Expenditure Claimed on account of Forward Premium relating to Forward Contracts in respect of Foreign Currency Loans are Capital Expenditure: ITAT [Read Order]

The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has recently held that expenditure claimed on account of forward premium relating to forward contracts in respect of foreign currency loans are capital expenditure.

R. Mohan Reddy, counsel appeared for the revenue. R. Vijayaraghavan, counsel appeared for the assessee.

Assessee-Tamil Nadu Newsprint and Papers Ltd is a domestic company, in which the public are substantially interested and engaged in the manufacture of newsprint, printing and writing paper and generation of power.

Assessee filed its return of income for the relevant assessment year 2009-10 on 29.09.2009 and assessment was completed under Section 143(3) of the Income Tax Act after making some additions.

Subsequently, the PCIT issued show-cause notice under Section 263 of the Income Tax Act and seeked why the forward premium claimed on foreign exchange fluctuation as capital receipt be not treated as revenue receipt.

Therfater the PCIT passed the revision order directing the AO to verify the assessee’s claim of notional income with reference to annual accounts and verify the nature of forward transactions as to whether the assessee has debited the amount crystallized into profit and loss account.

Consequently AO set aside the assessment order and noted the expenditure is capital in nature and disallowed  assesee’s claim.

Aggrieved by the order assesee filed an appeal before the CIT(A). The CIT(A) also confirmed the action of the AO and observed that  foreign exchange loans taken were for the purpose of capital expenditure and therefore forward premium paid by assessee is capital expenditure.

Thereafter the assessee filed an appeal before the tribunal.

It was observed by the tribunal that “provisions of section 43A of the Income Tax Act specifically provides that the amount of increase or decrease in the liability due to fluctuation in exchange rate should be adjusted against the actual cost of the capital expenditure or the cost of acquisition of capital asset.”

Further relying upon the decision of  CIT vs. Elgi Rubber Products Ltd, the tribunal bench held that having regard to the provisions of Section 43A of the Income Tax Act, the additional amount paid to the ICICI due to fluctuation in exchange rate was capital in nature and not revenue.

Finally the two member bench of Mahavir Singh, (Vice President) and Manjunatha.G, (Accountant Member) dismissed the appeal filed by the assessee.

To Read the full text of the Order CLICK HERE

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