Section 43A not applicable if assessee claimed it on account of foreign exchange fluctuation and there was no actual payment or remittance

 

Recently ITAT Delhi in the case of Bando (India) (P.) Ltd. vs. DCIT [2024] 114 ITR(T) 275 (Delhi – Trib.), ITA NO.: 7743 (DEL) OF 2018, A.Y.: 2014-15, Date of Order: 11th July, 2024 has rendered an important judgement on the applicability of section 43A.  It has held that where the assessee claimed expenses on account of foreign exchange fluctuation, which were merely reinstatement of losses as per accounting standards and there was no actual payment or remittance, section 43A could not apply.

Let us have a Short Overview of the case:

Facts of the case:
During the year the assessee had claimed losses on account of foreign exchange fluctuation of ₹6,42,33,238/-. The AO had disallowed amount of ₹4,20,57,880/- u/s 37(1) treating exchange fluctuation as capital expenditure on account of ECB loan being utilized for purpose of acquiring capital asset which had enduring benefit. Aggrieved by the order, the assessee was in appeal before CIT(A). The CIT(A) in its order sustained the disallowance by invoking the provisions of section 43A instead of section 37 invoked by the AO.

Aggrieved, the assessee filed an appeal before the – Tribunal –

HELD

The ITAT observed that the assessee had reinstated income or loss from fluctuation of currency as per accounting standards AS-11 and the assessee was regularly following the same system of accounting in the previous years and subsequent years.

The ITAT observed that disallowance u/s 37 and u/s 43A of the Act, both operate in different spheres. Section 43A is a deeming provision for adding or deducting, the fluctuation loss or profit, from the cost of asset whereas disallowance u/s 37 was however for the reasons that capital expenditures are specifically disallowed.

The ITAT held that there was no ground to invoke section 43A since there was merely reinstatement of losses on account of fluctuation in foreign exchange currency and there was no actual payment or remittance. The ITAT following the concept of consistency, allowed the losses claimed for foreign exchange fluctuation.

The appeal of the Appellate is as under:

1721038279-Bando India Pvt Ltd.