INCOME TAX ACT, 1961

Section 37(1) Section 43A

Business expenditure - Forward contract premium expenses - Allowability of - Assessee incurred the cost to secure the foreign currency liability against the exchange fluctuation was akin to insurance policies

Assessee incurred an expense on the forward contracts to hedge the instalments of two foreign currency loans in order to avoid any loss on account of foreign currency fluctuation. It was contended that the foreign currency loans were obtained by the assessee to acquire equipment which were used for the purpose of the business. AO was of the view that such amount of premium paid by the assessee to secure the amount of instalment, representing the principal amount, of the foreign currency loan cannot be allowed as deduction under section 37(1) and provision of section 43A would apply. Assessee submitted that provisions of section 43A did not apply as premium paid by the assessee to secure the payment of the liability in foreign currency on account of exchange fluctuation. Held: Provisions of section 43A deal with the loss/gain with respect to the liability in foreign currency for the assets acquired from a country outside India. It did not deal with respect to the cost incurred by the assessee to secure the loss which may arise at the time of repayment on account of fluctuation in the exchange rate with respect to foreign currency liability which was recorded in the books of the assessee in Indian currency. Thus, once the provisions of section 43A are not applicable on the deduction claimed by the assessee in the given facts and circumstances, there cannot be any disallowance by invoking the provisions of section 43A. Assessee incurred the cost to secure the foreign currency liability against the exchange fluctuation was akin to insurance policies. Therefore, expenses incurred by the assessee in the course of business were allowable as deduction under section 37(1).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2014-15

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