IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1430 OF 2018 Principal Commissioner of Income Tax-15, Mumbai Aayakar Bhavan, M.K. Road, Mumbai 400020 …Appellant Versus Galaxy Surfactants Ltd.

C-49/2, TTC Industrial Area, Pawne, Navi Mumbai 400 703 PAN : AAACG1539P AY 2009-10 …Respondent Mr. Akhileshwar Sharma, Advocate for the Appellant.

Mr. Nitesh Joshi, a/w Atul Jasani, Advocates for Respondent-

Assessee.

CORAM : G. S. KULKARNI &

SOMASEKHAR SUNDARESAN, JJ.

RESERVED ON : AUGUST 09, 2024 PRONOUNCED ON : SEPTEMBER 24, 2024 JUDGEMENT: (Per, Somasekhar Sundaresan J.)

1. The captioned Appeal is a challenge to an order dated April 3, 2017 (“Impugned Order”) passed by the Income Tax Appellate Tribunal, Mumbai, (“ITAT”) allowing an appeal filed by Galaxy Surfactants Ltd., Digitally signed by ASHWINI ASHWINI JANARDAN the Respondent-Assessee, setting aside the concurrent view of the JANARDAN VALLAKATI VALLAKATIDate:

2024.09.24 +0530 Assessing Officer (“AO”) and the Commissioner of Income Tax Appeal (“CIT-A”) in relation to the interpretation of Section 43A of the Income- tax Act, 1961 (“the Act”), and allowing a certain expense as revenue expenditure.

2. The questions of law raised in the captioned Appeal are as follows:

A. Whether in the facts and circumstances of the case, ITAT erred in allowing the claim of expenditure, in Indian Rupee, equivalent to the exchange rate difference, on loan liability denominated in foreign exchange, towards payment of capital goods acquired in India, without deciding as to whether the differential amount on account of exchange difference represent the circulating capital or the capital assets?

B. Whether in the facts and circumstances of the case, the increase in loan liability in Indian Rupee, equivalent to the exchange rate difference, on loan liability denominated in foreign exchange, towards payment of capital goods, acquired in India, does not represent circulating capital and therefore, not allowable as expenditure u/s

37(1) of the Income-tax Act 1961?

Factual Background and Context:

3. The issue that lies at the heart of these questions is whether losses arising out of fluctuation of exchange rates in servicing a foreign currency loan that is utilized partly for acquiring assets from outside India and partly for acquisition of assets within India, should be entirely capitalised with the value of the assets acquired. According to the Appellant-Revenue, such losses ought to be entirely capitalised regardless of whether the asset is acquired from outside India or from within India. According to the Respondent-Assessee, the losses must be broken down in proportion to the value of assets acquired from outside India and from within India; and the portion attributable to utilisation for import of assets into India must be capitalised under Section 43A of the Act, while the portion attributable to utilisation for acquiring assets from within India must be treated as revenue expenditure under Section

37(1) of the Act.

4. Before us, the position canvassed by the Revenue is that both the AO and CIT-A were right in holding that the entire foreign currency losses ought to be capitalised. Two primary reasons recorded in these decisions are that the losses are not attributable to trading in foreign exchange for them to be treated as revenue expenditure, and that as a point of principle, capitalization of the losses is provided for under Section 43A of the Act, and that principle must be applied entirely to the losses on account of exchange rate fluctuations in servicing the loan. The ITAT took the view that the provisions of Section 43A are not attracted at all to the extent the loan was utilized for acquiring assets within India, and that there is no scope to capitalize such component of the losses. The ITAT allowed the foreign exchange losses to be broken up in proportion to the value of import of assets and value of assets acquired locally, and allowed the latter compo