Foreign Exchange Loss Allowed as Revenue Expenditure: ITAT Deletes Disallowance Citing Non-Capitalization [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted the disallowance of foreign exchange loss amounting to Rs. 1,12,449 and ruled that such loss arising from revenue transactions should be allowed as deductible expenditure, absent capitalization to project costs under relevant accounting standards.

Macrotech Developers Limited (assessee), engaged in real estate development, filed its return for Assessment Year (AY) 2013-14. During assessment, the Assessing Officer (AO) noted a foreign exchange loss of Rs. 1,12,449 claimed by the assessee, arising from consulting charges paid to foreign parties for contract-related services.

The AO disallowed the claim, holding that the loss pertained to project-related expenses which should be capitalized to work-in-progress under Accounting Standard-7 (AS-7) and the ICAI Guidance Note on real estate transactions, rather than treated as revenue expenditure.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) held that the consulting charges were revenue in nature and, consequently, the foreign exchange loss thereon should be treated as revenue expenditure, following the assessee's own case for AY 2018-19.

Aggrieved by the CIT(A)’s order, the Revenue appealed to the ITAT. The Revenue argued that the loss should be capitalized as it related to construction activities governed by AS-7, and exchange differences must be recognized only upon settlement or intervening periods, but aligned with project cost accounting.

The assessee’s counsel contended that the treatment followed Accounting Standard-11 (AS-11), mandating foreign exchange gains/losses to be charged to the profit and loss account. The counsel emphasized that the underlying expenses were not capitalized, and the disallowance was inconsistent with prior tribunal decisions in the assessee's group cases.

The two-member bench, comprising Pawan Singh (Judicial Member) and Prabhhash Shankar (Accountant Member), observed that the assessee had provided details of the loss, which arose from revenue consulting charges not allocated to project costs.

The bench noted that AS-11 requires such losses to be recognized in the profit and loss account, and the AO's reliance on AS-7 was misplaced without evidence of capitalization. It relied on coordinate bench decisions in the assessee's group cases for AY 2015-16, 2017-18, and 2018-19, where similar claims were allowed.

The tribunal upheld the CIT(A)’s order, deleting the Rs. 1,12,449 disallowance and confirming the loss as allowable revenue expenditure. The appeal of the Revenue was dismissed.

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