S O INCREASED OR REDUCED DURING SUCH PREVIOUS YEAR AND WHICH IS TAKE N 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 CLAU SE (I) OF SECTION 43; OR (II) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUBSECTION (I) OF SECTION 35: OR (III) THE AMO,MT OF EXPENDITURE OF A CAPITAL NATURE RE/RRED TO IN SECTION 35A; OR (IV) THE AMOUNT OF EXPENDITURE A/A CAPITAL NATURE R EFERRED TO IN CLAUSE (IX) OFSUBSECTION (I) 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 PUMPOSES OF SECTI ON 48, AND THE AMOUNT ARRIVED AT AFTER SUCH ADDITION OR DE DUCTION SHALL BE TAKEMZ TO BE THE ACTUAL COST OF THE ASSET OR THE AM OUNT OF EXPENDITURE OF A CAPITAL NATURE OM AS THE CASE MAY BE, THE COST OF INQUISITION OF THE CAPITAL ASSET AS AFORESAID: ITA NO.371/MDS/2014 :- 12 -: PROVIDED THAT WHERE AN ADDITION TO OR DEDUCTION HEM THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION HAS BEEN MADE UN DER THIS SECTION, AS IT STOOD IMMEDIATELY BEFORE ITS SUBSTITUTION BY THE FINANCE ACT, 2002, ON ACCOUNT OF AN INCREASE OR REDUCTION IN THE LIABI LITY AS AFORESAID, THE AMOUNT TO BE ADDED TO OR, AS THE CASE MAY HE. DEDUC TED UNDER THIS SECTION FROM, THE ACTUAL COST OR EXPENDITURE OR COS T OF ACQUISITION AT THE TIME OF MAKING THE PAYMENT SHALL BE SO ADJUSTED THA T THE TOTAL AMOUNT ADDED TO, OR, AS THE CASE IMLAY 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 TH E TIME OF MAKING PAYMENT. A BARE READING OF THE AFORESAID PROVISION OF SECTIO N 43A, WHICH OPENS WITH A NON-OBSTANTE AND OVERRIDING CLAUSE, WOULD SHOW TH AT IT COMES INTO PLAY ONLY WHEN THE ASSETS ARE ACQUIRED FROM A COUNTRY OUTSIDE INDIA AND DOES NOT APPLY TO ACQUISITION OF INDIGENOUS ASSETS. ANOTHER NOTABL E FEATURE IS THAT S. 43A PROVIDES FOR MAKING CORRESPONDING ADJUSTMENT S TO THE COSTS OF ASSETS ONLY IN RELATION TO EXCHANGE GAINS/ LOSSES ARISING AT THE TIME OF MAKING PAYMENT. IT THEREFORE DEALS WITH REALISED EX CHANGE GAIN! LOSS. THE TREATMENT OF UNREALISED EXCHANGE GAIN! LOSS IS NOT COVERED UNDER THE SCOPE OF S. 43A OF THE ACT. IT IS THUS APPARENT THAT SPECIAL PROVISION OF S. 43A HAS NO APPLICATION TO THE FACTS OF THE CASE. THEREFORE, TH E ISSUE WHETHER, THE LOSS IS ON REVENUE ACCOUNT OR A CAPITAL ONE IS REQUIRED TO BE TESTED IN THE LIGHT OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, PRONOUNCE MENTS AND GUIDELINES ETC. 10.5 BEFORE WE DELINEATE ON THE ALLOWABILITY OF LOS S BASED ON GENERALLY ACCEPTED ACCOUNTANCY PRINCIPLES, IT MAY BE PERTINEN T TO EXAMINE WHETHER THE INCREASED LIABILITY DUE TO FLUCTUATION LOSS CAN BE ADDED TO THE CARRYING COSTS OF CORRESPONDING CAPITAL ASSETS WITH REFERENCE TO S. 4 3(1) OF THE ACT. SECTION 43(1) DEFINES THE EXPRESSION ACTUAL COST. AS PER S. 43(1), ACTUAL COST MEANS ACTUAL COST OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COSTS AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY. SEVERAL EXPLANATIONS HAVE BEEN APPENDED TO S. 43(1) . HOWEVER, THE SECTION NOWHERE SPECIFIES THAT ANY GAIN OR LOSS ON FOREIGN CURRENCY LOAN ACQUIRED FOR PURCHASE OF INDIGENOUS ASSETS WILL HAVE TO BE REDUC ED OR ADDED TO THE COSTS OF THE ASSETS. THUS, VIEWED FROM THIS PERSPECTIVE ALSO , SUCH INCREASED LIABILITY ITA NO.371/MDS/2014 :- 13 -: CANNOT BE BRACKETED WITH COST OF ACQUISITION OF CAP ITAL ASSETS SAVE AND EXCEPT IN TERMS OF OVERRUTHNG PROVISMNS OF S. 43A OF THE A CT. 10.6 WE ALSO SIMULTANEOUSLY NOTE HERE THAT THE HON BLE SUPREME COURT IN THE & CASE OF CIT VS. TATA IRON AND STEEL CO. LTD. (199 8) 22 ITR 285 HELD THAT COST OF AN ASSET AND COST OF RAISING MONEY FOR PURC HASE OF ASSET ARE TWO DIFFERENT AND INDEPENDENT TRANSACTIONS. THUS, EVENT S SUBSEQUENT TO ACQUISITION OF ASSETS CANNOT CHANGE PRICE PAID FOR IT. THEREFORE, FLUCTUATIONS IN FOREIGN EXCHANGE RATE WHILE REPAYING INSTALLMENTS O F FOREIGN LOAN RAISED TO ACQUIRE ASSET CANNOT ALTER ACTUAL COST OF ASSETS. T HE RELEVANT OPERATIVE PARA IS REPRODUCED HEREUNDER:- COMING TO THE QUESTION RAISED, WE FIND IT DIFFICUL T TO FOLLOW HOW THE MANNER OF REPAYMENT OF LOAN CAN AFFECT THE COST OF THE ASSETS ACQUIRED BY THE ASSESSEE. WHAT IS THE ACTUAL COST M UST DEPEND ON THE AMOUNT PAID BY THE ASSESSEE TO ACQUIRE THE ASSE T. 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 O F THE ASSET. IF THE BORROWER DEFAULTS IN REPAYMENT OF A PART OF THE LOA N, THE COST OF THE ASSET WILL NOT CHANGE. WHAT HAS TO BE HOME IN MIND IS THAT THE COST OF AN ASSET AND THE COST OF RAISING MONEY FOR PURCH ASE OF THE ASSET ARE TWO DIFFERENT AND INDEPENDENT TRANSACTIONS. EVE N 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 CA SE, 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 OTHER WISE PAID. IN OUR JUDGMENT, THIS IS NOT A FACTOR WHICH CAN ALTER THE COST INCURRED BY THE ASSESSEE FOR PURCHASE OF THE ASSET. THE ASSE SSEE 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 . THAT PRICE CANNOT CHANGE BY ANY EVENT SUBSEQUENT TO THE ACQUISITION O F THE ASSET. IN OUR JUDGMENT, THE MANNER OR MODE OF REPAYMENT OF TH E LOAN HAS ITA NO.371/MDS/2014 :- 14 -: NOTHING TO DO WITH THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE FOR THE PURPOSE OF HIS BUSINESS. WE HOLD THAT THE QUEST IONS WERE RIGHTLY ANSWERED BY THE HIGH COURT. THE APPEALS ARE DISMISS ED. THERE WILL BE NO ORDER AS TO COSTS. THUS, IT IS EVIDENT THE VARIATION IN THE LOAN AMOUN T HAS NO BEARING ON THE COST OF THE ASSET AS THE LOAN IS A DISTINCT AND INDEPEND ENT TRANSACTION AS IN COMPARISON WITH ACQUISITION OF ASSETS OUT OF SAID L OAN AMOUNT BORROWED. ACTUAL COST OF THE CORRESPONDING FIXED ASSET ACQUIR ED EARLIER BY UTILIZING THE AFORESAID LOAN WILL NOT UNDERGO ANY CHANGE OWING TO SUCH FLUCTUATION. 10.7 THE ISSUE IS ALSO TESTED IN THE LIGHT OF PROVI SION OF S. 36(L)(III) GOVERNING DEDUCTION OF INTEREST COSTS ON BORROWALS. AS STATED EARLIER, MANNER OF UTILIZATION OF LOAN AMOUNT HAS NOTHING TO DO WITH A LLOWABILITY OF ANY EXPENDITURE IN CONNECTION WITH LOAN REPAYMENT. BOTH ARE INDEPENDENT AND DISTINCT TRANSACTIONS IN NATURE. SIMILAR ANALOGY CA N BE DRAWN FROM S. 36(L)(III) OF THE ACT WHICH ALSO REINFORCES THAT UTILIZATION O F LOAN FOR CAPITAL ACCOUNT OR REVENUE ACCOUNT PURPOSE HAS NOTHING TO DO WITH ALLO WABLITY OF CORRESPONDING INTEREST EXPENDITURE. A PROVISO INSERTED THERETO BY FINANCE ACT, 2003, ALSO PROHIBITS CLAIM OF INTEREST EXPENDITURE IN REVENUE ACCOUNT ONLY UPTO THE DATE ON WHICH CAPITAL ASSET IS PUT TO USE. ONCE THE CAPI TAL ASSET IS PUT TO USE, THE INTEREST EXPENDITURE ON MONEY BORROWED FOR ACQUISIT ION OF CAPITAL ASSET IS ALSO TREATED AS REVENUE EXPENDITURE. AS ALSO NOTED, S. 4 3A SPECIFICALLY AND CATEGORICALLY CALLS FOR ADJUSTMENTS IN COST OF ASSE TS FOR LOSS OR GAIN ARISING OUT OF FOREIGN CURRENCY FLUCTUATIONS IN RESPECT OF FUND S BORROWED IN FOREIGN CURRENCY FOR ACQUISITION OF FOREIGN ASSETS. HOWEVER , THE SAME RATIONALE OF A DEEMING PROVISION OF S. 43A CANNOT BE APPLIED TO LO SS OR GAIN ARISING FROM FOREIGN CURRENCY LOSS UTILIZED FOR PURCHASE OF INDI GENOUS ASSETS. NEEDLESS TO SAY, IMPUGNED CURRENCY FLUCTUATION LOSS HAS EMANATE D FROM FOREIGN CURRENCY LOANS. BESIDES AS-I 1, THE CLAIM OF EXCHANGE FLUCTU ATION LOSS AS REVENUE ACCOUNT IS ALSO FOUNDED ON THE ARGUMENT THAT THE AF ORESAID ACTION WAS TAKEN TO SAVE INTEREST COSTS AND CONSEQUENTLY TO AUGMENT THE PROFITABILITY OR REDUCE REVENUE LOSSES OF THE ASSESSEE. THE IMPUGNED FLUCTU ATION LOSS THEREFORE HAS A DIRECT NEXUS TO THE SAVING IN INTEREST COSTS WITHOU T BRINGING ANY NEW CAPITAL ITA NO.371/MDS/2014 :- 15 -: ASSET INTO EXISTENCE. THUS, THE BUSINESS EXIGENCIES ARE IMPLICIT AS WELL EXPLICIT IN THE ACTION OF THE ASSESSEE. THE ARGUMENT THAT TH E 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 ATTRIBUTAB LE TO REVENUE ACCOUNT HAS CONSIDERABLE MERITS. 10.8 SECTION 145 OF THE INCOME TAX ACT DEALS WITH M ETHOD OF ACCOUNTING AND STATES THAT BUSINESS INCOME INTER-ALIA HAS TO BE CO MPUTED IN ACCORDANCE WITH CASH OR MERCANTILE SYSTEM OF ACCOUNTING. SUB-SECTIO N (2) THEREOF AUTHORIZES THE CENTRAL GOVERNMENT TO NOTIFY ACCOUNTING STANDAR DS TO BE FOLLOWED FOR DETERMINATION OF BUSINESS INCOME. SECTION 211 OF TH E 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 O F SECTION 145 OF THE ACT AND SECTION 211 OF THE COMPANIES ACT LEAVES NO ROOM FOR DOUBT THAT THE ASSESSEE IS OBLIGED TO FOLLOW THE ACCOUNTING STANDA RDS PRESCRIBED TO DETERMINE BUSINESS INCOME UNDER THE HEAD BUSINESS OR PROFESSION. WE NOTICE THAT THE HONBLE SUPREME COURT IN THE CASE O F WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA) HAS OBSERVED THAT AS-I I IS MANDATORY IN NATURE. IN THE LIGHT OF OBSERVATIONS MADE IN WOODWARD GOVERNOR IND IA (P) LTD. (SUPRA), WE ARC OF THE VIEW THAT LOSS ARISING ON FOREIGN EXCHAN GE FLUCTUATION LOSS HAS BEEN RIGHTLY ACCOUNTED FOR AS A REVENUE EXPENSE IN THE P ROFIT & LOSS ACCOUNT IN ACCORDANCE WITH ACCOUNTING FIAT OF AS-11. 10.9 WE FIND THAT THE DECISION IN THE CASE OF SUTLE J COTTON MILLS LTD. (SUPRA) RELIED UPON BY THE LD. DEPARTMENTAL REPRESENTATIVE IS OF NO ASSISTANCE TO THE REVENUE. THE HONBLE SUPREME COURT THEREIN STATED T HE PRINCIPLE OF LAW THAT WHERE ANY PROFIT OR LOSS ARISES TO AN ASSESSEE ON A CCOUNT OF DEPRECIATION IN FOREIGN CURRENCY HELD BY HIM ON CONVERSION FROM ANO THER CURRENCY, SUCH PROFIT AND LOSS WOULD ORDINARY BE TRADING LOSS IF THE FORE IGN CURRENCY HELD BY THE ASSESSEE ON REVENUE ACCOUNT AS TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARGO IN BUSINESS. HOWEVER, IF THE FOREIG N CURRENCY IS HELD AS A ITA NO.371/MDS/2014 :- 16 -: CAPITAL ASSET, THE LOSS SHOULD BE CAPITAL IN NATURE . THE AFORESAID PRINCIPLE OF LAW IS REQUIRED TO BE APPLIED TO THE FACTS OF CASE TO DETERMINE WHETHER THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A PART OF CIRCULATING CAPITAL. IN THE PRESENT CASE, FLUCTUATI ON LOSS INFLICTED UPON THE ASSESSEE BEARS NO NEXUS OR RELATION TO THE ACQUISIT ION TO THE ASSETS. THE ACTION OF THE ASSESSEE IS TIED UP TO ITS UNDERLYING OBJECTIVE I.E. SAVING IN INTEREST COSTS, HEDGING ITS REVENUE RECEIPTS ETC. W HICH ARE UNDOUBTEDLY ON REVENUE ACCOUNT. THUS, THE LOSS GENERATED IN IMPUGN ED ACTION BEARS THE CHARACTER OF REVENUE EXPENDITURE. SIMILARLY, DECISI ON OF THE APEX COURT IN THE CASE OF TATA IRON AND STEEL CO. (SUPRA) ALSO WEIGHS IN FAVOUR OF THE ASSESSEE. WE ALSO NOTE THAT RELIANCE PLACED BY THE CIT(A) ON ELECON ENGINEERING CO. LTD. (SUPRA) IS MISPLACED. THE DECISION CONCERNS AP PLICABILITY OF S. 43A IN THE FACTS OF THAT CASE AND THUS CLEARLY DISTINGUISHABLE . 11. FOR THE AFORESAID REASONS, IN THE ABSENCE OF AP PLICABILITY 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 WI TH GENERALLY ACCEPTED ACCOUNTING PRACTICES AND MANDATORY ACCOUNTING STAND ARDS NOTIFIED BY THE ICAI AND ALSO IN CONFORMITY WITH CBDT NOTIFICATION CANNO T BE FAULTED. NO INCONSISTENCY WITH ANY PROVISION OF ACT OR WITH ANY ACCOUNTING PRACTICES HAS BEEN BROUGHT TO OUR NOTICE. OTHERWISE ALSO, IN THE LIGHT OF FACT THAT THE CONVERSION IN FOREIGN CURRENCY LOANS WHICH LED TO I MPUGNED LOSS, WERE DICTATED BY REVENUE CONSIDERATIONS TOWARDS SAVING I NTEREST 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 A CT. THE ORDER OF THE CIT(A) SUSTAINING THE DISALLOWANCE IS NOT CALLED FOR AND I S THUS REVERSED. IN THE RESULT, THE GROUND NO.1 IS ALLOWED. IN VIEW OF THE DECISION OF CO-ORDINATE BENCH OF PUN E TRIBUNAL, THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED. 7.1 HOWEVER, BEFORE US LD. D.R BROUGHT TO OUR KNOWL EDGE, THE JUDGEMENT OF SUPREME COURT IN THE CASE OF ACIT VS. ELECON ENGINE ERING CO. LTD. IN [2010] 322 ITR 20 (SC) WHEREINHELD THAT:- ITA NO.371/MDS/2014 :- 17 -: REVERSING THE DECISION OF THE HIGH COURT, PROCEEDI NG ON THE BASIS THAT THE PURPOSE OF THE LOAN TAKEN BY THE ASSESSEE WAS TO FINANCE THE PURCHASE OF PLANT AND MACHINERY, AND ON THE FAC TS OF THIS CASE, THAT IT COULD NOT BE SAID THAT THE ROLLOVER CHARGES HAD NOTHING TO DO WITH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANG E. SINCE THE COURT WAS CONCERNED WITH CAPITALISATION OF FOREIGN EXCHAN GE DIFFERENCE IN RESPECT OF ACQUISITION OF FIXED ASSETS FROM ABROAD, ROLLOVER CHARGES RELATING THERETO HAD TO BE DEBITED/CREDITED TO THE ASSET IN RESPECT OF WHICH LIABILITY WAS INCURRED. ROLLOVER PREMIUM C HARGES WERE NOT ALLOWABLE UNDER SECTION 36(1)(III) . EXPLANATION 3 TO SECTION 43A , AS IT STOOD PRIOR TO ITS AMENDMENT IN 2002, WOULD A PPLY TO SUCH ROLL OVER CHARGES. 7.2 FURTHER IN THE CASE OF C.I.TVS. CLAIMATE SYSTE MS P LTD. 90CCH 40(DEL.) WHEREIN IT WAS HELD AS FOLLOWS:- 8. DECISION OF THE DELHI HIGH COURT IN WOODWARD GO VERNOR INDIA PVT. LTD. (SUPRA) HAS BEEN AFFIRMED BY THE SUPREME COURT IN D ECISION REPORTED AS COMMISSIONER OF INCOME TAX, DELHI VS. WOODWARD GOVE RNOR INDIA PVT. LTD. [2009] 312 ITR 254. IT HAS BEEN, INTER ALIA, HELD T HAT THE EXPRESSION EXPENDITURE IN SECTION 37(1) OF THE ACT CONNOTES WHAT IS PAID OUT AND WHAT HAS GONE IRRETRIEVABLY. BUT THE WORD EXPENDIT URE USED IN CONTEXT OF SECTION 37(1) WOULD ALSO COVER ,,LOSS? EVEN THOUGH THE SAID AMOUNT HAD NOT GONE OUT FROM THE POCKET OF THE ASSESSEE. THE SAID PROVISION WAS A RESIDUARY PROVISION EXTENDING THE ALLOWANCE TO ITEMS OF BUSIN ESS EXPENDITURE, NOT COVERED BY SECTION 30 TO 36 OF THE ACT. REFERENCE W AS MADE TO SECTION 28 AND 29 READ WITH SECTION 145(1) OF THE ACT, AND IT WAS OBSERVED THAT ACCOUNTS MAINTAINED IN THE NORMAL COURSE OF BUSINESS SHOULD BE TAKEN AS CORRECT UNLESS THERE WERE STRONG AND SUFFICIENT REASONS FOR THEIR UNRELIABILITY. THUS, THE PROFITS AND GAINS? OF THE PREVIOUS YEAR WERE REQUIR ED TO BE COMPUTED WITH REGARD TO THE RELEVANT ACCOUNTING STANDARDS. THE RE FERENCE ALSO MADE TO ACCOUNTING STANDARD-11, WHICH DEALS WITH THE EFFECT S OF FOREIGN EXCHANGE FLUCTUATIONS, AND IT WAS ACCORDINGLY OBSERVED AS UN DER: ITA NO.371/MDS/2014 :- 18 -: 21. IN CONCLUSION, WE MAY STATE THAT IN ORDER TO F IND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCO UNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTIL E SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIAB ILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CRE DIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BE GINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA F IDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLA IMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER TH E ASSESSEE HAS BEEN CONSISTENT ANC DEFINITE IN MAKING ENTRIES IN THE AC COUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYS TEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. THEREAFTER, REFERENCE WAS MADE TO SECTION 43A OF TH E ACT, BOTH AS THE PROVISION STOOD PRIOR TO 01.04.2003 AND THEREAFTER. HOWEVER, WE NEED NOT TO GO FURTHER INTO THE SAID ISSUE AS THE SUPREME COURT IN WOODWARD GOVERNOR INDIA PVT. LTD. (SUPRA) HAD DEALT WITH THE UNAMENDE D SECTION 43A OF THE ACT. 7.3 FURTHER IN THE CASE OF METTLER TOLEDO INDIA (P .) LTD.VS. ITO REPORTED IN [2013] 56 SOT 498 (ITAT[MUM]) WHEREIN IT WAS HELD A S FOLLOWS:- 13. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALL OWABILITY OF LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF FOREIGN CURRENCY LOAN TAKEN BY THE ASSESSEE. THE ASSESSEE HAD BEEN R ESTATING FOREIGN EXCHANGE LOAN LIABILITY ON THE BALANCE-SHEET DATE W HICH RESULTED INTO LOSS WHICH HAS BEEN CLAIMED AS DEDUCTION. THE LOSS/ GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION ON RESTATEMENT OF T HE LOAN LIABILITY ON THE BALANCE-SHEET DATE IS REQUIRED TO BE TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME IF THE LOAN IS ON REVENUE ACC OUNT OR IS A WORKING CAPITAL LOAN. LOSS IS ALLOWABLE AS DEDUCTIO N UNDER SECTION ITA NO.371/MDS/2014 :- 19 -: 37(1) AS HELD BY THE HON'BLE SUPREME COURT IN THE C ASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA). THE LOAN IN THIS CASE HAD BEEN TAKEN AS WORKING CAPITAL LOAN AS IS CLEAR FROM THE LOAN A GREEMENT WHEREIN THE PURPOSE OF THE LOAN IS CLEARLY MENTIONED TO USE IT AS A WORKING CAPITAL TO FINANCE THE ACTIVITIES OF THE COMPANY. A S HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LT D. V. CIT [1979] 116 ITR 1, FOREIGN CURRENCY FLUCTUATION LOSS IS ALL OWABLE AS DEDUCTION IF THE FOREIGN CURRENCY IS HELD ON REVENUE ACCOUNT OR AS TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMPLOYED IN THE B USINESS. AS REGARDS THE YEAR OF ALLOWABILITY, THE CLAIM HAS TO BE ALLOW ED ON THE BASIS OF RESTATEMENT OF THE LIABILITY ON THE BALANCE-SHEET D ATE AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR INDIA (P.) LTD. (SUPRA). THUS THE CLAIM OF THE ASSESSEE IS ALL OWABLE. IN CASE THERE IS GAIN IN A YEAR AND THE ASSESSEE HAS NOT OF FERED IT TO TAX, THE REVENUE IS FREE TO TAKE ACTION UNDER LAW. IN THESE YEARS, ADMITTEDLY THERE IS LOSS WHICH IS ALLOWABLE AS DEDUCTION. WE, THEREFORE, SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) AND ALLOW THE CLAIM OF THE ASSESSEE. 7.4 IN VIEW OF THE ABOVE JUDGEMENT, WE ARE NOT IN A POSITION TO FOLLOW THE EARLIER DECISION OF THE CHENNAI TRIBUNAL IN THE CAS E OF M/S.TVS MOTOR COMPANY LTD CITED SUPRA OR DECISION OF CO-ORDINATE BENCH OF PUNE TRIBUNAL IN THE CASE OF COOPER CORPORATION CITED SUPRA. FURTHER, IT IS T O BE NOTED THAT JURISDICTIONAL HIGH COURT IN THE CASE OF LEARNED COMMISSIONER OF I NCOME TAX VS. M/S.HI TECH ARAI LTD., REPORTED IN [2010] 321 ITR 477 (MAD ) WHEREIN HELD THAT:- IT CANNOT BE HELD THAT SIMPLY BECAUSE A CO-ORDINAT E BENCH OF THE TRIBUNAL HAD EARLIER TAKEN A DIFFERENT VIEW, THE TR IBUNAL ON THIS OCCASION ALSO OUGHT TO HAVE FOLLOWED THE SAME. WHEN WE FIND THAT THE TRIBUNAL HAS APPLIED THE LAW CORRECTLY IN THE IMPUG NED ORDER, THERE IS NO GAINSAYING THAT THERE WAS AN EARLIER ORDER BY TH E CO-ORDINATE BENCH AND THEREFORE, FOR THAT REASON, THIS TIME ALS O THE TRIBUNAL SHOULD HAVE BLINDLY FOLLOWED ITS OWN EARLIER DECISI ON EVEN IF SUCH EARLIER DECISION DID NOT REFLECT THE CORRECT POSITI ON OF THE LAW.AW 8. IN VIEW OF THE DECISION, WE ARE OF THE OPINION THAT FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF TERM LOAN LIABILITIES REL ATING TO ACQUISITION OF ASSETS ARE TO BE ITA NO.371/MDS/2014 :- 20 -: CAPITALIZED IN TERMS OF THE EXPLANATION 3 TO SECTION 43A OF THE ACT AND IT CANN OT BE SAID THAT THE LD. C.I.T(A) HAS ENHANCED ASSESSME NT SO AS TO ISSUE NOTICE FOR ENHANCEMENT OF ASSESSMENT. ACCORDINGLY, ALL TH E GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED CUMULATIVELY. WE APPLYING THE PROVISIONS AND RATIO OF DECISION OF CO-ORDINATE BENCH FIND THAT THE ASSESSEE HAS ENTERED INTO A SWAP TRANSACTION IN FOREIGN CURRENCY BEING SPECULATIVE LOSS AND ACCORDINGLY WE ALLOW THE GROUN D OF APPEAL OF THE REVENUE. 7. IN THE RESULT, THE REVENUE APPEAL IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 21 ST DAY OF JUNE, 2017 AT CHENNAI. SD/ - ( ) (CHANDRA POOJARI) ! / ACCOUNTANT MEMBER SD/ - ( . ) (G. PAVAN KUMAR) $ ! / JUDICIAL MEMBER / CHENNAI / / DATED: 21 ST JUNE, 2017 JPV ' )#12 32 / COPY TO: 1. & / APPELLANT 2. )*& / RESPONDENT 3. 4 () / CIT(A) 4. 4 / CIT 5. 2 )## / DR 6. : / GF