14 [2019] 111 taxmann.com 189 (Trib.)(Coch.) Baby Memorial Hospital Ltd. vs. ACIT (CPC –
TDS) ITA No. 420/Coch/2019 A.Y.: 2014-15 Date of order: 8th November, 2019
Sections 37,
263 – 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
FACTS
For assessment
year 2014-15, the assessment of total income of the assessee was completed u/s
143(3) of the Act by accepting the income returned. The Pr. CIT, on
verification of records, noticed that the assessment order passed by the AO was
prima facie erroneous insofar as it was prejudicial to the interest of
the Revenue.
The Pr. CIT
found that the assessee had claimed an amount of Rs. 2,08,09,140 being foreign
exchange loss which was allowed by the AO. According to the Pr. CIT, the
foreign exchange loss was on account of foreign currency loan taken for the
construction of new building and additional equipment and the loss was
recognised translating the liabilities at the exchange rate in effect at the
balance sheet date. The Pr. CIT said that the loss on devaluation of rupee on
account of loan utilised for fixed capital was not deductible u/s 37(1) since
the expenditure is capital in nature. Therefore, he held that the foreign
exchange loss claimed as revenue expenditure is to be disallowed in the
assessment. The Pr. CIT set aside the assessment and invoked the provision of
section 263 of the I.T. Act inter alia for the limited purpose of
verifying whether the foreign exchange loss qualifies for being a revenue
expenditure.
Aggrieved, the
assessee preferred an appeal to the Tribunal where it contended that the case
of an assessee was a limited scrutiny case and in a limited scrutiny case the
details specific to CASS reasons were furnished and were verified. Therefore,
the order of CIT is invalid.
HELD
As regards the
challenge of the assessee to the jurisdiction of CIT, the Tribunal held that
even in a case of limited
scrutiny assessment, the AO is duty-bound to make a prima facie inquiry
as to whether there is any other item which requires examination and in the
assessment, the potential escapement of income thereof exceeded Rs. 10 lakhs.
The AO ought to have sought the permission of CIT / DIT to convert the ‘limited
scrutiny assessment’ into a ‘complete scrutiny assessment’. If there is no
escapement of income, which would have been more than Rs. 10 lakhs, the Pr. CIT
could not exercise jurisdiction u/s 263 of the I.T. Act. In the present case,
the assessee itself agreed that the Pr. CIT is justified in giving direction to
rework MAT income after adding back the provision for doubtful debts. Now, the
argument of the learned AR that in case of limited scrutiny assessment, the Pr.
CIT could not exercise jurisdiction u/s 263 is devoid of merit. Accordingly,
the Tribunal rejected the ground relating to challenging of the exercise of
jurisdiction by the Pr. CIT u/s 263.
The Tribunal
observed that the question for its consideration is whether gain on account of
foreign exchange fluctuation can be reduced from the cost of assets as per the
provisions of section 43(1). It held that as per the provisions of section
43(1), actual cost means actual cost of the capital 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. The section also has
Explanations. However, the section nowhere specifies that any gain or loss on
foreign currency loans acquired for purchase of indigenous assets will have to
be reduced or added to the cost of assets.
After having
considered the ratio of various judicial pronouncements and the
provisions of Schedule VI and AS-11, the Tribunal observed that 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 currency fluctuations in respect of fixed
assets acquired through loan in foreign currency shall be required to be given
in profit and loss account. The said exchange loss should be allowed as revenue
expenditure in view of amended AS-11 (2003). The Tribunal observed that the
Apex Court had followed treatment of exchange loss or gain as per AS-11 (1994).
It held that in view of revision made in AS-11, now treatment shall be as per
the revised AS-11 (2003). Exchange gain or loss on foreign currency
fluctuations in respect of foreign currency loan acquired for acquisition of
fixed asset should be allowed as revenue expenditure.
The Tribunal held that –
(a) in its opinion, section 43A is only relating
to the foreign exchange rate fluctuation in respect of assets acquired from a
country outside India by using foreign currency loans which is not applicable
to the indigenous assets acquired out of foreign currency loans;
(b) foreign exchange loss arising out of foreign
currency fluctuations in respect of loans 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 its
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 filed by
the assessee is allowed.
