PCIT Vs Aayakar Bhavan (Bombay High Court)
Matter was remitted back to ITAT for determining capital asset financed by foreign currency loan could be capitalized u/s 43A If such asset was acquired within India
Conclusion: While expounding on the positive mandate of 43A as against the negative caveat in 37(1), the Bench observed that the essential jurisdictional fact for the mandatory capitalization of such an expense u/s 43A is that the capital asset financed by the foreign currency loan in question, must have been brought into India from a country outside India. High Court therefore remitted the matter back to ITAT for an effective adjudication on the specific issue as to whether the disallowance towards fluctuation loss for component of application of foreign currency loan towards acquisition of assets within India can be treated as ‘not a capital expenditure’ to be allowed u/s 37(1).
Held: The issue that arose at the heart of these questions was whether losses arising out of fluctuation of exchange rates in servicing a foreign currency loan that was utilized partly for acquiring assets from outside India and partly for acquisition of assets within India, should be entirely capitalised with the value of the assets acquired. According to Revenue, such losses ought to be entirely capitalised regardless of whether the asset was acquired from outside India or from within India. According to assessee, the losses must be broken down in proportion to the value of assets acquired from outside India and from within India; and the portion attributable to utilisation for import of assets into India must be capitalised under Section 43A, while the portion attributable to utilisation for acquiring assets from within India must be treated as revenue expenditure under Section 37(1) of the Act. It was held that section 43A contains a positive enjoinment that losses due to exchange rate changes on a foreign currency loan taken for import of a capital asset must not be treated as revenue expenditure. This is why Section 43A is a non-obstante provision, that positively imposes such obligation notwithstanding anything contained in the Act. However, that positive obligation would not necessarily mean the converse – that any loss on exchange rate fluctuation on a foreign currency loan taken for acquiring capital assets would necessarily not be a capital expenditure, only because the assets were not imported into India from abroad. Consequently, there was no option left but to remand the matter to the ITAT for an effective adjudication of this specific issue. It would be inappropriate for us to deal with the issue in its entirety for the first time in the High Court, and that too, in exercise of the jurisdiction of determining substantial questions of law, on a matter which would involve returning findings on fact in order to answer mixed questions of fact and law. It would be appropriate for assessee and Revenue to address the ITAT on all facets of facts and the case law that had been cited before us in a bid to canvas the correct treatment of losses arising due to exchange rate fluctuation, essentially keeping in mind, the import of Section 37(1).
