THIRU THAANIGAI SPINNING MILLS PRIVATE LIMITED, COIMBATORE V. ITO CORPORATE WARD 4, COIMBATORE

ITA 595/CHNY/2018

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9721 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 19-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V NANDA KUMAR
• Assessee Lawyers: A ARJUNARAJ
• Keywords: Capital asset; Depreciation; Additional depreciation; Revenue expenditure
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.595/CHNY/2018 ( )( / ASSESSMENT YEAR : 2013-14 M/S THIRU THAANIGAI SPINNING MILLS PRIVATE LIMITED, OLD NO.252, NEW NO.101, PUDUR MARIAMMAN KOVIL STREET, PEELAMEDUPUDUR, COIMBATORE - 641 004. PAN : AACCT 4310 R V. THE INCOME TAX OFFICER, CORPORATE WARD 4, COIMBATORE. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SHRI A. ARJUNARAJ, CA -.+, / 0 / RESPONDENT BY : SHRI V. NANDAKUMAR, JCIT 1 / 2% / DATE OF HEARING : 27.11.2018 3') / 2% / DATE OF PRONOUNCEMENT : 03.12.2018 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER : THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) -1, COIMBA TORE, DATED 08.12.2017 AND PERTAINS TO ASSESSMENT YEAR 2013-14. 2 I.T.A. NO.595/CHNY/18 2. SHRI A. ARJUNARAJ, THE LD. REPRESENTATIVE FOR TH E ASSESSEE, SUBMITTED THAT TWO ISSUES ARISE FOR CONSIDERATION I N THIS APPEAL. THE FIRST ISSUE IS WITH REGARD TO CLAIM OF 98,98,784/- TOWARDS EXCHANGE FLUCTUATION LOSS. THE SECOND GROUND IS WITH REGARD TO ADDITIONAL DEPRECIATION OF 1,24,922/-. ACCORDING TO THE LD. REPRESENTATIVE, T HE ASSESSEE AVAILED A TERM LOAN OF 2.6 CRORES ON 31.03.2006 FROM CITY UNION BANK FOR ACQUIRING THE BUSINESS OF M/S S INGARAVELAR SPINNING MILLS PRIVATE LIMITED, SATHYAMANGALAM, ERO DE DISTRICT. SUBSEQUENTLY, THE SAID LOAN WAS CONVERTED INTO FORE IGN CURRENCY LOAN ON 11.09.2007. ACCORDING TO THE LD. REPRESENT ATIVE, THE INTEREST ON THE SAID LOAN WAS FULLY ALLOWED BY THE ASSESSING OFFICER AS REVENUE EXPENDITURE. HOWEVER, THE LOSS CLAIMED BY THE ASSESSEE DUE TO FLUCTUATION IN FOREIGN CURRENCY WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT THERE WAS NO UNDERLYING ASSET OR UNDERLYING LIABILITY. PLACING RELIANCE ON THE DECISION OF PUNE BENCH OF THIS TRIBUNAL IN COOPER CORPORATION P VT. LTD. V. DCIT IN I.T.A. NO.866/PN/2014 DATED 29.04.2016, THE LD. REPRESENTATIVE SUBMITTED THAT ON IDENTICAL CIRCUMSTANCES, THE PUNE BENCH OF THIS TRIBUNAL FOUND THAT THE LOSS CLAIMED BY THE ASSESSE E ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS ALLOWABLE UNDER SEC TION 37(1) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). THE PUN E BENCH, 3 I.T.A. NO.595/CHNY/18 ACCORDING TO THE LD. REPRESENTATIVE, PLACED ITS REL IANCE ON THE JUDGMENT OF APEX COURT IN CIT V. TATA IRON AND STEE L CO. LTD. (1998) 231 ITR 285. THE LD. REPRESENTATIVE HAS ALS O PLACED HIS RELIANCE ON THE JUDGMENT OF APEX COURT IN CIT V. WO ODWARD GOVERNOR INDIA (P.) LTD. (2009) 312 ITR 254 AND SUB MITTED THAT THIS JUDGMENT RELATES TO ASSESSMENT YEAR 1998-99. ACCOR DING TO THE LD. REPRESENTATIVE, ACCOUNTING STANDARD 11 CAME INTO EFFECT FROM THE YEAR 2013, THEREFORE, THE APEX COURT HAD NO OCCASIO N TO CONSIDER THE ACCOUNTING STANDARD 11. HENCE, ACCORDING TO THE LD. REPRESENTATIVE, THIS JUDGMENT OF APEX COURT IN WOOD WARD GOVERNOR OF INDIA (P.) LTD. (SUPRA) MAY NOT BE APPLICABLE TO THE FACTS OF THIS CASE. 3. ON THE CONTRARY, SHRI NANDAKUMAR, THE LD. DEPART MENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE BORROWE D LOAN FOR ACQUIRING A CAPITAL ASSET, NAMELY, THE BUSINESS OF M/S SINGARAVELAR SPINNING MILLS PRIVATE LIMITED, SATHYAMANGALAM. AC CORDING TO THE LD. D.R., IN THE CASE BEFORE THE APEX COURT IN WOOD WARD GOVERNOR OF INDIA (P.) LTD. (SUPRA), THE LOAN WAS BORROWED F OR REVENUE PURPOSE. THEREFORE, THE APEX COURT FOUND THAT WHEN THE LOAN WAS TAKEN FOR REVENUE PURPOSE, THE LOSS ARISING OUT OF FLUCTUATION IN THE 4 I.T.A. NO.595/CHNY/18 RATE OF FOREIGN CURRENCY IS ALLOWABLE AS BUSINESS E XPENDITURE UNDER SECTION 37(1) OF THE ACT. IN THE CASE BEFORE US, A CCORDING TO THE LD. D.R., THE LOAN WAS BORROWED FOR THE PURPOSE FOR ACQ UIRING AN CAPITAL ASSET, THEREFORE, THE LOAN WAS TAKEN FOR CAPITAL PU RPOSE AND NOT FOR REVENUE PURPOSE. HENCE, THE JUDGMENT OF APEX COURT IN WOODWARD GOVERNOR OF INDIA (P.) LTD. (SUPRA) MAY NOT BE APPL ICABLE TO THE FACTS OF THIS CASE. THEREFORE, ACCORDING TO THE LD. D.R. , THE CIT(APPEALS) HAS RIGHTLY FOUND THAT THE LOSS DUE TO EXCHANGE RAT E FLUCTUATION TO THE EXTENT OF 98,98,784/- IS NOT ALLOWABLE EXPENDITURE. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE ASSESSEE BORROWED LOAN IN INDIAN RUPEE FROM CITY UN ION BANK LTD. FOR ACQUIRING THE BUSINESS OF M/S SINGARAVELAR SPIN NING MILLS PRIVATE LIMITED, SATHYAMANGALAM. SUBSEQUENTLY, THE LOAN WA S CONVERTED INTO FOREIGN CURRENCY LOAN ON 11.09.2007. THE ASSE SSEE CLAIMS THE LOSS SUFFERED IN EXCHANGE RATE FLUCTUATION AS REVEN UE LOSS. THE INTEREST ON PAYMENT OF SUCH LOAN WAS ALSO CLAIMED A S REVENUE EXPENDITURE. THE ASSESSING OFFICER ALLOWED THE INT EREST ON SUCH LOAN AS REVENUE EXPENDITURE. HOWEVER, SHE DISALLOW ED THE CLAIM OF THE ASSESSEE IN RESPECT OF LOSS DUE TO EXCHANGE RAT E FLUCTUATION. 5 I.T.A. NO.595/CHNY/18 5. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF A PEX COURT IN TATA IRON AND STEEL CO. LTD. (SUPRA). THE ISSUE AROSE BEFORE THE APEX COURT WAS WHETHER THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE, WHILE REPAYING THE INSTALMENTS OF FOREIGN LOAN, WOULD GO TO REDUCE / INCREASE THE COST OF DEPRECIABLE ASSETS FOR COMPUTING DEPRECIATION? THE APEX COURT FOUND THAT THE MANNER OR MODE OF REPAYMENT OF THE LOAN HAS NOTHING TO DO WITH THE CO ST OF ASSET ACQUIRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINES S. THE APEX COURT HAS ALSO FOUND THAT EVEN IF THE BORROWED FUND S WERE NOT REPAID, IT WILL NOT ALTER THE COST OF THE ASSET. T HE APEX COURT FURTHER FOUND THAT THE COST OF RAISING MONEY FOR PURCHASE O F THE ASSET AND THE COST OF THE ASSET ARE TWO DIFFERENT AND INDEPEN DENT TRANSACTIONS. THEREFORE, FOR THE PURPOSE OF DEPRECIATION, THE COS T OF ASSET CANNOT BE REDUCED OR INCREASED DUE TO EXCHANGE RATE FLUCTU ATION. 6. THIS ISSUE WAS ALSO CONSIDERED BY THE PUNE BENCH OF THIS TRIBUNAL IN COOPER CORPORATION PVT. LTD. (SUPRA). AFTER REFERRING TO SECTION 43A OF THE ACT WHICH PROVIDES FOR CAPITALIZ ATION OF SUCH LOSSES ARISING OUT OF FLUCTUATION IN FOREIGN CURREN CY ON ACQUISITION OF CAPITAL ASSET OUTSIDE INDIA, THE PUNE BENCH FOUND T HAT IT MAY NOT BE APPLICABLE FOR ACQUISITION OF ASSET IN INDIA. REFE RRING TO ACCOUNTING 6 I.T.A. NO.595/CHNY/18 STANDARD 11, THE PUNE BENCH FOUND THAT THE LOSS O R GAIN ARISING FROM CONVERSION OF LIABILITY AT THE CLOSING RATE SH OULD BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT FOR THE REPORTING PERI OD. THE PUNE BENCH HAS PLACED ITS RELIANCE ON THE CBDT NOTIFICAT ION S.O.892(E) DATED 31.03.2015. ULTIMATELY, THE PUNE BENCH RECOR DED ITS FINDING AT PARAGRAPHS 10.9 AND 11 AS FOLLOWS:- 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 HON'BLE SUPREME COURT THEREIN STATED THE PRINCIPLE OF LAW THAT WHERE ANY PROFIT OR LOSS ARIS ES TO AN ASSESSEE ON ACCOUNT OF DEPRECIATION IN FOREIGN CURR ENCY HELD BY HIM ON CONVERSION FROM ANOTHER CURRENCY, SUCH PR OFIT AND LOSS WOULD ORDINARY BE TRADING LOSS IF THE FOREIGN CURRENCY HELD BY THE ASSESSEE ON REVENUE ACCOUNT AS TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARGO IN BUSINES S. HOWEVER, IF THE FOREIGN CURRENCY IS HELD AS A CAPIT AL ASSET, THE LOSS SHOULD BE CAPITAL IN NATURE. THE AFORESAI D PRINCIPLE OF LAW IS REQUIRED TO BE APPLIED TO THE FACTS OF CA SE TO DETERMINE WHETHER THE FOREIGN CURRENCY IS HELD BY T HE ASSESSEE ON REVENUE ACCOUNT OR AS A PART OF CIRCULA TING CAPITAL. IN THE PRESENT CASE, FLUCTUATION LOSS INF LICTED UPON THE ASSESSEE BEARS NO NEXUS OR RELATION TO THE ACQUI SITION 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. WHICH ARE UNDOUBTEDLY ON REVE NUE ACCOUNT. THUS, THE LOSS GENERATED IN IMPUGNED ACTI ON BEARS THE CHARACTER OF REVENUE EXPENDITURE. SIMILARLY, DE CISION OF THE APEX COURT IN THE CASE OF TATA IRON AND STEE L CO. LTD. (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 DEC ISION 7 I.T.A. NO.595/CHNY/18 CONCERNS APPLICABILITY OF S. 43A IN THE FACTS OF THAT CASE AND THUS CLEARLY DISTINGUISHABLE. 11. 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 T HE INCOME TAX ACT DEALING WITH THE ISSUE, CLAIM OF EXCHA NGE FLUCTUATION LOSS IN REVENUE ACCOUNT BY THE ASSESSEE IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRACT ICES AND MANDATORY ACCOUNTING STANDARDS NOTIFIED BY THE ICAI AND ALSO IN CONFORMITY WITH CBDT NOTIFICATION CANNOT BE FAULTED. NO INCONSISTENCY WITH ANY PROVISION OF AC T OR WITH ANY ACCOUNTING PRACTICES HAS BEEN BROUGHT TO OUR NO TICE. OTHERWISE ALSO, IN THE LIGHT OF FACT THAT THE CONVE RSION IN FOREIGN CURRENCY LOANS WHICH LED TO IMPUGNED LOSS, WERE DICTATED BY REVENUE CONSIDERATIONS TOWARDS SAVING I NTEREST COSTS ETC. WE HAVE NO HESITATION IN COMING TO THE C ONCLUSION THAT LOSS BEING ON REVENUE ACCOUNT IS AN ALLOWABLE EXPENDITURE UNDER S. 37(1) OF THE ACT. THE ORDER OF T HE CIT(A) SUSTAINING THE DISALLOWANCE IS NOT CALLED FO R AND IS THUS REVERSED. IN THE RESULT, THE GROUND NO.1 IS A LLOWED. 7. IN VIEW OF THE ABOVE FINDING OF CO-ORDINATE BENC H OF THIS TRIBUNAL AT PUNE, WE DO NOT FIND ANY REASON TO DISA LLOW THE CLAIM OF THE ASSESSEE. ACCORDINGLY, FOR THE REASONS STATED BY THE PUNE BENCH OF THIS TRIBUNAL IN COOPER CORPORATION PVT. L TD. (SUPRA), MORE SPECIFICALLY AT PARAGRAPHS 10.9 AND 11 AS REPRODUCE D ABOVE, THE ORDERS OF BOTH THE AUTHORITIES BELOW ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE LOSS SUFFERED IN E XCHANGE RATE FLUCTUATION ON FOREIGN CURRENCY LOAN AS REVENUE EXP ENDITURE. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 8 I.T.A. NO.595/CHNY/18 ORDER PRONOUNCED IN THE COURT ON 3 RD DECEMBER, 2018 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESA N) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 3 RD DECEMBER, 2018. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. 1 92 () /CIT(A)-1, COIMBATORE 4. PRINCIPAL CIT-1, COIMBATORE 5. 7: -2 /DR 6. ;( < /GF.