Capital Asset Financed By Foreign Currency Loan Can Be Capitalized U/s 43A If Such Asset Was Imported From Abroad: Bombay High Court
Pankaj Bajpai
29 Sept 2024 8:50 PM IST
While explaining that Section 43A is a non-obstante provision, which positively imposes an obligation notwithstanding anything contained in the Income tax Act, the Bombay High Court held that losses due to exchange rate changes on a foreign currency loan taken for import of a capital asset must not be treated as revenue expenditure.Section 43A of Income tax Act requires companies to...
While explaining that Section 43A is a non-obstante provision, which positively imposes an obligation notwithstanding anything contained in the Income tax Act, the Bombay High Court held that losses due to exchange rate changes on a foreign currency loan taken for import of a capital asset must not be treated as revenue expenditure.
Section 43A of Income tax Act requires companies to capitalize expenses that are required to be capitalized as per the accounting standard, so that companies cannot claim such expenses as a deduction in the current year but will have to capitalize and claim depreciation over the useful life of the asset.
The Division Bench comprising Justice G.S. Kulkarni and Justice Somasekhar Sundaresan explained that just because the assets were not imported into India from abroad, any loss on exchange rate fluctuation on a foreign currency loan taken for acquiring capital assets would necessarily not be a capital expenditure.
While expounding on the positive mandate of 43A as against the negative caveat in 37(1), the Bench observed that the essential jurisdictional fact for the mandatory capitalization of such an expense u/s 43A is that the capital asset financed by the foreign currency loan in question, must have been brought into India from a country outside India.
Facts of the case:
The assessee company had availed foreign currency loan in nature of external commercial borrowings from DBS Bank, Singapore towards capital expenditure. As per AS 11, the assessee restated the balance outstanding in respect of such foreign currency loan which resulted in loss of Rs. 5.30 crore due to change in exchange rate. The assessee broke up such loss amount in the proportion of value of capital goods imported into India and value of capital goods acquired within India. Accordingly, the assessee attributed Rs. 51.86 lacs to capital assets imported which was capitalized along with the cost of the asset and Rs. 4.78 crore to capital assets acquired within India which was claimed as revenue expenditure.
The AO disallowed losses arising out of fluctuation of exchange rates in servicing a foreign currency loan and held that such losses ought to be entirely capitalized regardless of whether the asset is acquired from outside India or from within India. On appeal, the CIT(A) held that the entire foreign currency losses ought to be capitalized on the ground that the losses are not attributable to trading in foreign exchange for them to be treated as revenue expenditure. When the matter reached ITAT, it was held that unless the asset had been acquired outside India, Section 43A could have no relevance. Challenging the said decision, the Revenue Department approached the High Court.
Observations of High Court
The Bench observed that Section 43A imposes a positive obligation to capitalize losses arising out of exchange rate fluctuation in servicing a foreign currency loan taken for import of an asset from a country outside India for business or profession.
The positive obligation, introduced with non-obstante provision of Section 43A, would have to be met where the loan is intended to finance import of a capital asset, added the Bench.
The Bench observed that Section 43A contains a positive enjoinment that losses due to exchange rate changes on a foreign currency loan taken for import of a capital asset must not be treated as revenue expenditure and this is why Section 43A is a non-obstante provision, that positively imposes such obligation notwithstanding anything contained in the Act.
At the same time, the Bench clarified that any loss on exchange rate fluctuation on a foreign currency loan taken for acquiring capital assets would necessarily not be a capital expenditure, only because the assets were not imported into India from abroad.
The Bench noted that the assessee without demur, capitalized the loss on exchange rate fluctuation in servicing the loan to the extent the loan was utilized for import of assets.
The High Court therefore remitted the matter back to the ITAT for an effective adjudication on the specific issue as to whether the disallowance towards fluctuation loss for component of application of foreign currency loan towards acquisition of assets within India can be treated as 'not a capital expenditure' to be allowed u/s 37(1).
Counsel for Appellant/ Revenue: Advocate Akhileshwar Sharma
Counsel for Respondent/ Assessee: Advocates Nitesh Joshi and Atul Jasani
Case Title: Principal Commissioner of Income Tax vs. Galaxy Surfactants
Case Number: ITA No. 1430 of 2018
