AI Insights
The case involves CES Limited, a company engaged in IT & ITes, which appealed against the order of the Commissioner of Income Tax (Appeals) concerning the assessment year 2015-16. The primary issues in the appeal included the disallowance of employees' contributions towards PF and ESI, the credit for TDS, and the treatment of a foreign exchange loss as capital rather than revenue expenditure. The Tribunal examined the legal provisions under the Income Tax Act, relevant case laws, and the arguments presented by both parties. The Tribunal's decision addressed the proper treatment of foreign exchange losses and the verification of tax credits.
Appeal Details
Counselvise Citation
[2022] 140 COUNSELVISE.COM (IT) 122352 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 7 month(s) 21 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-12-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
DB-A
Next Hearing Date
14-12-2022
Assessment Year
2015-2016
Appeal Filed On
08-05-2019
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A’ Bench, Hyderabad Before Shri Rama Kanta Panda, Accountant Member AND Shri K.Narasimha Chary, Judicial Member O R D E R Per Shri Rama Kanta Panda, A.M. This appeal filed by the assessee is directed against the order dated 18.02.2019 of the Learned Commissioner of Income Tax (Appeals)-1, Hyderabad relating to AY 2015-16. 2. Facts of the case, in brief, are that the assessee is a company engaged in the business of IT & ITes. It filed its return of income on 30.11.2015 declaring total income of Rs.9,73,65,990/- under normal provisions and book profit of Rs.9,42,85,093/- under the provisions of section 115JB of the I.T.Act. The return was processed u/s. 143(1). Subsequently, the case was selected for scrutiny under CASS and statutory notices u/s. 143(2) & 142(1) were issued and served on the assessee. In response to the statutory notices, the assessee appeared before the AO from time to time and filed the requisite details. The AO completed the assessment u/s. 143(3) on 29.12.2017 wherein he made the following additions ITA No.726/Hyd/2019 Assessment Year: 2015-16 CES Limited C/o.P.Murali & Co Chartered Accountants 6-3-655/2/3, Somajiguda Hyderabad-500 082 PAN : AADCS4564P Vs. DCIT,Circle-1(2) B-Block, 7 th Floor I.T.Towers, AC Guards Masab Tank Hyderabad-500 004 (Appellant) (Respondent) Assessee by: Shri P.Murali Mohan Rao, CA Revenue by : Shri M.Murali Mohan, Sr.AR Date of hearing: 15.12.2022 Date of pronouncement: 30.12.2022 2 ITA 726/Hyd/2019 A. Rs.9,12,184 on account of delayed payment of PF& ESIC. B. Rs.42,810/- on account of underreporting of income of Rs.37,692/- and Rs.5,118/- respectively being less receipt of interest and underreporting of interest from M/s. Infra Master Private Limited. C. Rs.14,32,814/- being loss on account of foreign exchange loss. 3. In appeal, the ld.CIT(A) confirmed the disallowance of Rs.9,12,184/- on account of delayed payment of PF & ESIC and directed the AO to verify the tax credit and give appropriate credit. So far as the addition of foreign exchange loss is concerned, the ld.CIT(A) held that such foreign exchange loss is to be treated as capital in nature and to be added back to the value of building and proportionate depreciation to be allowed. 4. Aggrieved with such order of the ld.CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds 1.The Ld.CIT (A) erred both on facts and in law and the order passed by the Ld. CIT(A) in upholding the order of the AO passed u/ s 143(3) of the Act is prejudicial to the interests of the assessee. 2. The Ld CIT(A) ought to have allowed the grounds of appeal with regard to the disallowance of employees contribution towards PF and ESI amounting to Rs.29,12,184/ _ instead of directing the AO to verify further. 3. The Ld CIT (A) ought to have allowed the grounds of appeal in respect of credit for TDS of Rs.3,20,21,101/ - instead of directing the AO to verify further. 4. The Ld. CIT(A) erred in upholding the disallowance made by AO in respect of the claim for disallowing the forex loss amounting to Rs.14,32,814/ - without appreciating the facts of the case. 5. The Ld.CIT(A) erred in upholding the disallowance made by AO in respect of the claim for disallowing an amount of Rs.14,32,814/ - which was incurred as a result of restatement of foreign loan which was obtained exclusively for the purpose of business and allow able as deduction u/s 37 of the Act. 6. The Ld. CIT(A) ought to have appreciated that Sec 43A of the Income Tax Act focuses on making adjustment to the value of the asset only in 3 ITA 726/Hyd/2019 relation to exchange gain or loss arising at the time of making payment but not at the time of restatement of loan. 7.The Ld.CIT(A) vide his order dated 18.02.2019 erred in not considering the submissions submitted by the appellant containing that the loss incurred on restatement of loan is revenue in nature and giving the decision considering it as capital in nature is erroneous and bad in law. 8. Without prejudice to the ground nos 4 to 7, the Ld.CIT(A) ought to have allowed the grounds of appeal regarding the disallowance of loss to the cost of the asset and allow proportionate depreciation accordingly instead of directing the AO to further verify the issue. 9. The Assessing Officer erred in issuing limited scrutiny notice u/s 143(2) of the Act dt. 24.03.2016 without mentioning the matters considered for examination and the same against to the guidelines of the CBDT Instruction No. 20/2015 dated 29.12.2015. 10. The Assessing Officer erred in completing the assessment u/s. 143(3) of the Act when the notice issued u/s. 143(2) of the Act itself is invalid and without jurisdiction. 11.The AO ought to have appreciated the fact that the issues considered for examination in the notice u/ s 142(1) of the Act dt. 15.02.2017 and the additions made during the year under consideration are not same and accordingly the order u/s 143(3) of the Act is invalid. 12. The AO erred in considering the total taxes paid at Rs.3,19,78,883/ - instead of Rs. 3,29,39,073/ - while computing the tax payable of Rs. 30,40,050/ -. 13. The AO ought to have appreciated the fact that assessee has paid total taxes of Rs. 3,29,39,073/ - in year under consideration which includes payment of TDS at Rs. 15,04,813/ -, advance taxes of Rs. 3,10,00,000/ - and self assessment tax of Rs. 4,34,260/-. 14. The Assessee may add, alter or modify any other points to the grounds of appeal at any time before or at the time of the hearing. 5. The assessee has also raised the following additional grounds of appeal. 11. The ld.CIT(A) erred in not appreciating the fact that sec 43A of the Act is applicable only at the time of when the assets are acquired from a country outside India and does not apply to the acquisition of indigenous assets. 12. The ld.CIT(A) ought to have considered that AO has erred in making the addition of Rs.42,810/- as per 26AS on account of shortfall of income 4 ITA 726/Hyd/2019 offered without appreciating the fact that the assessee is following Mercantile system of Accounting. 6. Referring to the decision of Hon’ble Supreme Court in the case of NTPC Ltd vs CIT reported in 229 ITR 383, he submitted that since all the necessary facts are available on record and no new facts are required to be investigated, therefore, the additional grounds raised by the assessee should be admitted. 6.1 After hearing both the sides and considering the fact that all material facts necessary for adjudication of the grounds are already available on record and the grounds being purely legal in nature, therefore, the additional grounds raised by the assessee are admitted. 7. Grounds of appeal No.1 and 14 being general in nature are dismissed. Ground of appeal No.2 was not pressed by the ld.counsel for the assessee for which the ld. DR has no objection. Accordingly, ground of appeal No.2 is dismissed as not pressed. Grounds of appeal No.9 to 11 were not argued by ld. AR for which these are dismissed as not pressed. 8. Grounds of appeal No.3,12 and 13 by the assessee relate to the order of the ld.CIT(A) in directing the AO to verify the TDS credit of Rs.3,20,21,101/- instead of allowing the same. 8.1 After hearing both the sides, we find the AO while computing the tax payable by the assessee has considered the total taxes paid at Rs.3,19,78,883/- instead of Rs.3,20,21,101/- as claimed by the assessee in its return of income. According to the ld.AR, the assessee has paid advance tax of Rs.3,10,00,000/-, self assessment tax of Rs.4,34,260/- and TDS credit of Rs.5,86,841/-. Since the AO has not given credit of the tax paid at Rs.3,20,21,101/- and given credit of Rs.3,19,78,883/- only 5 ITA 726/Hyd/2019 without assigning any reason, the assessee preferred appeal before the ld.CIT(A) who directed the AO to verify the taxes paid and give credit accordingly. We do not find any infirmity in the order of the ld.CIT(A) on this issue. Since, the ld.CIT(A) has directed the AO to verify the taxes paid and give appropriate credit and since it is the apprehension of ld.AR that the ld.CIT(A) has no power to set aside an issue and therefore, the AO may not follow his direction, therefore, we direct the AO to verify the record and give due credit of the taxes paid by the assessee in shape of TDS, advance tax and self-assessment tax. The ground raised by the assessee on this issue is accordingly allowed for statistical purposes. 9. In the second additional ground raised by the assessee, the assessee has challenged the order of the ld.CIT(A) in not deleting the addition of Rs.42810/- made by the AO without appreciating the fact that assessee is following mercantile system of accounting. 10. Facts of the case, in brief, are that during the course of assessment proceedings the AO asked the assessee to reconcile the gross receipts with 26AS statement. From the details furnished by the assessee, he noted that there is excess receipts to the tune of Rs.5,118/- over the income reported in P&L account on interest received from M/s. Infra Master Pvt.Ltd. Similarly, there is an underreporting of income to the tune of Rs.37,692/- on professional receipts/contract receipts from M/s. CES Information Systems Pvt.Ltd. and M/s. Magnitude Software India Pvt.Ltd. He, therefore, made addition of Rs.42,810/- being the income underreported and treated the same as income of the assessee for AY 2014-15. The assessee did not challenge the addition before the ld.CIT(A). However, it has raised the ground in the shape of additional ground. 6 ITA 726/Hyd/2019 11. After hearing both the sides, we find it is the argument of the ld.counsel for the assessee that the assessee is following mercantile system of accounting and has duly filed the reconciliation statement. It is his submission that due to misunderstanding by the AO, he could not appreciate the system of accounting consistently followed by the assessee and made the addition. It is also his submission that given an opportunity, the assessee is in a position to substantiate with evidence to the satisfaction of the AO that such income has already been offered to tax in subsequent years and the method of accounting consistently followed by the assessee has been accepted by the revenue and therefore, no addition should be made in this year. Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the AO with a direction to verify from the record the method of accounting consistently being followed by the assessee and pass appropriate order as per fact and law. The second additional ground raised by the assessee is accordingly allowed for statistical purposes. 12. The remaining grounds as well as the first additional ground raised by the assessee relates to the order of the ld.CIT(A) in considering the foreign exchange loss of Rs.14,32,814/- as capital expenditure and allow depreciation on the same instead of revenue expenditure as claimed by the assessee. 13. Facts of the case, in brief, are that the AO observed from the annual report of the assessee company that it has debited an amount of Rs.35,32,544/- towards net loss/gain on foreign currency transactions. He observed from the Forex loss statement that the loss of Rs.35,32,544/- includes foreign exchange loss to the tune of Rs.14,32,814/- on account of restatement of loan taken from Indusind Bank for purchase of building at Chennai 7 ITA 726/Hyd/2019 from M/s. Shriram Venture Limited. As the loss is in the capital field, the AO held that the same is not allowable as revenue expenditure under the provisions of Income Tax Act, 1961 being notional loss. 14. In appeal, the ld.CIT(A) held that the foreign exchange loss has to be treated as capital in nature and to be added back to the value of building and proportionate depreciation to be allowed. He accordingly directed the AO to allow depreciation on such foreign exchange loss. Aggrieved with such order of the ld.CIT(A) the assessee is in appeal before the Tribunal. 15. The ld.counsel for the assessee submitted that the assessee company has taken a loan from Indusind bank for the purpose of purchase of building at Chennai from M/s. Shriram Venture Limited. The said loan was outstanding for the year under consideration and at the year ending there was an exchange loss of Rs.14,32,814/- towards restatement of the above loan. The above building being purchased in India, provisions of Sec 43A is not applicable. Referring to page No.155 of the paper book, he drew the attention of the Bench to the terms and conditions of the repayment of the loan of Rs.600 lakhs over a period of 36 equal monthly installments of Rs.16.67 lakhs towards principal plus interest as and when debited. 16. The ld.Counsel for the assessee referring to a series of decision submitted that foreign fluctuation currency loss arising out of acquiring fixed asset cannot be capitalized and it should be allowed as revenue expenditure. Referring to the decision of Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India Ltd. reported in 312 ITR 254, he submitted that the Hon’ble Supreme Court in the said decision has held that loss suffered by assessee on account of foreign exchange difference as on date 8 ITA 726/Hyd/2019 of balance sheet is an item of expenditure u/s.37(1) of the I.T.Act. Referring to the Cochin Bench of the Tribunal in the case Baby Memorial Hospital Ltd vs ACIT reported in (2019) 111 taxmann.com 189, he submitted that the foreign exchange loss arising out of foreign currency fluctuations in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure by charging the same to profit and loss account and not as capital expenditure by deducting same from cost of respective fixed assets. 17. Referring to the decision of Pune Bench of the Tribunal in the case of Cooper Corporation Pvt.Ltd. vs DCIT reported in 159 ITD 165, he submitted that where assessee’s act of conversion of Indian currency loan availed for acquisition of assets, etc., into foreign currency loan was dictated by revenue considerations towards saving interest costs, etc., foreign exchange fluctuation loss being on revenue account was an allowable expenditure under section 37(1) of the I.T.Act. 18. Referring to the decision of Hon’ble Supreme Court in the case of CIT vs Tata Iron and Steel Company Ltd. reported in 231 ITR 285, he submit that Hon’ble Supreme Court in the said decision has held that the cost of asset and cost of raising money for purchase of asset are two different and independent transactions. Therefore, events subsequent to acquisition of asset cannot change the price paid for it. The manner of utilization of loan has nothing to do with the allowability of expenditure in connection with loan repayment. Similar analogy can be drawn from sec. 36(1)(iii) of the Act which also enforces that utilization of loan for capital or revenue has nothing to do with allowability of interest. 9 ITA 726/Hyd/2019 19. Referring to the recent decision of Hon’ble Supreme Court in the case of Wipro Finance Ltd. vs CIT vide Civil Appeal No.6677 of 2008 order dated 12.04.2022 (copy filed), he submitted that foreign exchange fluctuations loss was held to be revenue in nature. He also relied on the following decisions: i.MRFA Hotels & Resorts Ltd. vs ACIT reported in 105 taxman 335 (ITAT Cochin) ii. Cobra Instalaciones Y Servicios SA vs. DCIT reported in 96 taxmann.com 80 (ITAT Delhi) 19.1 He accordingly submitted that under the facts and circumstances of the case the foreign exchange fluctuations loss has to be treated as revenue in nature and is an allowable expenditure. 20. The ld.DR on the other hand heavily relied on the other of the AO. He submitted that although the AO has treated the same as capital in nature, however, the ld.CIT(A) has already granted depreciation on the same and therefore, the order of the ld.CIT(A) should be upheld and the ground raised by the assessee on this issue should be dismissed. So far as the decision of Hon’ble Supreme Court in the case of Wipro Finance Ltd.(supra) is concerned, he submitted that the said decision is not applicable to the facts of the present case. He submitted that in that case the assessee has obtained loan for its lease cum hire purchase business and therefore, it is on the trading account and not for purchase of any capital asset for which the fluctuation loss has been allowed as revenue in nature. He accordingly submitted that the order of the ld.CIT(A) on this issue be upheld and the grounds raised by the assessee should be dismissed. 21. We have considered rival arguments made by both the sides, perused the orders of the AO and ld.CIT(A) and the paper book filed on behalf of the assessee. We have also considered the 10 ITA 726/Hyd/2019 various decisions cited before us. We find the AO in the instant case disallowed an amount of Rs.14,32,814/- being foreign exchange loss on account of restatement of loan taken from Indusind bank for purchase of building at Chennai from M/s. Shirram Venture Ltd on the ground that such loss is in the capital field and therefore, the same is not an allowable revenue expenditure under the provisions of the Income tax Act being notional loss. We find the ld.CIT(A) held that the foreign exchange loss has to be treated as capital in nature and to be added back to the value of building and proportionate depreciation to be allowed. It is the submission of the ld.counsel for the assessee that in view of the various decisions, such foreign exchange fluctuation loss has to be allowed as revenue expenditure. 22. We find merit in the above argument of the ld.counsel for the assessee. A perusal of page No.153 to 164 of the paper book gives the details of the term loan of Rs.600 lakhs sanctioned for purchase of commercial office at Chennai which has to be repaid in 36 equal monthly installments of Rs.16.67 lakhs per month. The assessee while making the payment of installments has incurred a foreign exchange loss to the tune of Rs.14,32,814/-. Under these circumstances, we have to see as to whether such foreign exchange fluctuation loss has to be allowed as revenue in nature or to be treated as capital in nature and to be added back to the value of the building and proportionate depreciation to be allowed. 23. We find the Hon’ble Supreme Court in the case of CIT vs. Tata Iron and Steel Company Ltd.(supra) were concerned with similar issue and have observed as under:- 11 ITA 726/Hyd/2019 1. Although several questions of law were raised before the High Court, we are here concerned only with the following two questions: "(2) Whether on the facts and in the circumstances of the case, and having regard to the fact that the net gain of Rs. 48,984 was made by the assessee-company from fluctuations in the rate of foreign exchange while repaying the instalments of the foreign loan for the Assessment Year 1960-61, the appropriate part of the said gain (i.e. after excluding that portion of it which is attributable to the element of interest) was gain on capital account which went to reduce the 'actual cost' of the depreciable assets for computing depreciation for the Assessment Year 1960-1961? (3) Whether on the facts and in the circumstances of the case and having regard to the fact that the net loss of Rs. 29,063 and net loss of Rs. 58,28,839 accrued to the assessee-company from the fluctuations in the rate of foreign exchange for the Assessment Year 1961-62, the appropriate part of each of the said two amounts (i.e. after excluding that portion of it which is attributable to the element of interest) was loss on capital account which went to increase the 'actual cost' of the depreciable assets for computing depreciation for the Assessment Year 1961-62?" The High Court has followed its earlier decisions in the case of CIT v. Tata Hydro Electric Power Supply Co. Ltd., (1986) 159 ITR 28 (Bom HC) A point has been taken on behalf of the respondents that the Department not having come up in appeal against that decision, must be taken to have accepted the law stated in that decision as correct. Therefore, it should not be allowed to agitate these questions in this Court. Mr. Murthy, learned Senior Counsel appearing on behalf of the Department, has pointed out that we are concerned in this case with assessment for the Assessment Years 1960-61 and 1961-62. The relevant assessment years in the judgment relied upon by the High Court were 1970-71 and 1971-72. The High Court in those cases relied on the provisions of Section 43-A of the Income Tax Act which came into force on 1-4-1967. In the instant case, there is no scope for application of Section 43-A. Therefore, the decision rendered in the case relied upon by the High Court cannot have any bearing to the controversy now raised. We are of the view that Mr. Murthy is right in his contention on this aspect of the matter. Coming to the questions raised, we find it difficult 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 must depend on the amount paid by the assessee to acquire the asset. 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 of the asset. If the borrower defaults in repayment of a part of the loan, cost of the asset will not change. What has to be borne in mind is that cost of an asset and cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with no 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 case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign 12 ITA 726/Hyd/2019 exchange as a result of which, the assessee had to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee 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 of the asset. In our judgment the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs. 24. We find Hon’ble Supreme Court in the case of the CIT vs. Woodward Governor India (P.) Ltd. (supra) has held that loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u/s. 37(1) of the I.T.Act. 25. We find the Cochin Bench of the Tribunal in the case of Baby Memorial Hospital(supra) while deciding an identical issue at para 9 of the order has observed as under:- 9. In our opinion, foreign exchange loss arising out of foreign currency fluctuations in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure by charging the same into the Profit and Loss account and not as capital expenditure by deducting the same from the cost of the respective fixed assets. Hence, in our opinion, there is no potential escapement of income on the issue relating to allowability of foreign exchange loan taken for the construction of new building and additional equipment. Accordingly, this ground of appeal of the assessee is allowed. 26. We find the Pune Bench of the Tribunal in the case of Cooper Corporation Pvt.Ltd. (supra) has observed as under:- 10.5 Before We delineate on the allowability of loss based on generally accepted accountancy principles, it may be pertinent 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. 43(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 13 ITA 726/Hyd/2019 assets will have to be reduced or added to the costs of the assets. Thus, viewed from this perspective also, such increased liability cannot be bracketed with cost of acquisition of capital assets save and except in terms of overriding provisions of S. 43A of the Act. 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. (1998) 22 ITR 285 held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions. Thus, events subsequent to acquisition of assets cannot change price paid for it. Therefore, fluctuations in foreign exchange rate while repaying installments of foreign loan raised to acquire asset cannot alter actual cost of assets. The relevant operative para is reproduced hereunder:- “Coming to the question raised, we find it difficult 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 must depend on the amount paid by the assessee to acquire the asset. 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 of the asset. If the borrower defaults in repayment of a part of the loan, 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 purchase of the asset are two different and independent transactions. Even 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 case, 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 otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee 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 of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs.” Thus, it is evident the variation in the loan amount has no bearing on the cost of the asset as the loan is a distinct and independent transaction as in comparison with acquisition of assets out of said loan amount borrowed. Actual cost of the corresponding fixed asset acquired 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 provision 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 allowability of any expenditure in connection with loan repayment. Both are independent and distinct transactions in nature. Similar analogy can be 14 ITA 726/Hyd/2019 drawn from S. 36(l)(iii) of the Act which also reinforces that utilization of loan for capital account or revenue account purpose has nothing to do with allowablity 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 capital asset is put to use, the interest expenditure on money borrowed for acquisition of capital asset is also treated as revenue expenditure. As also noted, S. 43A specifically and categorically calls for adjustments in cost of assets for loss or gain arising out of foreign currency fluctuations in respect of funds borrowed in foreign currency for acquisition of foreign assets. However, the same rationale of a deeming provision of S. 43A cannot be applied to loss or gain arising from foreign currency loss utilized for purchase of indigenous assets. Needless to say, impugned currency fluctuation loss has emanated from foreign currency loans. Besides AS-I 1, the claim of exchange fluctuation loss as revenue account is also founded on the argument that the aforesaid action was taken to save interest costs and consequently to augment the profitability or reduce revenue losses of the assessee. The impugned fluctuation loss therefore has a direct nexus to the saving in interest costs without bringing any new capital asset into existence. Thus, the business exigencies are implicit as well explicit in the action of the Assessee. The argument that the 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 attributable to revenue account has considerable merits. 10.8 Section 145 of the Income Tax Act deals with method of accounting and states that business income inter-alia has to be computed in accordance with cash or mercantile system of accounting. Sub-section (2) thereof authorizes the Central Government to notify accounting standards to be followed for determination of business income. Section 211 of the 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 of 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 standards prescribed to determine business income under the head “business or profession”. We notice that the Hon’ble Supreme Court in the case of 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 India (P) Ltd. (supra), we arc of the view that loss arising on foreign exchange fluctuation loss has been rightly accounted for as a revenue expense in the Profit & Loss account in accordance with accounting fiat of AS-11. 10.9 We find that the decision in the case of Sutlej 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 arises to an assessee on account of depreciation in foreign currency held by him on conversion from another currency, such profit and loss would ordinary be trading 15 ITA 726/Hyd/2019 loss if the foreign currency held by the assessee on revenue account as trading asset or as a part of circulating capital embargo in business. However, if the foreign currency is held as a 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, fluctuation loss inflicted upon the assessee bears no nexus or relation to the acquisition 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 revenue account. Thus, the loss generated in impugned action bears the character of revenue expenditure. Similarly, decision 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 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 the Income Tax Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the Assessee in accordance with generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot 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 impugned loss, were dictated by revenue considerations towards saving interest costs etc. we allowable expenditure under S. 37(1) of the Act. The order of the CIT(A) sustaining the disallowance is not called for and is thus reversed. In the result, the Ground No.1 is allowed.” 27. In view of the above decisions, we are of the considered opinion that the foreign exchange fluctuation loss of Rs.14,32,814/- on account of restatement of loan taken from Indusind bank for purchase of building at Chennai from M/s.Shriram Ventures Ltd. has to be allowed as revenue expenditure. We hold and direct accordingly. The grounds raised by the assessee on this issue are accordingly allowed. 16 ITA 726/Hyd/2019 28. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the Open Court on 30 th December, 2022. Sd/- Sd/- (K.NARASIMHA CHARY) JUDICIAL MEMBER (RAMA KANTA PANDA) ACCOUNTANT MEMBER Hyderabad, dated 30 th December, 2022. Thirumalesh/sps Copy to: S.No Addresses 1 CES Limited C/o.P.Murali & Co Chartered Accountants 6-3-655/2/3, Somajiguda Hyderabad-500 082 2 DCIT,Circle-1(2) B-Block, 7 th Floor I.T.Towers, AC Guards Masab Tank Hyderabad-500 004 3 CIT(A)-1, Hyderabad 4 Prl.CIT-1, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File By Order
Other Referred Cases
NTPC Ltd vs CIT, CIT vs Woodward Governor India Ltd, Baby Memorial Hospital Ltd vs ACIT, Cooper Corporation Pvt.Ltd vs DCIT, CIT vs Tata Iron and Steel Company Ltd, Wipro Finance Ltd vs CIT
Laws Referred To
Income Tax Act
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