Notional Liability: Loss due to fluctuations in foreign exchange rates
November, 14th 2008
CIT vs Oil and Natural Gas Corpn. Ltd. Citation 301 ITR 415
Notional Liability: Loss due to fluctuations in foreign exchange rates The assessee had borrowed funds in foreign exchange for the purpose of capital outlay. No liability for repayment of loan was quantified nor any payment was made. The notional liability on account of change in exchange rates could not be allowed on notional basis, nor this could be taken into account for determining actual cost.
High Court of Uttaranchal
CIT vs Oil and Natural Gas Corpn. Ltd.
Income-tax Appeals Nos. 89, 91, 92, 123 of 2003, 2 of 2004, 50 of 2005, 59, 60 and 63 of 2006
P.C. Verma and B.C. Kandpal, JJ
29 March 2007
1. These are the appeals under Section 260A of the Income-tax Act, 1961, arising out of the orders passed by the Income-tax Appellate Tribunal, New Delhi.
2. I.T.A. No. 91/2003 arises out of the order dated August 28, 2002, passed by the Income-tax Appellate Tribunal Bench "C", Delhi, in I.T.A. No. 2591 /Del./97 relating to assessment year 1992-93; I.T.A. No. 89/2003 arises out of the order dated August 28, 2002, passed by the Income-tax Appellate Tribunal Bench "C", Delhi, in I.T.A. No. 2592/Del./97 relating to the assessment year 1993-94; I.T.A. No. 92/2003 arises out of the order dated October 31, 2002, passed by the Income-tax Appellate Tribunal Bench "E" Delhi in I.T.A. No. 355/Del./98 relating to the assessment year 1994-95; I.T.A. No. 123/2003 arises out of the order dated August 1, 2002, passed by the Income-tax Appellate Tribunal Special Bench, Delhi, in I.T.A. No. 2472/Del./96 relating to the assessment year 1991-92; I.T.A. No. 2/2004 arises out of the order dated September 26, 2003, passed by the Income-tax Appellate Tribunal Bench "A", New Delhi, in I.T.A. No. 3811/Del./96 relating to the assessment year 1991-92; I.T.A. No. 50/2005 arises out of the order dated September 13, 2004, passed by the Income-tax Appellate Tribunal Bench "A", New Delhi, in I.T.A. No. 4934/2000 relating to the assessment year 1997-98; I.T.A. No. 59/2006 arises out of the order dated October 20, 2004, passed by the Income-tax Appellate Tribunal Bench "D", Delhi, in I.T.A. No. 3083/Del./2000 relating to the assessment year 1997-98; I.T.A. No. 60/2006 arises out of the order dated October 21, 2004, passed by the Income-tax Appellate Tribunal Bench "D", Delhi, in I.T.A. No. 3084/Del,/2000 relating to the assessment year 1997-98 and I.T.A. No. 63/2006 arises out of the order dated October 21, 2004, passed by the Income-tax Appellate Tribunal Bench "D", Delhi, in I.T.A. No. 3081/Del/2000 relating to the assessment year 1997-98. This Court has framed the following common substantial questions of law in the above income-tax appeals:
1. Whether the foreign exchange losses suffered by the assessee on the revenue account on accrual basis on account of foreign exchange on account of fluctuation in foreign exchange on the last date of the accounting year ending March 31, 1992 (i.e. the assessment year in question) being a contingent notional liability was allowable, as deduction under the Income-tax Act?
2. Whether the foreign exchange losses arisen on account of revaluation of the foreign exchange borrowings utilized on revenue account was not allowable as deduction under the Income-tax Act as repayments of these borrowings fell after the accounting year under consideration and, therefore, liability for such losses did not arise in the accounting year under consideration.
3. Whether in view of Section 43A of the Income-tax Act, the Tribunal was right in taking into consideration foreign exchange losses suffered by the assessee on capital account on accrual basis for the purposes of determining written down value of the assets?
4. Whether the Tribunal was right in holding that the assessee was entitled to adjust the actual cost of assets by foreign exchange losses arising on notional basis?
3. The brief facts of the case are that the Oil and Natural Gas Corporation Ltd. filed its return for the assessment years ranging from 1991-92 to 1997-98 and claimed that it suffered loss as a result of fluctuation in foreign exchange rates which was disallowed by the Assessing Officer and the assessment orders were passed. Feeling aggrieved, the assessee preferred appeals before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) partly allowed the appeals and gave relief to the appellant. Thereafter, the Revenue Department preferred appeals before the Income-tax Appellate Tribunal, who dismissed the appeals filed by the Revenue.
4. Against the dismissal orders of the Income-tax Appellate Tribunal, the Revenue has preferred these appeals in the High Court. Common substantial questions of law are involved in all these appeals, therefore, they are being decided by this single judgment.
5. We have heard learned Counsel for the parties and have gone through the record.
6. In order to answer the substantial questions of law framed in this case, it would be pertinent to quote the provisions of Section 37 of the Income-tax Act which reads as follows:
37. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.
Explanation. For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
A perusal of the record as well as the aforesaid provision clearly indicates that claim under Section 37 of the Act will be allowable only in respect of liability which has become enforceable during the relevant assessment year and actually in respect of payment made in that year but not in hallow. The assessee was allowed the illegal relevant claims which were neither actually made nor were the same enforceable nor were allowable under the provisions of the Act by the Tribunal. The impugned order of the Tribunal appears to be perverse and based on no material allowed for the relevant consideration. The assessee had agreed that the actual component has to be bifurcated from the total foreign exchange losses allowable under the aforesaid Section but the Tribunal has ignored the consent of the assessee which he agreed, thus the impugned order of the Tribunal is perverse and without any material on record.
7. We have considered the issue involved in this case very carefully. We find that the facts and circumstances of the case with regard to its claim for foreign exchange loss on actual basis in revenue account in respect of its foreign exchange borrowings outstanding in the revenue account as on the last date of the accounting year under consideration are exactly the same as were of this issue in the appeal before us for the assessment year.
8. We hereby hold that the foreign exchange loss so claimed by the respondents in the revenue account on accrual basis on account of foreign exchange fluctuation on the last date of the accounting year under consideration is only a contingent and notional liability, hence not allowable and the same did not get crystallized or accrued in the year under consideration. The Assessing Officer was justified to disallow the same in the impugned assessment order.
9. The first substantial question of law is answered in the negative.
10. So far as the substantial questions of law formulated at serial Nos. 2, 3 and 4 are concerned, we hold that the foreign exchange borrowings made for general purposes which were partly used in the revenue account and partly in the capital account and repayment of which fell beyond the accounting year under consideration, the appellant's claim for loss and increased liability on revaluation of such loan made at the prevailing exchange rates at the end of the accounting year under consideration, that its claim for foreign exchange loss arising on account of revaluation of such foreign exchange borrowings taken for general purposes but used in the revenue account is not allowable for the same reasons as given by us above in not allowing the respondent's claim of loss for foreign exchange loss claimed in the revenue account, for payment of these fell after the accounting year under consideration and hence liability to such a loss did not arise in the year under consideration.
11. The first appellate authority while dismissing the appeal passed a well reasoned and speaking order in accordance with law after due application of judicial mind. The said authority had fully considered the ingredients of Section 37(1) of the Act, and held that there was no written agreement on record so as to find out its terms and conditions of repayments to the foreign creditors; it was further held that nor as a matter of fact any repayment either in foreign currency or in the Indian currency was made in the assessment year in question, nor was it quantified.
12. It was further held that Section 43A of the Act applied only where as a result of exchange in the rate of foreign exchange, there is any increase or reduction in liability of the assessee in terms of the Indian currency, to pay wholly or in part of the price of any assets payable in foreign exchange or to repay loan, if any, in foreign currency borrowed specifically for the purposes of acquiring the assets. Accordingly, the foreign exchange fluctuation losses, if any, duly quantified and actually repaid on the capital component is allowable as per the provisions of Section 43A of the Act. It is very clear that Parliament in its wisdom, while enacting Section 43A in the Act, took care of the foreign exchange variations rate with respect to capital assets. There is no such provision with respect to revenue component on account of these foreign exchange variations, if any at all.
13. Further, it is clear from the material on record, that all the carry forward foreign exchange losses, subject to sufficient proof to the satisfaction of the assessing authority, was not filed by the respondent at any stage in any of the assessment years. There has been no reparation by the assessee to the Government of India or any actual repayment was made to any of its alleged foreign creditors in the assessment year in question.
14. Income tax being annual charge it has to be quantified and determined according to rules, whether the liability has actually been incurred in the year in question and whether it is an expenditure which has actually been paid and has gone within the coffers of the assessee in that year. None of these elements are present in the instant case. But, even then the Tribunal on irrelevant consideration without any agreement on record between ONGC and its creditors has committed grave and serious error of law in allowing the deductions which do not fulfil the legal requirements and which were against the provisions of the Act.
15. The provision of Section 43A of the Act is confined only to those liabilities which have become due as per the terms and conditions of the written agreement between the ONGC and foreign creditors, but no agreement was made available by ONGC at any stage of the proceedings, thus there was no material on record to justify the claims of the ONGC in law. The variation of foreign exchange was not quantified nor it became due nor repaid, but the Tribunal without application of mind to favour the ONGC allowed illegally all the deductions which legally could not be allowed nor was there any material on record to justify such deductions. The impugned orders of the Tribunal are perverse, without any material on record and against the statutory provisions of the Act. The assessee did not actually pay any amount to any of the creditors nor it became due nor was there any devaluation of exchange rate but on mere presumption imaginations, the Tribunal had allowed.
16. The substantial questions of law formulated at serial Nos. 2, 3 and 4 are also answered in the negative.
17. Learned Counsel for the respondent has submitted that the COD vide its minutes of meeting dated March 2, 2007, refused to grant permission to the Revenue Department to pursue the appellants in this Court on the ground that the transactions of revenue were neutral and did not involve any substantial question of law which was required to be adjudicated by this court. It has been submitted that the said decision of the COD being final and cannot be called into question in any forum, the present appeals are not maintainable and are liable to be dismissed.
18. We are not concerned with regard to this aspect of the matter. It is not material that the COD did not accord any permission to the Revenue Department to prefer the appeal. The relevant questions for consideration before us is to answer the substantial questions of law involved in the matter. The decision taken by the COD in its meeting does not have any binding effect on this court. The arguments raised by learned Counsel for the respondent does not appear to be tenable.
19. For the reasons stated above, we are of the view the impugned orders passed by the Tribunal are liable to be quashed and the appeals deserve to be allowed.
20. Accordingly, the appeals are allowed. The impugned orders passed by the Tribunal are hereby set aside.
21. Let the copy of the judgment be placed in each file.