×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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ITA No. 209/Bang/2014 is an appeal filed by the assessee while ITA No. 210/Bang/2014 is an appeal filed by the Revenue. Both these appeals are directed against the order dated 24-10-2013, of the Commissioner of Income Tax (Appeals)-1, Bangalore, relating to Assessment Year 2009-10.
First we take up for consideration the appeal of assessee in ITA No.209/Bang/2014
2. The first issue that arises for consideration in the appeal by the assessee is with regard to addition made to the total income by rejecting the claim of assessee for deduction of a sum of Rs. 5,23,38,266/-.
3. Brief facts regarding the above issue are that the assessee is a company, engaged in the business of manufacturing of drugs and pharmaceuticals preparation. In the course of assessment proceedings for the AY. 2009-10 u/s. 143(3) of the Income Tax Act [Act], the Assessing Officer (AO) noticed that in the computation of income, the assessee had claimed deduction of a sum of Rs. 5,23,38,266/- under the head ‘Foreign Currency Monetary Item Translation Difference Account’. The AO called upon the assessee to furnish the details in respect of the aforesaid claim of assessee and also to substantiate as to how the aforesaid claim is admissible.
3.1. In reply, assessee submitted that as per the provisions of Accounting Standard-11 (AS-11), issued by the Institute of Chartered Accountants of India (ICAI), the effect of changes in foreign exchange rates, insofar as they relate to the recognition of losses or gains arising on re-statement of long term foreign currency monetary items should be recognized. In doing so, the assessee has exercised his option of adjusting to the cost of the asset, where the long-term foreign currency monetary item relate to the acquisition of a depreciable capital asset (whether purchased within or outside India), and consequently, claimdepreciation over such asset’s balance life. The assessee also pointed out that in the financial year ended 31-03-2018, it had a gain/profit consequent to foreign exchange fluctuation of Rs. 1,79,69,743/-, which was offered as income in that year. The assessee submitted that it was consistently offering gains on foreign exchange translation to tax. The assessee pointed out that while claiming depreciation; it had not increased the Written Down Value (WDV) of the Fixed Assets over which depreciation was claimed for income tax purposes.
4. The AO, however, did not agree with the contention of the assessee. He placed reliance on the provisions of Section 43A of the Act, which provides that where an asset is acquired from a country outside India and consequent to change in the rate of foreign exchange, there is an increase or reduction in the liability of the assessee as expressed in Indian currency at the time of making payment, such liability or gain should go to increase or reduce the WDV of the corresponding asset on which depreciation is claimed by the assessee. The AO therefore was of the view that only when there is an actual payment and in that year adjustment on account of fluctuation of foreign exchange currency has to be given effect. The AO accordingly disallowed the claim of assessee for deduction.
5. On appeal by the assessee, the CIT(A) concurred with the view of the AO. The CIT(A) firstly held that the fact of the gain on foreign exchange fluctuation was offered to tax by the assessee in the AYs. 2007-08 and 2008-09 should not have any bearing for AY. 2009- 10 because, each assessment year is independent. Thereafter, the CIT(A) after noticing that the loan-in-question was availed for acquiring capital asset, held that the only recourse available to the assessee was as per the provisions of Section 43A of the Act. In Paras 4.7 and 4.8 the CIT(A) summed up the legal position as laid down in various decisions as follows:
“4.7. Sum and substances the aforesaid decision is that the liability expressed in foreign currency at the close of the year has to be increased/decreased based on the rates prevailing at the close of the year when corresponding increase/decrease has to be effected in the value of assets. The amendment of section 43A(1) as stated above provides for increase/decrease only for currency fluctuation at the time of payment. This will have a major implication for increase/decrease in unpaid foreign currency liability as though value of assets for the same has to be increased/decreased in he books of account. The amount of liability as stated above increased/decreased during the previous year are taken into account at the time of making payment irrespective of the method of accounting adopted by the assessee shall be added as the case may be deducted from actual cost of asset.
4.8. In view of the discussion made above the action of the AO is upheld. However, as per ruling of the Hon'ble ITAT in the case of JSW Steel Ltd., Vs. ACIT (supra) depreciation is to be allowed on the enhanced value of the capital assets.”
5.1. Aggrieved by the aforesaid order of CIT(A), assessee preferred an appeal before the Tribunal.