Whether provisions of Sec 43A will apply even if FCNR loan is taken not for acquisition of capital assets but to repay debentures - NO: HC

THE issue before the Bench is - Whether provisions of Sec 43A will apply even if FCNR loan is taken not for acquisition of capital assets but to repay debentures. And NO is the answer of the High Court.

Facts of the case

The assessee Climate Systems Pvt Ltd had issued 15% unsecured redeemable non-convertible debentures carrying interest @15% per annum. In order to repay the debentures, the assessee borrowed money. The loan was taken against Foreign Currency Non-Resident Loan Account [FCNR(B) Loan]. The advantage was that the loan was availed at a lower rate of interest as

compared to interest payable on the normal loan account. In order to hedge against foreign exchange fluctuations, the assessee had entered into forward contracts with banks in India. The assessee incurred loss of Rs. 49,98,072/- on account of foreign exchange fluctuation on account of FCNR(B) Loan. The said amount was paid during the previous year relevant to the assessment year.

In the Assessment Order under Section 143(3), income of the assessee was assessed at Rs.2,76,29,016/- as against return income of Rs.2,46,94,573/-. No enquiry or questions were raised regarding expenditure of Rs.49,98,072/- during the original assessment proceedings.

Commissioner of Income Tax under Section 263 of the Act, required the Assessing Officer to examine the issue of applicability of provisions of Section 43A after verifying the nature and source of expenditure relating to the foreign exchange fluctuations. This order passed by the Commissioner of Income Tax was not challenged and has attained finality.

In the assessment order passed u/s 263 read with Section 143, the Assessing Officer observed that decisions of the Delhi High Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. and Oil and Natural Gas Corporation Vs. DVIT had not been accepted by the Revenue and appeals stood preferred before the Supreme Court. He further observed that the assessees contention on Section 43A was not acceptable, though no asset had been acquired from the said loan, as assets were acquired in the earlier years for purpose of business or profession. Thus, the provisions of Section 43A were applicable.

On appeal, the HC held that,

++ reference to Section 43A would be redundant and not necessary as the revenue has not been able to point out that the loan taken under the heading FCNR(B) loan was for purpose of acquisition of any capital asset. The Assessing Officer has accepted that the loan was not for acquisition of an asset but he observed that assets had been acquired in the earlier period. He did not specify or hold that an asset was acquired;

++ finding of the Commissioner of Income Tax (Appeals) is clear and categorical that the loan was not for acquisition of an asset, payment for which was to be made in foreign currency. Rs. 49,98,072/- was the actual expenditure incurred by the assessee as per the terms negotiated. The payment was to save and protect the assessee from foreign exchange fluctuation loss. The payment of Rs.49,98,072/- was made during the previous year relevant to the assessment year in question. This is not disputed. Keeping in view the aforesaid aspects, it is clear that the payment of Rs. 49,98,072/- would be of revenue nature i.e. virtually in nature of payment of interest for the loan taken having regard to the nature and type of loan which was taken i.e. FCNR(B) Loan Account. It is part and parcel of payment towards debt servicing.