Section 43A specifies that additional amount paid due to fluctuation is capital expenditure

ACIT Vs Tamilnadu Newsprint and Papers Ltd (ITAT Chennai)

ITAT Chennai Held that the provisions of section 43A of the 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.

Facts- The assessee filed its return of income for the relevant assessment year 2009-10 on 29.09.2009 and assessment was completed u/s.143(3) of the Act by the AO vide order dated 31.12.2011 after making some additions. Subsequently, the PCIT issued show-cause notice u/s.263 of the Act dated 28.10.20 13 as to why the forward premium claimed on foreign exchange fluctuation as capital receipt be not treated as revenue receipt. 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 (hedging transactions) as to whether the assessee has debited the amount crystallized into profit and loss account.

The CIT(A) also confirmed the action of the AO by holding that the provisions of section 43A of the Act are clearly applicable to the facts of the case of the assessee and hence, foreign exchange loan taken were for the purpose of capital expenditure and therefore forward premium paid by assessee is capital expenditure. Being aggrieved, the present appeal is filed.

Conclusion- Held that the provisions of section 43A of the 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. When the terms of Section 43A of the Act are fulfilled, it is mandatory to take the actual cost, capital expenditure or the cost of acquisition at a higher or lower figure for the purposes of depreciation allowance irrespective of whatever might have been the position de hors the provision. This provision has been interpreted by the Hon’ble High Court of Madras in the case of CIT vs. Elgi Rubber Products Ltd., [1996] 219 ITR 109, wherein it has been held that having regard to the provisions of section 43A of the Act, the additional amount paid to the ICICI due to fluctuation in exchange rate was capital in nature and not revenue.

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