Foreign Exchange loss

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Tapas Ruparelia (Querist)
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17 September 2009 A company has taken a loan from foreign bank in foreign currency, for purchasing plant and machinery from domestic market and the same is purchased from India.

Question is:- During the year, while making repayment of installment of loan(which pertains to interest as well as principle), there is a foreign exchange loss. Proper treatment is given in the books pursuant to AS 11 and AS16. How will the treatment be given as per income tax act.? How much foreign exchange loss would be allowable as expense and what proportion should be capitalised?

Section 43A speaks about machinery purchased from foreign market and treatment thereof. However there is no provision regarding treatment of forex loss arising from repayment of LOAN taken from "foreign market" and purchasing machinery from "domestic market"

Rajeev

Rajeev (Expert)
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17 September 2009 create a foreign flux account in accounts , give effect in P&L at year end according to profit or loss. i dont think so it can be capitalised unless its hire purchase .

whole loss can be claimed as expense , as long as its pertaining to interest on loan , cos its revenue expense in nature .

Tapas Ruparelia

Tapas Ruparelia (Querist)
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17 September 2009 I request you to please read the question properly.
my question was " what proportion of such loss can be claimed as deduction under income tax act?"

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Asha Kanta Sharma

Asha Kanta Sharma

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25 July 2024 Under the Income Tax Act, the treatment of foreign exchange loss arising from the repayment of a loan taken from a foreign bank in foreign currency, used for purchasing plant and machinery from the domestic market, is guided by specific provisions and judicial interpretations. Here’s how it typically applies:

### Treatment of Foreign Exchange Loss under Income Tax Act

1. **Allowability as Expense:**
- Foreign exchange loss incurred on the repayment of the loan (which includes both interest and principal payments) is generally allowable as a deduction under Section 37(1) of the Income Tax Act, 1961.
- The loss would be treated as a revenue expenditure and can be claimed in the year in which it is incurred, provided it is incidental to the business and not in the nature of a capital loss.

2. **Capitalization of Loss:**
- If the foreign exchange loss is directly attributable to the cost of acquiring the plant and machinery, it can be capitalized along with the cost of the asset.
- However, if the loss is incurred on the repayment of the loan (interest or principal) and not directly related to the acquisition cost of the asset, it would typically be treated as a revenue expenditure.

3. **AS 11 and AS 16 Compliance:**
- As per Accounting Standards (AS 11 - The Effects of Changes in Foreign Exchange Rates and AS 16 - Borrowing Costs), foreign exchange differences arising on repayment of foreign currency loans are accounted for as per the principles laid down in these standards.
- AS 11 requires that exchange differences related to monetary items be recognized in the profit and loss account, except to the extent that they are capitalized as part of the cost of qualifying assets under AS 16.

4. **Tax Treatment vs. Accounting Treatment:**
- While AS 11 and AS 16 guide the accounting treatment, for tax purposes, the Income Tax Act governs the deductibility of expenses.
- The treatment should ensure compliance with both accounting standards and income tax regulations, recognizing the specific provisions applicable to each.

### Proportion to Capitalize:

- The proportion of the foreign exchange loss to be capitalized should be determined based on whether it is directly attributable to the cost of acquiring the plant and machinery.
- If the loss is considered incidental to the loan repayment and not related to the acquisition cost, it should generally be treated as a revenue expenditure and not capitalized.

### Conclusion:

Foreign exchange losses incurred on the repayment of a loan taken from a foreign bank, used for purchasing plant and machinery from the domestic market, are allowable as a deduction under Section 37(1) of the Income Tax Act. The exact proportion to capitalize depends on the specific circumstances and whether the loss is directly attributable to the acquisition cost of the asset. It’s advisable to consult with a tax advisor or chartered accountant for precise application based on your company's situation and relevant judicial interpretations.