Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view to save interest costs, is an allowable revenue expenditure.to save interest costs, is an allowable revenue expenditure.
Facts
The assessee company was engaged in foundry business, manufacturing cylinder liners/heads, flywheels and other automobile components, etc. The assessee had in earlier years taken loans from Corporation Bank, IDBI Bank and Bank of Maharashtra in Indian currency for the purposes of acquisition of fixed assets and windmills, etc. which were purchased in India. These loans were bearing interest @ 12% to 14% p.a. In order to save on interest costs, these term loans were converted over a period of years into foreign exchange loans where interest rate was chargeable from 6% to 7% p.a.
In the return of income the assessee had claimed a deduction of Rs. 1,39,98,945 on account of devaluation of Indian currency qua foreign currency on outstanding foreign currency loans u/s. 37(1) of the Act. The Assessing Officer (AO) disallowed this sum of Rs. 1,39,98,945 on the ground that it was merely a notional loss and not an actual loss incurred by the assessee. The AO further observed that even presuming that increased liability for repayment of foreign currency loans have been saddled on the assessee, still the same will be capital in nature since the impugned loans were obtained for acquiring capital assets.
Aggrieved, the assessee preferred an appeal to the CIT(A) who granted partial relief of Rs. 37,92,087 on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items like bill discounting, debtors, etc. Foreign exchange fluctuation loss in respect of loan taken for purpose of acquiring capital assets was not allowed as a deduction.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held
The Tribunal noted that – (i) the assessee entered into the agreement with lenders to convert the loan in foreign currency to gain advantage of savings in interest; (ii) there is no dispute that the acquisition of capital assets / expansion of projects, etc from the term loans taken are already complete and the assets so acquired have been put to use; (iii) there is no adverse finding from the Revenue about the correctness of accounts or the assessee on the touchstone of section 145 of the Act – in other words, the profits / gains from the business have admittedly been computed in accordance with the generally accepted accounting practices and guidelines notified; (iv) loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. The Tribunal observed that the assessee had applied Accounting Standard-11 which it was mandatorily required to follow. It also noted that the provisions of section 43A would not apply since the assets were not acquired from out of India.
The Tribunal held that 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 Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the assessee in accordance with the generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. In the light of the fact that conversion in foreign currency loans which led to impugned loss, were dictated by revenue consideration towards saving interest costs, etc., the Tribunal stated that it had no hesitation in coming to the conclusion that loss being on revenue account was an allowable expenditure u/s. 37(1) of the Act.
This ground of appeal filed by the assessee was allowed.
