Cooper Corporation Pvt. Ltd.,, V. Deputy Commissioner of Income-tax,

ITA 866/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1921 (ITAT-PUNE)
• Duration Of Justice: 2 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 29-12-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 29-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Cost of acquisition; Commercial expediency; Revenue expenditure
• Section: 143(3); 37(1); 32; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , !', $ % BEFORE MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA NO.866/PN/2014 ASSESSMENT YEAR : 2008-09 COOPER CORPORATION PVT. LTD., L-3, ADDITIONAL MIDC, SATARA 415 004. PAN : AAACC9687J . APPELLANT VS. THE DY. COMMISSIONER OF INCOME TAX, SATARA CIRCLE, SATARA. . RESPONDENT / APPELLANT BY : SHRI KRISHNA GUJARATHI / RESPONDENT BY : SHRI HITENDRA NINAWE / DATE OF HEARING : 05.04.2016 / DATE OF PRONOUNCEMENT: 29.04.2016 & / ORDER PER PRADIP KUMAR KEDIA, AM : THE CAPTIONED APPEAL FILED BY THE ASSESSEE IS AGAIN ST THE ORDER OF CIT(A)-III, PUNE DATED 26.02.2014 RELATING TO ASSES SMENT YEAR 2008-09 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT). 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL :- 1. THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW I N UPHOLDING DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LOSS OF RS.1,02,06,863 /- CONSIDERING IT AS CAPITAL IN NATURE. SHE FAILED TO APPRECIATE THE FACTS IN ITS P ROPER PERSPECTIVE AND ALSO FAILED TO APPRECIATE THE ARGUMENTS AND CONTENTIONS ADVANCED B Y THE ASSESSEE IN THIS REGARD. 2 ITA NO.866/PN/2014 2. WITHOUT PREJUDICE TO THE ABOVE GROUND NO. 1 AND IN THE ALTERNATIVE, THE CIT (A) OUGHT TO HAVE ALLOWED CAPITALIZATION OF FOREIGN EXCHANGE FLUCTUATION LOSS OF RS. 1,02,06,863/- AND CONSEQUENT DEPRECIATION U/S. 32 O F THE INCOME TAX ACT, 1961. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, DELETE OR SUBSTITUTE ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 3. THE PREDOMINANT ISSUE ARISING IN THE PRESENT APP EAL IS DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LOSS OF RS.1,02,06,863 /- SUSTAINED BY THE CIT(A) OUT OF TOTAL FOREIGN EXCHANGE LOSS OF RS.1,39,98,94 8/- DISALLOWED BY THE ASSESSING OFFICER. THE BASIC PREMISE FOR SUSTAININ G THE DISALLOWANCE BY THE CIT(A) IS THAT THE LOSS IS OF CAPITAL NATURE AND TH US NOT ALLOWABLE AS REVENUE EXPENDITURE. 4. THE RELEVANT FACTS CONCERNING THE ISSUE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY, PRIMARILY ENGAGED IN FOUNDRY BUSIN ESS, MANUFACTURING CYLINDER LINERS/HEADS, FLYWHEELS AND OTHER AUTOMOBI LE COMPONENTS ETC. BESIDES GENERATION OF ELECTRICITY THROUGH WINDMILLS. IT WA S NOTICED BY THE ASSESSING OFFICER THAT IN ITS FINANCIAL STATEMENT, THE ASSESS EE HAS INTERALIA SHOWN OUTSTANDING LOANS RECEIVED IN FOREIGN CURRENCY AT T HE END OF THE YEAR. IT WAS FURTHER NOTICED THAT THE ASSESSEE HAS CLAIMED A DED UCTION OF AN AMOUNT OF RS.1,39,98,948/- ON ACCOUNT OF DEVALUATION OF INDIA N CURRENCY QUA FOREIGN CURRENCY ON OUTSTANDING FOREIGN CURRENCY LOANS UNDE R SECTION 37(1) OF THE ACT. IT WAS CONTENDED BY THE ASSESSEE BEFORE THE ASSESSI NG OFFICER THAT THE ASSESSEE HAS OBTAINED VARIOUS LOANS IN FOREIGN CURRENCY TO T AKE BENEFIT OF THE LOW INTEREST RATE REGIME ON FOREIGN CURRENCY LOAN. IT WAS FURTHER CONTENDED THAT AS PER ACCOUNTING STANDARD 11 (AS-11), IN RELATION T O EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES ISSUED BY INSTITUTE OF CHAR TERED ACCOUNTANTS OF INDIA (ICAI), THE OUTSTANDING FOREIGN CURRENCY LOAN IS RE QUIRED TO BE TRANSLATED INTO INDIAN RUPEES BY APPLYING THE FOREIGN EXCHANGE RATE AS ON THE CLOSING DAY OF REPORTING PERIOD AND THE NET EXCHANGE DIFFERENCE RE SULTING ON SUCH TRANSLATION IS REQUIRED TO BE RECOGNIZED AS INCOME OR EXPENSE F OR THE RESPECTIVE FINANCIAL PERIOD. IT WAS SUBMITTED THAT THE ASSESSEE HAD, FO R ACQUISITION OF ASSETS AND FOR 3 ITA NO.866/PN/2014 EXPANSION OF PROJECT ETC., INITIALLY AVAILED VARIOU S TERM LOANS IN INDIAN RUPEE FROM BANKS IN FY 2004-05 TO FY 2006-07. HOWEVER, TH E EXISTING LOANS IN INDIAN CURRENCY WERE CONVERTED INTO FOREIGN CURRENC Y LOANS TO TAKE BENEFIT OF LOWER RATE OF INTEREST ON SUCH FOREIGN CURRENCY LOA NS VIS A VIS LOANS IN INDIAN RUPEE. THE ASSESSEE SUBMITTED THAT WHILE INTEREST C OSTS WERE SAVED DUE TO LOWER RATE OF INTEREST, THE ASSESSEE UNFORTUNATELY SUFFERED LOSSES DUE TO STRONGER FOREIGN CURRENCY (USD) IN THE IMPUGNED YEAR. IT WAS THEREAFTER SUBMITTED THAT SUBJECT TO THE PROVISIONS OF S. 43A, THE PROFIT / L OSS ARISING FROM SUCH CONVERSION WHICH IS IN ACCORDANCE WITH THE METHOD O F ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE IS A REVENUE ITEM. THE ASS ESSEE TOOK A STAND BEFORE THE AO THAT OVERRIDING PROVISION OF SECTION 43A HAS NO APPLICATION IN THE INSTANT CASE SINCE, THE ASSETS WERE NOT ACQUIRED FR OM A COUNTRY OUTSIDE INDIA. SUCH LOANS SO CONVERTED ARE FOR THE PURPOSE OF BUSI NESS AND THEREFORE LOSS INCURRED DUE TO FLUCTUATION IN THE RATE WAS CORRECT LY CLAIMED AS BUSINESS LOSS IN THE COURSE OF CARRYING ON OF BUSINESS. IT WAS FURTH ER ARGUED BEFORE THE ASSESSING OFFICER THAT THERE IS NO PROVISION IN THE INCOME-TAX ACT TO REJECT THE LOSS INCURRED ON FLUCTUATION IN EXCHANGE AS REVENUE EXPENSE EXCEPT SECTION 43A WHICH PROVIDES CAPITALIZATION OF SUCH LOSS WHER E THE LOAN WAS TAKEN ON ACQUISITION OF ANY CAPITAL ASSET OUTSIDE THE INDIA. THE ASSESSING OFFICER, HOWEVER, DID NOT FIND MERIT IN THE CLAIM OF THE ASS ESSEE. THE AO TOOK A VIEW THAT THE SO CALLED LOSS IS MERELY A NOTIONAL LOSS A ND NOT AN ACTUAL LOSS INCURRED BY THE COMPANY. THE ASSESSING OFFICER FURTHER OBSER VED THAT EVEN PRESUMING THAT INCREASED LIABILITY FOR REPAYMENT OF FOREIGN C URRENCY LOANS HAVE BEEN SADDLED ON THE ASSESSEE, STILL THE SAME WILL BE A P AYMENT OF CAPITAL IN NATURE SINCE IMPUGNED LOANS WERE OBTAINED FOR ACQUIRING TH E CAPITAL ASSET. THE AO THUS HELD THAT THE LOSS CLAIMED ON ACCOUNT OF FLUCT UATION IN THE FOREIGN EXCHANGE RATE COULD NOT BE ALLOWED AS REVENUE EXPEN DITURE. 5. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) GRANTED PAR TIAL RELIEF OF RS.37,92,087/- ON ACCOUNT OF FOREIGN CURRENCY FLUCT UATION LOSS ARISING ON LOANS 4 ITA NO.866/PN/2014 FOUND BY HIM TO BE CONNECTED TO REVENUE ITEMS SUCH AS BILL DISCOUNTING, DEBTORS ETC. HOWEVER, IN RESPECT OF OTHER LOANS, TH E CIT(A) OBSERVED THAT SUCH LOANS IN QUESTION WERE SANCTIONED AND RECEIVED FOR PART FINANCING THE COST OF EXPANSION PROJECT OF THE FOUNDRY BUSINESS, COST OF ACQUISITION OF WINDMILLS AND COST OF EXPANSION OF THE ENGINE DIVISION, ETC.. THU S, THE LOANS WERE TAKEN FOR CAPITAL PURPOSES AND THEREFORE THE ASSESSEE IS NOT ENTITLED TO LOSSES FROM FLUCTUATION IN CURRENCY AS REVENUE EXPENDITURE. AS REGARDS PLEA OF THE ASSESSEE THAT CONVERSION FROM RUPEE LOAN TO FOREIGN CURRENCY LOAN RESULTING IN SAVING OF INTEREST COSTS WHICH IS IN REVENUE FIELD, THE CIT(A ) OBSERVED THAT SUCH ACTION MAY HAVE SOME COMMERCIAL JUSTIFICATION BUT THE LOSS IS ON ACCOUNT OF OUTSTANDING LIABILITY TAKEN FOR FIXED ASSET FOR A P ERIOD SPANNING OVER 5 TO 7 YEARS. THE CIT(A) RELIED UPON THE DECISION OF ELECO N ENGINEERING CO. LTD. 189 TAXMAN 83 (SC) WHEREIN IT WAS HELD THAT IF THE LOSS IS ON CAPITAL ACCOUNT, THEN IT CAN NOT BE ALLOWED AS REVENUE EXPENDITURE. THE CIT(A) HELD THAT SINCE THE PURPOSE OF LOANS RAISED WAS TO ACQUIRE CAPITAL ASSETS, THE ASSESSEE IS NOT ENTITLED TO FLUCTUATION LOSS OF RS.1,02,06,863/- IN CURRED ARISING THEREFROM OWING TO THE REVISION IN VALUES IN BALANCE SHEET. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE THE TRIBUNAL. 7. THE LD. AUTHORIZED REPRESENTATIVE(AR) FOR THE AS SESSEE MR. KRISHNA GUJARATHI, AT THE OUTSET, ADVERTED OUR ATTENTION TO PAGE 25 OF THE PAPER BOOK SHOWING WORKING OF THE EXCHANGE RATE FLUCTUATION LO SS AND SUBMITTED THAT THE ASSESSEE HAD TAKEN CERTAIN LOANS FROM CORPORATION B ANK, IDBI BANK AND BANK OF MAHARASHTRA IN THE EARLIER YEARS IN INDIAN CURRE NCY FOR THE PURPOSES OF ACQUISITION OF FIXED ASSETS AND WINDMILLS, ETC. WHI CH WERE PURCHASED IN INDIA. IT WAS SUBMITTED THAT INTEREST ON THESE RUPEE LOANS WERE CHARGED AT THE RATE RANGING FROM 12% TO 14% P.A.. THEREFORE, IN ORDER T O SAVE ON THE INTEREST COSTS, THESE TERM LOANS SANCTIONED TO PART FINANCE ITS EXP ANSION PROJECTS ETC. WERE CONVERTED, OVER A PERIOD OF YEARS, INTO FOREIGN EXC HANGE LOANS WHERE THE 5 ITA NO.866/PN/2014 INTEREST RATE WAS CHARGEABLE RANGING FROM 6% TO 7% P.A.. THE LD. AR FOR THE ASSESSEE THUS EXPLAINED THAT THE PURPOSE OF THE CON VERSION WAS ESSENTIALLY TO SAVE ON INTEREST COSTS AND HENCE THE OBLIGATIONS IN FOREIGN CURRENCY WERE TAKEN ON SUCH CONVERSION WITH A VIEW TO GAIN AN ADVANTAGE IN THE REVENUE FIELD. HE SUBMITTED THAT DUE TO UNFORTUNATE FALL IN THE VALUE OF THE RUPEE VIS--VIS USD IN THE INTERNATIONAL MARKET, THE ASSESSEE WAS MADE TO SUFFER FOREIGN EXCHANGE LOSSES ON THE OUTSTANDING LOANS REPAYABLE IN FOREIG N CURRENCY. MR. GUJARATHI, THEREAFTER CANVASSED THAT AS PER AS-11 CONCERNING EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES ISSUED BY ICAI, THE OUTSTAN DING LIABILITIES IN FOREIGN CURRENCY ARE REQUIRED TO BE NECESSARILY CONVERTED I NTO INDIA CURRENCY BY APPLYING THE FOREIGN EXCHANGE RATE PREVAILING AS AT THE CLOSING DATE OF RELEVANT ACCOUNTING YEAR. IT WAS THEREAFTER SUBMITTED THAT AS-11 FURTHER OBLIGES THE ASSESSEE COMPANY TO ACCOUNT FOR PROFIT / LOSS ARISI NG FROM SUCH EXCHANGE FLUCTUATION, IF ANY, IN THE BOOKS. IN THE IMPUGNED ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE HAS INCURRED LOSSES ON SUCH FLUCTUATION WITH REFERENCE TO FOREIGN CURRENCY RATE PREVAILING AT TH E END OF THE YEAR AND THEREFORE THE LOSS SO INCURRED HAS BEEN DEBITED TO PROFIT AND LOSS ACCOUNT OF THE ASSESSEE AND CLAIMED AS DEDUCTION. THE LD. AR EMPH ASIZED THAT AS-11 HAS BEEN DULY NOTIFIED BY THE NATIONAL ADVISORY COMMITT EE FOR ACCOUNTING STANDARDS IN TERMS OF SECTION 211(3C) OF THE COMPAN IES ACT, 1956 WHEREBY THE COMPLIANCE WITH THE ACCOUNTING STANDARDS HAS BE COME MANDATORY FOR THE ASSESSEE COMPANY. THE LD. AR MADE AVERMENT TO THE E FFECT THAT THE IMPUGNED LOSS IS ON ACCOUNT OF RE-STATEMENT OR CONVERSION OF OUTSTANDING LOANS WITH REFERENCE TO FOREIGN CURRENCY RATE PREVAILING AT TH E YEAR END. EXTENDING HIS CONTENTIONS, THE LD. AR SUBMITTED THAT IT IS WELL S ETTLED THAT BUSINESS INCOME SHOULD BE COMPUTED IN ACCORDANCE WITH METHOD OF ACC OUNTING REGULARLY EMPLOYED BY THE ASSESSEE AND IT IS ONLY WHERE THE P ROVISIONS OF THE INCOME TAX LAW ARE IN DIVORCE WITH THE ACCOUNTING POLICIES , THE ACCOUNTING POLICIES FOLLOWED BY THE ASSESSEE ARE TO BE DISCARDED. HE SU BMITTED THAT, ADMITTEDLY, THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE IS CO NSISTENTLY FOLLOWED AND THERE IS NO CHANGE IN THE METHOD OF ACCOUNTING EMPL OYED DURING THE YEAR. HE 6 ITA NO.866/PN/2014 SUBMITTED THAT THE LOSS ON ACCOUNT OF FOREIGN EXCHA NGE FLUCTUATION HAS BEEN RECOGNIZED AS PER AS-11 NOTIFIED BY THE ICAI READ W ITH NOTIFICATION OF THE NATIONAL ADVISORY COMMITTEE FOR ACCOUNTING STANDARD S AS SUBMITTED EARLIER. HE THEREAFTER REFERRED TO PAGE 74 OF THE PAPER BOOK AND ADVERTED OUR ATTENTION TO A SUBSEQUENT NOTIFICATION OF THE CBDT DATED 31 ST MARCH, 2015 ISSUED IN EXERCISE OF POWERS CONFERRED UNDER S. 145(2) OF THE ACT. AS PER THE AFORESAID NOTIFICATION NO. S.O. 892(E), THE CBDT HAS NOTIFIED THAT THE INCOME COMPUTATION AND DISCLOSURE STANDARDS AS SPECIFIED I N THE ANNEXURE THERETO IS TO BE FOLLOWED BY ALL ASSESSEES, FOLLOWING THE MERCANT ILE SYSTEM OF ACCOUNTING, FOR THE PURPOSES OF COMPUTATION OF INCOME CHARGEABL E TO TAX UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION OR IN COME FROM OTHER SOURCES. THIS NOTIFICATION IS APPLICABLE TO ASSESSMENT YEAR 2016-17 AND SUBSEQUENT ASSESSMENT YEAR. THE LD. AR SUBMITTED THAT AS PER THE AFORESAID NOTIFICATION ALSO, THE CBDT HAS ADDRESSED THE ISSUES RELATING TO THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. WITH REFERENCE TO ABOVE CBD T NOTIFICATION, THE LD. AR SUBMITTED THAT THE PROFIT OR LOSS ARISING FROM T HE EXCHANGE DIFFERENCES SHALL BE RECOGNIZED AS INCOME OR AS AN EXPENSE IN THE REL EVANT ASSESSMENT YEAR EXCEPT IN CASES GOVERNED BY PROVISIONS OF SECTION 4 3A OF THE ACT. IT WAS SUBMITTED THAT CBDT NOTIFICATION MERELY CLARIFIES T HE EXISTING POSITION OF LAW AND EQUALLY APPLIES TO ASSESSMENT YEAR 2008-09 IN A PPEAL. 7.1 ADDRESSING THE APPLICABILITY OF S. 43A IN THE C ONTEXT, THE LD. AR SUBMITTED THAT THE AFORESAID PROVISION IS NOT APPLI CABLE IN THE PRESENT CASE ON THE GROUND THAT RUPEE TERM LOANS INITIALLY TAKEN WE RE NOT UTILIZED FOR ACQUISITION OF CAPITAL ASSETS FROM OUTSIDE INDIA. THE LD. AR A DDED THAT THERE IS NO PROVISION TO DISALLOW THE FOREIGN EXCHANGE FLUCTUAT ION LOSSES UNDER THE INCOME-TAX ACT EXCEPT SECTION 43A OF THE ACT. IN VI EW OF THE LEGAL LIABILITY ACCRUED AGAINST THE ASSESSEE DUE TO FLUCTUATION AND IN VIEW OF THE ACCOUNTING METHODS AND POLICIES EMPLOYED CONSISTENT WITH ACCOU NTING STANDARDS PRESCRIBED, THE LD. AR JUSTIFIED THE ACTION OF THE ASSESSEE IN CLAIMING THE EXPENSE AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE ACT. 7 ITA NO.866/PN/2014 7.2 THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSES SEE EXTENSIVELY RELIED UPON THE OBSERVATIONS MADE BY THE HONBLE SUPREME C OURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD., (2009) 312 IT R 254 (SC). HE SUBMITTED THAT IN THE ABSENCE OF APPLICABILITY OF S . 43A, THE ASSESSEE IS GOVERNED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLE S AND POLICIES. THE LOSSES ARISING TO THE ASSESSEE DETERMINED ON COMMERCIAL P RINCIPLES BY ADOPTING WELL RECOGNIZED AND GENERALLY ACCEPTED ACCOUNTING POLICI ES ARE DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT. HE REFERRED TO THE OBSERV ATIONS OF THE HONBLE SUPREME COURT AND ASSERTED THAT THE CENTRAL GOVERNM ENT HAS MADE AS-11 MANDATORY FOR THE PURPOSE OF DETERMINATION OF INCOM E CHARGEABLE UNDER THE HEAD INCOME FROM BUSINESS/PROFESSION OR INCOME FRO M OTHER SOURCES, ETC. WITH REGARD TO THE PROVISIONS OF SECTION 145 OF THE ACT. HE NEXT SUBMITTED THAT AS PER WOODWARD CASE SUPRA, THE LIABILITY OWING TO FLUCTUATION HAS ACCRUED AND CRYSTALLIZED TO THE ASSESSEE AND FOLLOWING MERCANTI LE SYSTEM OF ACCOUNTING AS MANDATED UNDER S. 209 OF THE COMPANIES ACT, 1956, T HE LOSS HAS BEEN RIGHTLY ACCOUNTED FOR AND CLAIMED AS REVENUE LOSS. 7.3 THE LD. AR FINALLY SUBMITTED THAT THE ASSETS WE RE EARLIER ACQUIRED BY UTILIZING LOANS BORROWED IN INDIAN CURRENCY. THE LO ANS SO BORROWED WERE THEREAFTER CONVERTED INTO FOREIGN CURRENCY LOANS TO BRING DOWN INTEREST COSTS WHICH IS A REVENUE ITEM. THE LD. AR ALSO NOTED THAT EXPOSURE SO TAKEN IN FOREIGN EXCHANGE ALSO SERVES AS A USEFUL TOOL FOR H EDGING A PART OF REVENUE DERIVED FROM EXPORTS. THUS, IT IS THE CASE OF THE A SSESSEE THAT LOSS ARISING DUE TO HOLDING LOANS IN FOREIGN CURRENCY ARE ATTRIBUTABLE TO REVENUE FIELD. THEREFORE THE DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LO SS IS NOT JUSTIFIED AND REQUIRES TO BE REVERSED. 7.4 THE LD. AR IN THE ALTERNATIVE AND WITHOUT PREJU DICE TO THE AFORESAID GROUND SUBMITTED THAT THE ASSESSEE WOULD BE ENTITLE D TO DEPRECIATION ON THE AFORESAID LOSS AS PART OF THE CAPITAL ASSET. 8 ITA NO.866/PN/2014 8. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVE NUE, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE CIT(A) IN JUSTIF ICATION OF THE DISALLOWANCE. IN FURTHERANCE, HE SUBMITTED THAT IT IS OBVIOUS IN THE FACTS OF THE CASE THAT THE BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF ACQ UISITION OF CAPITA ASSET AND THE FOREIGN CURRENCY LOAN SUBSTITUTED IN PLACE OF T HE INDIAN RUPEE LOAN TAKEN EARLIER YEAR MAKES NO DIFFERENCE TO THE NATURE OF T HE LOAN. HE RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE S UTLEJ COTTON MILLS LTD. VS. CIT, (1979) 116 ITR 1 (SC) FOR THE PROPOSITION THAT THE LOSS INCURRED IN RESPECT OF CAPITAL ASSET IS NOT ALLOWABLE BUSINESS EXPENDIT URE IRRESPECTIVE OF THE MANNER IN WHICH THE ENTRIES HAVE BEEN PASSED IN THE BOOKS OF ACCOUNT. THE LD. DEPARTMENTAL REPRESENTATIVE ALSO SUBMITTED THAT APART FROM THE STAND OF THE REVENUE THAT FOREIGN EXCHANGE FLUCTUATION LOSS HAVE BEEN ORIGINATED IN THE CAPITAL FIELD, IT IS ALSO THE CASE OF THE REVENUE T HAT THE LIABILITY IS CONTINGENT IN NATURE AND THEREFORE REQUIRES TO BE IGNORED. HE SUB MITTED THAT THE IMPUGNED INCREASE IN LIABILITY AND CORRESPONDING LOSSS ARE M ERELY NOTIONAL AND CONTINGENT WITH NO ACTUAL OUTGO OWING TO DEVALUATION OF THE VA LUE OF INDIAN RUPEE VIS A VIS FOREIGN CURRENCY IN WHICH THE LOANS HAVE BEEN SECUR ED. 9. IN REJOINDER, THE LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT FACTS OF THE CASE IN SUTLEJ COTTON MILLS LTD. ARE ENTIRELY D IFFERENT AND IS REQUIRED TO BE READ IN THE CONTEXT. HE SUBMITTED THAT WHEN THE FOR EIGN CURRENCY IS HELD IN REVENUE ACCOUNT WHICH IS THE CASE HERE, THE PROFIT OR LOSS WOULD BE REGARDED AS TRADING PROFIT / LOSS. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS, ORDERS OF THE AUTHORITIES BELOW AND CASE LAWS CITED. THE CENTRAL ISSUE INVOLVED IN THE PRESENT CASE IS WHETHER PROVISION FOR LOSS IN THE HANDS OF ASSESSEE ON ACCOUNT OF RESTATEMENT OF OUTSTANDING FOREIGN CURRENCY LOANS N ECESSITATED BY FLUCTUATION IN FOREIGN EXCHANGE WOULD BE ALLOWABLE AS BUSINESS LOSS OR A LOSS OF CAPITAL NATURE IN THE FACTS NARRATED ABOVE. WHILE AS PER TH E REVENUE, THE INCREASED 9 ITA NO.866/PN/2014 LIABILITY DUE TO EXCHANGE FLUCTUATION CORRESPOND WI TH CARRYING COSTS OF THE FIXED ASSETS AND THUS CAPITAL IN NATURE, THE ASSESS EE 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 FOR EIGN CURRENCY LOANS HAVE ACTUALLY BENEFITED THE ASSESSEE IN TERMS OF SAVING OF INTEREST COSTS. WE ALSO NOTICE THAT THERE IS NO DISPUTE ON THE FACT THAT TH E ACQUISITION OF CAPITAL ASSETS / EXPANSION OF PROJECTS ETC. FROM THE TERM LOANS TAKE N ARE ALREADY COMPLETE AND THE ASSETS SO ACQUIRED HAVE BEEN PUT TO USE. AS A C ONSEQUENCE, THE LOSS OCCASIONED FROM FOREIGN CURRENCY LOANS SO CONVERTED IS A POST FACTO EVENT SUBSEQUENT TO CAPITAL ASSETS HAVING BEEN PUT TO USE . WE SIMULTANEOUSLY NOTICE THAT THERE IS NO ADVERSE FINDING FROM THE REVENUE A BOUT THE CORRECTNESS OR COMPLETENESS OF ACCOUNTS OF ASSESSEE ON THE TOUCHST ONE OF SECTION 145 OF THE ACT. IN OTHER WORDS, THE PROFITS/GAINS FROM THE BU SINESS HAVE BEEN ADMITTEDLY COMPUTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCO UNTING PRACTICES AND GUIDELINES NOTIFIED. 10.2 THE ASSESSEE HAS INTER ALIA APPLIED AS-11 DEALING 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 CLOSING RATE AT THE END OF THE ACCOUNTING YEAR. IT ALSO REQUIRES THAT ANY DIFFEREN CE, LOSS OR GAIN, ARISING FROM SUCH CONVERSION OF THE LIABILITY AT THE CLOSING RAT E SHOULD BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT FOR THE REPORTING PERIOD. 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 NOTIFICATI ON ALSO SETS OUT THAT THE EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TR ANSACTIONS HAVE TO BE 10 ITA NO.866/PN/2014 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 ACCOUNTING STANDARDS AS APPLICABLE IS REQUIRED TO BE FOLLOWED WHILE DRAWING STATEMENT OF AFFAIRS. S. 145 OF THE INCOME TAX ACT,1961 SIMILARLY CASTS OBLIGATION TO C OMPUTE 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 11. THUS, IN OUR CONSIDERED VIEW, THE LOSS RECOGNIZED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS PER N OTIFIED ACCOUNTING STANDARD AS 11 IS AN ACCRUED AND SUBSISTING LIABILITY AND NO T MERELY A CONTINGENT OR A HYPOTHETICAL LIABILITY. A LEGAL LIABILITY ALSO EXIS TS AGAINST THE ASSESSEE DUE TO FLUCTUATION AND LOSS ARISING THEREFROM. ACTUAL PAYM ENT OF LOSS IS AN IRRELEVANT CONSIDERATION TO ASCERTAIN THE POINT OF ACCRUAL OF LIABILITY. AS A COROLLARY, THE REVENUE HAS COMMITTED ERROR IN HOLDING THE LIABILIT Y 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 RELEV ANT IN THE CONTEXT, READS AS UNDER: NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PRO VISION OF THIS ACT, WHERE AN ASSESSEE HAS ACQUIREDANY ASSET IN ANY PREVIOUS YEAR FROM A C OUNTRY OUTSIDE INDIA FOR THE PURPOSES OF HIS BUSINESS OR PROFESSION AND, IN CONSEQUENCE OF A CHANGE IN THE RATE OF EXCHANGE DURING ANY PREVIOUS YEAR AFTER THE ACQUISITION OF SUCH ASS ET, THERE IS AN INCREASE OR REDUCTION IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIAN CU RRENCY (AS COMPARED TO THE LIABILITY EXISTING AT THE TIME OF ACQUISITION OF THE ASSET) A T THE TIME OF MAKING PAYMENT (A) TOWARDS THE WHOLE OR A PART OF THE COST OF THE ASSET ; OR 11 ITA NO.866/PN/2014 (B) TOWARDS REPAYMENT OF THE WHOLE OR A PART OF THE MONEYS BORROWED BY HIM FROM ANY PERSON, DIRECTLY OR INDIRECTLY, IN ANY FOREIGN CURR ENCY 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 ANDWHICH IS TAKEN INTO ACCOUNT AT THE TIME OF MAKING THE PAYMENT, IRRESPECTIVE OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE, SHALL BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED FROM (I) THE ACTUAL COST OF THE ASSET AS DEFINED IN CLAU SE (1) OF SECTION 43 ; OR (II) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IV) OF SUBSECTION (1) OF SECTION 35 ; OR (III) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN SECTION 35A ; OR (IV) THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE REFERRED TO IN CLAUSE (IX) OF SUBSECTION (1) OF SECTION 36 ; OR (V) THE COST OF ACQUISITION OF A CAPITAL ASSET (NOT BEING A CAPITAL ASSET REFERRED TO IN SECTION 50) FOR THE PURPOSES OF SECTION 48, AND THE AMOUNT ARRIVED AT AFTER SUCH ADDITION OR DE DUCTION SHALL BE TAKEN TO BE THE ACTUAL COST OF THE ASSET OR THE AMOUNT OF EXPENDITURE OF A CAPITAL NATURE OR, AS THE CASE MAY BE, THE COST OF ACQUISITION OF THE CAPITAL ASSET AS AFORESA ID: PROVIDED THAT WHERE AN ADDITION TO OR DEDUCTION FRO M THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITION HAS BEEN MADE UNDER THIS SECTION, AS IT STOOD IMMEDIATELY BEFORE ITS SUBSTITUTION BY THE FINANCE ACT, 2002, ON ACCOUNT O F AN INCREASE OR REDUCTION IN THE LIABILITY AS AFORESAID, THE AMOUNT TO BE ADDED TO, OR, AS THE CASE MAY BE, DEDUCTED UNDER THIS SECTION FROM, THE ACTUAL COST OR EXPENDITURE OR COST OF ACQ UISITION AT THE TIME OF MAKING THE PAYMENT SHALL BE SO ADJUSTED THAT THE TOTAL AMOUNT ADDED TO , OR, AS THE CASE MAY BE, DEDUCTED FROM, THE ACTUAL COST OR EXPENDITURE OR COST OF ACQUISITI ON, IS EQUAL TO THE INCREASE OR REDUCTION IN THE AFORESAID LIABILITY TAKEN INTO ACCOUNT AT THE T IME 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 THAT IT COMES IN TO PLAY ONLY WHEN THE ASSETS ARE ACQUIRED FROM A COUNTRY OU TSIDE INDIA AND DOES NOT APPLY TO ACQUISITION OF INDIGENOUS ASSETS. ANOTHER NOTABLE FEATURE IS THAT S. 43A PROVIDES FOR MAKING CORRESPONDING ADJUSTMENTS T O THE COSTS OF ASSETS ONLY IN RELATION TO EXCHANGE GAINS/ LOSSES ARISING AT TH E TIME OF MAKING PAYMENT. IT THEREFORE DEALS WITH REALISED EXCHANGE 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, THE ISSUE WHETHER, THE LOSS IS ON REVENUE ACCOUNT OR A CAPITAL ONE IS REQUIRED TO BE TESTED IN THE LIGHT O F GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, PRONOUNCEMENTS AND GUIDELINES ETC. 12 ITA NO.866/PN/2014 10.5 BEFORE WE DELINEATE ON THE ALLOWABLITY OF LOSS 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 PE RSON OR AUTHORITY. SEVERAL EXPLANATIONS HAVE BEEN APPENDED TO S. 43(1). HOWEVE R, THE SECTION NOWHERE SPECIFIES THAT ANY GAIN OR LOSS ON FOREIGN CURRENCY LOAN ACQUIRED FOR PURCHASE OF INDIGENOUS ASSETS WILL HAVE TO BE REDUCED OR ADD ED TO THE COSTS OF THE ASSETS. THUS, VIEWED FROM THIS PERSPECTIVE ALSO, SUCH INCRE ASED LIABILITY CANNOT BE BRACKETED WITH COST OF ACQUISITION OF CAPITAL ASSET S 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 SUBSEQUE NT TO ACQUISITION OF ASSETS CANNOT CHANGE PRICE PAID FOR IT. THEREFORE, FLUCTUA TIONS IN FOREIGN EXCHANGE RATE WHILE REPAYING INSTALLMENTS OF FOREIGN LOAN RA ISED TO ACQUIRE ASSET CANNOT ALTER ACTUAL COST OF ASSETS. THE 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 A SSESSEE. WHAT IS THE ACTUAL COST MUST DEPEND ON THE AMOUNT PAID BY THE ASSESSEE TO ACQUIRE THE ASSET. T HE AMOUNT MAY HAVE BEEN BORROWED BY THE ASSESSEE, BUT EVEN IF THE ASSESSEE DID NOT REPAY TH E LOAN IT WILL NOT ALTER THE COST OF 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 BORNE IN MIND IS THAT THE COST OF AN ASSET AND T HE 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 ALLEG ATION IS THAT AT THE TIME OF REPAYMENT OF LOAN, THE RE WAS A FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE A S A RESULT OF WHICH, THE ASSESSEE HAD TO REPAY A MUCH LESSER AMOUNT THAN HE WOULD HAVE OTHERWISE PAI D. IN OUR JUDGMENT, THIS IS NOT A FACTOR WHICH CAN ALTER THE COST INCURRED BY THE ASSESSEE FOR PUR CHASE OF THE ASSET. THE ASSESSEE MAY HAVE RAISED TH E FUNDS TO PURCHASE THE ASSET BY BORROWING BUT WHAT T HE ASSESSEE HAS PAID FOR IT, IS THE PRICE OF THE AS SET. 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 T HAT THE QUESTIONS WERE RIGHTLY ANSWERED BY THE HIGH COURT. THE APPEALS ARE DISMISSED. THERE WILL B E NO ORDER AS TO COSTS. 13 ITA NO.866/PN/2014 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 IND EPENDENT 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(1)(III) GOVERNING DEDUCTION OF INTEREST COSTS ON BORROWALS. AS STATED EARLIER, MANNER OF UTILIZATION OF LOAN AMOUNT HAS NOTHING TO DO WIT H ALLOWABILITY OF ANY EXPENDITURE IN CONNECTION WITH LOAN REPAYMENT. BOT H ARE INDEPENDENT AND DISTINCT TRANSACTIONS IN NATURE. SIMILAR ANALOGY CA N BE DRAWN FROM S. 36(1)(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 CAPITAL ASSET IS PUT TO USE, THE INTEREST EXPENDITURE ON MONEY BORROWED FOR ACQUISITION OF CA PITAL ASSET IS ALSO TREATED AS REVENUE EXPENDITURE. AS ALSO NOTED, S. 43A SPECI FICALLY 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 RA TIONALE OF A DEEMING PROVISION OF S. 43A CANNOT BE APPLIED TO LOSS OR GA IN ARISING FROM FOREIGN CURRENCY LOSS UTILIZED FOR PURCHASE OF INDIGENOUS A SSETS. NEEDLESS TO SAY, IMPUGNED CURRENCY FLUCTUATION LOSS HAS EMANATED FRO M FOREIGN CURRENCY LOANS. BESIDES AS-11, THE CLAIM OF EXCHANGE FLUCTUATION LO SS AS REVENUE ACCOUNT IS ALSO FOUNDED ON THE ARGUMENT THAT THE AFORESAID ACT ION WAS TAKEN TO SAVE INTEREST COSTS AND CONSEQUENTLY TO AUGMENT THE PROF ITABILITY OR REDUCE REVENUE LOSSES OF THE ASSESSEE. THE IMPUGNED FLUCTUATION LO SS THEREFORE HAS A DIRECT NEXUS TO THE SAVING IN INTEREST COSTS WITHOUT BRING ING ANY NEW CAPITAL ASSET INTO EXISTENCE. THUS, THE BUSINESS EXIGENCIES ARE IMPLIC IT AS WELL EXPLICIT IN THE 14 ITA NO.866/PN/2014 ACTION OF THE ASSESSEE. THE ARGUMENT THAT THE ACT O F CONVERSION HAS SERVED A HEDGING MECHANISM AGAINST REVENUE RECEIPTS FROM EXP ORT ALSO PORTRAYS COMMERCIAL EXPEDIENCY. THUS, WE ARE OF THE OPINION THAT THE PLEA OF THE ASSESSEE FOR CLAIM OF EXPENDITURE IS ATTRIBUTABLE T O 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 COMPUTED IN ACCORDANCE WITH CASH OR MERCANTILE SYSTEM OF ACCOUNTING. SUB-SECTIO N (2) THEREOF AUTHORIZES THE CENTRAL GOVERNMENT TO NOTIFY ACCOUNTING STANDARDS T O BE FOLLOWED FOR DETERMINATION OF BUSINESS INCOME. SECTION 211 OF T HE 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 STANDA RDS PRESCRIBED TO DETERMINE BUSINESS INCOME UNDER THE HEAD BUSINESS OR PROFESS ION. WE NOTICE THAT THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR INDIA (P) LTD. (SUPRA) HAS OBSERVED THAT AS-11 IS MANDATORY IN NAT URE. IN THE LIGHT OF OBSERVATIONS MADE IN WOODWARD GOVERNOR INDIA (P) LT D. (SUPRA), WE ARE OF THE VIEW THAT LOSS ARISING ON FOREIGN EXCHANGE FLUCTUAT ION 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 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 THE 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 15 ITA NO.866/PN/2014 ASSESSEE ON REVENUE ACCOUNT AS TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARGO IN BUSINESS. HOWEVER, IF THE FOREIGN CURRE NCY IS HELD AS A CAPITAL ASSET, THE LOSS SHOULD BE CAPITAL IN NATURE. THE AF ORESAID PRINCIPLE OF LAW IS REQUIRED TO BE APPLIED TO THE FACTS OF CASE TO DETE RMINE 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 INFL ICTED 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 REVE NUE ACCOUNT. THUS, THE LOSS GENERATED IN IMPUGNED ACTION BEARS THE CHARACTER OF REVENUE EXPENDITURE. SIMILARLY, DECISION OF THE APEX COURT IN THE CASE O F TATA IRON AND STEEL CO. (SUPRA) ALSO WEIGHS IN FAVOUR OF THE ASSESSEE. WE A LSO 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 FA CTS 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 ABSE NCE 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 CAN N OT 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 INTEREST C OSTS ETC. WE HAVE NO HESITATION IN COMING TO THE CONCLUSION THAT LOSS BE ING ON REVENUE ACCOUNT IS AN ALLOWABLE EXPENDITURE UNDER S. 37(1) OF THE ACT. TH E 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. 16 ITA NO.866/PN/2014 12. THE ASSESSEE HAS SOUGHT RELIEF TOWARDS DEPRECIA TION IN THE ALTERNATIVE AS PER GROUND NO. 2. THUS, GROUND NO. 2 IS RENDERED IN FRUCTUOUS AND DOES NOT REQUIRE ADJUDICATION IN VIEW OF THE RELIEF GIVEN AS PER GROUND NO. 1 OF THE APPEAL. 13. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED ON THIS 29 TH DAY OF APRIL, 2016. SD/- SD/- ( SUSHMA CHOWLA ) ( PRADIP KUMAR KEDIA ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER PUNE ; DATED : 29 TH APRIL, 2016. & ' ()* +*( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)- III, PUNE; 4) THE CIT- III, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. &, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE