In a recent case, the Income Tax Appellate Tribunal (ITAT) observed that foreign exchange loss cannot be included in the cost of the project and allowed it as a Deduction.
M/s Macrotech Developers Limited, the respondent assessee is engaged in the business of real estate, construction and development. For the year under consideration, the assessee filed the return of income declaring total income of Rs.62,08,53,170/- and book profit under section 115JB of Rs.45,42,04,660/-.
Subsequently, the return was revised on 29/03/2018 declaring Nil income after setting off all brought forward losses of Rs.21,37,37,597/-. The case was selected for scrutiny under CASS and the notices were duly served on the assessee. The revised return is filed due to the merger of M/s Suryakripa Constructions Ltd with effect from 01.04.2015 vide order dated 24.04.2017 of the National Company Law Tribunal (NCLT).
The Assessing Officer (AO) noticed that the assessee has claimed foreign exchange loss to the tune of Rs. 2,22,36,855/-. The assessee was asked to furnish the details of the foreign exchange loss and also to show cause why the amount should not be capitalized. The assessee submitted that the loss incurred towards the purchase of material for construction activity and therefore, claimed as a revenue expenditure. The assessee also submitted that by AS-11 on accounting for the effect of changes in foreign exchange rates, the entire amount of gaining/loss should be charged to P& L A/c irrespective of the nature of accounting followed by the assessee.
The AO did not accept the submissions of the assessee and held that in the assessee’s case, the material purchased form part of the cost of construction which is added to the cost of the project and not to the P&L A/c and therefore, the foreign exchange loss attributable to the purchase of material should also be added to the cost of construction.
The AO disallowed the entire foreign exchange loss claimed by the assessee. On further appeal, the CIT(A) held that the issue is covered by the decision in the case of Woodward Governor (I.) Pvt. Ltd. (179 taxman 376) and therefore, decided the issue in favour of the assessee by deleting the disallowance made by the AO.
A two-member bench comprising Shri Kuldip Singh (Judicial Member) and Ms Padmavathy S (Accountant Member) observed that the foreign exchange gain or loss arises when the amount of sundry creditors outstanding at the time of payment is settled. The sundry creditors are the monetary items as per the Ind As 21.
Even as per Accounting Standard 2, monetary items are not required to be carried to the cost of inventory. Therefore, the foreign exchange gain or loss arising on the settlement of dues of sundry creditors does not have any correlation with the cost of inventory. Hence, it is not required to be included in the cost of the project/cost of inventory.
The Tribunal held that the foreign exchange loss of ₹ 9,906,468/– incurred by the assessee is revenue expenditure and cannot be included in the cost of the project. While dismissing the appeal of the revenue, the ITAT held that the foreign exchange loss cannot be included in the cost of the project and accordingly should be allowed as a deduction.
Shri Niraj Sheth appeared for the appellant and Shri Samuel Pitta appeared for the respondent.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
