Section 43A Vs. Foreign exchange fluctuations on loan taken to buy capital assets in India
Recently in PR. COMMISSIONER OF INCOME TAX-15, MUMBAI V. GALAXY SURFACTANTS LTD. (ITA 1430 OF 2018), it has been held by Bombay HC that Section 43A is applicable only to foreign exchange fluctuations on loans taken to import capital assets.
Let us have a short overview of the case:
Facts:
1. The Respondent-Assessee had availed of foreign currency loan in the nature of external commercial borrowings from DBS Bank, Singapore towards capital expenditure.
2. The exposure was denominated in foreign exchange, which resulted in a loss of Rs.5,30,25,000/- owing to change in the exchange rate between the Indian Rupee and foreign currency.
3. In its commercial books of account, the Respondent- Assessee exercised the option to add the entire exchange rate loss of Rs.5,30,25,000/- towards the cost of fixed assets i.e. it capitalized this loss amount.
4. However, for purposes of Computation of Total Income under the Act, the sum of Rs.51,86,755/- (attributed to capital assets imported) was capitalized under Section 43A of the Act. The balance Rs. 4,78,38,245/- (attributed to capital assets acquired domestically) was treated as revenue expenditure under Section 37(1) of the Act.
5. The AO took the position that the amount involved must entirely be capitalized, quite akin to the accounting treatment adopted by the Respondent-Assessee in its financial statements. The AO took a view that the requirement to capitalize the losses cannot be restricted to assets acquired from outside India.
6. According to the AO, Section 43A was introduced to remove any controversy about treatment of foreign exchange fluctuation being regarded as capital expenditure, revenue expenditure, and the principle underlying that provision ought to be applied to the entire loss.
Hon Bombay HC held as below:
1. 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. This is why Section 43A is a non-obstante provision that positively imposes such obligation notwithstanding anything contained in the Act.
2. However, that positive obligation would not necessarily mean the converse – 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 copy of the order is as under:
