IN THE HIGH COURT OF DELHI AT NEW DELHI
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ITA 471/2014
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COMMISSIONER OF INCOME TAX VI
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..... Appellant
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Through: Mr.Rohit Madan, Standing Counsel
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versus
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CLIMATE SYSTEM PVT.LTD.
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..... Respondent
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Through:
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CORAM:
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HON'BLE MR. JUSTICE SANJIV KHANNA
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HON'BLE MR. JUSTICE V. KAMESWAR RAO
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O R D E R
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22.08.2014
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This appeal by the revenue relates to the Assessment Year 2003-04
raises a singular issue, whether Rs. 49,98,072/- debited in the Profit
and Loss Account were covered by Section 43A of Income Tax Act, 1961
(‘Act, in short) and/or was otherwise expenditure of capital nature. The
respondent assessee had issued 15% Unsecured Redeemable Non-convertible
Debentures carrying interest @15% per annum. In order to repay the
debentures, the respondent-assessee borrowed the money. The loan was
taken against Foreign Currency Non Resident Loan Account [FCNR(B) Loan].
The advantage/benefit was that the loan was availed at a lower rate of
interest as compared to normal loan account. In order to hedge against
foreign exchange fluctuations, the respondent-assessee had entered into
forward contracts with banks in India. The respondent-assessee incurred
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loss of Rs. 49,98,072/- on account of foreign exchange fluctuations, as a result of taking loan under FCNR(B) Loan. The said amount was paid during
the previous year relevant to the assessment year.
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In the Assessment Order under Section 143(3) dated 31.01.2006,
income of the respondent-assessee was assessed at Rs.2,76,29,016/- as
against return income of Rs.2,46,94,573/-. It appears that no enquiry or
questions were raised on the aforementioned issue during the original
assessment proceedings.
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Commissioner of Income Tax, by order dated 25.03.2008 under Section
263 of the Act required the Assessing Officer to examine the issue of
applicability of provisions of Section 43A, after verifying the nature
and source of expenditure relating to the foreign exchange fluctuations.
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The aforesaid order passed by the Commissioner of Income Tax was not
challenged and has attained finality.
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In the assessment order dated 20.11.2008 passed under Section 263
read with Section 143, the Assessing Officer observed that decisions of
the Delhi High Court in the case of CIT Vs. Woodward Governor India Pvt.
Ltd., [2007] 294 ITR 451 and Oil and Natural Gas Corporation Vs. DVIT
[2003] 261 ITR 0001 were not been accepted by the revenue and appeals
were preferred before the Supreme Court. He further observed that the
respondent assessee’s contention on Section 43A was not acceptable,
though no asset had been acquired from the said loan, as assets were
acquired in the earlier years for purpose of business or profession.
Thus, the provisions of Section 43A were applicable. He further observed
that the decisions relied upon by the respondent assessee were not with
reference to the foreign exchange fluctuations loss on loan account.
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The aforesaid findings were reversed by the Commissioner of Income
Tax (Appeals), who observed that the appellant had outstanding 15%
Unsecured Redeemable Non-convertible Debentures of Rs. 100 Crores as on
31.03.1999 and these debentures were due to redemption in the financial
year 1999-2000 (Assessment Year 2000-01). For repayment of debentures,
the respondent-assessee had raised FCNR (B) Loan from banks on 27.01.2000
and loan was utilized for repayment of the debentures. The exercise of
taking FCNR(B) Loan had resulted in reduction of financial expenditure as
similar borrowing under a normal loan would have resulted in higher
interest payment. The details with regard to the financial cost or
interest rates had been submitted. He referred to the salient features of
FCNR(B) loans as they offered low cost funding option to the Indian
Corporates, but, have two elements; interest rate-risk which is bench
marked or LIBOR rates and foreign exchange risk i.e. risk of Indian
National Rupees (INR) depreciation against the foreign currency
pertaining to the loan. These FCNR(B) loans were/are usually for short
term and the loan taken by the respondent-assessee was in fact for six
months only. This could be extended by refinance by way of a fresh
FCNR(B) loan from time to time till complete repayment was/is made. In
order to protect himself, the respondent-assessee entered into forward
contracts to hedge against fluctuation loss in value of Indian National
Rupees. During the year, the respondent-assessee had incurred foreign
currency fluctuation loss of Rs. 49,98,072/-, which was the actual
expense paid as was evident from the papers/documents filed before him.
The aforesaid computation of actual expenditure was done as per the
accounting procedures and Accounting Standards issued by the Institute of
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Chartered Accountants of India. It was further observed that the aforesaid decision to take FCNR(B) loan had resulted in benefit as saving
to the assessee of Rs.69,67,717/-. Thus, the purpose of raising FCNR(B)
loan was to reduce the cost of funding. As far as business of respondent-
assessee was concerned, fixed assets were/are purchased each and every
year and old loans were repaid and new loans were taken on need to need
basis. There was no foreign exchange loss on purchase of fixed assets as
was stated in the Audit Report and also clear from the depreciation
schedule as per the Companies Act, 1956 as well as Audit report as per
the Act. Thus, the amount paid was for raising or repayment of loan and
thus, on revenue account, at not of capital nature. The reasoning given
by the Commissioner of Income Tax (Appeals) is lucid and clear, and is
worthy of reproduction:
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‘‘10. I have gone through the facts of the case and submission of
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the Appellant and also to the remand report and rejoinder thereof. I have
also perused the accounts of the assessee for the year under
consideration and additional documents filed in course of appellate
proceedings. I am inclined to accept the additional documents filed by
the appellant as the same copies of the original documents and no
prejudice cause to Department on accepting the same and is also in the
interest of justice to dispose of present appeal on merits of facts. My
findings of the facts of the case are as under:-
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The FCNR (B) loan has been taken on Jan. 27,2000 , (Fy1999-00) and
the said amount is utilized for repayment of 15% Unsecured Redeemable
Non-Convertible Debentures (Debentures) for Rs. 100,000,000/-. This fact
is evidenced by the bank statement of Bank of America filed with
submission.
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It is also accepted that Foreign Currency Fluctuation Loss on
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short term loan amounting to Rs. 49,98,072/- is an actual
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expenditure incurred during the year on the purchase of forward
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contacts for repayment of FCNR(B) Loan and not notional or
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contingent as stated by the Ld. AO.
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It is also admitted that by this FCNR (B) Loan, no fixed
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assets has been acquired in foreign currency by the appellant in
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earlier years or in this year. This fact is also supported by the
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audited accounts of earlier year and this year. It is evident from the
extract of balance sheet that the debentures have been repaid and new
loans are raised at lower finance cost. The appellant is able to reduce
the cost of financing by Rs. 6,967,717/-. It is also clear from the
submission made before me.
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In respect of the applicability of section 43A of the Act, the, Ld.
AO is wrong in applying the provisions of the section 43A in the present
case, as from the fact is clearly evident that no assets were acquired by
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the assessee by raising the FCNR(B) loan by making the payment in foreign currency on acquisition of capital assets out of the borrowings of
FCNR(B) loan as such amount is utilized for repayment of debentures.
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The submission of the assessee that initial rupee loan is
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borrowed for acquisition of fixed assets has been withdrawn by the
appellant in the light of the facts discussed above, hence the theory
that FCNR(B) loan has indirectly utilized for purchasing the fixed assets
in foreign currency could not be applied on present facts, especially in
the light of the fact that the appellant is following is AS-11 and the
accounts are audited wherein it has been stated that the Exchange
difference arsing on settlement of transaction, except those relating to
fixed assets, are only recognized as income or expense in the year in
which they arise.
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11. Thus, the sole purpose of raising of FCNR(B) loan in FY 1999-2000
would only be termed as swapping of Debenture loan to, FCNR(B) Loan to
reduce the revenue expenditure of the appellant as the payment on
interest on debenture is an revenue expenditure even if the amount of
such debenture is utilized for acquisition of fixed assets. The issue
also needs examination from another angle. In case the appellant has not
repaid the debenture, the whole interest of Rs. 1,500,000/- would be
allowed as a deductible expenditure. However, since the assessee has paid
the debenture by obtaining another loan, the reduced cost of that loan of
Rs. 4,998,072/- would not be allowed as a deductible expenditure. This
would result into absurd situation i.e. the higher interest on debenture
is an allowable expenditure whereas expenditure incurred to arrange
finance for the redemption would not be allowed.
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12. Further, the issue of allow ability of foreign exchange loss
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has been no more res-integral in view of the decision of the Apex court
in the case of CIT vs Woodward Governor India (P) Ltd. 312 ITR 254
wherein it has held that exchange fluctuation arising on revenue account
transaction should be allowed as deductible, expenditure. In view of the
above Supreme Court decision, the expenditure in question is an allowable
expenditure and ground of the ld. AO that the Department had preferred an
appeal in Hon'ble Supreme Court against that the order of the Hon'ble
Delhi High Court in the case of CIT vs. Woodward Governor, 291 ITR 451 in
the assessment order would not hold good after the decision of the Apex
Court wherein the decision of the Hon'ble Delhi High Court has been
upheld’‘.
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On appeal filed by the revenue, the aforesaid decision was affirmed
by the Income Tax Appellate Tribunal.
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Decision of the Delhi High Court in Woodward Governor India Pvt.
Ltd. (supra) has been affirmed by the Supreme Court in decision reported
as Commissioner of Income Tax, Delhi Vs. Woodward Governor India Pvt.
Ltd. [2009] 312 ITR 254. It has been, inter alia, held that the
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expression ‘‘expenditure’‘ in Section 37(1) of the Act connotes ‘‘what is paid out’‘ and what has gone irretrievably. But the word ‘‘expenditure’‘
used in context of Section 37(1) would also cover ‘loss’ even though the
said amount had not gone out from the pocket of the assessee. The said
provision being a residuary provision extending the allowance to items of
business expenditure, not covered by Section 30 to 36 of the Act.
Reference was made to Section 28 and 29 read with Section 145(1) of the
Act, and it was observed that accounts maintained in the normal course of
business should be taken as correct unless there are strong and
sufficient reasons for their unreliability. Thus, the ‘profits and
gains’ of the previous year are required to be computed with regard to
the relevant Accounting Standards. The reference was also made to
Accounting Standard-11, which deals with the effects of foreign exchange
fluctuations, and it was accordingly observed as under:
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‘‘21. In conclusion, we may state that in order to find out if an
expenditure is deductible the following have to be taken into account (i)
whether the system of accounting followed by the assessee is mercantile
system, which brings into debit the expenditure amount for which a legal
liability has been incurred before it is actually disbursed and brings
into credit what is due, immediately it becomes due and before it is
actually received; (ii) whether the same system is followed by the
assessee from the very beginning and if there was a change in the system,
whether the change was bona fide; (iii) whether the assessee has given
the same treatment to losses claimed to have accrued and to the gains
that may accrue to it; (iv) whether the assessee has been consistent and
definite in making entries in the account books in respect of losses and
gains; (v) whether the method adopted by the assessee for making entries
in the books both in respect of losses and gains is as per nationally
accepted accounting standards; (vi) whether the system adopted by the
assessee is fair and reasonable or is adopted only with a view to
reducing the incidence of taxation’‘.
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Thereafter, reference was made to Section 43A of the Act, both as stood
prior to 01.04.2003 and thereafter. However, we need not to go further
into the said issue as the Supreme Court in Woodward Governor India Pvt.
Ltd. (supra) had dealt with un-amended Section 43A of the Act.
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Reference to Section 43A would be redundant and not necessary as the
revenue has not been able to state and point out that the loan taken
under the heading FCNR(B) loan was for purpose of acquisition of any
capital asset. The Assessing Officer has accepted that the loan was not
for acquisition of an asset but he observed that assets have been
acquired in earlier period. Finding of the Commissioner of Income Tax
(Appeals) is clear and categorical that the loan was not for acquisition
of an asset payment for which was to be made in foreign currency. Rs.
49,98,072/- which was the actual expenditure incurred by the assessee as
per the terms negotiated. The payment of said amount during the previous
year relevant to the assessment year in question is also undisputed.
Keeping in view the aforesaid aspects, it is clear that the payment of
Rs. 49,98,072/- would be of revenue nature i.e. virtually in nature of
payment of interest for the loan taken having regard to the nature and
type of loan which was taken i.e. FCNR(B) Loan Account. It is part and
parcel of payment towards debt servicing.
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In view of the aforesaid, we do not find merit in the present
appeal and the same is dismissed.
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No costs.
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SANJIV KHANNA, J
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V. KAMESWAR RAO, J
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AUGUST 22, 2014/akb
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$ 21
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