The Kolkata bench of Income Tax Appellate Tribunal (ITAT) deleted the disallowance of payment made on account of the Forward Contract Loss incurred towards hedging Foreign Exchange Fluctuation Loss on the FCNRB Loan Account.
The Assessee La Opala RG Ltd is engaged in the business of manufacturing Opal and crystal glassware and generation and sale of electricity from Wind Farm.
In the course of assessment proceedings AO noted from the P&L Account that the assessee had claimed an amount of Rs.39,19,130/- towards loss on Forward Contracts under the head finance cost. After calling for explanation of the assessee, he disallowed the said claim by holding that this loss is a capital loss and not a revenue, it is notional/marked to market loss and that being speculative in nature is not allowable .
Aggrieved by the order the assessee filed an appeal before the CIT(A) who confirmed the disallowance . Therefore the assessee filed another appeal before the tribunal.
A. K. Tulsiyan, the counsel for assessee submitted that assessee had taken rupee loan from State Bank of India for the purpose of acquisition of certain assets. The asset was purchased in the preceding year and was put to use.
Subsequently the existing rupee loan was converted by the assessee with the bank into a FCNRB loan for the purpose of availing the benefit of lower rate of interest. Therefore, in order to reduce the interest charge on the loan, the assessee converted the rupee loan into FCNRB loan. This conversion into FCNRB took place much after the asset was purchased. This asset was never purchased with the foreign currency loan. It was put to use and had started commercial production.
Further submitted that in order to protect itself from loss due to change in rate of interest in foreign currency, assessee hedged the FCNRB loan and entered into Forward Contract for this hedging by way of Forward Contracts. Assessee paid a premium of Rs.39,19,131/- to the bank and charged the same in its P&L Account as loss on Forward Contract.
Prabhakar Prakash Ranjan,counsel for revenue argued that the loan was obtained for procuring capital assets and, therefore, it is on capital account.
It was observed by the tribunal that interest on loan taken for purchase of an asset is allowed as revenue expenditure once the commercial production of the asset starts.
Furthermore, interest expenses incurred by the assessee on its FCNRB loan has been allowed as revenue expenditure by the AO himself. The premium paid to hedge exchange fluctuation on its interest expenses has been disallowed. Further the claim of the assessee is not notional or marked to market loss but actual premium paid by it for entering into forward contracts for hedging exchange fluctuation in servicing foreign currency loan.
After reviewing the facts the ITAT bench of Rajpal Yadav, (Vice President)and Girish Agrawal,(Accountant Member)deleted the disallowance of payment made on account of the Forward Contract Loss incurred towards hedging Foreign Exchange Fluctuation Loss on the FCNRB Loan Account.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
