Delhi High Court
The respondent assessee had issued15% Unsecured Redeemable Non-convertible Debentures carrying interest @15% per annum. In order to repay the debentures, the respondent-assessee borrowed loan against Foreign Currency Non Resident Loan Account [FCNR(B) Loan] at an advantageous lower rateof interest as compared to interest payable on the normal loanaccount. In order to hedge against foreign exchange fluctuations, the respondent-assessee had entered into forward contracts with banksin India. The respondent-assessee incurred loss of Rs. 49,98,072/-on account of foreign exchange fluctuation on account of FCNR(B)Loan. It was held that finding of CIT(A) is clear and categorical that the loan was notfor acquisition of an asset, payment made inforeign currency. Rs. 49,98,072/- was the actual expenditure incurred by the assessee as per the terms negotiatedto save and protect the assessee from foreign exchange fluctuation loss. Keeping in view the aforesaid aspects, it is clearthat 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 havingregard 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.
Commissioner of Income Tax - Appellant – Versus – Climate System Pvt. Ltd. – Respondent
IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 471/2014
COMMISSIONER OF INCOME TAX VI
Through: Mr. Rohit Madan, Standing Counsel
CLIMATE SYSTEM PVT.LTD.
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J (ORAL)
Date of Decision: August 22, 2014
1. This appeal by the revenue relates to the Assessment Year2003-04 raises a singular issue, whether Rs. 49,98,072/- debited inthe 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 issued15% Unsecured Redeemable Non-convertible Debentures carrying interest @15% per annum. In order to repay the debentures, the respondent-assessee borrowed 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 interest payable on the 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 loss of Rs. 49,98,072/-on account of foreign exchange fluctuation on account of FCNR(B)Loan. The said amount was paid during the previous year relevant to the assessment year.
2. In the Assessment Order under Section 143(3) dated31.01.2006, income of the respondent-assessee was assessed atRs.2,76,29,016/- as against return income of Rs.2,46,94,573/-. It appears that no enquiry or questions were raised regarding expenditure of Rs.49,98,072/- during the original assessment proceedings.
3. Commissioner of Income Tax, by order dated 25.03.2008under 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.
4. The aforesaid order passed by the Commissioner of Income Tax was not challenged and has attained finality.
5. 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.,  294 ITR 451 and Oil and Natural Gas Corporation Vs. DVIT  261 ITR 0001 had not been accepted by the revenue and appeals stood 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.
6. 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 for 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 on27.01.2000 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. Commissioner of Income Tax (Appeals) referred to the salient features of FCNR(B) loans as they offered low cost funding option to the Indian Corporates, but, had two elements; interest rate-risk which was bench marked on LIBOR rates and foreign exchange fluctuation risk i.e. risk of Indian Rupees (INR) depreciation against the foreign currency pertaining to the loan. These FCNR(B) loans were 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 made. In order to protect himself, the respondent-assessee entered into forward contracts to hedge against fluctuation loss in value of Indian 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 Chartered Accountants of India. It was further observed that the aforesaid decision to take FCNR(B) loan had resulted in benefit or 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 had been 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, was attributable to revenue account and not of capital nature. The reasoning given by the Commissioner of Income Tax (Appeals) is lucid and clear, and is worthy of reproduction:
To read the full judgement, please find the attached file.