M/s. MFAR Hotels & Resorts Ltd, Cochin V. The ACIT, Cochin

ITA 63/COCH/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4415 (ITAT-COCHIN)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 23-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K T MOHANAN CA SHRI A DHANARAJ
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 2

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., JM I.T.A. NO. 63/COCH/2015 ASSESSMENT YEAR : 2006 - 07 M/S. MFAR HOTELS & RESORTS LTD., N.H. BYEPASS, KUNDANOOR JN., MARADU, KOCHI- 682 304. [PAN: AABCM 9267F] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(2), CORPORATE CIRCLE, KOCHI. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) A SSESSEE BY SHRI K.T. MOHANAN, CA REVENUE BY SHRI A. DHANARAJ, SR. DR DATE OF HEARING 12 /0 3 /2018 DATE OF PRONOUNCEMENT 16 / 0 3 /2018 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS-II, KOCHI DATED 30/09/2014 AND PERTAINS TO THE ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS: I) REDUCING THE CLAIM OF DEPRECIATION AMOUNTING TO RS.19,10,6967- BY CONCLUDING THAT THE NOTIONAL FOREIGN EXCHANGE RATE FLUCTUATION, WHICH IS ADJUSTED TO THE VALUE AFFIXED ASSETS IN THE BOOKS O F ACCOUNTS TO COMPLY WITH THE REQUIREMENT OF AS.11, NEED TO BE ADJUSTED FROM THE VALUE OF FIXED ASSETS FOR COMPUTING DEPRECIATION UNDER INCOME TAX RULES A LSO BY APPLYING THE I.T.A. NO.63/C/2015 2 PROVISIONS OF SECTION 43A OF THE INCOME TAX ACT, EV EN THOUGH THE ASSETS WERE NOT ACQUIRED FROM A COUNTRY OUTSIDE INDIA, IS AGAIN ST THE PRINCIPLES OF LAW ON TAXATION. II) AS PER SECTION 43A OF THE ACT, THE ADJUSTMENT O F THE EFFECT OF FOREIGN EXCHANGE FLUCTUATION RATE TO THE VALUE OF FIXED ASS ETS NEED TO BE DONE ONLY IN RESPECT OF ASSETS ACQUIRED FROM OUTSIDE INDIA, THAT TOO ONLY ON ACTUAL PAYMENT. IN CASE ANY ASSET IS PURCHASED LOCALLY USI NG FOREIGN CURRENCY LOAN, THE SUBSEQUENT IMPACT OF ANY FOREIGN EXCHANGE RATE FLUCTUATION ON SUCH LOAN CANNOT HAVE AN IMPACT ON THE VALUE OF FIXED ASSETS. WHEN AN ASSET IS PUT TO USE, THE COST OF THE ASSET CANNOT BE CHANGED FOR AN Y CHANGE IN THE VALUE OF LOAN TAKEN FOR ACQUIRING SUCH ASSET, EXCEPT IN THE CASE OF IMPORTED ASSETS, WHEREIN SPECIFIC TREATMENT IS MENTIONED IN SECTION 43A OF THE ACT. III) THE HON'BLE COMMISSIONER OF INCOME TAX HAS AGR EED WITH THE CONCLUSION OF THE ASSESSING OFFICER THAT THE SPECIAL PROVISION S MENTIONED IN SECTION 43A WITH REFERENCE TO THE ASSETS ACQUIRED FROM OUTSIDE INDIA NEED TO BE APPLIED FOR THE ASSETS ACQUIRED LOCALLY, NEEDS TO BE RECONSIDER ED. IV) FOREIGN EXCHANGE RATE FLUCTUATIONS ARE NOTIONAL FIGURES FOR REINSTATING THE FOREIGN EXCHANGE LOANS ON THE DATE OF REPORTING, TO COMPLY WITH THE ACCOUNTING STANDARD, WHICH HAS NO RELEVANCE TO THE ACTUAL VALUE OF FIXED ASSETS FOR TAXATION PURPOSES AND HENCE THE SAME HAS NOT BEEN ADDED OR REDUCED FROM THE ORIGINAL VALUE OF FIXED ASSETS FOR THE COMPUTATION OF DEPRECIATION UNDER THE ACT. V) THE SECTION 43A CONSIDERED BY THE LEARNED ASSESS ING OFFICER IS HAVING NO RELEVANCE IN THE CASE OF THE APPELLANT, SINCE THE L OAN AVAILED IS NOT FOR THE PURPOSE OF IMPORT OF EQUIPMENT'S ALONE, BUT FOR PAR T FINANCING THE ENTIRE HOTEL PROJECT. THEREFORE IT IS REQUESTED THAT THE DELETIO N OF NOTIONAL AMOUNT FROM THE VALUE OF FIXED ASSETS FOR THE PURPOSE OF COMPUT ATION OF DEPRECIATION UNDER THE INCOME TAX RULES, MAY PLEASE BE REVERSED. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE-CO MPANY IS ENGAGED IN THE BUSINESS OF RUNNING HOTEL AND CONVENTION CENTRE AT MARADU, KOCHI. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 WAS FILED DECLARING NIL INCOME AFTER SETTING OFF THE CARRY FORWARD DEPRECIATION ALLOWANC E AND BUSINESS LOSS. THE ASSESSMENT WAS COMPLETED VIDE ASST. ORDER DATED 22/ 12/208 ACCEPTING THE I.T.A. NO.63/C/2015 3 RETURN OF INCOME FILED. SUBSEQUENTLY, THE ASSESSM ENT WAS REOPENED AND COMPLETED U/S. 143(3) R.W.S. 147 ON 14/10/2011 REDU CING THE CLAIM OF DEPRECIATION. 2.1 THE ASSESSING OFFICER WHILE MAKING THIS ADDIT ION OBSERVED AS FOLLOWING: 'THE ASSESSEE DURING THE FINANCIAL YEARS RELEVANT T O ASSESSMENT YEARS 2004-05 AND 2005-06 HAVE MADE ADJUSTMENTS TO THE WDV OF VAR IOUS BLOCKS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43A OF THE ACT. AS P ER THE PROVISIONS OF SECTION 43A OF THE ACT, WHERE AN ASSESSEE HAS ACQUIRED AN ASSET FROM A COUN TRY OUTSIDE INDIA AND IN CONSEQUENCE OF A CHANGE IN THE RATE OF EXCHA NGE AFTER ACQUISITION OF SUCH ASSET, THERE IS AN INCREASE OR REDUCTION IN LIABILI TY AS AGAINST IN INDIAN CURRENCY, THE DIFFERENCE SHALL BE ADDED TO OR DEDUCTED FROM T HE WDV. THE ASSESSEE HAS ACCORDINGLY ADDED BACK AN AMOUNT OF RS. 1,17,72,435 /- TO VARIOUS BLOCKS OF ASSETS FOR THE ASST. YEAR 2004-05 AND RS. 40,56,284 /- FOR THE ASST. YEAR 2005-06 AND ACCORDINGLY REVISED THE VALUE OF ITS WDV. THE P ROVISIONS OF SEC. 43A HAS BEEN AMENDED 'WITH EFFECT FROM 01-04-2003 BY THE FI NANCE ACT, 2002. BEFORE THE AMENDMENT, ANY CHANGE IN LIABILITY ARISING OUT OF FOREIGN EXCHANGE FLUCTUATIONS NEEDED TO BE ADJUSTED TO THE WDV OF TH E ASSET AT THE END OF EVERY YEAR IRRESPECTIVE OF WHETHER PAYMENT WAS MADE DURIN G THE YEAR OR NOT. HOWEVER, AFTER THE AMENDMENT W.E.F. 01-04-2003, SUC H ADJUSTMENT CAN BE MADE ONLY WHEN ACTUAL PAYMENT HAS BEEN MADE TOWARDS THE FOREIGN LIABILITY DURING THE YEAR. THE ASSESSEE COMPANY HAS NOT MADE ANY ACTUAL PAYMENTS DURING THE FINANCIAL YEARS RELEVANT TO ASST. YEARS 2004-05 AND 2005-06, BUT HAS CONTINUED TO MAKE ADJUSTMENTS IN ACCORDANCE WITH THE OLD PROVISI ONS OF SEC. 43A OF THE ACT. IN THE ABOVE CIRCUMSTANCES, THE ASSESSEE WAS ASK ED TO EXPLAIN WHY THE DEPRECIATION SHOULD NOT BE RESTRICTED RE-COMPUTING THE WDV OF THE ASSETS AS DISCUSSED ABOVE. THE ASSESSEE, VIDE ITS LETTER DATE D 10-10-2011, STATED THAT THE ADJUSTMENT HAS BEEN MADE IN ACCORDANCE WITH THE ACC OUNTING STANDARD 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THOUGH IT IS MANDATORY FOR THE COMPANIES TO FOLLOW THE ACCOUNTING STANDARD S, FOR THE PURPOSE OF INCOME TAX ACT, THE PROVISIONS OF SEC. 43A WOULD OVERRIDE THE ACCOUNTING STANDARDS. THEREFORE, BASED ON THE ABOVE DISCUSSION, THE DEPRE CIATION ALLOWED ON THE FOLLOWING BLOCKS ARE RECOMPUTED AS UNDER: I.T.A. NO.63/C/2015 4 ASSETS WDV AS ON 10.04.05 ADDITION DELETION DEPRN. ALLOWED DEPRN. ALLOWABLE ABOVE I80 DAYS BELOW 180 DAYS HOTEL BUILDINGS 214600295 - 12468769 619334 22954212 22021535 EQUIPMENTS 61428961 699830 8955004 476980 10475823 9919396 EL FITTINGS 4222910 45000 1005234 - 598901 477055 FURNITURE 3363050 74301 1746600 85714 3578166 3449239 COMPUTER 694454 291488 1751130 26727 1271688 1100869 38878790 36968094 TOTAL INCOME AS ASSESSED U/S 143(3) ADD; EXCESS DEP RN. ALLOWED RS. 21,06,22,464 RS.19,10,696' 3. THE CIT(A) OBSERVED THAT THE ASSESSEE HAD TA KEN FOREIGN CURRENCY LOAN FOR THE WHOLE PROJECT IN 2001 AND ITS REPAYMENT SCHEDUL E STARTED FROM 01/09/2004. ACCORDING TO THE CIT(A), THE TERM LOAN OF NBO WAS T RANSFERRED TO UBI TERM LOAN OF $35,35,309 ON 05/10/2005. THE CIT(A) OBSERVED T HAT THE INTEREST PAYMENT ON THIS LOAN WHICH WAS SHOWN FROM A.Y. 2008-09 WAS NOT ALLOWED TO THE ASSESSEE AS IT WAS IN THE NATURE OF PRE-ACQUISITION AL INTEREST, AS THE ASSESSEES PROJECT WAS COMPLETED ONLY IN FEBRUARY 2013 AND THI S ASSET WAS PUT TO USE ONLY FROM A.Y. 2013-14. THE CIT(A) NOTICED THAT THE ASS ESSING OFFICE BASED ON SUCH FLUCTUATION IN THE FOREIGN CURRENCY LOAN AT THE END OF THE YEAR MADE ADJUSTMENTS IN THE ACTUAL COST OF THE ASSETS AND THE CONSEQUENT IAL CLAIM OF WDV AND DEPRECIATION. I.T.A. NO.63/C/2015 5 3.1 THE CIT(A) FURTHER OBSERVED THAT THE ASSESS EE WAS ADOPTING ACCOUNTING STANDARD AS-11 AND AS PER THE REQUIREMENT OF THIS S TANDARD, ACCORDING TO THE CIT(A), EVERY TRANSACTION IN FOREIGN CURRENCY HAS T O BE RECORDED AT THE PREVAILING RATE OF EXCHANGE RATE ON ITS TRANSACTION. ACCORDIN G TO THE CIT(A) ANY DIFFERENCE ON ACCOUNT OF FOREIGN EXCHANGE RATE ON ITS SUBSEQUE NT SETTLEMENT IS TO BE RECOGNIZED IN THE BOOKS OF ACCOUNT. FURTHER, IT WA S NOTED BY THE CIT(A) THAT ON EACH BALANCE SHEET DATE, THE LIKELY PROFIT OR LOSS IN RESPECT OF THE OPEN TRANSACTIONS ENTERED INTO IN FOREIGN CURRENCY IS RE QUIRED TO BE COMPUTED BY TAKING THE PREVAILING RATE ON THE DATE OF THE BALAN CE SHEET AND IS TO BE RECOGNIZED IN THE BOOKS OF ACCOUNT AND ALSO ACCORDI NG TO AS-11, THE PROFIT OR LOSS ARISING DUE TO EXCHANGE DIFFERENCES IN RESPECT OF S UCH ITEMS DURING AN ACCOUNTING PERIOD IS TO BE RECOGNIZED AS INCOME OR EXPENSES IN THE PERIOD IN WHICH IT AROSE. 3.2 THE CIT(A) RELIED ON THE JUDGMENT OF THE DELH I HIGH COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR (P) LTD., 210 CTR 354 WHE REIN IT WAS HELD THAT THE YEAR-END FOREIGN EXCHANGE LOSSES ARE OF TWO DIFFERE NT TYPES: I) ONE IN RESPECT OF DEFERRED PAYMENT LIABILITY FO R ASSETS ACQUIRED, AND II) THE OTHER IN RESPECT OF FOREIGN CURRENCY HELD ON REVENUE ACCOUNT, OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL OF THE BUSINESS. I.T.A. NO.63/C/2015 6 THE DELHI HIGH COURT FOUND THAT AS-11 REQUIRED YEAR -END CONVERSION OF MONETARY ITEMS AT CLOSING FOREIGN EXCHANGE RATES, AND THAT F OREIGN EXCHANGE RATE DIFFERENCES WERE REQUIRED TO BE RECOGNIZED AS INCOM E OR EXPENSES OF THE PERIOD, EXCEPT IN CASES OF DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR PURPOSE OF ACQUIRING FIXED ASSETS. ACCORDING TO TH E CIT(A), THE DELHI HIGH COURT ALSO NOTED THE TESTS LAID DOWN BY THE SUPREME COURT IN THE CASES OF SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 AND CIT VS. TAT A LOCOMOTIVE & ENGINEERING CO. LTD., 60 ITR 405 AND BY THE BOMBAY HIGH COURT I N CASE OF CIT VS. V.S. DEMPO & CO. (P) LTD. 206 ITR 291, FOR DETERMINING W HEN FOREIGN EXCHANGE LOSSES OR GAINS WERE OF A CAPITAL NATURE, AND WHEN THEY WERE OF A REVENUE NATURE. THUS THE DELHI HIGH COURT HELD THAT THE LOS S ON ACCOUNT OF FOREIGN EXCHANGE RATE DIFFERENCE WAS AN ACTUAL LOSS ON REVE NUE ACCOUNT, ALLOWABLE AS A DEDUCTION, AND NOT A CONTINGENT LOSS. 3.3 THE CIT(A) NOTICED THAT THE ASSESSING OFFICER HAD ADDED THE LOSS ON ACCOUNT OF THE DEFERRED PAYMENT LIABILITY TO THE CO ST OF THE ASSET BY APPLYING S. 43A AS THE LOSS IN RESPECT OF FOREIGN CURRENCY ON ACCOUNT OF REDUCTION IN VALUE OF SUCH CURRENCY HAS EFFECT ON THE COST OF THE ASSETS. IN THIS CONTEXT, THE CIT(A) REFERRED TO THE DETAILED WORKING OF DEPRECIATION CO MPUTATION AND WDV ADOPTED BY THE ASSESSEE FOR A.Y.S 2004-05, 2005-06 AND 2006 -07 SHOWING THAT BASED ON THE FLUCTUATION IN THE EXCHANGE RATE, ITS EFFECT ON EVERY BLOCK OF ASSET IS RECOGNIZED ON A YEAR TO YEAR BASIS, AND ACCORDINGLY CORRECT DELETIONS AND I.T.A. NO.63/C/2015 7 ADDITIONS WERE MADE IN THE VALUE OF FIXED ASSETS IN CLUDING HOTEL BUILDING, EQUIPMENTS, ELECTRICAL FITTINGS, FURNITURE ETC. HOWE VER, IT WAS OBSERVED BY THE CIT(A) THAT SUCH VARIATION IN THE COST OF ASSETS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION WAS ACCOUNTED IN ONE YEAR, BUT IN THE NEXT YEAR SUCH NOTIONAL DELETION WAS ADDED BACK. FOR THE SUBSEQUENT YEAR, IT WAS OBSERVED BY THE CIT(A) THAT BASED ON THE RATE OF CURRENCY, ADJUSTME NT IN THE VALUE OF THE ASSET WAS MADE TREATING THE EARLIER ADJUSTMENT AS NOTIONA L ADJUSTMENT, ADDING IT BACK IN THE COST OF ASSET AND THEN AGAIN MAKING DELETION ON THE BASIS OF EXCHANGE RATE IN THAT YEAR. FURTHER ADJUSTMENT IN THE FOREI GN EXCHANGE FLUCTUATION ON REVENUE ACCOUNT WAS MADE SEPARATELY, WHICH ACCORDIN G TO THE CIT(A) WAS PART OF FOREIGN EXCHANGE FLUCTUATION LOSS AND GAIN FOR T HE WHOLE PROJECT. 3.4 THE CIT(A) HELD THAT THE ASSESSEE WAS NOT COR RECT IN AGAIN ADDING BACK THE COST OF ASSETS TREATING THE SAME AS NOTIONAL CHANGE IN THE VALUE OF ASSETS MAINTAINING THAT NO REPAYMENT OF LOANS WAS MADE. F OR THIS, THE CIT(A) REFERRED TO THE LEDGER ACCOUNT FOR FOREIGN CURRENCY LOAN WHI CH SHOWED THAT REPAYMENTS OF PRINCIPAL AMOUNTS OF LOAN WERE MADE BY THE ASSESSEE ON THE FOLLOWING DATES: DATE DETAILS OF PAYMENT AMOUNT IN INR 01/09/2004 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 57,000/- @ 46.39 34,79,400/- 06/10/2004 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 25,000/- @ 45.96 11.46,875/- 30/11/2004 PAYMENT OF USD 35,000/- @ 44.98 15,74,25 0/- 31/12/2004 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 15,000/- @ 43.64 AN INTEREST USD 37000/- INT ON LOAN 16,14,510 DR SBI C/A 6,54,600/- I.T.A. NO.63/C/2015 8 CR 22,69,110 CR 04/01/2005 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 25,000/- 10,89,375/- 21/02/2005 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 1,00,000/- @ 43.85 43,85,,250/- 02/03/2005 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 50,000/- @ 43.73 21,86,625/- 16/03/2005 PART PAYMENT OF PRINCIPAL REPAYMENT OF USD 75,000/- @ 43.71 32,78,125/- 13/04/2005 PAYMENT OF USD 14,400/- @ 43.98 6,33,4 48/- 05/10/2005 TERM LOAN OF NBO CLOSED AND BALANCE TRANSFERRED TO UBI TERM LOAN OF $35,35,309/- 16,76,67,700/- 3.5 THE CIT(A) HELD THAT THE ADJUSTMENT IN THE CO ST OF THE ASSETS MADE IN A.Y. 2004-05 AND 2005-06 THAT WERE ADDED BACK AGAIN IN T HE A.Y. 2006-07 AS NOTIONAL DECREASE IN THE VALUE OF ASSETS WAS NOT CO RRECT. THE CIT(A) HELD THAT EVEN IF THE ASSESSEE HAD NOT ACQUIRED ANY ASSET FRO M OUTSIDE INDIA, THE ASSESSEE HAD TAKEN FOREIGN CURRENCY LOAN FOR ACQUIRING ASSET S, AND THE CHANGE IN AMOUNT OF THE LOAN DUE TO EXCHANGE RATE FLUCTUATION SHOULD BE REFLECTED IN THE COST OF THE ASSET, AS THESE ASSETS WERE ACQUIRED BY USING THE F OREIGN CURRENCY LOAN. THEREFORE, THE CIT(A) REJECTED THE ASSESSEES CONTE NTION THAT THE ASSESSING OFFICER WAS NOT CORRECT IN MAKING SUCH ADJUSTMENT I N THE COST OF ASSETS AS REPAYMENT OF LOAN IS MADE AND HENCE THE DELETION IN THE VALUE OF ASSETS MADE IN THE PREVIOUS YEARS IS NOT NOTIONAL AND THE SAME COU LD NOT BE ADDED BACK FOR ARRIVING AT THE REVISED WDV OF THESE ASSETS. ACCOR DINGLY, THE CIT(A) CONFIRMED THE ADDITION OF RS. 19,10,696/- ON ACCOUNT OF EXCES S DEPRECIATION MADE BY THE ASSESSING OFFICER. I.T.A. NO.63/C/2015 9 4. AGAINST THE ORDER OF THE CIT(A) , THE ASSESS EE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE ISSUE TO BE CONSIDERED IS WHETHER DEPRECIATION IS ALLOWABLE UNDER INCOME TAX ACT ON NOTIONAL EXCHANGE RATE FLUCTUATION CAPITALIZED IN THE BOOKS OF ACCOUNTS IN ACCORDANCE WITH ACCOUNT ING STANDARDS 11 (PRIOR TO ITS REVISION), FOR THE ASSETS PURCHASED LOCALLY FOR SET TING UP A HOTEL PROJECT FOR WHICH THE AMOUNT INVOLVED WAS 19,10,696/-. THE LD. AR S UBMITTED THAT THE ASSESSEE HAD NOT CONSIDERED THE EXCHANGE RATE FLUCTUATION FO R THE PURPOSE OF COMPUTATION OF DEPRECIATION AS PER THE PROVISIONS OF THE INCOME TAX ACT, THOUGH THE SAME WAS CONSIDERED AS ADDITION/DELETION TO FIXED ASSET AS PER BOOKS OF ACCOUNTS WHICH WAS DONE CONSIDERING THE DEFINITION OF ACTUAL COST AS PER SECTION 43(L)OF THE ACT WHEREIN THERE IS NO REQUIREMENT TO ADD OR D ELETE THE ACTUAL COST OF THE ASSET CONSEQUENT TO THE CHANGE IN VALUE OF LOAN AVA ILED FOR THE PURCHASE OF THE SAID ASSET. 4.1 THE LD. AR SUBMITTED THAT THE E LEARNED ASSES SING OFFICER AND ALSO THE CIT(A) HAD CONSIDERED THE PROVISIONS OF SECTION 43A OF THE ACT FOR THE PURPOSE OF ADJUSTING THE EXCHANGE RATE FLUCTUATION TO THE COST OF FIXED ASSET, WHICH IN THE OPINION OF THE ASSESSEE IS APPLICABLE ONLY FOR ASSE TS IMPORTED USING FOREIGN CURRENCY LOAN. THE LD. AR RELIED ON THE DECISION O F HON. SUPREME COURT IN THE CASE OF CIT VS. TATA IRON AND STEEL COMPANY LTD (19 98) 231 ITR 285 (SC). IT WAS THEREFORE PRAYED THAT THE DISALLOWANCE OF CLAIM OF DEPRECIATION ON THIS GROUND MAY BE DELETED. I.T.A. NO.63/C/2015 10 4.2 THE LD. AR RELIED ON THE JUDGMENT OF THE SUPR EME COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS TATA IRON AND STEEL C O. LTD. REPORTED IN (1998) 231 ITR 285 WHEREIN IT WAS HELD THAT FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE RESULTING IN GAIN OR LOSS AT THE TIME OF REPAYMENT OF LOAN WOULD NOT ALTER THE ACTUAL COST INCURRED FOR THE PURCHASE OF ASSETS FOR COMPUTING DEPRECIATION. 5. THE LD. DR RELIED ON THE ORDER OF THE LD. CIT (A) 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL ON RECORD. THE QUESTION THAT ARISES FOR OUR CONSIDERATION IS T HAT WHETHER GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION CAN BE REDUCED FROM TH E COST OF ASSETS AS PER THE PROVISIONS OF SECTION 43(1) OF THE I.T. ACT. AS PE R THE PROVISIONS OF SECTION 43(1) OF THE ACT, ACTUAL COST MEANS ACTUAL COST OF THE CA PITAL ASSETS OF THE ASSESSEE REDUCED BY THAT PORTION OF THE COST OF THE CAPITAL ASSETS AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY. TH E SECTION ALSO HAS EXPLANATIONS. HOWEVER, THE SECTION NOWHERE SPECIFIES THAT ANY GAI N OR LOSS ON FOREIGN CURRENCY LOANS ACQUIRED FOR PURCHASE OF INDIGENOUS ASSETS WI LL HAVE TO BE REDUCED OR ADDED TO THE COST OF ASSETS. I.T.A. NO.63/C/2015 11 6.1 IN THE CASE OF CIT VS. TATA IRON AND STEEL C O. LTD. (1998) 231 ITR 285 (SC) WHERE IT WAS HELD THAT COST OF AN ASSET AND CO ST OF RAISING MONEY FOR PURCHASE OF ASSET ARE TWO DIFFERENT AND INDEPENDENT TRANSACTIONS AND EVENTS SUBSEQUENT TO ACQUISITION OF ASSETS CANNOT CHANGE P RICE PAID FOR IT. THEREFORE, FLUCTUATIONS IN FOREIGN EXCHANGE RATE WHILE REPAYIN G INSTALLMENTS OF FOREIGN LOAN RAISED TO ACQUIRE ASSET CANNOT ALTER ACTUAL COST OF ASSETS FOR COMPUTING DEPRECIATION. HENCE, IT RESTRICTED ASSESSEE'S RIGHT TO ADD SUCH LOSS INCURRED ON ACCOUNT OF CURRENCY FLUCTUATIONS TO THE COST OF ASS ET. THEREBY, THE DECISION GIVEN BY SUTLEJ AND TATA IRON AND STEEL (SUPRA) ARE CONTR ARY IN VIEW. IN FORMER MENTIONED CASE IT RESTRICTED THE ASSESSEE'S RIGHT T O CLAIM SUCH LOSS ON CURRENCY FLUCTUATIONS CONSIDERING THE SAME AS ATTRIBUTABLE T O CAPITAL ACCOUNT TRANSACTIONS AND AT THE SAME TIME DOES NOT ALLOW TO ADD THE SAME TO COST OF THE ASSET BY FOLLOWING PRINCIPLE LAID DOWN IN TATA IRON AND STEE L (SUPRA).. 6.2 SCHEDULE VI OF COMPANIES ACT, SUGGESTS TREATM ENT OF THE 'GAIN/LOSS' AS CAPITAL IN NATURE AND SHOULD BE ADJUSTED TO THE COS T OF RELEVANT ASSET, WHEREAS ACCOUNTING STANDARDS 11 SUGGESTS THAT TREATMENT OF 'GAIN/LOSS' ATTRIBUTABLE TO FOREIGN BORROWINGS SHOULD BE REFLECTED IN PROFIT AN D LOSS ACCOUNT. HOWEVER, SAID CONFLICT WAS RESOLVED BY MCA CIRCULAR IT WAS CLARIF IED BY MCA THAT ACCOUNTING TREATMENT OF EXCHANGE DIFFERENCES WILL BE MADE AS P ER AS 11 AND FURTHER CATEGORICALLY MENTIONED THAT PROVISIONS OF AS-11 IS REQUIRED TO BE FOLLOWED IRRESPECTIVE OF THE RELEVANT PROVISION OF SCHEDULE- VI TO THE COMPANIES ACT, 1956. I.T.A. NO.63/C/2015 12 THEREFORE IN VIEW OF THE SAME, THE EXCHANGE DIFFERE NCE IS REQUIRED TO BE RECOGNIZED IN PROFIT AND LOSS ACCOUNT. HENCE, ANY L OSS ARISING OUT OF FOREIGN CURRENCY FLUCTUATION IS ALLOWED TO BE DEDUCTED FROM COMPUTATION OF TOTAL INCOME. THE COMPANIES ACT 2013 MANDATES THE FINANCIAL STATE MENTS OF COMPANIES TO BE COMPLIANT WITH APPLICABLE ACCOUNTING STANDARDS (INC LUDING AS-11). THUS, EXCHANGE GAIN/LOSS IS RECOGNIZED IN THE FINANCIAL S TATEMENTS IN ACCORDANCE WITH AS - 11 AND REFERENCE MAY BE HAD TO GENERALLY ACCEP TED PRINCIPLES OF ACCOUNTING AS PROVIDED BY VARIOUS ACCOUNTING STANDARDS ISSUED BY ICAI IN ABSENCE OF SPECIFIC PROVISIONS IN THE INCOME TAX ACT IN RELATI ON TO TREATMENT OF EXCHANGE FLUCTUATION GAIN OR LOSS. THE ABOVE PRINCIPLE IS FO LLOWED IN CASE OF PRAKASH LEASING LTD. [2012] 23 TAXMANN.COM 3 (KAR.), IT WAS HELD THAT: 'IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE AC T DEALING ON THE SUBJECT, WHEN THE ACCOUNTING STANDARD IS NOW MADE THE BASIS OF MAINTAINING THE ACCOUNTS FOR THE PURPOSE OF INCOME-TAX, EVEN IF THE CENTRAL GOVERNMENT HAS NOT NOTIFIED IN THE OFFICIAL GAZETTE THE ACCOUNTING STANDARDS, CERTAINLY THE ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS HAVE TO BE FOLLOWED. THEREFORE, THE REASONING OF TH E AUTHORITIES, THOUGH THE CLAIM OF THE ASSESSEE IS BASED ON SUCH ACCOUNTING S TANDARDS OF THE ICAI WHILE DECIDING WHETHER RECEIPT OF MONEY IS TAXABLE OR NOT, THAT IT HAS TO BE DECIDED IN ACCORDANCE WITH THE PROVISIONS OF LAW AN D NOT IN ACCORDANCE WITH THE ACCOUNTING PRACTICE, HAS NO SUBSTANCE AS THERE IS NO INCONSISTENCY BETWEEN THE SAID ACCOUNTING PRACTICE AND ANY PROVIS IONS OF THE ACT.' 6.3 FURTHER, THE NATURE OF EXPENDITURE BEING CAPI TAL OR REVENUE DOES NOT DEPEND ON THE PURPOSE FOR WHICH FOREIGN CURRENCY LO AN WAS OBTAINED OR ON NATURE OF ULTIMATE UTILIZATION OF LOAN AMOUNT. THE SAME WAS ALSO AFFIRMED BY APEX COURT IN CASE OF INDIA CEMENTS LIMITED VS. CIT (1966) (SC) 60 ITR 52. I.T.A. NO.63/C/2015 13 6.4 IT IS TO BE NOTED THAT LIABILITY TO PAY OR TO PROVIDE FOR LOSS ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATION DOES NOT ARISES AT THE TIME OF OBTAINING/RAISING FOREIGN CURRENCY LOAN BUT THE SAME WAS INCURRED SUB SEQUENTLY ON DEVALUATION OF CURRENCY WHICH IS AN INDEPENDENT EVENT HAVING NO CO NTROL OVER IT BY THE ASSESSEE. THE SAME CURRENCY FLUCTUATION MAY RESULT INTO GAIN OR LOSS WHICH IS NOT ASCERTAINABLE AT THE TIME OF TAKING FUNDS. HENCE IT CANNOT BE SAID AS CAPITAL EXPENDITURE. THE LIABILITY TO PAY OR TO PROVIDE FOR FOREIGN CURRENCY FLUCTUATION ARISES ONLY ON DEVALUATION OF CURRENCY AND THERE MA Y NOT BE ANY LIABILITY TO PAY FOR LOSS ON CURRENCY FLUCTUATION IF CURRENCY VALUE IS INFLATED SUBSEQUENTLY. 6.5 ONE OF THE ISSUE INVOLVED IN THE CASE OF CIT V S. WOODWARD GOVERNOR INDIA (P) LTD. 312 ITR 254 (SC) WAS 'WHETHER THE ASSESSEE IS ENTITLED TO ADJUST THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH BALANCE SHEET DATE, PENDING ACTUAL PAYMENT OF THE VARIED LIABILITY?' THE ABOVE MENTIONED DECISION HAD CONSIDERED THE IMP LICATION OF PARA 10 OF AS- 11 ALONG WITH SECTION 43A OF THE ACT. WHILE DECIDIN G THE ISSUE, IT WAS OBSERVED BY HON'BLE APEX COURT AT PARA 17: HAVING COME TO THE CONCLUSION THAT VALUATION IS A PART OF THE ACCOUNTING SYSTEM AND HAVING COME TO THE CONCLUSION THAT BUSI NESS LOSSES ARE DEDUCTIBLE UNDER SECTION 37(1) ON THE BASIS OF ORDINARY PRINCI PLE OF COMMERCIAL ACCOUNTING AND HAVING COME TO THE CONCLU SION THAT THE I.T.A. NO.63/C/2015 14 CENTRAL GOVERNMENT HAS MADE ACCOUNTING STANDARD MAN DATORY, WE ARE NOW REQUIRED TO EXAMINE THE SAID ACCOUNTING STANDAR D (AS). DECIDED IN ABOVE MATTER TO TREAT FOREIGN EXCHANGE G AIN OR LOSS ARISING ON ACQUISITION OF FIXED ASSETS IN FOREIGN CURRENCY AS LAID DOWN IN AS-11 (REVISED 1994). PARA 10 OF AS-11 (REVISED 1994) PROVIDES AS UNDER: EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABIL ITIES INCURRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH CARRIED IN TERMS OF HISTORICAL COST, SHOULD BE ADJUSTED IN THE CARRYING AMOUNT OF THE RE SPECTIVE FIXED ASSETS. THE CARRYING AMOUNT OF SUCH FIXED ASSETS SHOULD TO THE EXTENT NOT ALREADY SO ADJUSTED OR OTHERWISE ACCOUNTED FOR ALSO BE ADJU STED TO ACCOUNT FOR ANY INCREASE OR DECREASE IN THE LIABILITY OF THE ENTERP RISE, AS EXPRESSED IN THE REPORTING CURRENCY BY APPLYING THE CLOSING RATE, FO R MAKING PAYMENT TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSE TS OR FOR REPAYMENT OF THE WHOLE OR A PART OF THE MONIES BORROWED BY THE E NTERPRISE FROM ANY PERSON, DIRECTLY OR INDIRECTLY, IN FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THOSE ASSETS. 6.6 AS-11 (REVISED 1994) PROVIDES FOR ADJUSTMENT I N THE CARRYING COST OF FIXED ASSETS ACQUIRED IN FOREIGN CURRENCY, DUE TO FOREIGN EXCHANGE BALANCE SHEET DATE WHICH ALSO CORRESPOND TO TREATMENT GIVEN IN SECTION 43A. THE ISSUE ACCORDINGLY DECIDED BY APEX COURT IN THE MANNER LAID DOWN IN AS -11 (REVISED 1994) AT PARA- 10. 6.7 THE REVISED TREATMENT PROVIDED AT PARA 13 OF AS-11 (REVISED 2003) IS GIVEN BELOW: EXCHANGE DIFFERENCES ARISING ON THE SETTLEMENT OF M ONETARY ITEMS OR ON REPORTING AN ENTERPRISE'S MONETARY ITEMS AT RATES D IFFERENT FROM THOSE AT WHICH THEY WERE INITIALLY RECORDED DURING THE PERI OD, OR REPORTED IN PREVIOUS I.T.A. NO.63/C/2015 15 FINANCIAL STATEMENTS, SHOULD BE RECOGNIZED AS INCOM E OR AS EXPENSES IN THE PERIOD IN WHICH THEY ARISE, WITH THE EXCEPTION OF EXCHANGE DIFFERENCES DEALT WITH IN ACCORDANCE WITH PARAGRAPH 15.' 6.8 IN VIEW OF THE REVISION MADE IN AS-11 IN 2003 , IT CAN BE SAID THAT TREATMENT OF FOREIGN EXCHANGE LOSS ARISING OUT OF FOREIGN CUR RENCY FLUCTUATIONS IN RESPECT OF FIXED ASSETS ACQUIRED THROUGH LOAN IN FOREIGN CURRE NCY SHALL REQUIRED TO BE GIVEN IN PROFIT AND LOSS ACCOUNT. SAID EXCHANGE LOSS SHOU LD BE ALLOWED AS REVENUE EXPENDITURE IN VIEW OF AMENDED AS-11 (2003). IT MAY BE NOTED THAT APEX COURT HAD FOLLOWED TREATMENT OF EXCHANGE LOSS OR GAIN AS PER AS-11 (1994). IN VIEW OF REVISION MADE IN AS-11, NOW TREATMENT SHALL BE AS P ER REVISED AS-11 (2003). EXCHANGE GAIN OR LOSS ON FOREIGN CURRENCY FLUCTUATIO NS IN RESPECT OF FOREIGN CURRENCY LOAN ACQUIRED FOR ACQUISITION OF FIXED ASS ET SHOULD BE ALLOWED AS REVENUE EXPENDITURE. HOWEVER, IN THE PREAMBLE OF AS -11 (REVISED 2003), IT WAS STATED THAT THE REVISED STANDARD SUPERSEDES AS-11 ( 1994) EXCEPT THAT IN RESPECT OF ACCOUNTING FOR TRANSACTIONS IN FOREIGN CURRENCIE S ENTERED INTO BY THE REPORTING ENTERPRISE BEFORE THE DATE OF AS-11 (2004) COMES IN TO EFFECT, AS 11 (1994) WILL CONTINUE TO BE APPLICABLE. 6.9 IN THE PRESENT CASE, THOUGH THE ASSESSEE TOOK THE PLEA BEFORE THE LOWER AUTHORITIES THAT AS-11 IS APPLICABLE, THE LOWER AUT HORITIES HAS NOT AT ALL EXAMINED IT AND STRAIGHTAWAY APPLIED THE PROVISIONS OF SEC. 43A. IN OUR OPINION, SEC. 43A IS ONLY RELATING TO THE FOREIGN EXCHANGE RATE FLUCT UATION IN RESPECT OF ASSETS ACQUIRED FROM A COUNTRY OUTSIDE INDIA BY USING FORE IGN CURRENCY LOANS WHICH IS I.T.A. NO.63/C/2015 16 NOT APPLICABLE TO THE INDIGENOUS ASSETS ACQUIRED OU T OF FOREIGN CURRENCY LOANS. HENCE, THE ASSESSING OFFICER HAS TO BIFURCATE THE F OREIGN EXCHANGE FLUCTUATION IN RESPECT OF FOREIGN CURRENCY LOAN USED FOR ASSETS AC QUIRED OUTSIDE INDIA AND THE INDIGENOUS ASSETS AND APPLY PROVISIONS OF SEC. 43A OR AS-11(2003) ACCORDINGLY. 6.10 FURTHER, THE REVISED STANDARD SUPERSEDES AS 11 (1994), EXCEPT THAT IN RESPECT OF ACCOUNTING FOR TRANSACTIONS IN FOREIGN C URRENCIES ENTERED INTO BY THE ASSESSEE BEFORE THE DATE OF AS-11 (2004) COMES INT O EFFECT, AS-11 (1994) WILL CONTINUE TO BE APPLICABLE. WITH THIS OBSERVATION W E REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR HIS FRESH CONSIDERATION. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THI S 16 TH MARCH, 2018. SD/- SD/- ( GEORGE GEORGE K.) (CHAN DRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: DATED: 16 TH MARCH, 2018 GJ COPY TO: 1. M/S. MFAR HOTELS & RESORTS LTD., N.H. BYEPASS, K UNDANOOR JN., MARADU, KOCHI- 682 304. 2. THE INCOME TAX OFFICER, WARD-1(4), TRIVANDRUM. I.T.A. NO.63/C/2015 17 3. THE PR. COMMISSIONER OF INCOME-TAX(APPEALS), KOC HI 4. THE PR. COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T. , COCHIN