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Loan taken by an assessee, which was necessary for carrying on its business of financing and not for creation of asset can be claimed to be a general deduction in terms of Section 37 of the Income Tax Act, 1961, held the Top Court last week.

With this view, a bench of Justices AM Khanwilkar, Abhay S Oka and CT Ravikumar allowed the entire claim of Wipro Finance Limited to the tune of Rs.3,56,57,727/­ as being revenue expenditure.

“… allowing the entire claim of the appellant to the tune of Rs.3,56,57,727/­ being revenue expenditure, suitable amends will have to be effected in the final assessment order passed by the assessing officer for the concerned assessment year, thereby treating the consequential benefits such as   depreciation availed by the appellant­assessee in relation to the stated amount towards exchange fluctuation related to leased assets capitalised (being Rs.2,46,04,418/­), as unavailable and non­est”, ordered the three-judge bench.

Wipro had submitted returns of income in November, 1997 for the assessment year 1997­1998, mentioning loss of income owing to exchange fluctuation of Rs.1,10,53,909/-.

After processing the return under Section 143(1)(a) of the Income Tax Act, the assessment was completed on 16th March, 2000.  As against the loss declared by Wipro, the assessment was   concluded by positive taxable income.

Against said decision, an appeal was filed before the Commissioner of Income Tax (Appeals) and eventually, by way of appeal before the Income Tax Appellate Tribunal.

Before the ITAT, Wipro not only claimed deduction in respect of loss of Rs.1,10,53,909/­ arising on account of exchange fluctuation, but also set up a fresh claim in respect of revenue expenses to the tune of Rs.2,46,04,418/­, erroneously capitalised in the returns.

ITAT reversed the finding of CIT(A) regarding application of Section 43A of the 1961 Act saying that said provision had no application to the fact situation of the present case.  

Further noting that loss suffered by Wipro owing to exchange fluctuation can be regarded as   revenue expenditure or capital expenditure incurred by it, ITAT held that it would be a case of expenditure on revenue account and an allowable deduction.

High Court in the impugned judgment reversed the judgment of ITAT.

The top court noted that Wipro entered into a loan agreement with one Commonwealth   Development Corporation, England, UK, ­ for expanding its primary business of leasing and hire purchase of capital equipment to existing Indian enterprises.

As the loan was obtained in foreign currency, while repaying the it, due to the difference of rate of foreign exchange, Wipro had to pay higher amount, resulting in loss.

“….the transaction of loan between the appellant and Commonwealth Development Corporation, the same was in the nature of   borrowing   money   by   the   appellant,   which   was   necessary   for carrying on its business of financing.  It was certainly not for creation of asset of the appellant as such or acquisition of asset from a country outside India for the purpose of its business.  In such a scenario, the appellant would be justified in availing deduction of entire expenditure or loss suffered by it in connection with such a transaction in terms of Section 37 of the Act”, held the Court.

Thus, while allowing the appeal the three-judge bench held that High Court had missed the relevant aspects of the analysis of the ITAT concerning the fact situation of the present case.

Case title: WIPRO FINANCE LTD. vs COMMISSIONER OF INCOME TAX