Forex Loss on ECB Restatement Held Capital in Nature — ITAT Chennai Dismisses Egger Pumps India Appeal for AY 2011-12
Overview of the Dispute
ITAT Chennai, in the matter of Egger Pumps India Pvt. Ltd. Vs ITO (ITAT Chennai), dismissed the assessee's appeal pertaining to Assessment Year 2011-12, affirming the disallowance of Rs. 7,02,000/- claimed as a deduction on account of foreign exchange fluctuation loss arising from year-end restatement of an External Commercial Borrowing (ECB). The Tribunal held that since the ECB was obtained for the acquisition of a capital asset, the resultant restatement loss was squarely capital in nature and could not be allowed as a business deduction.
Background of the Assessee and the ECB Transaction
Egger Pumps India Pvt. Ltd. is a company engaged in the manufacture of industrial pumps. Its Swiss parent company, M/s. Emile Egger & CIE SA, Switzerland, had extended a loan of Euros 3,24,982.65 to the assessee in the year 2006 in the form of External Commercial Borrowings (ECB). This ECB remained outstanding and was subjected to restatement at each financial year-end in accordance with applicable accounting norms.
On account of such restatement, the assessee recorded a cumulative notional foreign exchange fluctuation loss of Rs. 36,95,418/- spread across three Assessment Years — AY 2010-11, AY 2011-12, and AY 2012-13. Specifically, for AY 2011-12, the assessee claimed a forex loss of Rs. 7,02,000/- arising from the ECB restatement and debited the same to its Profit & Loss Account.
For AY 2011-12, the assessee had originally filed its return of income on 07.11.2011, declaring a total income of Rs. 48,28,789/- and a book profit of Rs. 75,88,530/- under Section 115JB of the Income Tax Act, 1961.
Reassessment and Disallowance by the Assessing Officer
The case of the assessee for AY 2011-12 was subsequently reopened by the Assessing Officer under sections 143/147 of the Income Tax Act, 1961. Upon examination, the AO concluded that the forex loss on restatement of the ECB was capital in nature and therefore not deductible in the computation of business income. An assessment order was accordingly passed on 04.07.2018 disallowing the claim of Rs. 7,02,000/-.
The AO's primary reasoning was premised on the fact that both the CIT(A) and ITAT had, in earlier proceedings for other assessment years, consistently held that the forex loss arising from the restatement of this very ECB was capital in character, since the loan itself had been availed for the purpose of acquiring a capital asset.
CIT(A)'s Confirmation of the Disallowance
Aggrieved by the AO's order, the assessee preferred an appeal before the Learned Commissioner of Income Tax (Appeals)/Addl./JCIT(A)-10, who passed an order dated 04.11.2024. The CIT(A) upheld the action of the AO by placing reliance on the Tribunal's decision in the assessee's own case — specifically ITA No. 477/Mds/2017 dated 01.09.2017 — which had dealt with an identical issue for AY 2012-13.
The CIT(A) observed that the ratio laid down by the Tribunal in the AY 2012-13 decision was squarely applicable to the facts of AY 2011-12 as well, and accordingly confirmed the disallowance of the Rs. 7,02,000/- forex loss.