The Income Tax Appellate Tribunal (ITAT), Hyderabad bench in an appeal filed before it, held that foreign exchange fluctuation loss incurred in the business health care could not be allowed as revenue expenditure.
Assessee-Kamineni Health Services (P) Ltd is a company engaged in the business of healthcare. After filing the return of income, the assessee’e case was selected for scrutiny.
During the course of assessment proceedings, the Assessing Officer noted from the Profit and Loss Account that the assessee has claimed Rs.29,56,433/- on account of foreign exchange fluctuation.
On being asked by the Assessing Officer to substantiate the same, the assessee submitted that it has taken buyers credit facility from Bank of India, Sanfransico. The exchange difference amounting to Rs.29,56,433/- for buyers credit was debited to Foreign Exchange Fluctuation account.
Further, the Assessing officer said that loan is a capital liability and he held that the Foreign Exchange Fluctuation loss on sale could not be allowed as revenue expenditure and made addition.
Aggrieved assessee filed an appeal before the CIT(A). The CIT(A) upheld the addition made by the Assessing Officer. Thereafter, the assessee field second appeal before the ITAT.
Shashank Dundu, counsel for the assessee submitted that foreign currency loan was taken for the purpose of acquiring a medical equipment and since the medical equipment is a fast depreciating asset due to the rapid technological advancements, therefore, any loss or expenditure incurred towards purchase of such equipment must be considered in terms with AS-11 which explains the effects of the changes in foreign exchange rates so as to provide the true and fair value of outstanding liabilities towards borrowings of the company.
Kumar Aditya Counsel for the revenue submitted that the loan was taken for the purpose of acquisition of a capital asset and hence foreign exchange fluctuation loss incurred thereon is to be treated as a capital expenditure and not as revenue expenditure.
It was observed that the additional liability on account of fluctuation in the foreign exchange rate in respect of liability incurred for the import of machinery by the assessee would not constitute revenue expenditure.
Further, the bench obsereved that loss on foreign exchange fluctuation loss has to be added to the cost of the asset and depreciation has to be allowed on this but such foreign exchange fluctuation loss cannot be allowed as a revenue expenditure.
Therefore, the two member bench of R.K. Panda, (Accountant Member) and K. Narasimha Chary, (Judicial Member) disallowed the above ground.
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