I.T.A.  No.  1406/KOL/ 2009  Assessment year : 2005-2006
Apeejay Tea Limited (Appellant) vs  Deputy Commissioner of income Tax (Respondent)

I.T.A.  No.  1233/KOL/ 2009 Assessment year : 2005-2006
Apeejay Tea Limited (Respondent) vs  Deputy Commissioner of income Tax (Appellant)

Date of concluding the hearing           : 24-08-2015
Date of pronouncing the order            : 11-09-2015

ORDER

Per Shri M. Balaganesh, A.M .:       
I.T.A.  No.  1406/KOL/ 2009

            This appeal of the assessee arises out of order of ld. Commissioner of Income Tax (Appeals), Central-I, Kolkata in Appeal No. 04/CC-III/CIT(A)C-I/08-09 dated 23.04.2009 for the assessment year 2005-06, which is against the order of assessment framed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

2.  The only issue to be decided in the appeal of the assessee is as to whether the ld. CIT(Appeals) is correct in disallowing the Foreign Exchange loss of Rs.10,00,000/- under section 43A of the Act without appreciating the fact that the said provision is not applicable in the facts and circumstances of the case.

2.1.  Brief facts of the case are that the assessee is engaged in the business of cultivation of green leaf and manufacture and sale of Black Tea. The assessee had borrowed Estate of Commercial Borrowings (hereinafter referred to as ‘ECB’) of USD 50,00,000 and utilized the same for the general business purposes. Hence, this goes to prove that the loan has been obtained for revenue account. This loan was outstanding as on 31 ^st March, 2005 and the same was restated exchange rate prevailing at the end of the year in consonance with the Accounting Standard 11 (AS-11) issued by the Institute of Chartered Accountant of India (ICAI) by the assessee-company. The assessee incurred a Notional Exchange Loss of Rs.10,00,000/- on such restatement in view of the increase in liability payable on the loan account.  This work-out is as under:-

The difference representing exchange loss by way of increase in liability Rs.10,00,000/-.

2.2.      The Assessing Officer disallowed the same as the exchange loss incurred thereon was notional in nature by invoking the provisions of section 43A of the Act, wherein pursuant to an amendment brought with effect from 1 ^st April, 2003, in exchange loss arising out of restatement could be allowed only on payment basis and not on restatement. The assessee pleaded that the provisions of section 43A per se for not applicable for the case as the assets were acquired by ECB loan available by the assessee as admittedly the said loan was availed for general working out capital business purposes on Revenue’s account. But this explanation before the Assessing Officer did not hold water. Aggrieved the assessee preferred appeal before the ld. CIT(Appeals), who upheld the decision of the Assessing Officer. Aggrieved, the assessee is in appeal before us on the following grounds:-

(a)        That on the facts and in the circumstances of the case, ld. CIT(A) erred in confirming the action of Assessing Officer who disallowed loss of Rs.10,00,000/- u/s 43A of Income Tax Act, 1961, without appreciating the fact that section 43A is not applicable in appellant’s case.

(b)        That the ld. CIT(A) having admitted that the appellant following mercantile system has to provide loss on account of increase of foreign exchange liability has erred in dismissing the assessee’s appeal.

2.3.  Shri Manish Tiwari, FCA, A.R., argued on behalf of the assessee and Shri Arindam Bhattacharya, JCIT, Sr. D.R., argued on behalf of the Revenue.

2.4. Ld. A.R. argued that the assessee had borrowed ECB loan for its general working out capital purposes which is only on Revenue Account. On specific query from the Bench, he placed on record a copy of the ECB loan agreement. He further argued that since the ECB loan was utilized on revenue account and no fixed assets were purchased out of the same, the provision of section 43A of the Act per se was applicable to the assessee. He relied on the decision of the Hon’ble Supreme Court in the case of Woodward Governor reported in 312 ITR 254 (SC) in support of his contention that the case law on restatement of the foreign currency loan for the end of the year leading to increase in liability is an allowable business expenditure. In response to this, ld. D.R. vehemently supported the order of the lower authorities.

2.5. We have heard the rival submissions and perused the material available on record. It is seen from the ECB loan agreement, which was filed when specific query from the Bench of the A.R. that the loan was utilized for general corporate purposes and not for any acquisition of any fixed asset. Hence, we hold that the borrowings were utilized on Revenue Account and the provisions of section 43A of the Act were not applicable at all in the facts of the case. Based on this, it could logically be concluded that any exchange fluctuation arising out of the restatement of the said loan at the end of the year, be it gain or loss, would also fall on revenue account and hence, automatically comes under the ambit of taxation if it is a case and allowable as an expenditure if it is a loss. This issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of CIT –vs.- Woodward Governor (India) Pvt. Ltd. reported in 312 ITR 254 (SC), wherein the questions raised before Their Lordships were as under:-

8. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open Court on, 2015.