Case Law Details
Steril-Gene Life Sciences Pvt. Ltd. Vs DCIT (ITAT Chennai)
Introduction: Explore the intricacies of the case involving Steril-Gene Life Sciences Pvt. Ltd. and the Deputy Commissioner of Income Tax (DCIT) as they navigate through the treatment of forex loss on a foreign currency term loan (FCTL). The core contention revolves around whether the forex loss should be considered as revenue expenditure or capital expenditure. Additionally, the article delves into the alternate claim made by the assessee regarding the impact on machinery cost and depreciation.
Detailed Analysis: The article provides a comprehensive analysis of the case, highlighting that Steril-Gene Life Sciences claimed a forex loss of Rs.81,66,986 during the financial year 2012-13, pertaining to the assessment year 2013-14. The loss was attributed to a foreign currency term loan obtained from Indian Overseas Bank, specifically for the purchase of machinery. The company asserted that the forex loss should be treated as revenue expenditure in the form of financial cost.
However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] contested this claim, asserting that the forex loss was capital in nature since the loan was utilized for acquiring capital assets, i.e., machinery. The CIT(A) affirmed the AO’s decision, leading to Steril-Gene Life Sciences challenging the verdict before the Tribunal.
While upholding the lower authorities’ decision regarding the forex loss being treated as capital expenditure, the Tribunal acknowledged the alternate claim made by the assessee. The alternate claim focused on the recognition of the forex loss as part of the cost of the asset (machinery), thereby affecting the calculation of depreciation.
Conclusion: The article concludes by affirming the Tribunal’s decision to uphold the capital nature of the forex loss. However, it emphasizes that the AO should consider the alternate claim made by Steril-Gene Life Sciences. According to the alternate claim, the effect of the change in foreign exchange rates on the FCTL, obtained through the conversion of a rupee term loan, should be recognized as the cost of the asset purchased (machinery). Consequently, the AO is directed to allow depreciation on this amount at an appropriate rate.
This case sheds light on the nuanced considerations involved in the treatment of forex losses, especially when linked to specific loans utilized for capital asset acquisition. The allowance of depreciation on the altered machinery cost demonstrates the significance of accurate cost determination for depreciation calculations.
We have perused the case records and noted that foreign currency term loan sanctioned by the bank was by way of conversion of existing rupee term loan and that the FCTL was at concessional rate as compared to the rupee term loan leading to lower interest being debited in the profit & loss account. As the assessee has not represented nor made any submission before AO or before CIT(A) or in the statement of facts that in this year, the assessee has claimed forex loss and what is the treatment of any loss or gain arising in future years and whether the Department has accepted the same or not. These facts are not available on record and hence, we presume that the loan taken for purchase of machinery is rightly held by AO as capital loss.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-16, Chennai in ITA No.173/CIT(A)-16/2013-14, order dated 18.09.2018. The assessment was framed by the DCIT, Corporate Circle-6, Chennai for the assessment year 2013-14 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 31.03.2016.
2. At the outset, it is noticed that this appeal was fixed for hearing on many occasions numbering 17 and none is coming forward despite service of notice through RPAD on the assessee. The proofs of services are kept on record. Hence, we decided to hear this appeal ex-parte qua assessee and decide the appeal on merits.
3. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in treating the loss arising out of foreign currency term loan as capital loss as against claimed by the assessee as revenue. For this, assessee has raised various grounds which need not be reproduced. However, one fact is to be mentioned that alternative claim made by assessee is that in case, this loss is treated as capital loss, the same will increase the cost of asset i.e., machinery and the depreciation at the appropriate rate by increasing the cost of this machinery be allowed to the assessee.
4. Brief facts are that during the financial year 2012-13 relevant to assessment year 2013-14, assessee claimed loss on foreign currency transaction to the extent of Rs.81,66,986/- and claimed the same as revenue expenditure in the nature of financial cost. The assessee claimed this forex loss on FCTL loan availed from Indian Overseas Bank with the stipulation that the FCTL will be subject to roll over every six months. The assessee before AO and CIT(A) stated the fact that FCTL loan has been taken for purchase of indigenous assets i.e., purchase of machinery which has been used in the project and assessee has already commenced commercial business. The assessee also clarified that the depreciation already claimed on the assets on the original cost of purchase and not adjusted for forex loss. The AO has disallowed the forex loss claimed as revenue expenditure by holding that this is capital expenditure being loan availed for purchase of machinery being capital asset. The CIT(A) disallowed the claim of assessee by holding that the assessee itself has admitted in restatement of loss on long term loan obtained for purchase of indigenous assets and according to him, the loss is capital loss and not revenue. Accordingly, the CIT(A) confirmed the action of AO. Aggrieved, now assessee is in appeal before the Tribunal.
5. We have heard ld. Senior DR and gone through facts and circumstances of the case. We have perused the case records and noted that foreign currency term loan sanctioned by the bank was by way of conversion of existing rupee term loan and that the FCTL was at concessional rate as compared to the rupee term loan leading to lower interest being debited in the profit & loss account. As the assessee has not represented nor made any submission before AO or before CIT(A) or in the statement of facts that in this year, the assessee has claimed forex loss and what is the treatment of any loss or gain arising in future years and whether the Department has accepted the same or not. These facts are not available on record and hence, we presume that the loan taken for purchase of machinery is rightly held by AO as capital loss. We affirm the findings of lower authorities on this issue.
6. However, we noted that alternate claim made by assessee is that in case, the effect is to be given for change in foreign exchange rates on FCTL, obtained by conversion of rupee term loan is considered to be a capital expenditure, the same ought to have been considered as the cost of asset purchased and depreciation should have been allowed on the cost of asset including this forex loss. We direct the AO to allow depreciation on this amount at an appropriate rate. Hence, this alternate claim of assessee is allowed.
7. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 15th June, 2022 at Chennai.
