ITAT rules on deductibility of forward contract premium
30th November, 2012
In an interesting case dealing with conversion of rupee loan into foreign currency loan, the Income Tax Appellate Tribunal (ITAT), Bangalore upheld the orders passed by lower appellate authority and agreed with the reasoning of the Asessing Officer (AO). The AO sought to verify the real nature of the expenditure and concluded that foreign exchange fluctuation loss as claimed by the assessee was capital in nature and not admissible. The assessee had paid a premium to secure against fluctuation in foreign exchange during the tenure of repayment of the foreign currency loan. The AO held that repayment of loan was not revenue expenditure and exchange loss on loan amount was not allowable expenditure.
The assessee argued that it had recorded the amount in books as per AS-11 of the ICAI and that the ‘loss’ on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet would be allowable as per Section 37(1) of the Income Tax Act, 1961 (the Act). It also contended that Section 43A of the Act to capitalise the increase or decrease in liability due to fluctuation in foreign exchange in respect of any asset acquired in the previous year would not be applicable, since there was no import of machinery during the previous year.
The Tribunal concluded that the sum claimed as deduction was not a loss on account of foreign exchange fluctuation but a premium on a forward contract to secure against fluctuation. On facts, it was held that AS-11 relating to actual exchange rate fluctuations was not applicable. As per para 36 of AS-11 the premium on forward contracts is to be amortised over the life of the contract. The Tribunal also rejected the assessee’s contentions that as per CIT v Woodward Governor India Pvt. Ltd., [(2009) 312 ITR 254] unrealised loss was deductible. It observed that the decision was applicable only to exchange fluctuation on loans taken for revenue purposes. In the instant cast, the loan had been taken for purchase of machinery which is on capital account and hence the ‘loss due to fluctuation’ as claimed could not be allowed.