The central legal point established in the judgment is the capitalization of exchange differences under Section 43A of the Income Tax Act, 1961, when liabilities are incurred for acquiring fixed assets.

JUDGMENT :

T.S. Sivagnanam, J.,

(Prayer: Appeal under Section 260A of the Income Tax Act, 1961 against the order dated 16.6.2017 made in ITA.No.3344/Mds/2016 on the file of the Income Tax Appellate Tribunal, Chennai 'A' Bench for the assessment year 2013-14.)

1. We have heard Mr.R.Sivaraman, learned counsel appearing for the appellant - assessee and Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the respondent - Revenue.

2. This appeal, filed by the assessee under Section 260A of the Income Tax Act, 1961 (for short, the Act) is directed against the order dated 16.6.2017 made in ITA.No.3344/Mds/2016 on the file of the Income Tax Appellate Tribunal, Chennai 'A' Bench (for brevity, the Tribunal) for the assessment year 2013-14.

3. The appeal has been admitted on 26.3.2019 on the following substantial question of law:

“Whether, on the facts and circumstances of the case, the Tribunal was right in law in disallowing the amount of Rs.36,33,333/- paid towards the premium for hedging foreign exchange fluctuations on loans taken for the purpose of appellant's business is a capital loss by treating it as capital expenditure under Section 43A of the Income Tax Act, 1961, when an asset was purchased within India ?”

4. The assessee is a company engaged in generation of wind energy. For the assessment year under consideration namely AY 2013- 14, the assessee filed a return of income on 31.11.2013 admitting loss to the tune of Rs.36,45,17,202/-. Subsequently, the case was selected for scrutiny and a notice under Section 143(2) of the Act along with a questionnaire and thereafter, the assessment was completed. In this appeal, we are concerned about the disallowance of the premium paid on forward contract reasoning that the premium paid on forward contracts was to be considered as speculative transaction under Section 43(5) of the Act.

5. Aggrieved by the assessment order dated 05.2.2016, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-1, Chennai-34 [for brevity, the CIT(A)], who, by order dated 08.11.2016, partly allowed the appeal by deleting the disallowance under Section 14A of the Act, of which, we are not concerned in this appeal.

6. As against the said order passed by the CIT(A), the assessee filed further appeal before the Tribunal, which dismissed it by the impugned order. Thus, the assessee is before us.

7. The argument of Mr.R.Sivaraman, learned counsel appearing for the appellant - assessee that the foreign exchange fluctuation on the loan taken for the purpose of the assessee's business could not have been brought under Section 43A of the Act, which is a special provision consequential to change in rate of exchange of currency, which would be applicable when the assessee acquired any asset in any previous year from a country outside India. Admittedly, the assessee did not purchase any asset in any previous year from any country outside India and this aspect was noted by the CIT(A) in the order dated 08.11.2016. However, before the Tribunal, the assessee made an alternate submission because the Tribunal appeared to have come to a conclusion that the loss suffered by the assessee was a capital loss. The alternate submission was that if it had to be treated as a capital loss, then the assessee was entitled to the benefit of depreciation.

8. The learned counsel for the assessee has referred to the decision of this Court rendered by us in the case of CIT Vs. M/s.Celebrity Fashion Ltd. [TCA.No.26 of 2018 dated 21.9.2020].

9. In our considered opinion, the said decision may not be of any assistance to the assessee, as the nature of transaction done therein was wholly different. It is an admitted case of the assessee that they availed loan for the purpose of purchase of capital assets in India. The loan was availed in Indian currency and pursuant to a request made by the assessee, by entering into a contract dated 04.8.2011 with the State Bank of India, the loan in Indian currency was converted into a